Green Shoots of Radicalism

Over the weekend David Cameron gave his speech to the Conservative Spring Forum at Cheltenham. I had thought I might try and analyse the speech, but instead I'll just focus on one very important aspect: the singling out of tax credits for the chop.

Now Cameron didn't say he'd obliterate them totally, but rather that the situation whereby someone on £50,000 receiving tax credits was unsustainable and in need of reform. I agree, but was pleasantly surprised to see a politician say it (Vince Cable also said this was a problem last weeek). Tax credits are a nice handout to the middle classes, so removing them will be politically painful if not traumatic. But removed they must be.

Why? I fear that tax credits have been a time bomb sitting within the public finances. Ordinarily governments set up automatic stabilisers which kick in during a recession. The classic example is unemployment benefit - tax revenues are falling because people are losing their jobs so no longer paying things like income tax or national insurance, but at the same time they start collecting unemployment benefit from the government. This causes the government to need to borrow money, but stops the economic fallout being too horrendous (the people have got some money). Tax credits act as souped up automatic stabilisers. Now you don't need to lose your job to start costing the state more money. If your income simply falls you pay less tax, but become eligible for more tax credits to be paid to you. Given that these tax credits can start once your income falls below £50k, that affects an awful lot of people. So many that it represents a real threat to the stability of the public finances, whose stabilisers can cause it to fly out of control. A small downturn can quickly create a huge need to borrow, so a deep recession can create a gargantuan need to borrow.

Therefore tax credits represent a threat to the stability to the public finances, but ordinarily would be a political hot potato no-one would like to pick up. That Cameron and Cable have attempted to pick it up is heartening. It shows that they get how big the problem is, and what may be needed to solve it. This could be the start, the green shoots if you will, of a radical reshaping of economic policy in the UK.