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STEPHEN GLOVER: George is right about tax credits... but he must fine-tune his plan before it backfires

Published: 19:54 EST, 21 October 2015 | Updated: 20:26 EST, 21 October 2015

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Harsh critics: Tory MPs remind George Osborne daily that we still have an annual deficit of £70 billion, and Britain’s gargantuan debt continues to rise

George Osborne has good reason to feel irritated. Tory MPs and commentators remind him daily that we still have an annual deficit of £70 billion, and Britain’s gargantuan debt continues to rise.

The Chancellor is urged to redouble his efforts to bring down the deficit, and sometimes scolded for not having done so fast enough. Now he has committed himself to producing a surplus of £10 billion in 2019-2020.

To achieve this will not be at all easy since the NHS, foreign aid, defence and the schools budget are off-limits. The Chancellor nonetheless has to find a further £20 billion in public sector savings over the next few weeks.

And yet some of the same backbenchers and pundits who have lectured him about the necessity to make cuts are upset about the proposed savings of £4.4 billion a year in tax credits, which were announced in the July Budget.

I think Mr Osborne is entitled to feel that his critics are being overly harsh. He is justified in thinking he is damned if he does and damned if he doesn’t. I can see why he may be tempted to brazen out the brickbats.

But he would be wrong to do so. In order to safeguard his own reputation for competence, to protect his party against charges that it is being unjust, and, above all, for the good of the working families which he and David Cameron claim to represent, he must think again about tax credits.

Let me say that in most respects his July Budget was a progressive one. It is right to prune back Gordon Brown’s labyrinthine system of tax credits, the cost of which has soared to some £30 billion a year.

New Labour said its aim was to help the low-paid by topping up their income with state hand-outs. But, in fact, this was partly a political ploy to increase the number of people beholden to government. Even middle-income families found themselves being drawn into the welfare morass.

Some big employers felt relieved of the need to pay their workers a decent wage since the Government was obligingly doing it for them. This was foolishness of a very high order.

Mr Osborne’s solution is to balance the reduction of tax credits with a rapid rise in the ‘living wage’, which will shoot up from £6.70 an hour this year to £9 a hour in 2020. Throw in a higher threshold at which people start paying tax, plus increased provision for free childcare, and — so Mr Osborne claims — few will be worse off.

The trouble is the Treasury appears to have got its sums in a twist. The respec-ted, and independent, Institute for Fiscal Studies (IFS) argues that 13 million families will lose an average of £260 a year as a result of the freeze in benefit rates, while three million of those families will be another £1,000 worse off from cuts to tax credits.

Meanwhile, the normally pretty sensible Resolution Foundation estimates that planned cuts to welfare including tax credits will lead to an increase of 200,000 in the number of working households living in poverty by 2020.

Iain Duncan Smith (left) bravely brought about something of a revolution in trying to wean people off welfare. The way tax credits operate is highly complex, as befits any scheme dreamt up by Gordon Brown (right)

Needless to say, the way tax credits operate is highly complex, as befits any scheme dreamt up by Gordon Brown. The Government does not accept the scary figures its detractors are throwing around. For example, it claims the IFS has not taken account of the higher tax threshold or extra free childcare.

It is also undeniable that a good deal of rubbish is being spouted by Labour and others. There was a great hullaballoo after a tearful woman, who described herself as a Tory voter, broke down on BBC1’s Question Time last week, claiming that the cut in tax credits will impoverish her. In fact, the IFS suggests the reforms may have no effect on her at all.

But wise heads who have looked at the Government’s plans do agree that hundreds of thousands, if not millions, of hard-working families will be significantly worse off after the changes are introduced next April, though their plight should improve as the living wage continues to rise.

Despite winning a vote on Tuesday evening against a Labour motion calling for it to jettison its changes, the Government is slightly on the back foot, with big-hitters such as Boris Johnson, David Davis and Zac Goldsmith calling for a re-think.

Despite winning a vote on Tuesday evening against a Labour motion calling for it to jettison its changes, the Government is slightly on the back foot on tax credits, with big-hitters such as Boris Johnson, David Davis and Zac Goldsmith calling for a re-think

And Heidi Allen, a new backbench Tory MP, made a splash in the debate with her maiden Commons speech in which she criticised the Chancellor’s plans as being ‘too hard and too fast’.

Surely Mr Osborne can’t stick his head in the sand. Almost no one believes his assertion that most people will be better off as a result of the changes he announced in July’s Budget. Does he any longer believe it himself?

This Government has declared again and again that it is on the side of working families. During his speech at the Conservative party conference, Mr Cameron promised ‘an all-out assault on poverty’. Is that really compatible with the Tories’ plans?

I can see that it may be difficult for Mr Osborne to inform the Commons, presumably when he makes his Autumn Statement in a few weeks’ time, that he has listened to criticism, and decided to phase in some of his changes less dramatically.

B ut he was forced to climb down after his ‘Omnishambles’ Budget of 2012 (which included taxes on pasties and caravans that were later reversed) from which he eventually recovered. On the whole, voters appreciate politicians who show they can think anew without abandoning their principles.

A much greater danger for Mr Osborne than executing an elegant sidestep is sticking blindly to his guns, thereby calling into question his own judgment while blackening the image of his party which claims to be on the side of ‘people who do the right thing’.

Here we reach the crux of the matter. Most of us are not over-concerned about Mr Osborne’s place in history and we do not fret at night about the future of the Tory Party. But we ought to be concerned about working families doing their utmost to get by.

Iain Duncan Smith has bravely brought about something of a revolution in trying, with a large measure of success, to wean people off welfare, and make work pay. The scale and speed of Mr Osborne’s plans would seem to challenge that noble ambition.

I realise he has little room for manoeuvre because of the state of the public finances, and am calling for a humane tweaking rather than a U-turn. I can also see that, if a government is going to be tough, it is prudent to be so at the beginning of a Parliament rather than towards the end.

Moreover, desirable though some judicious fine-tuning undoubtedly is, the House of Lords would be acting unconstitutionally if it voted against the reforms. Under the so-called Salisbury Convention, peers do not oppose legislation prefigured in a party’s manifesto. The Tories went into the election pledging £12 billion of welfare cuts.

George Osborne has been a pretty successful Chancellor, and could still be a great one. One voice in his head will be telling him to cleave to his plans, and not show weakness in the line of fire. Another will be urging him to be fair to the very people he says he wants to help. That is the one to which he should listen.