UK Family Law Reform

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Overhaul tax credits or miss key child poverty targets, Brown told

· Citizens Advice calls for a 'radical rethink' of system
· Almost half of tax credit payments were incorrect

Phillip Inman 5th December 2006

Gordon Brown will miss crucial child poverty targets unless he signals, in his pre-budget report tomorrow, a complete overhaul of the troubled £14bn tax credits system, leading anti-poverty campaigners have warned the chancellor.

In 2004-05, almost half of all payments were incorrect. Of the nearly 6.5 million families receiving them, almost 2 million were overpaid and then forced to pay the money back, while more than 900,000 were underpaid.

David Harker, chief executive of Citizens Advice, said progress in reducing poverty had hit the buffers and the Treasury needed a radical rethink to continue the progress of the last few years. He called for a debate about the next stage of welfare reform to tackle disincentives built into the system, which over the longer term discourage workers from increasing their earnings.

"The government has had considerable success at getting many people, particularly mothers, into work. But the existence of high marginal tax rates - when you combine the effect of tax payments and the loss of benefits - and low wages and relatively low skills, makes it difficult for them to improve their living standards.

"This is a major challenge for any future government. It demands a rethink of existing approaches that may have now run their course," he told the Guardian ahead of the pre-budget report.

Mr Harker, 55, who has keenly supported the expansion of tax credits since Labour came to power, said the steep increase in complaints, often from families on low incomes, showed an overhaul was needed.

A series of critical reports has questioned the long-term benefits of the scheme. Separate studies by the Joseph Rowntree Foundation and the Institute of Fiscal Studies showed the government was unlikely to meet its aim of reducing child poverty by half in 2010 if it continued with the current system of tax credits and welfare benefits.

A recent study by the Child Poverty Action Group found many jobs taken up by single mothers and other tax credit claimants were low quality and unlikely to provide a springboard to a better life.

Mr Brown is expected to rebuff calls for any review of tax credits.

Mr Harker warned of an alarming rise in the numbers of people getting into debt problems, and said creditors acting more aggressively.

He said the numbers with serious problems had doubled over the past eight years, and he expected debt to overtake welfare benefits as the charity's single biggest issue next year. This year 1.4 million people asked his charity for advice on debts compared with 1.5 million seeking help with welfare payments.

Mr Harker is not one to grandstand and make demands for sweeping regulations each time a financial scandal hits. However, he is critical of the government's failure to promote financial education, and to do more to prevent the worst excesses of modern capitalism - loan sharks, aggressive bailiffs, commission-hungry sales staff - from ruining people's lives.

The sudden growth in credit card debt, unsecured loans and second mortgages has given him a deep sense of foreboding about the next couple of years.

"We try not to get sucked into a moral argument about borrowing and debt. But there are two areas where we have real concerns. One is how vulnerable consumers are treated when they first get into problems and, second, is monitoring how quickly finance companies send in the bailiffs or repossess homes.

"Our survey in September found more than 750,000 homeowners had missed at least one mortgage payment. Following the latest interest rate rise, we are starting to feel there is a serious problem looming. We could be approaching a tipping point."

Dickensian sub-prime lenders are some of the worst offenders. He said they will often attempt to grab back homes as soon as one payment is missed.

"We're looking at evidence that some are targeting people on more modest incomes and encouraging them to get on the property ladder when maybe it is not the best option. When they get into trouble, the companies are acting very aggressively," he said.

According to recent reports, local councils are increasingly joining the gang of creditors. Research from the University of Warwick estimates that 3m summonses for non-payment of council tax are issued each year. And with nearly 2 million households struggling to pay the tax, it could get much worse.

Mr Harker says the growing workload should nudge the chancellor to extend funding for the charity's work.

Last year Mr Brown awarded an extra £33m for two years from his financial inclusion budget to double the number of specialist advisers.

"There is every sign that the problem isn't going to go away, so we would hope the government can find the funding we need to keep up this level of service," Mr Harker said.

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