news analysis on the Chancellor’s pre-budget report

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.