July 8th

July 8th 2002 marked the passing of the Tax Credits Act which aimed to provide further financial top-ups to workers with low-paid jobs. Chancellor of the Exchequer Gordon Brown championed the legislation as the greatest welfare reform since Beveridge, with 5.75 million families eligible and benefiting thereafter.


RH Gordon Brown (Chancellor 1997-2007) before 2002 Budget

In 1942 British economist and social reformer, William Beveridge published a government report as to how Britain should rebuilt post-war. His Report on Social Insurance and Allied Services identified the five ills of ‘Want, Disease, Squalor, Ignorance, and Idleness’, which went on to form the basis of the welfare reforms, such as sickness and unemployment benefit, retirement pension, widow and maternity benefit, the National Health Service, mass housebuilding, expansion of education and widespread nationalisation, brought about by the new Labour government following Clement Attlee’s landslide victory in 1945.

Brown’s legislation, its first stage began in 1999, successfully transferred over £75 billion to the lowest paid workers and prevented them from drifting into poverty, however questions have been raised as to how much it really addresses the issues of poverty-pay and economic inequality in the UK. It seems conclusive that tax credits allowed New Labour to pursue free-market principles whilst bolstering social protection for those down the ladder, rather than expanding the socialist policies of the 1945-51 Labour government. Whilst in 1971, the new family income supplement (FIS) was to give the unemployed a financial incentive to find work, tax credits were inspired by US President Clinton’s expansion of earned income tax credit (EITC) in 1993, which rebuked accusations of too much ‘welfare’ by returning an annual tax return for families on income below a certain threshold. An idea that integrated taxes and benefits which was raised through Milton Friedman’s book ‘Capitalism and Freedom’ (1962), chimed with the New Labour ideology of ‘rewarding work’ and ‘reducing welfare dependency’, breaking with the perceived poorly targeted ‘tax-and-spend’ image of Labour in the 60s and 70s, also crucial to reducing poverty following the high unemployment and poor pay generated by 18 years of Conservative government. Brown’s policies to make low-pay work more attractive included the minimum wage and a new 10% tax band, and he did succeed in lifting 600,000 children out of poverty and the incomes of the poorest 20% of families had raised by 12% 1997-2007

“What America needs now is not more welfare, but more workfare”

Richard Nixon, 1969

The system has, however, become extremely complex and difficult for individuals to navigate due to the variety of types of credit and the huge amounts of information and forms required to claim, causing regular delays and often costly overpayments due to the fluctuating incomes of many in low-pay. This issue which has become even more apparent since the Conservatives took inherited the system in 2010. In a belief that Tax Credit abolition would save £4.5 billion from annual expenditure, whilst lowering tax thresholds and taking families out of tax instead, Chancellor George Osbourne came into a stand-off with the House of Lords in 2015 whereby his plans were vetoed. This was criticised by Conservatives for breaking the convention of the Lords having no say over ‘money bills’, although with Osbourne’s plans being a statutory instrument which is subject to an expedited parliamentary process, the Lord’s did in fact act within their powers.

An leftist interpretation of tax credits may view them as a subsidy for bad employers and the promotion of low-pay, a belief that partly drove Jeremy Corbyn’s policy of a £10 minimum wage at the 2017 General Election. Moreover, its poor delivery has provided much pressure for hard-pressed families.

“There has been a cultural change, in that work incentives are now recognised as a core aspect of a welfare system. Both parties now accept that. I view that as a vindication of the direction of travel.”

Paul Gregg (Labour/welfare academic)



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