George Osborne will soften the impact of his planned tax credits cuts if peers step back from a confrontation with the government and instead back a “regret motion”, the Cabinet Office minister, Matt Hancock, has indicated.
In the strongest signal from the chancellor’s camp that he will respond to growing unease among ministers to the cuts, his former chief of staff said Osborne was “very much in listening mode”.
As the government fights to persuade the House of Lords not to throw out the tax cuts altogether, Hancock suggested the chancellor would not act if peers voted for any other option on Monday afternoon.
Speaking on the BBC Radio 4 Today programme, Hancock said: “George is very much in listening mode. The peers this afternoon have the opportunity, through a motion put down by the bishop of Portsmouth, to express regret at this measure without breaking these constitutional conventions, long standing.”
Hancock indicated that, ideally, he would rather peers did not even support the regret motion. “I hope they support the measures because they are part of a package to get this country to live within its means and to support work and to support people getting into work and I think they are important. However, this is an opportunity for the House of Lords … to improve and suggest in a way that doesn’t break this long-standing constitutional convention.”
The remarks by Hancock echo, in stronger language, those of the education secretary, Nicky Morgan, on Sunday, that the chancellor was always keen to help working families. Morgan made clear that there would be no change to the plan to cut the earnings level at which tax credits start to be withdrawn, from £6,420 to £3,850, from next April.
The tax credits cuts will deliver £4.4bn of the chancellor’s planned welfare cuts. The Guardian reported on Friday that Whitehall sources expected Osborne would find ways to relieve the pressure on low-paid workers. The sources suggested the chancellor could mitigate the impact of the cuts by raising the rate at which employees pay national insurance contributions or by accelerating his planned rise in the tax-free allowance.
The remarks by Hancock show the government is adopting a good cop, bad cop routine ahead of the debate in the Lords which could see peers vote on four different motions. The government believes the first three motions, including a “fatal” one to be tabled by the Liberal Democrats, would break the convention that peers do not block financial measures. But Labour and the Lib Dems say the Lords are free to vote on all the motions because the planned cuts are being introduced through a “statutory instrument”, not through a finance bill.
The four planned votes are:
- A fatal motion, tabled by the Liberal Democrat peer Zahida Manzoor, that would kill the tax credits cuts stone dead. This motion has been dubbed the “Farron motion” after the Lib Dem leader, who has forced reluctant party peers to accept it. It is expected to fail because Labour is not whipping its peers to support it.
- A motion, to be tabled by the crossbench peer Molly Meacher, that would delay the cuts until the government spelled out how it would help low-paid workers. It cites a report by the Institute for Fiscal Studies (IFS) that 3 million families would lose £1,000 a year. Meacher is facing intense pressure from the government to back down. Labour does not expect Meacher to force a vote on her motion if the government says it will produce a report highlighting the impact of the cuts on different income groups.
- A motion, to be tabled by the former Labour minister Patricia Hollis, which would halt the cuts until the government produced a scheme to compensate low-paid workers for three years. This is the most dangerous motion for the government because it would force the chancellor to go back to the drawing board. It explains why the government is issuing such dire warnings to the Lords about the dangers of blocking financial measures.
- A motion of regret, to be tabled by the bishop of Portsmouth, Christopher Foster. The government is hoping that crossbench peers, who are wary of being overly hostile to the government, will support this motion. This would allow peers to register their opposition without disrupting the government’s plans.
Hancock quoted the former cabinet secretary Lord Butler of Brockwell, a member of the crossbench group of peers, who described the first three motions as unprecedented blocking measures. The government has said the lords have blocked statutory measures five times over the last century, and never on financial matters.
“The conventions say that the lords does not block financial measures that effect the budget of the country,” Hancock said. “Yes of course that means the finance bill. But it also means things like this that are over £4bn of public spending. This is obviously a financial matter.”
Andrew Hood, a research economist at the IFS, said on Friday that the chancellor could mitigate the impact of the cuts in four ways:
• Taking steps to exempt the lowest earners from paying national insurance. This is currently levied at a rate of 12% on incomes above £8,000, unlike income tax which is not paid on earnings below £10,600.
• Accelerating the raising of the tax-free personal allowance, which is due to increase to £11,000 from April 2016 and to £12,500 by the end of the parliament. Hood said these two policies were expensive and did not target low-paid workers as effectively as tax credits. “The problem that both of those policies have in common is that, in the absence of any change to the rates of income tax or employee national insurance, increasing the thresholds is very expensive for the amount of compensation you get.”
• Making the income threshold at which tax credits start to be withdrawn apply only to new claimants from next April, or changing the threshold from £6,420 to £3,850 in increments.
• Changing his path of eliminating the deficit by, for example, delaying his plans to deliver an overall budget surplus. Osborne has already delayed his surplus target by one year, to 2019-20, which delivered him about £4bn. He could delay the target by another year, until 2020-21, and still meet his surplus target by the time of the next general election.
