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The Chancellor's autumn statement last week conjured up two new tax credits and a pension credit. Jonathan Pearce reports on fears that poverty relief is over-complicated.

Politicians can be like magicians. While you are watching the right hand, the left is engaged in sleight of hand - or underhandedness, according to your political bias. Last week's pre-budget report confirmed Chancellor Gordon Brown's reputation as a "smoke and mirrors" man.

The report set the scene for the government's continuing policy assault on tackling poverty and making work pay, all within the economic framework of a global downturn which Britain seems to be riding out better than most.

Tough decisions had been taken and more would be made, he said, while the Wanless Report into long-term health trends opened a debate on appropriate levels of taxation to finance the NHS.¹

Despite talk of prudence, a £1bn rabbit for the NHS was pulled out of the hat and a string of tax credit handkerchiefs to combat policy appeared from up Brown's sleeve. (see list below). But much of it had been seen in earlier announcements and policy developments.

In tackling poverty - particularly child poverty - Gordon Brown has made tax credits the only game in town. From 2003, the government will introduce two new tax credits: the child tax credit and the working tax credit.

The payment levels will be announced in next year's budget. Whatever their merits the media is generally indifferent and the public does not understand them. As one child poverty campaigner puts it: "They just ain't sexy." Mention them and people soon start talking of needing to wash their hair or supervise wet paint. But to understand how government will be handling benefits and paying out money, the tax system is the place to start.

Tax credits are in effect tax relief for certain groups of people, administered through the Inland Revenue and a way of paying welfare benefits through the tax system. They are means-tested and credited to the income of wage-earners.

They already exist in the form of the working families' and disabled person's tax credits, which benefit 2.5 million children in 1.25 million families. These credits will be replaced by the new ones in 2003.

To confuse things, Brown also put £2bn aside for a pension credit - but this is not a tax credit.

This was in addition to guarantees that state pensions would rise by at least £100 a year for single pensioners (£160 for couples) in April 2003, irrespective of inflation, along with guaranteed above-inflation increases in subsequent years.

The credit will "reward" pensioners who have "modest savings" or an income from a second pension, so that a single pensioner who is receiving up to about £135 per week (£200 for couples) will receive a top-up of up to £13.80 per week for single pensioners and £18.60 for couples.

"Academically elegant, but ferociously complicated," says Help the Aged head of public affairs Mervyn Kohler of the pension credit arrangements - a classic bit of Brown policy. The plans run the risk of not working because people will not be able to understand the system. "There are an increasingly complex array of subsidies and benefits," adds Kohler. "You'll need a degree in financial management before you retire."

Although the extra money is obviously welcome, the government's approach to pensions means that 5.4 million pensioners (half of the UK's over-65s) have been moved into a means-tested regime, with all the attendant problems that creates.

"Any means-tested system raises issues of dignity, creates a barrier of complexity, produces anomalies at the margins, and introduces the possibility of poor take-up by those who need it, fraud by those who do not, and inaccurate processing and awards," says Kohler.

Many of the arguments over pension credits apply to tax credits, not least the complex assessment mechanisms and the extension of means-testing.

Through the Inland Revenue's involvement, the government is redefining the nature of the welfare state. Social security has already seen a significant shake-up following this year's General Election. The Department of Social Security gave way to the Department for Work and Pensions and the introduction of Jobs Centre Plus.

The Inland Revenue also took over responsibility for child benefit earlier this year, and its involvement in welfare benefits and financial support is set to extend.

"The Inland Revenue will become a big player in the welfare state," says Child Poverty Action Group director Martin Barnes.

With a tax credits bill already published, the new proposals are likely to become law by next summer, with rules and regulations following soon afterwards. This means the Inland Revenue has a major challenge to have its systems (including its information technology system) up and running by April 2003. The working tax credit is perhaps less of a problem because it will be paid through employers - the Inland Revenue's traditional modus operandi. But with child tax benefit, many payments will be going to people who are not in work.

The government has talked of using bank accounts where people are unemployed, but many people in this position do not have access to financial services, including bank accounts. So, organisations such as CPAG have campaigned for the retention of giro-cheques and order books. If the government's plans for a universal bank were further on, then this might present a viable option, but that is not the case.

Another challenge for the tax credits system is the capacity to adjust payments to changing circumstances during the course of a tax year, so that if a family adult becomes employed or unemployed, or another child is born, the payment received can be altered accordingly. This is a tricky issue for any organisation and the scope for under and overpayments should not underestimated, adds Barnes.

Despite the scale of the task, the Inland Revenue says it is prepared. However, there will be an inevitable knock-on effect for the Benefits Agency, as the tax credits will affect the pay-outs of its income-related benefits for the parents of the families receiving tax credits. And whether the Benefits Agency is ready is another matter altogether.

For the government, the benefits are a seamless and transparent system of support, a portable and secure income bridge spanning welfare and work, a common assessment and payment framework.

The downsides for those on low incomes are a complicated system, where it can be very hard to know your exact entitlement and difficult to have it re-assessed. In addition, means-testing becomes further extended and some campaigners fear that universal child benefit - which is paid regardless of income - will eventually go the same way, because of the link with the Inland Revenue and the tax credits system.

If it works efficiently, the system will help many people over the poverty threshold, but it is likely to be those just below the threshold rather than the worse off who will benefit most.

While tax credits prosper, Downing Street's performance and innovation unit is said to be carrying out a confidential review of the social fund - the grants and loans safety net - despite the government's public dismissal of the fund's critics. Perhaps tax credits will be further developed and refined to sweep away the social fund.

If the government can develop such a beautifully intricate and elaborate, yet arcane, system to tackle basic poverty, then surely it must be able to come up with something to tackle deeply entrenched poverty. Here's hoping.

¹ Derek Wanless, Securing our Future Health: Taking a Long-Term View, Treasury, 2001

Pre-budget report highlights

- Greater access to training and tax incentives for lower skilled working people.

- Extension of New Deal for long-term unemployed.

- Working tax credit.

- Pension credit.

- Increased winter fuel payments for pensioners (for duration of this parliament).

- Guaranteed minimum pension increases.

- Child tax credit.

- Extra £1bn for the NHS next year.

- Community investment tax credit (for businesses to regenerate high unemployment areas).

- Exemption from stamp duty for property transfers up to £150,000 in almost 2,000 most disadvantaged areas.

Child tax credit

- Paid on top of universal child benefit.

- Provides income-related support for families, employed or otherwise.

- Paid directly to families' main carer for children.

- Will support children up to the September following their sixteenth birthday (extended to 19 for child in full-time education).

- No capital limits apply.

Working tax credit

- Paid by employers in employees' salaries.

- Supports adults in low-income households, including disabled workers.

- Includes elements for individual circumstances, such as disability, hours worked, childcare costs.