Tax credits have become the most divisive issue in British politics, splitting government from opposition, both major political parties internally and the House of Lords from the House of Commons.  But what are tax credits anyway?  I suspect not many readers of this newspaper know.  Few subscribers to the Financial Times are eligible.

Tax credits originate in a scheme devised under Margaret Thatcher’s government by Arthur Cockfield, a brilliant but impossible adviser. (and in due course  a key figure in the creation of Europe’s single market.) Labour Chancellor Gordon Brown loved the tax credit scheme and greatly extended it.

The idea was to achieve a partial integration of tax and benefits by providing credits which would reduce liability to tax, or in many cases turn it negative.  In practice, the integration was more apparent than real. Tax credits, separately applied for, separately paid and separately calculated were a new name for benefits to families and low paid adult workers.

        A poverty line is usually defined as some proportion of mean or median earnings.  But the measurement of poverty is complex, as a result from differing housing costs across the country, and differences in household composition. And should a measure of the poverty line be fixed or rise in line with the incomes of the non-poor?  Extensive data on poverty over time in the UK has been compiled by the (independent) Institute for Fiscal Studies and the (more campaigning) Resolution Foundation

But on almost any measure, child poverty was reduced significantly between 1997 and 2010, mainly because of the generosity of tax credits to working households with children.  Pensioners also made significant gains because of the so-called ‘triple lock’ which provided annual increases of whichever is higher of the rise in earnings, prices, or 2½%.  The least favoured  in this period were childless adults with low or no earnings.  They benefited from the introduction of a minimum wage, but this was set at levels such that those receiving it would normally still be designated as poor.  

Labour’s policies from 1997 – 2010, relatively successful in achieving their aims of tacking poverty among children and the elderly, were in aggregate expensive: the costs of extended tax credits and real increases in pensions totalled around 5% of UK government spending.

Conservative Chancellor George Osborne appeared on this scene with a variety of objectives.  The position of pensioners remained sacrosanct: baby boomers are too numerous, too vocal, and too selfish.  For the first time in British history, people of pensionable age are better off than the rest of the population.   But the feckless idlers with large families routinely featured in tabloid newspapers, who boast of receiving more in benefits than most working households could aspire to earn, enjoy no public sympathy or political clout. Even if there are few such households, their grinning faces jeopardise the legitimacy of a system which aids the genuinely needy. .  Yet this is not an easy problem:  one might wish such cases did not exist, but is it either just or sensible to punish the children of these households when they do? 

   Mr Osborne’s proposals combine drastic cuts to tax credits with a substantial increase in the minimum wage. The primary objective is  to spend less, but at the same time to shift part of the burden of supporting poor households from the state to business and to redistribute from households with children to individuals who work.

Amongst hard political choices these are not necessarily bad ones.  But whenever you are dealing with the finances of people who live from week to week, any change must be gradual, and preferably imperceptible.   The scale of current controversy is a powerful signal that this principle has not been observed.