News
21-5-2007
A bad credit rating
One of the reasons Gordon Brown liked the idea of giving the Bank of England independence was that handing responsibility to Threadneedle Street for setting interest rates gave him more time to sort out the supply side of the economy. Given the king-sized screw-up that the government has made of tax credits, Brown might have been better off fretting about bank rate.
Like most of the chancellor's innovations, tax credits were imported from the United States. The downside of the flexible labour market on the other side of the pond is that large numbers of workers end up on poverty wages, so the government steps in with a tax credit - a wage top-up, in other words - to bring take-home pay up to a decent level.
There are three big problems with this approach. One is that the UK tax credits regime is fiendishly complex. In the US, tax credits are paid once a year after an individual has filled in a tax form, but Brown thought - with some justification - that making people wait up to a year for their wages boost could expose them to significant deprivation. So, the UK system offers a more immediate cash payment but at the expense of a regime that is almost impossible to understand, expensive to administer and easy to defraud. The Commons public accounts committee said yesterday that tax credits had cost £2bn in fraud and overpayment.
The second problem is that tax credits trap people in low-paid jobs, giving them little incentive to move into higher-paid employment because their tax credits are removed as their wages rise.
The final problem is a philosophical one. Is it right that employers should be allowed to pay poverty wages knowing that the state will step in to clear up the mess? If governments paid less obeisance to the great god of labour-market flexibility, those on poor wages might be a lot better off.
Like most of the chancellor's innovations, tax credits were imported from the United States. The downside of the flexible labour market on the other side of the pond is that large numbers of workers end up on poverty wages, so the government steps in with a tax credit - a wage top-up, in other words - to bring take-home pay up to a decent level.
There are three big problems with this approach. One is that the UK tax credits regime is fiendishly complex. In the US, tax credits are paid once a year after an individual has filled in a tax form, but Brown thought - with some justification - that making people wait up to a year for their wages boost could expose them to significant deprivation. So, the UK system offers a more immediate cash payment but at the expense of a regime that is almost impossible to understand, expensive to administer and easy to defraud. The Commons public accounts committee said yesterday that tax credits had cost £2bn in fraud and overpayment.
The second problem is that tax credits trap people in low-paid jobs, giving them little incentive to move into higher-paid employment because their tax credits are removed as their wages rise.
The final problem is a philosophical one. Is it right that employers should be allowed to pay poverty wages knowing that the state will step in to clear up the mess? If governments paid less obeisance to the great god of labour-market flexibility, those on poor wages might be a lot better off.