In 2003, Paul Granby – not his real name – was a solicitor with a rapidly-appreciating house in Wandsworth and an annual salary of £55,000, equal to £80,000 today. Not, you might think, the most obvious recipient of welfare under a new Gordon Brown initiative to tackle child poverty.
But Mr Granby and his wife were amazed to discover that yes, he was entitled to receive child tax credits (a social security benefit, despite the name) even though he was a top-rate taxpayer. “By the standards of solicitors from Wandsworth, I probably was quite poor,” he joked last week. “I didn’t work for a City firm. But by any other yardstick it was absurd. I took it, though.”
Mr Granby’s case wasn’t a loophole or mistake (though at least £3 billion was lost to “fraud and overpayments” in the early years of the new tax credits scheme). In 2003, you could in fact earn up to £66,000, equivalent to £96,000 now, and still get some child tax credit if you had children under one, or £58,000 (£84,000) with older kids. Ninety per cent of all families with children were entitled to the benefit.
As a result of this and other Labour changes, the number of households receiving tax credits trebled, virtually overnight, to 6 million, or around 20 million people. The bill went up from
£6 billion a year in 2002 to about £30 billion a year today, of which £23 billion is for child tax credit (not to be confused with child benefit, incidentally).
But did this vast sum reduce child poverty in the slightest? Unfortunately not. The previous, more targeted, version of tax credits did have that effect; but after the 2003 splurge, child poverty rates, both relative and absolute, “drifted upwards” in the words of the Resolution Foundation think tank.
The explosion of tax credits may have had two unintended consequences for the poor. First, though this is disputed, it may have allowed employers to keep their wages low – in effect, a state subsidy for poverty pay. As the Office for Budget Responsibility puts it, “earnings grew more slowly in the tax credit population than in the wider economy”.
Second, the way the benefit is withdrawn as your earnings grow means that two million or so claimants, typically the poorer ones, suffer tough penalties for working harder, losing typically around 68p to 70p in benefit and tax for every extra pound they earn from work, according to the Resolution Foundation. The number of families caught in this trap, an obvious disincentive to work more, is roughly double what it was before Mr Brown expanded the tax credit scheme in 2003.
It’s worth remembering this cautionary tale in the wake of Ed Miliband’s recent denial of overspending by the last Labour government of which he was a central member. As the snorts of his TV audience made clear, most people disagree with him. Public spending when Labour took office was £324 billion a year; by April 2008, fully six months before the crash, it was £686 billion, a rise in real terms of 49 per cent.
Over the same period, even as the economy boomed, welfare spending rose in real terms by a fifth; and Labour ran up deficits every year from 2001 onwards. All this, again, before the crash. Yet there’s a respectable economic case for saying it is allowed to borrow at least some money. The issue is how the cash was spent as much as how it was raised.
Quite often, the act of handing out money was an end in itself, without much attempt to connect it to evidence or outcomes. In 2004, Labour introduced the Educational Maintenance Allowance (EMA), up to £30 a week, to persuade teenagers to stay in education. Even in the Department of Education’s own research, only 12 per cent of recipients said it would make any difference to their decision (other research found the figure was just 6 per cent).
It was described as a benefit for the children of low-income families; but in fact, you could get EMA if your household income was as high as £30,800 a year, about £10,000 above the then average. Participation of 16- to 18-year-olds in full-time education did rise after it was introduced, but only slowly, from 58 per cent of the age group in 2004 to 63 per cent in 2007. The rate rose sharply to more than 80 per cent after the crash reduced other work opportunities. The abolition of the allowance in 2010 by the Coalition, and the recovery of the economy, have made absolutely no difference to participation rates, which – at 82 per cent – are now the highest on record.
Yet though the EMA, the expanded tax credits, and many other poor-value programmes achieved little or nothing of their stated purpose, they were much more successful in achieving the unstated one. This was to create a greatly expanded universe of entitlement, conditioning more of the public to view government as a source of free goods whose removal should be treated as a betrayal.
As well as the expansion of actual entitlements, Labour was successful at growing a climate of sympathy to entitlement – with a big expansion of both the public and the quasi-public sector, the large network of mainly Left-wing academics and charities whose work was greatly boosted, and increasingly dominated, by public funding. This may help explain why Labour is likely to do extremely well in London. Though the capital has proportionately fewer public-sector workers than other parts of the UK, the ones it has are more likely to be middle-class and opinion-forming.
The shroud-waving led by such people about the end of EMA turns out to be one of a dozen predicted catastrophes that haven’t happened – like the collapse in working-class and other university student numbers supposedly caused by tuition fees, the rise in unemployment to “approaching five million”, the “social cleansing” of London by housing benefit changes, the privatisation of the NHS, the surge in crime allegedly to be triggered by falling police numbers, and the “break-up of civil society” warned about by three big-city Labour council leaders in 2012.
But it doesn’t matter, because the caravan has moved on to the next synthetic scandal – zero-hours contracts, perhaps – and it’s still contributed to the general sense that the Coalition is heartless and destructive. What’s more, the Coalition hasn’t cared enough to challenge it.
The truth about the cuts is that for a long time the Tories and Lib Dems seemed to want to look tougher than they were, even as government spending continued to rise year-on-year, wealthy pensioner subsidies were sacrosanct and most of the Labour disaster programmes went relatively untouched. (The child tax credit cut-off point has been reduced somewhat.) Perhaps ministers were trying to reassure the markets, but they probably overdid it, scaring consumers, sending the economy back into contraction and forcing them to change course two years in.
Yet if the Coalition has cut less than it would like us to think, Labour is at least promising to cut much more than most of its supporters want. If the polls are right, and they do not change, Ed Miliband will be prime minister.
But for Labour, this might almost be worse than losing. Even if he wins more English votes than David Cameron – by no means certain – Mr Miliband may well have the weakest mandate of any PM in the universal suffrage era. But if the English vote Tory, and the SNP effectively imposes a Labour government on them instead, his legitimacy problem will be very much greater.
Against this backdrop, Mr Miliband must then reconcile the wildly conflicting expectations set up by his years of rhetoric about reordering society and “moving on from New Labour” and his more recent words of fiscal and budgetary restraint. His supporters’ demands for a return to the cash fountain will meet the reality that abolishing the winter fuel allowance for wealthier pensioners and reinstating the 50p tax rate raise barely a trickle. He will have to disappoint one side, enormously, and quickly.
The last man to become prime minister with less than 35 per cent of the vote, Ramsay MacDonald in 1924, lasted nine months, and was then swept out of power for five years. Might the same thing happen to Mr Miliband?