This week the House of Lords voted against measures to reform the system of tax credits.
The votes by the Lords on Monday evening raise a number of constitutional issues as the unelected Labour and Liberal Democrat peers defeated a financial package which had been passed by the elected Members of the House of Commons.
The issue of the relationship between the House of Commons and the House of Lords is clearly something that will need to be addressed. No one can disagree that the elected members of the Commons should have the final decision on legislation.
In May this Government stood on a commitment to continue to secure our economic recovery. It was elected to deliver this commitment: to tackle the deficit and deliver the lower welfare, higher wage economy that the British people want to see. That commitment has not changed. However, the Government will address the consequences of the votes in the House of Lords. The Chancellor has always said that he would listen to the concerns being raised over the reforms of the unsustainable tax credits system. That is precisely what he will do at the upcoming Autumn Statement.
When tax credits were first introduced they cost just over £4 billion in the first full year. They now cost £30 billion every year with nine out of ten families qualifying for means tested payments. We are now in a situation where the tax credits system is supressing wages rather than supplementing them as was originally intended. It is clear that the system needs to be reformed but it has always been the intention of the Government to protect lower income families and mitigate any reduction in the tax credits system. From next April the introduction of the National Living Wage will deliver a £900 a year pay rise for someone working full time on a minimum wage. By 2020 it will reach more than £9 per hour, worth at least £4,800 a year extra in cash terms. The increases in the personal tax allowance has already saved a typical basic-rate taxpayer £825 a year and this threshold will rise again next April and continue to rise throughout this Parliament.
It is clear that reforms to the tax credit system are needed in order to get our bloated welfare bill under control but it is also clear that more needs to be done to protect families in receipt of tax credits when the changes are made.