Why we still need tax credits (as well as pre-distribution)

Would you be surprised if I wrote a blog piece supporting the speech on social security made by our leader Ed Miliband, and the contribution made by Ed Balls earlier? No, I didn’t think so.  So for those looking for surprising contributions to the social security debate, look away now. I am about to be dull.

Dull, that is, if you think the practical realities of family finances are tiresome. Because it did concern me that the mood music ahead of both these speeches sought to prompt the Eds towards dropping our past achievements. Specifically, some have tried to push the line that tax credits (which did so much to improve the incomes of UK families) were an error: a subsidy for big business who should have made up the difference.

Now, I will fight til I’m worn out alongside all those who seek living wages from employers. My own local council, Wirral, was no sooner taken over by Labour in 2012, than our leader Phil Davies took the decision to pay our staff the living wage. We are now campaigning for Unison’s ethical care charter for Wirral that would see that promise extended to the low-paid, women-dominated, social care sector.  Part of the answer is also clearly greater membership of trade unions in low-paid sectors, especially those where women traditionally dominate. And we must use the National Minimum wage to set a good basic standard of pay, which helps in areas of geographic clusters of low pay.

That’s not the only response we need though. Put it this way: a single mum with 2 kids, working 30 hours on the living wage would take home £10,721. But to help her she’s entitled to £7,119 in tax credits. Two low paid earners with 3 kids on a living wage take home £21,442, but it’s topped up with tax credits of £5,725.

We can press business to do right by employees, but tax credits will still have a part to play. It’s like paying negative tax at a time of high cost (bringing up a family) that you pay back later. To me that’s the difference between just about getting by, and having enough to raise your kids. Birthday presents, or not. A trip to the seaside, or not. School uniform, or not. If you didn’t yourself grow up with parents who struggled to find the cash for those things, ask someone who did. Not ideal.

Tax credits redistribute today, reduce inequality, and make us a society better related to each other. Families spend money keeping the economy going. And preventing insecurity grows the social capital that helps people have self-esteem and confidence for their future.

Now clearly pre-distribution is better. Clearly a skilled labour force that can – in greater number –  command a good level of income is better. But what about in the meanwhile? Should current families just struggle?

The best thing about both Eds’ speeches was that they struck this balance right. Recognising that there is a compromise to be struck between investing for change for the long term, and seeing people don’t fall between the cracks today. The public finances will (because of Osborne’s mismanagement) remain extremely tight.  It should be clear that we will only be able to protect families if we take tough decisions about priorities.

As Ed Balls said, “Our task is to strike the right balance for the British economy: between living standards, growth and deficit reduction…between short term priorities and the vital long term investments we must make.”

This balance is important nowhere more than family finances. The struggles being discussed round dinner tables seep out into spending choices and hold business – and us all- back. That’s why Ed and Ed give us a vision for the future, and ideas to help right now.

Alison McGovern is the Labour MP for Wirral South

Note on tax credit calculation:

Living wage (outside London): £7.45 per hour
On basis of 30 hour week, £223.50 per week, gross £11,622 per annum.
Taxable income of £2,182, leading to deductions of £436.40 income tax and £464.04 NI. Net pay therefore £10,721.56

Single parent earning the above, with two children aged 6 and 8, both in full-time education, no other income or benefits (bar child benefit) would be entitled to:
Child tax credit: £4,995.26
Childcare element: £0.00
Working tax credit: £2,122.74
Total: £7,095.25

Couple with three children, aged 4, 6 and 8, elder two in full-time education, no other income or benefits (bar child benefit) would be entitled to:
Child tax credit: £5,725.25
Childcare element: £0.00
Working tax credit: £0.00
Total: £5,725.25

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