Tax Credits: Now it’s a Constitutional Issue

October 27, 2015, 2:39 PM GMT+0

The government’s defeat on its tax credit policy in the House of Lords on Monday evening has left it with two problems: what to do about the policy itself, and what to do about the Lords.

On the first, the Chancellor, George Osborne, says he will ‘listen’ to the objections raised and come up with a revised plan when he delivers his autumn statement next month. That will be difficult enough, but the second problem could prove even more intractable. The Lords, having successfully flexed its muscles, looks set to keep doing so whenever the government proposes something it doesn’t like. So what, if anything, should be done about the Lords’ defiance?

The policy the Lords stood up against was the controversial one announced by Mr Osborne in his summer budget, to cut the levels of benefit paid in the form of tax credits to working people on low incomes. He claimed then that the effect would be offset by his unexpected introduction of a national living wage which would, in effect, raise the minimum wage to £7.20 from next April and to over £9.00 by the end of the parliament. This, together with other measures, including raising the threshold at which earners would begin to pay income tax, would mean few people would end up worse off. But in the process he would make savings in the welfare bill of £4.4bn.

However, the independent Institute for Fiscal Studies has calculated that three million households will be worse off to the tune of £1,300 a year on average. It is this the Lords objected to. They passed one motion calling for a delay in implementation until the consequences had been fully explored. And, by a majority of seventeen, they passed a Labour motion giving full redress for those financially harmed by the cuts to their tax credits.

The government responded by saying it was constitutionally outrageous for the Lords to do this because, in its view, it breached a long-standing constitutional convention – some saying going back to the fifteenth century – that the House of Lords does not defy the House of Commons (and therefore the government) on financial measures. The Commons, they argued, had voted three times to support the government’s policy, most recently with a majority of thirty-five, well above the government’s notional majority of twelve. Furthermore, they said, the Conservative Party made clear in its manifesto that it wanted to cut the overall welfare budget by £12bn, to which the tax credit cut would contribute substantially.

But defenders of the Lords’ action buy none of this. They argue that the Tory manifesto at the election made no reference to hitting tax credits and that during the campaign David Cameron explicitly ruled out cutting benefits relating to children. They also say that the government is wrong about the constitutional convention.

The most salient feature of this, they argue, goes back to the prolonged constitutional crisis a hundred years ago when a Tory-dominated House of Lords tried to throw out the 1909 budget of the Liberal chancellor, David Lloyd George, the so-called ‘People’s Budget’. Two years of arm-wrestling between the two houses of parliament followed, including two general elections and the threat by the Liberal prime minister, Herbert Asquith, to pack the Lords with his supporters to vote the Conservative peers down. The result was a victory for the government and the Commons. The Lords passed the Budget and agreed that in future it would not block subsequent finance bills coming from the Commons.

Defenders of the Lords’ action on Monday say that their defiance does not breach this convention because the measure that they stopped in its tracks (the cutting of tax credits) came not in the form of a finance bill but as a statutory instrument, a parliamentary device by which governments use existing legislation to authorise a particular measure they want to introduce. The difference may seem arcane but to those peers who voted against the government it provided a vital justification. That’s because statutory instruments cannot be amended in the Commons: the lower house simply votes yes or no to them. So in this case, the lordly rebels argued, they were doubly justified in acting as they did: the measure wasn’t a finance bill and even the elected Commons had not had the opportunity to amend it.

Whether their action was or was not constitutional, it leaves the government with a problem that goes far beyond what to do about tax credits. For the first time a Conservative prime minister faces a House of Lords in which his party does not have a majority and one where the opposition benches know they can inflict similar defeats whenever they want to. Tory ministers have attacked Labour and Liberal Democrat peers for showing pique at having lost the general election and for acting undemocratically. They point out in particular that the LibDems managed to get only eight of their candidates elected as MPs but have 111 unelected peers. (The Tories have 249 peers, Labour 212 with 176 cross-benchers and 25 bishops.)

Before the vote, hints were being dropped that the Prime Minister might ‘do an Asquith’ and flood the Lords with 150 new Tory peers in order to re-establish his majority. But in the cold light of morning this seems highly unlikely to happen. Mr Cameron has already been heavily criticised for creating far more new peers than his predecessors, pushing the size of the Lords up to over eight hundred, considerably more than the elected Commons (whose numbers he anyway wants to reduce). It would also be politically risky (to say the least) to make such an unpopular move in support of an unpopular policy.

Instead, Downing Street announced that the Prime Minister had ordered a ‘rapid review’ as to how the convention, whereby a government could get its finance measures through the Lords, might be put ‘back in place’.

Such a review is bound to re-ignite the whole issue of Lords reform. Indeed, this is no doubt what many LibDem peers hope will be the outcome of their defiance. They are still smarting from the way their party’s attempt to reform the upper house when the LibDems belonged to the coalition government was scuppered by Conservative backbenchers.

So once again we are likely to hear all the old arguments rehearsed. Should the Lords be elected? Would that set it up as a democratic challenger to the Commons? Or should it go on being appointed? If so, should there be more curbs on its ability to defy an elected government in the Commons?

Whatever the government comes up with in its ‘rapid review’, any new proposals will face a particularly difficult hurdle to jump: they will have to be agreed in the Lords and there the government does not have a majority…

What’s your view? Were the Lords right or not to challenge the government on its tax credit policy? What should the government now do about that policy? And what, if anything, should be done about how the Lords uses its powers and how their lordships get to be in the House in the first place?

Let us know what you think.