Tax Credit Cuts and the Argument Against Constitutional Crisis

House of Lords 3

When it comes to mind, there is rarely much of a middle ground concerning the House of Lords. The second chamber of parliament in the UK is viewed by its supporters as a grossly undervalued institution, which makes detailed and meaningful revisions to legislation passing from the Commons, benefitting from being unelected in so far as this allows the expression of alternate points of view. Opponents meanwhile consider the upper house an anachronism, an unrepresentative blight on democracy for being unelected, which is unfit to challenge or advise the Commons, and lies subject to a corrupting and highly politicised system of patronage.

If the Lords ever makes headlines, it is usually upon the question of reforming the House. This has traditionally been a cause of the left, although despite promising reform in their 1997 general election manifesto, the Labour Party under Tony Blair and Gordon Brown failed to implement any measure, public consultations and two parliamentary votes resulting in a divided Commons and a Lords keen to remain all-appointed. The Conservative-Liberal Democrat coalition agreement in 2010 included a provision for a largely elected second chamber, but a reform bill introduced by Nick Clegg in 2012 was abandoned in the face of opposition from Tory backbenchers.

Yet when on Monday the House of Lords voted to delay the government’s proposed £4.4 billion cuts to tax credits, which were outlined in George Osborne’s Summer Budget speech in July, within hours leading Conservatives were branding the decision ‘unconstitutional’ and threatening various ‘rapid’ processes of investigation and reform.

The government’s proposed cuts have been approved on three occasions in the Commons, where the Conservatives have a majority. But in the Lords, there are currently 249 Conservative peers, 212 Labour peers, 176 crossbenchers, and 112 Liberal Democrats, as well as small numbers of assorted bishops and peers from the UK’s minor parties.

This was a rare high-profile example of the Lords, parliament, and the constitution working as they should, to protect the marginalised and most vulnerable members of society against the populist manoeuvring of government. As well as opting to delay the cuts for a process of consultation, the Lords also voted to provide three years of compensation to all those affected. Together, the two votes raise the prospect of the Conservatives having to implement significant welfare reform close to the 2020 general election.

Tax credits, first introduced by the Labour government in 2003, come in two forms: Working Tax Credits (WTCs) and Child Tax Credits (CTCs). Working Tax Credits are given to people who work for at least 16 hours per week on low pay: which means single people earning less than £14,000 a year, and couples earning less than £19,000. They come with a basic element of up to £1,960 a year, with additional elements relating to disabilities and total hours worked. Currently claimants who earn less than £6,240 a year will receive the full entitlement of Working Tax Credits. The governments proposals would lower that threshold to £3,850 a year, while increasing the rate at which subsequent payments are withdrawn from 41% to 48%

Child Tax Credits can be received by any person or couple with a child. To be eligible, a claimant with a single child and no disabilities must earn less than £26,000 a year, with the figure rising depending on the number of children. The basic element is up to £545 a year, while currently claimants can receive an extra £2,780 for each child under their care. The governments proposals would lower the threshold for full entitlement from £16,105 to £12,125, while limiting Child Tax Credits to a families first two children. In total as many as 4.53 families benefit from Working Tax Credits.

Beyond reducing government spending, George Osborne and David Cameron have repeatedly defended the cuts to tax credits as part of a move from a ‘low-wage, high-tax, high-welfare society to a higher-wage, lower-tax, lower-welfare society’, suggesting that the National Living Wage announced in the budget – which will start next April at £7.20 an hour, rising by 2020 to more than £9 – will offset any negative effects. But independent analyses are united in asserting that the negative impact will be significant.

The House of Commons Library states that affected families would face an average loss of £1,300 in 2016-17. The Institute for Fiscal Studies argues that Osborne’s National Living Wage would offset only 27% of the drop in household incomes owing to tax credit and benefit reforms, concluding ‘There may be strong arguments for introducing the new NLW, but it should not be considered a direct substitute for benefits and tax credits aimed at lower income households’. It stresses that the cuts will actually weaken the incentive for families to have someone in work.

The Resolution Foundation suggests that by 2020, low-earning single parents would continue to be £1,000 a year worse off, while low-earning couples with two children would be £850 a year poorer. It notes that even if a National Living Wage of £9.35 was introduced next April, along with a raised income tax threshold of £12,500, families would still ultimately lose money owing to cuts to tax credits. Meanwhile the Child Poverty Action Group has calculated that some earners would suffer tax credit losses in 2016-17 in excess of £2,000.

So the Lords had a wealth of evidence at hand when arriving at Monday’s decision. But if the choice to delay and seek a rethink over the proposed tax credit cuts was morally justified, and well within wider society’s best interests, the degree of authority the Lords should possess over the matter remains a point of contention.

The UK’s constitution is made up of a myriad of laws, so that in the absence of a single codified document, it is often described as ‘unwritten’. The important law when it comes to the Lords and financial packages is the Parliament Act 1911, which removed the right of the Lords to veto money bills, and instead afforded the House a maximum delay of two years. This came after the Lords had rejected the Liberal Party’s ‘People’s Budget’ of 1909-10, which proposed a programme of wealth redistribution via increased taxes. It was the first time the Lords had rejected a budget in two centuries, and the Lords passed the Parliament Act only when King George V assented to threaten a flooding of the House with hundreds of new Liberal peers. The Parliament Act 1949 reduced the maximum delay period for money bills to a single year.

Bolstering the government’s sense of entitlement, under the Salisbury Doctrine, which dates back to the post-war Labour government of 1945-51, the Lords does not vote against measures included in the governing party’s manifesto.

However, Osborne’s tax credit cuts were not presented to the Lords as part of a money bill. Nor – despite claims that they were ‘signalled’ within an outline of £12 billion welfare savings – were they a Conservative manifesto commitment, with David Cameron insisting on a Question Time Election Leaders Special that he was not planning to cut Child Tax Credits.

Instead, they were presented in a statutory instrument, otherwise known as delegated or secondary legislation. And according to the Companion to the Standing Orders and Guide to the Proceedings of the House of Lords, which summaries the general powers of the Lords, the Parliament Acts do not apply to delegated legislation.

Peers in the Lords have rejected delegated legislation on five occasions since 1945. In 1968, they rejected the Southern Rhodesia (United Nations Sanctions) Order, which would have given effect to a UN resolution extending sanctions against Rhodesia. In 2000, they defeated the Commons twice on Greater London Authority Elections Orders. In 2007, the Commons was defeated on the Gambling (Geographical Distribution of Casino Premises Licences) Order, which dealt with the provision of regional casinos. And in late 2012, they rejected an amendment to the Legal Aid, Sentencing and Punishment of Offenders Act, which could have left some disabled claimants without legal aid.

Such a rejection of delegated legislation involves tabling and voting on a so-called ‘fatal motion’. Parliamentary records show that between 1950 and early 2012 (before the rejection of the Legal Aid amendment), the Lords voted on 69 fatal and 71 non-fatal motions, with 4 fatal motions and 22 non-fatal motions succeeding. Between 1999 and early 2012, this amounts to 27 fatal and 42 non-fatal motions, with 17 Commons defeats, three of which were fatal.

So although the Tories deem their proposed cuts to tax credits ‘a financial matter’, the Lords would have been within their rights not only to delay but to kill off the secondary legislation up for discussion on Monday. In fact the Liberal Democrats did table a fatal motion, which was rejected in favour of delay and three years of compensation.

In response to an ill-conceived policy and what appears to be a severe case of political misjudgment, Conservatives have posited creating hundreds of new peers in order to give themselves a majority in the Lords. Alternately, they could take the opportunity to restate the privileged nature of the House of Commons. But at the moment talk of constitutional crisis seems overblown, a government petulant at not getting its way. Wrapping the cuts into a finance bill now would attract widespread condemnation, and Osborne will have to backtrack or consider phasing in his reforms.