Tax Credits Crunch - unpicking the July budget's effect on NI

Recent events have stolen its spotlight but Welfare Reform remains the Assembly’s longest running sore.

Nama and the Kevin McGuigan murder currently dominate debate about public affairs, leaving us with in absentia DUP ministers and an Executive in purgatory.

Stormont always has been a rollercoaster, on the surface at least, but the current plunge and twist can be traced back to the years-long rows about welfare which were made worse by an apparent breakthrough at Stormont House which promptly fell to bits.

However, our government may slow to a crawl, or nothing at all, but time moves on regardless and it looks like some manouevering in London means local wrangling over welfare matter less and less.

This week the Social Security Agency, one of the Department for Social Development’s arms-length bodies, alongside the Northern Ireland Statistics and research Agency (NISRA) outlined the impacts on Northern Irish benefits of Chancellor George Osborne’s summer budget.

Their paper summarising the effects on benefits locally could be said to both show the importance and irrelevance of the long arguments between our political parties about how best to deal with changes to social security driven from London by the Tory government.

Important because Stormont could possibly make a substantial difference to future reductions in spending both to individuals in Northern Ireland and the total cash injection we receive; irrelevant insofar that it shows the scale of cutbacks that will proceed no matter how we handle devolved matters.

Westminster

The Chancellor’s major changes are summarised thus:

• A four-year freeze to working-age benefits (i.e. pensions and disability-related payments are exempt from the measure)
• Large suite of reforms to Tax Credits, ultimately reducing the entitlement for many households
• Housing and housing support reforms, with the entitlement to housing support in Universal Credit removed for those aged 21 or under, adjustments
• Lowering of the benefit cap to £20,000 (although in London this will be £23,000)
• Recalibration of payments across various out-of-work and jobseeking benefits to bring each separate but similar payment into line

The most interesting changes are to Tax Credits – a subsidy on personal taxation that people can qualify for if they have children (Child Tax Credits) or are in employment (Working Tax Credits), subject to certain conditions, which was brought in by Gordon Brown in a bid to make lower-wage jobs more attractive.

Overall the Treasury expects to save £194m from Tax Credit reductions in Northern Ireland in 2016/17, out of a total saving of £205m.

The DSD paper assumes that Welfare Reform will have been passed in Northern Ireland and Universal Credit (UC) will be introduced as of January 2017.

Under the new welfare structure, benefit receipts will all be wrapped up in UC. Tax Credits are therefore both being reduced and phased out.

The report itself worries that various aspects of these changes will go directly against the Chancellor’s stated aim to “make work pay” by reducing the income of people in work.

Credits crunch

The bulk of the saving on Tax Credits comes from a reduction in the income threshold – the sum beyond which credits begin to be withdrawn as income increases – which is currently £6,420 per annum and will reduce to £3,850 per year from April 2016.

DSD estimates this change will see 121,000 households in Northern Ireland lose out on an average of £918 per year.

Assuming Welfare Reform proceeds, as people shift over to Universal Credit the Treasury savings are expected to migrate to UC concurrently but, if this does not happen, similar savings will occur thanks to changes in the tax credits threshold.

This move means any inertia over Welfare Reform in Northern Ireland will still see our benefits bill reduce. According to the report’s conclusion:

“If Welfare Reform is delayed in Northern Ireland then the savings achieved through Tax Credit measures will continue to increase over time rather than decrease as Universal Credit rolls out. Correspondingly the profile for the savings from Universal Credit and other measures included in the Summer Budget 2015 will be delayed.”

However, while the threshold adjustments may amount to most of the savings through tax credit changes there is more to it than that.

Another significant change will result from the increased Tax Credit taper rate – the pace at which a claimant’s allowance is reduced when their income goes above a certain figure – which will affect 111,000 households in Northern Ireland, and see them lose a total of £77m in 2016/17 (an average of £712 per year).

As these 111,000 households should all be part of the 121,000 homes also missing out due to the lower threshold that means, between those two changes, they are all set to see their finances reduced by £1,630 per annum.

So, for 2016/17 threshold changes are expected to reduce spending by £111m locally – but the total Tax Credit saving is expected to be £197m, which includes the £77m from the reduced taper rate (note that this figure excludes any savings from the interest-rate uprating freeze – set to be £4m in total next year – the vast majority of which also relates to Tax Credits).

By 2019/20 spending is set to be reduced, compared with previous projections, by £361m.

The Tax Credits element of that – again, excluding any savings from the uprating freeze, though it’s worth noting this is set to rise to £105m by then – will itself have dropped to £105m on the assumption that Welfare Reform passes.

A total of £77m of that £105 Treasury savings from the uprating freeze will come from both Tax Credits and child benefits, taken together.

However, if NI does not have a deal on welfare that figure could be much higher in compensation for the equivalent savings under Universal Credit.

Whenever Stormont gets itself back on the rails after recent crises – and this looks like it will be sooner rather than later – it will find that its biggest argument is getting smaller.