A discredited system

Given New Labour’s penchant for replacing functional systems with
experimental alternatives, its determination to stick with the
ailing tax credits system is starting to look like
bloody-mindedness.

New figures show that about 5.6 million families received tax
credits during 2003-4, of whom 45 per cent received the wrong
amount. These figures look extraordinarily bad, but they are a
consequence of the Inland Revenue’s long-established practice of
making a rough guess on entitlement one year, and then clawing back
any excess from payments in the following year.

This system does little harm to businesses. But for families on the
poverty line, Gordon Brown’s brainchild has generated a damaging
cycle of boom and bust. Inland Revenue overpayments have left 1.9
million families repaying an average of £1,000 each. The
repayments are often debited from future tax credits, which
drastically reduces a family’s income, often without warning.

And while it may be tempting to conclude that the families
concerned should have been more prudent, if you are constantly
robbing Peter to pay Paul just to keep the lights on and food on
the table, the reality is that you spend what you have coming in.

Unfortunately, the chaos will continue as long as the tax credit
system is run by the Inland Revenue – or its new incarnation, HM
Revenue and Customs. The other option – favoured by many – is a
universal family benefit, set at adequate levels. How about that
for an experimental alternative?