Sunday, 30 August 2009

Are tax credits cost effective?

Theresa May, whom I have met, may be best known for her choice of shoes, but is actually one of the smarter members of Dave Cameron's team who tries to do some original thinking about important issues.

In a speech last week she made it clear that any government elected next year would struggle to prevent unemployment rising and that it was unlikely to return to pre-recession levels before 2016. She pointed out that unemployment had cost the British taxpayer £340bn in benefits since 1997.

The difficulties of dealing with the long-term unemployed have been emphasised in a series currently being screened on Channel 4 which looks at private contractors trying to get them back into work. But the jobs aren't there and most of them are ill equipped to deal with them because of the way in which long-term unemployment has affected their morale and ability to work, quite apart from any skill deficiencies.

The most interesting part of Ms May's speech was when she hinted that the Conservatives would re-examine tax credits for the less well off. Gordon Brown regarded this as one of his greatest achievements as chancellor, a redistribution by stealth in favour of working people with families.

Dave Cameron has already signalled that tax credits could be scrapped for middle income earners and Ms May said, 'Tax credits do not help people get better jobs; in fact they can create poverty traps that actually disincentivise people from working more hours or finding a better job.'

Certainly getting rid of them or reducing them substantially would save a lot of public money. However, one member of my family is a beneficiary. With two young children, tax credits have effectively covered the nursery fees for the younger child which means she is able to continue working (she earns more than her husband). It would be difficult for her to work more hours because of child care issues.

These issues are never straightforward, but they need to be debated.

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