New Tax Credits Will Cost UK Government £2.8 Billion A Year, Says IFS Report

by Amanda Banks, Tax-News.com, London

02 November 2001

Research published this week by the Institute for Fiscal Studies (IFS), a specialist research institute on the UK tax system, has revealed that two new tax credits that the UK government wants to introduce in 2003 have so far been excluded from the Treasury's public finance projections and could cost the government up to £2.8 billion a year.

David Willetts, the work and pensions spokesman for the Conservative Party, has told reporters in the UK that together with a planned pension credit the government could lose nearly £6 billion a year and called for details on how the costs would be met.

The two tax credits are an employment tax credit for low-wage workers and the integrated child credit for families with children. The IFS report has found that the credits could cost around £2.1 billion a year to introduce if they are not to make any poor families worse off, and this could rise to £2.8 billion a year - the approximate yield of an extra penny on the basic rate of income tax - to ensure that no dual-earner families who currently receive the children's tax credit lose out.

Michal Myck, one of the authors of the report, claimed: 'The employment tax credit looks set to go only to those 25 or over who work at least 30 hours a week, so the direct impact on poverty will be small. Only around 400,000 families will be entitled to receive an average payment of around £16 a week.' Nor, stated the report, will the work incentive effect be great. For most people without children, entering work already increases income significantly because the benefits available when unemployed are low.

The gains from both credits are largest amongst lower-income families, and they tail off as income rises: the poorest tenth of families are set to gain an average of 2.7 per cent, while the richest families are predicted to lose slightly.

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