Observations

Conservatives and Liberal Democrats would extend Labour's tax credit cuts for middle-income families

Date: 04 May 2010
Authors:
Publisher: IFS

The Labour party is pointing to the fact that the Conservative Party and Liberal Democrats are proposing cuts to child tax credit for middle- to high-income families with children. I and colleagues have written about these cuts before in the 2010 Green Budget and our election analysis, and I summarise that work here.

Both opposition parties want to save money by paying the family element of the child tax credit to fewer families with children. The child tax credit has two elements: a small family element, worth £545 a year for a family with children, and much larger child elements, worth up to £2,300 a year per child. The child elements are withdrawn as income rises, so that roughly the richer half of families with children do not receive them, and no party is proposing to make cuts to these. The family element does not start to be withdrawn until family income reaches £50,000 a year, and it is this here that the two parties are looking for cuts. Both cuts are small compared to total spending on tax credits (forecast to be £29 billion in 2010-11).

The Conservative Party's manifesto says that they want to "stop paying tax credits to families with incomes over £50,000". But this does not describe their policy in full, leading us to call that description "incomplete at best and misleading at worst". The Conservative Party want to lower the £50,000 threshold to £40,000, so families with a combined income above £40,000 currently receiving child tax credit would lose some or all of that entitlement. As we have explained before, we are not able to estimate precisely how much this would save, but it would be between £45 million and £400 million a year.

The Liberal Democrats want to make larger cuts by withdrawing the family element as soon as the child element has been withdrawn. For a 1-child family, this would mean that tax credits would not be paid to families with a combined income of around £25,500 if implemented today; each additional child would increase this value by around £6,080. We estimate this would save around £900 million a year, a little lower than £1.3 billion stated by the Liberal Democrats, which is based on a previous costing produced by IFS researchers which (unrealistically) assumed full take-up.

Given the strength of Gordon Brown's recent rhetoric about these potential cuts, you may be surprised to hear that the family element of the child tax credit has been cut by 19% in real -terms by the current government over the past seven years. Since its introduction in 2003, its value has always been £545 a year, and the upper threshold always been £50,000; had these values been increased by inflation - as is normal for benefits and tax allowance - the family element would now be worth £670 a year, and be paid to families with incomes up to £61,500 a year.

The bigger picture, though, is that many people consider that social security benefits and tax credits will be cut during the next Parliament by far more than is being admitted by the parties' manifestos. IFS analysis of the public spending plans set out by Alistair Darling in his last Budget suggest that departmental spending will fall by 11.9 per cent by 2014-15 in real-terms, but spending on welfare benefits and tax credits grow by 4.5 per cent over the same period. Obviously it is up to the next government to decide how much it wants to spend on public services and welfare benefits, but these diverging trends look unbalanced, and possibly unsustainable.