Tax credits Q&A: What makes the Government’s defeat in the Lords so important? What happens next?

An estimated 3.2 million families will be spared the miserable pre-Christmas shock the Government had in store for them

(PA)

Q | What makes the Government’s defeat in the Lords so important?

A | The real importance is that an estimated 3.2 million families will be spared the miserable pre-Christmas shock the Government had in store for them. If the Lords had rubber stamped the cuts in tax credits proposed by the Chancellor, their income would have dropped by more than £100 a month, on average. That may yet happen – but not in 2015.

Q | What are tax credits?

A | When Gordon Brown was Chancellor, he wanted to end the “poverty trap” under which some people were better off on benefits than if they found work, so he devised a complicated system under which the state topped up the wages of the low paid, giving them an incentive to stay in work. In 2001-2, the cost was £4bn a year, or 0.8 per cent of national income as measured by GDP. The cost soared when wages were hit by the crisis of 2008. Tax credits now cost £30bn a year, or 1.8 per cent of GDP.

Q | Why did the Government choose this time to cut them?

A | Osborne is determined to get the overall cost of welfare down by £12bn a year, which would be almost impossible without attacking tax credits. His proposed changes would reduce their annual cost by £4.4bn, giving Osborne more than a third of the savings he is seeking. He wants to do it now, so soon after a general election, on the political principle that it is best for a government to inflict bad news early in the Parliament in the hope that memories fade by the next election.

Q | What actually were they asking the Lords to do?

A | The Lords were presented with what is called a Statutory Instrument, which is much quicker to implement than an Act of Parliament. Osborne’s argument is that this an administrative measure that did no more than amend existing legislation. It is a matter of “take it or leave it”. The Commons took it: the Lords rejected it.

Q | Why is this a crisis?

A | There is a convention going back to the 17th century that financial measures are the exclusive preserve of the Commons, on the principle that there should be no taxation without representation. Ministers believe the Lords are guilty of a breach of that convention. The former Labour Lord Chancellor, Lord Irvine, evidently agreed, because he voted with the Government. Other experts, such as Dr Hannah White of the Institute for Government, believe that the Lords were within their rights because the Government tried to use a statutory instrument instead of passing an Act of Parliament.

Video: Baroness Hollis savages Osborne

Q | Surely this isn’t new?

A | The Lords defeat the government often enough, but blocking a statutory instrument is very rare. It is thought to have happened only once between 1945 and 1997, in 1968. After Labour got rid of hereditary peers, the Lords showed more spirit and blocked statutory instruments in 2000, 2007 and 2012.

Q | Was there an issue about what the Conservatives said during the election?

A | There is another convention that the Lords does not oppose measures that were contained in the governing party’s election manifesto. The Tory manifesto included a promise to deliver “welfare reform”. The Tories argue that reforming tax credits was implicit in that. Their opponents say that the words “tax credits” do not appear in the manifesto and David Cameron gave the misleading impression during the campaign that the tax credits were safe from cuts.

Q | What next?

A | There were dark threats of “consequences” if the Lords dared thwart the Government – including a threat to flood the upper house with 100 or more new Conservative peers – but all that has actually happened so far is the promise of a “rapid review” of the relationship between the Lords and the Commons, headed by Lord Strathclyde, a hereditary Tory peer. The outcome is unlikely to be revolutionary.

Meanwhile, George Osborne has to decide whether to back down or fight on. He has very little room for manoeuvre, because if he does not cut tax credits as threatened, his target for cutting the welfare budget becomes almost impossible.

He can always get his way eventually, provided he has a majority in the Commons, because the elected chamber will always prevail over the unelected one in the end.

His worry is that a number of Tory MPs who have supported him so far with increasingly vocal reluctance may break ranks, denying him the majority he needs and forcing him to make concessions.