George Osborne sees fresh blow over planned tax credit cuts changes

George Osborne has suffered a political setback over his plans to cut working tax credits when a Conservative-controlled select committee condemned his proposed reforms and urged him to consider a pause to undertake a fundamental rethink of his priorities in reforming the welfare state.

In a report, the work and pensions select committee argues that a slower phasing in of the tax credit cuts would compromise neither the government’s commitment to cut spending on welfare nor its aim to balance the books by the end of the parliament. The report was agreed unanimously, including by six Tory MPs.

In a rebuke to the Treasury’s priorities, the MPs warn that “the government is reaching the limits of cuts that can be made to the working-age welfare system, and particularly on those who are strivers”. At the same time, it argues “spending on pensioner benefits will continue to rise sharply and, arguably, unsustainably”.

The chancellor has already been forced by the House of Lords to agree to rethink his plans to save £4.4bn to cut tax credits and has promised that he would to revise his plans in the autumn statement due on 25 November.

But the MPs go further and suggest that if none of the mitigating proposals currently being examined prove workable, Osborne should rethink the plans from scratch, buying time by pausing the proposed reforms entirely for a year.

The accumulation of criticisms from a select committee in which there is a Tory majority will be a serious embarrassment to the previously unchallengeable Osborne and underlines the extent to which Tory MPs are now willing to assert his summer budget was badly misjudged.

The report condemns the Treasury for being “unacceptably evasive” about the overall impact of its summer budget reforms, including the cuts to tax credits, on different income groups. The Treasury’s “obfuscation is not consistent with effective scrutiny; nor is it consistent with effective policy-making”, said the committee.

In a further blow to Osborne’s prestige, the committee sides with the work and pensions secretary, Iain Duncan Smith, in saying the chancellor should not try to extricate himself from his political problems by raiding the related universal credit budget.

It says: “The chancellor should also resist the temptation to raid universal credit. This would either shift the burden to different low-income families or undermine the objective of making work pay. The government’s flagship welfare reform will struggle to survive further dilution and still achieve its aims”.

There have been reports that Osborne has been considering increasing the taper in universal credit as a different way of saving money, but Duncan Smith believes the move would fatally damage the purpose of the system – to improve work incentives.

The criticism comes as Gordon Brown, often seen as the architect of tax credits, sprung to their defence in an article in the Guardian.

The former prime minister accused the Tories of peddling a “most insidious myth, increasingly pervasive, that the poor are workshy, scrounging out chaotic lives in a nation where strivers are paying their taxes for skivers”.

Accusing the government of the constant lie, he writes “only a total abandonment of the cuts will correct Osborne’s mistakes”. He argues: “The majority of today’s poor, and the biggest losers from his tax credit changes are not the unemployed or ‘chaotic’ families but hard-working parents and their children.”

By contrast, the former Conservative chancellor Ken Clarke dismissed tax credits as a bung to those in work that at one point were going to 90% of working families.

The all-party select committee, chaired by the welfare expert Frank Field, found: “The proposed changes to tax credits in April 2016 will result in very substantial cuts to the incomes of working families, including many with children.

“There is now general agreement that it would be right for the chancellor to rethink reforms that went too far and too fast and may have most impact on those in work and striving to succeed.”

Saying there was no magic bullet to solve the problems created by Osborne’s proposals, the committee said a pause until 2017 “would enable a necessary and ambitious debate about the future of working age benefits and their position in a sustainable welfare system”. The proposals are due to save £4.4bn annually and were once seen as central to the chancellor’s plans to reach a overall budget surplus by 2019-20.

Overall, the committee says: “[The] proposed cuts would affect 3.3 million families, of which 2.7 million (including 1.2 million lone-parent families) have a total of 5.2 million children. On average, affected families will lose approximately £1,300 in tax credits in 2016–17 compared with 2015–16.

“The losses will not be spread evenly across affected families. The highest losses, of more than £2,600, will be incurred by families with relatively high gross incomes and circumstances that result in additional support, such as multiple children and childcare costs”.

The cuts come in two forms – cuts to the threshold at which tax credits start to be withdrawn, saving £2.9bn, and an increase in the taper, the rate at which credits are withdrawn, saving £1.5bn.

The committee looks at a pause in implementation of Osborne’s proposals for one year, slower implementation over as long as four years or total protection for existing claimants by imposing the cuts only on new tax credit claimants. None of the options would give Osborne the savings he had originally identified and each have advantages and drawbacks.

The report rejects other efforts to soften the impact of the tax credits cuts, such as the acceleration of planned increases to personal tax allowance or a national minimum wage. The committee say neither would be an effective remedy for those hit by tax credits since there is no great overlap between the groups. It said: “They should not be confused with mitigation for the tax credit cuts; they benefit very different parts of the working population.

“The majority of working families affected by the proposed cuts would still be worse off in 2020-21 as a consequence of the budget package.”

A Treasury spokesman said: “The chancellor has already made clear that the government will listen about how we make a transition to the higher wage, lower tax and lower welfare economy he wants to see, and will announce proposals on how we do that at the autumn statement.

“So this report is out of date. Like other analyses, the examples cited here don’t consider other measures the government has introduced or is introducing to support working families.”