Tax credits in the frame?

The government will consider dismantling the £20bn-a-year tax credits scheme for 2.4million households as part of a "big bang" reform of the welfare system, writes Andrew Grice.

In the election campaign the Conservatives denied that they would scrap the pay packet top-ups, promising only to stop paying them to families with incomes over £50,000 a year. But a merger of in-work benefits such as tax credits with out-of-work benefits such as Jobseeker's Allowance is being studied by Iain Duncan Smith, he says. "It is one of the leading options," said one Government source.

Grice reports officials' estimate that fraud and overpayments in the tax credits system amount to £1.7bn a year and Mr Duncan Smith has ordered a crackdown. More about tax credit fraud here.

I have written before that tax credits are very open to fraud and error because they are administered centrally. This centralisation - along with the detail required from claimants - reflects the character of their founder, Gordon Brown. Before they were introduced, the DWP offered to advise on how they might be administered, but he refused their offer. Control of tax credits was kept firmly in the Treasury. Thus it's significant that Grice's briefing appears to come from the DWP.

Grice writes that ministers believe tax credits are so complex that the public do not understand them. Many mistakes are reported in administering them - which suggests that not all the officials fully understand them either.

Labour fear the credits are vulnerable as the Government seeks ways to cut the £156bn public finances deficit. Obviously unpicking the scheme would be controversial. Grice writes that withdrawing tax credits "would be seen as a tax rise" for many hard-pressed families and could reduce their incentive to work rather than live on out-of-work benefits – at a time when Mr Duncan Smith has promised a major drive to "make work pay".

It wouldn't just "be seen as" a tax rise - it would be a tax rise - and a reform which Labour would vociferously oppose

According to Lord Freud, the Minister for Welfare Reform:

The heart of this issue is the separate in and out of work [benefit] structures we have got, which are enormously expensive. There are real savings to be made purely in getting these structures together.

Simplicity would cut running costs. It should reduce errors too.