Tax credit analysis: the SNP and Labour get themselves in a muddle

It says a great deal about Scottish politics that Scottish Labour could vote to oppose the renewal of Trident, and it still wouldn’t be the biggest controversy to emerge from the conference season.

The bomb had loomed large over the UK Labour conference without ever going off. It may never have been discussed, but the UK’s nuclear deterrent was conspicuous by its absence.

At the tail end of his first conference as party leader, Jeremy Corbyn had been under pressure to say whether or not he would ‘push the button’ if he was elected. His answer was a simple one – “No”. But by that point he had already seen his attempt to get the party to debate Trident rejected.

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No one wants to ever use Trident, and few ever want to talk about it, but still, its shadow fell over the conference.

Scottish Labour, meanwhile, has no control over defence policy. The issue is reserved, and so – regardless of the geography of Faslane – it is not up to Scottish Labour to decide if the weapons system should be renewed.

But Kezia Dugdale, the new leader, had been clear that party members could debate what they liked. Her deputy, Alex Rowley, had been hinting he would oppose renewal for months.

And so at Scottish Labour’s conference, 70 per cent voted against renewal.

The outcome was a bizarre one. A UK Labour party, which supports renewal of Trident, led by a man who opposes it. A Scottish Labour party, which now opposes renewal, led by a woman in favour of it.

Trident, clearly, is a matter of posturing – in both a military and political sense.

Meanwhile, though less explosive, the SNP conference was not free of controversy either.

The party seemed to be aiming for a quiet one. In fact, the build-up had seen the leadership accused of attempting to stifle debate.

Several motions calling for an outright ban on fracking were not selected, and the one that was chosen was watered down before it got there. Even then members only just backed the official line on a continued moratorium.

On land reform SNP members went further, sending plans back to be strengthened. It was the first defeat Nicola Sturgeon has experienced as First Minister.

But still, it was hardly open revolt. Sturgeon’s speech was – at least by her own standards – a fairly mundane one, with the FM telling the audience to judge her on the attainment gap and celebrating the SNP’s general election triumph.

She said: “We will set ourselves the highest standards in government. If we fall short, we will learn lessons and strive even harder in the future.

“We will welcome scrutiny – no matter how tough it might sometimes feel. We will respect those whose opinion differs from ours. We will strive each and every day to do our very best.

“In so doing, we will win again and again the trust of the people we serve.”

But while Labour talked TTIP and Trident, and the SNP handled calls for another referendum from a massively expanded membership, it was tax, or at least tax credits, that proved the most controversial issue to emerge.

The Treasury estimates planned cuts to tax credit would save £4.5bn a year from 2016. Pointing to the introduction of the National Living Wage and changes to income-tax thresholds, George Osborne claimed most people would be better off afterwards.

But analysis from the Institute for Fiscal Studies (IFS) said otherwise, reporting that millions of working people would lose an average of £1,000 a year. So the pressure began to build.

Critics reminded Cameron he had denied he planned to cut tax credits before the election. Corbyn focused on the issue at Prime Minister’s Questions. The media turned on Osborne, with even right-wing press questioning the need for such extreme action. Support, too, among his own party started to look shaky, with Tory MP Heidi Allen using her maiden speech to attack the plans, saying she “could sit on her hands no longer”.

As Allen put it: “Too many people will be adversely affected. Something must give. For those of us proud enough to call ourselves compassionate Conservatives, it must not be the backs of the working families we purport to serve.”

Still, plans went ahead – at least until the Lords intervened. And it was a speech from Labour peer Baroness Hollis of Heigham – who tabled a motion to delay the scheme’s implementation for three years – that captured the mood.

“We can be supportive of the Government and give them what they did not ask for – financial privilege – or we can be supportive instead of those three million families facing letters at Christmas telling them that on average, they will lose up to around £1,300 a year, a letter that will take away 10 per cent of their income, on average. That is our choice. Those families believed us when we all said that work was the best route out of poverty and that work would always pay. They believed the Prime Minister when he promised that tax credits – and they are one package – would not be touched.”

She continued: “In 1997, some 43 per cent of single parents worked. That figure is now 65 per cent – a 50 per cent increase – partly because tax credits made work pay. That was our contract with the working mother, and she has done everything that we asked. Now, we will send her a letter at Christmas telling her that we are taking away some £1,300. Her life is hard. She needs financial stability in which to bring up her children. She needs transitional protection, so that the cuts affect only new claimants who have not built their lives around the protection that tax credits currently offer.

“National newspapers, from the Daily Telegraph to the Sun, are asking the Government to think again before those letters arrive at Christmas, as are the think tanks. The IFS says that the Treasury’s claims are ‘arithmetically impossible’, yet those letters will still arrive at Christmas. Members of the Conservative Party, including members of this House, have expressed their disquiet as the cuts are too hard and being made too fast, yet those letters will still arrive at Christmas.”

The idea of these letters was too much and peers voted by 289 to 272 to provide full financial redress to those affected, while also stalling the plans until an independent study of the impact was carried out.

And so it was that, coming out of conference, it was Dugdale’s views on tax credits, and not Trident that captured attention.

She had spoken to Holyrood just days before the conference, telling editor Mandy Rhodes that the 50p tax rate would feature in her party’s 2016 manifesto.

Asked how much the tax would generate, Dugdale said: “Up to £100 million. But bluntly, Mandy, it could also raise zero because of the mechanisms by which people can avoid paying tax so it is up to £100 million which we would ringfence purely for school spending. But in the case of us not raising what we hope, we also have an additional redistributive mechanism which we would use for education, which is to scrap the APD measure which would bring £250 million and we would spend that on educational inequality.”

The SNP has been planning on either cutting or abolishing Air Passenger Duty (APD) for a long time, with the party arguing it would provide a boost to the aviation industry, and the wider economy, north of the border.

And so Labour would not cut the tax, keeping £250m in revenue that would otherwise be lost, and spending the money on education.

Fair enough. The difficulty came later, with Dugdale’s conference speech.

The new Scottish Labour leader had taken to the stage in front of a huge screen, lit up with the word ‘CHANGE’. Her speech focused on education and gender inequality, stressing the need to prepare for the future.

She said: “The SNP have said they would cut the tax paid on airline tickets, a policy which will eventually cost £250 million a year. I know that this is a policy which many will welcome, not least the airport operators.

“But I say this - a tax cut for those who can already afford to shop for airline tickets cannot be Scotland’s priority when families cannot afford the weekly shop.

“So we will spend the money the SNP would instead spend on abolishing Air Passenger Duty, and we won’t implement George Osborne’s new tax cut for those on the higher rate of income tax. We will do things differently.

“Before the UK elections our opponents said there was no difference between Labour and the Tories. I hope they can see the difference now.

“A Labour Government introduced tax credits, a Tory Government will cut them.

“At the Scottish elections if people ask what is the difference between a Scottish Labour Government and an SNP Government this is the difference. A Scottish Labour Government will restore the much needed tax credits. An SNP Government, left to their own devices, would leave the Tory cuts in place.”

The magazine featuring Dugdale’s interview was released at conference. In fact, it came out on the day of her speech. Labour would keep APD at the same rate – that much was clear. But would the money be spent on education and addressing the attainment gap, or on restoring tax credits?

The answer arrived soon after. Tabling a Scottish Parliament debate entitled ‘Supporting Scotland’s Children’, Jackie Ballie took to her feet just 24 hours after voting against Scottish Labour’s new position on Trident.

She said: “The SNP spends money to cut a tax, but we would spend that money differently. We would use that revenue to restore the money lost from tax credits for families in Scotland, using the new powers that are coming to the Scottish Parliament through the Scotland Bill.”

The debate was about as heated as it gets in Holyrood.

Alex Neil, cabinet secretary for Social Justice, responded: “The SNP will continue to demand total reversal of the tax-credit cuts in the Autumn Statement, but if the Tories continue to force through changes that are to the detriment of hard-pressed working families in Scotland, the Scottish Government will not stand by idly and watch the living standards of our poorest families fall off a cliff.

"Once we know the facts, the shape and the content of the Chancellor’s final tax credits proposals, we will consider carefully what action needs to be taken to protect the living standards of our most vulnerable children and families.”

The Government had been adamant, up to that point, that it was impossible to restore tax credits. Murdo Fraser intervened, asking Neil whether “the new amendments to the Scotland Bill that he has mentioned will, if agreed to, give this Parliament the power… to replace in full any reduction in tax credits?”

Neil responded: “The amendments that were tabled today should give the Scottish Parliament that power. However, none of the amendments that were tabled before today would have done that.”

Willie Rennie called it a “humiliating day” for the cabinet secretary. Baillie said if the SNP did not vote for Labour’s motion it would prove the “politics of grievance is more important to them than helping working families in Scotland”.

In FMQs, Dugdale pressed Sturgeon for an answer on what power the Government had.

She said: “Despite days of protesting that it was not possible, yesterday, the SNP Government finally admitted that we will have the power to restore money lost through tax credit cuts… Does the First Minister agree with her finance secretary that spending hundreds of millions of pounds to make airline tickets cheaper is affordable but restoring tax credits is not?”

The FM responded: “We will keep up the pressure on the Tories to drop the cuts altogether and, if they do not completely reverse them, we, as a responsible Government, will introduce credible, deliverable and affordable plans to protect low-income households, just as we did on the bedroom tax.”

Next, she went on the attack: “In an interview in Holyrood magazine the day before she [Dugdale] announced her position on tax credits, she said that Labour would scrap the Air Passenger Duty measure and spend that money on education, so in the space of 24 hours Labour managed to spend the same sum of money twice over.”

So the debate entered an uneasy stalemate, with both parties returning to familiar stances. The SNP accused Labour of inconsistency and incompetence. Labour accused the SNP of refusing to use the powers at its disposal.

Meanwhile, the discussion continued to be dominated by the financial effect of cutting APD, and not the effect such a move would have on the environment.

Both Labour and the SNP accepted the move would increase the number of flights – indeed, that is the whole point – but, for weeks, no one mentioned the effect increased emissions would have on climate change.

And so it went on. Tax credits had started off in the House of Commons with George Osborne, moved into the Lords to be derailed, had been resurrected, confusingly, by Dugdale at her conference, and used to trip up the SNP in Holyrood. Now, with the Scotland Bill entering its final stage in the House of Commons, the issue returned to Westminster.

The Bill gives the Scottish Parliament the power to top up welfare benefits and create new payments, but the SNP’s calls for tax credits to be devolved entirely were rejected.

And so while the Scottish Parliament will have the power to mitigate the cuts, it will not be straightforward.

Labour’s figures suggest it could cost £375-£400m in 2017/18 to compensate for the reductions, though it could rise in later years. Dave Phillips, Senior Research Economist at the IFS, described the figure as reasonable.

Speaking on Good Morning Scotland, he said: “It could be complicated, it is feasible to do, but it would involve complex calculations so it needs careful consideration.”

He added: “What’s not clear, from the announcement so far, is whether the proposal is to undo cuts that will come in next April – cuts to in-work support, cutting the threshold and increasing the taper rate for tax credits – or whether there are also plans to cancel cuts further down the line, such as restricting it to the first two children. If it was to also undo those changes as well, that is when the cost would start to rise in the long term.”

In the meantime, things are complicated enough.

If elected, Labour would keep APD, but have changed their mind about what the saving would be spent on. The SNP would do something to restore income lost by tax credit cuts, after saying they could not, but no one knows exactly how or by how much.

Meanwhile, the 2016 Scottish Parliament elections are fast approaching. Maybe the manifestos will clear things up.