Tax Credits (Working Families)

James Cartlidge Excerpts

Tuesday 7th July 2015 Commons Chamber

[James Cartlidge (South Suffolk) (Con)]

I am delighted finally to have the opportunity to speak on this subject because I profoundly believe that tax credits are one of the greatest policy errors in the history of the welfare state. I say that not because of the Resolution Foundation, the International Monetary Fund or any theory; I say it because of my experience in the real world running a small business.

Let me share two key experiences with the House. The first was when I set up as a mortgage broker in 2004. We focused on the shared ownership sector, so most of our applicants were on lower and middle incomes. I was distinctly surprised when I found that people could take out mortgages based on tax credits. It its wisdom the Financial Services Authority decided that that was suitable, and I would be interested to know whether there are any Treasury figures on the amount of credit—both secured and unsecured—that was taken out on the basis of tax credits, using other people’s money to borrow other people’s money, and reinforcing the double dependency at the core of the tax credit system.

In my experience, the most serious issue with tax credits was when we started to recruit staff. In 2009, we embarked on our first round of pay rises after the great recession—Labour Members will be familiar with that—and I found it extraordinary when I received emails from staff declining those pay rises. Why did people not want a pay rise? One would expect anybody to want one—we all would; we want to get on in life. People rejected those pay rises because they would lose too much in tax credits, and that is the fundamental flaw in the tax credit system. I found that with various members of staff and parents at our school: people were in a dilemma about whether they should press on in life and try to earn more, even though they would lose money from tax credits and other benefits. I think that the tax credit policy is such a profound error because at a time of general prosperity we should not be seeking massively to expand the benefit system.

Let us consider our three core economic challenges. The first is the productivity puzzle, but it is no puzzle to me that people do not become more productive or work harder when there is no incentive for them to do so. Secondly, why is it a surprise that we have flat wage growth when there is such a disincentive for millions of workers to earn more? Thirdly, and most importantly, we have a real problem with social mobility, which is frozen. Everybody talks about that problem, but why would someone try to get on in life and be socially mobile if the massively expanded benefit system does not reward them for doing so? That is fundamental. To me, the essence of the tax credit system is that we are spending £30 billion a year to put a cap on the wages of British people and a ceiling on ambition and aspiration.

[Jess Phillips (Birmingham, Yardley) (Lab)]

I would like the hon. Gentleman to recognise that quite a lot of Opposition Members lived on tax credits and it is insulting to say that we have no ambition. I am sure he will recognise that we do.

[James Cartlidge]

I am delighted that the hon. Lady has searing ambition, and I am sure that when she achieves her full ambition she will want to reform welfare and ensure that people make the most of themselves. Tax credits are a massive barrier—that is a fact even if no Labour Member will recognise it—and we are spending £30 billion a year to put a ceiling on the aspiration and ambition of British working families. My hon. Friends and I believe in a safety net, but I do not believe in a ceiling. We should not put ceilings on ambition and hold people back from making the most of their natural talents and abilities. We should empower them to make the most of their skills.

[Dr Eilidh Whiteford (Banff and Buchan) (SNP)]

The hon. Gentleman thinks people are getting a king’s ransom in tax credits. The reality is that the Government are taking people on low pay that simply will not keep a person and their family and bringing them just to the breadline. They are not exactly incentivising them to stay in poverty. That is the crucial flaw in his argument.

[James Cartlidge]

Of course it is not a king’s ransom. That is the point. We are trapping people on benefits.

At the end of the day, the money has to come from somewhere. Someone else has to earn the wages to pay for the tax credits of the people who receive them. If we reduce them, people will have to be more productive, will have to work harder and will take alternative employment to make that up. That is what happens in the real world. I am proud to be in a party that is ready to take the tough decisions to deal with the fundamental problems we face.

We must look at a solution to the problem the hon. Lady describes. Clearly, we cannot just cut the whole system overnight, but it is worth reflecting that, according to the House of Commons Library, if we spent the £30 billion we spend on tax credits on education, we would have the best-funded education system in the European Union and the fifth best-funded system in the entire world.

There are choices—to govern is to choose—and there is an opportunity cost to spending. My view is that we should reduce tax credits, increase the minimum wage over a long period towards the living wage and reduce employer’s national insurance with the savings we make so that employers can cope with the increase. That is a one nation policy. It is radical and tough. I say to my hon. Friends on the Front Bench: be brave, be bold and reform tax credits, because they will be helping working people who are being held back by that massive dependency culture.