Osborne waters down tax credit reforms after Lords defeat

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George Osborne has been forced to water down his flagship tax credit reforms after peers voted to delay the cuts and sparked a constitutional crisis.



In an historic move, the Lords voted for the Chancellor to stop his tax credit reforms until he comes up with a way of “compensating” low-paid workers for three years.

The defeat immediately forced Mr Osborne into a U-turn. The Chancellor announced that he would next month reveal measures to soften the impact of the cuts on the lowest paid.

Mr Osborne said: "I said I would listen to the concerns being raised and that is precisely what I will do.

"We can achieve the same goal of reforming these tax credits, securing the money we need to ensure our economy is safe, and at the same time helping in the transition to these changes and I will set out how we achieve that at the Autumn Statement."

Peers voted down the measures despite being warned that they would provoke a “constitutional crisis” because the reforms have already been passed by the House of Commons.

It is the first time in 100 years that the Lords has voted down a financial package backed by MPs in the Commons and will be seen as a major blow to Mr Osborne.

In the minutes after the votes, David Cameron suggested the government would seek retribution for the defeat.

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Osborne to cut Universal Credit to fund tax credits U-turn

George Osborne is at loggerheads with the work and pensions secretary over proposals to cut spending on universal credit by more than £1bn a year. The chancellor is considering the move – which Iain Duncan Smith fears could drastically undermine the effectiveness of universal credit – as a means of partially funding his anticipated U-turn on tax credits.

The savings would be achieved by changing the taper rate that applies to the new benefit. Currently it is set at 65% – meaning that for every extra £1 claimants earn above a threshold, they lose 65p – but Osborne is looking at a proposal to increase this to 75%.

Duncan Smith is resisting this because one of the key aims of universal credit is to increase work incentives. A taper rate of 75%, alternatively described as equivalent to a marginal tax rate of 75%, would make it hard for Duncan Smith to argue that universal credit is structured in a way that encourages people to work longer hours.

According to a source familiar with the dispute, the Osborne proposal could save the Treasury around £1.5bn a year, which would help fund the remedial measures being planned to alleviate the impact of the £4.4bn tax credit cuts.

Osborne was forced into a rethink after the House of Lords voted last month to block the measures until the government comes up with a plan to compensate those losing out.

Duncan Smith is particularly irked by Osborne’s proposal because the Treasury has upped the universal credit taper rate once before as a money-saving exercise. Originally it was intended to be set at 55%, but in the last parliament the Treasury decided it would be set at 65% when the benefit launched.

Universal credit is Duncan Smith’s most important welfare reform. Six existing benefits are being rolled into one, partly to simplify the system, and partly to improve work incentives. However, the programme has been hit by delays and it is not due to be fully rolled out for another few years.