TaxPersonal TaxView from the House – Nick Gibb

View from the House - Nick Gibb

At the centre of the government’s Budget was the introduction of the new Working Families Tax Credit which replaces the existing in-work benefit, Family Credit. This will cost some #1.4bn per year, according to the Red Book.

This is the extra cost of WFTC over and above the existing cost of Family Credit of some #3bn a year. Thus WFTC will cost about #4.5bn a year, according to the government.

But it is how this is accounted for which is the real steal. Family Credit was a benefit paid, generally speaking, to the spouse at home caring for the child. It counted as government expenditure.

The new WFTC would be paid, in many instances, to a working spouse. So the WFTC merely reduces this spouse’s tax bill and will be accounted for by the government as tax foregone, rather than government expenditure.

The government has assumed that 80% of the cost of WFTC will count as tax foregone. In other words, by using the neat trick of re-labelling Family Credit as a tax credit, the government has removed at least #3.5bn a year from government expenditure and shifted it into the tax receipts line of the accounts as a negative figure.

This, therefore, has the added advantage for the government that it reduces the perceived tax burden. By counting expenditure as tax foregone it reduces tax receipts as a percentage of GDP – a clever but dishonest wheeze. The irony for the government is that when they published the Red Book on 17 March they forgot to reflect this fiddle on the tax burden figures in the relevant table.

The Red Book accurately records the tax burden rising from 36% to 37.8% of GDP by 2000/2002. The figure of 37.8% just happens to be 0.1% less than the projection for that year announced in the last Conservative Budget in November 1996.

So when your mortgage rises because of lower MIRAS relief; when your take-home pay falls because of the reduction in the Married Couple’s Allowance; and when your pension contributions rise because of the abolition of the repayment of Dividend Tax Credits, you can take comfort from the fact that your tax burden has not risen because the government figures say it hasn’t.

Nick Gibb is Conservative MP for Bognor Regis.

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