Emmanuel Mourlon-Druol, Lord Kelvin Adam Smith Fellow at the University of Glasgow’s Adam Smith Business School, examines the contentious EU freedom of movement rules, how they impact on the British welfare state, and UK government plans for reform. This post was first published by Bruegel.
In a speech on 22 June 2015, UK Prime Minister David Cameron pointed at a number of possible changes that could be made to the UK’s tax credit system. The UK’s tax credit system is an arrangement whereby some taxpayers (families and individuals on low income) can deduct a certain amount of money from the tax they owe to the state (although you do not have to actually pay any tax to receive the tax credit: the name is misleading). The Labour government introduced tax credits in the 1990s.
Why is the UK government suddenly thinking of reforming this system? The first immediate reason is the UK government’s official aim of cutting public spending. In an article in the Sunday Times on 21 June 2015, Chancellor of the Exchequer George Osborne and Secretary of State for Work and Pensions Iain Duncan Smith outlined a plan to reduce welfare spending by £12 billion a year. A quick look at UK welfare spending shows that tax credits (most importantly Child Tax Credit and Working Tax Credit) are an obvious area for attention, since cuts to state pensions have been ruled out.