New Tory tax credit chaos

The Conservative party were on the defensive last night over their planned cuts to the Child Tax Credit amid accusations that their sums don’t add up.

A Conservative party press release accompanying George Osborne’s conference speech last year outlined that:

“The Government should stop paying tax credits to households with incomes over £50,000 by starting to means-test the Family Element of the Child Tax Credit at a lower threshold. According to the Institute for Fiscal Studies this would save £400 million a year or £2.0 billion over the next Parliament.”

In fact, as Left Foot Forward showed last year and Channel 4 Fact Check reiterated last week, saving £400 million would require an even deeper cuts in the Child Tax Credit.

A Parliamentary Answer by the Treasury Minister Stephen Timms in December detailed that:

“To reduce total annual tax credit expenditure by £400 million, it is estimated that the second income threshold would need to be reduced to around £31,000.”

The independent Institute for Fiscal Studies outlined in their ‘Green Budget 2010‘ (p.168) that:

“An early estimate of the savings from this reform was produced by researchers at IFS and cited by the Conservative Party, and this was that the change could save £0.4 billion a year …

“It is likely that the estimate from the government is more accurate [than the Conservative estimate], because the [original] IFS estimate assumed full take-up of the child tax credit. Without access to HMRC’s data, it is not possible for us to say precisely how much money would be raised by the Conservative Party’s proposal having allowed for incomplete take-up, but it can be stated confidently that it would be less than £0.4 billion (because that would require lowering the threshold to £31,000), but more than £45 million (which is what would be raised if the threshold at £50,000 were replaced by a cliff-edge, as this is the total amount to which families with incomes exceeding £50,000 are entitled).”

Last year, Left Foot Forward reported that:

“calculations carried out by the ‘ippr tax/benefit calculator’ and seen by Left Foot Forward show that [the £50,000 threshold] policy would only save £65 million assuming full take-up of the family component. If take up were 73 per cent, the relevant HMRC figure in 2005-06, the total saving would fall to £47.5 million. (pdf, Table 3: CTC, family element or less).”

But last night, writing on the Blue Blog, Theresa May made the bold may of accusing the Government of an outright “lie” while sewing further confusion with an admission that families with incomes over £40,000 would now be caught by the policy:

“Our priority is to find a way to get spending under control that is fair and protects the poorest. Tax credits are designed to help families on low incomes, but we are now paying them to families earning over £50,000. We don’t think that is affordable anymore, so we have said that under a Conservative Government these families would stop receiving tax credits. No families with a combined household income of £40,000 or less will be affected by our policy.”

May did not detail the latest Conservative estimate of the cost saving from the policy. It is unclear where this leaves Philip Hammond’s claim, reiterated yesterday to Channel 4, that:

“I gave a figure, off the top of my head, of a billion to a billion-and-a-half … I stand by that figure.

“In 2010-11 we can save a £1 billion to £1.5 billion from those three measures: child tax credits, child trust funds, and the reduction in the Government advertising budget.”

Channel 4 say, “After consulting with the Institute of Fiscal Studies we concluded the Tories would be lucky to save £625m this year.”

UPDATE 10.45

Labour List have a good summary of how some of this row played out on twitter yesterday.