The Treasury manages public spending within two ‘control totals’ of about equal size:

  • departmental expenditure limits (DELs) – mostly covering spending on public services, grants and administration (collectively termed ‘resource’ spending) and investment (‘capital’ spending). These are items that can be planned over extended periods.
  • annually managed expenditure (AME) – categories of spending less amenable to multi-year planning, such as social security spending and debt interest.

Social security and tax credits together are the biggest source of AME spending. Tax credits are one of the bigger elements of welfare spending. They comprise the working tax credit – payable to families with someone in work (typically for 16 hours or more a week) – and the much larger child tax credit – payable to families with children. The working tax credit also subsidises childcare costs. Awards are based on family circumstances and means-tested against family income.

Tax credits are one of the elements of welfare spending that will be replaced by universal credit over the coming years. Since universal credit is currently at an early stage of its rollout, we currently produce our forecasts by assuming that tax credits and the other legacy benefits continue being paid as before, then we add or subtract an amount to reflect the difference between universal credit and the six benefits and tax credits that will be replaced.

In our latest forecast, we expect tax credits spending in 2016-17 to total £27.5 billion, with 4.3 million recipients paid an average of £6,400 each. That would represent around 3.6 per cent of total public spending, and is equivalent to £1,000 per household and 1.4 per cent of national income.

  • Recent trends

  • Latest forecast

    Tax credits spending is set to increase by just 1.8 per cent in cash terms between 2016-17 and 2021-22. As this is considerably less than our forecast for nominal GDP growth during this time, this represents a fall of 0.20 per cent of GDP .

    This is mostly driven by falls to average awards. In particular, the uprating freeze between 2016-17 and 2019-20 means that average awards fall relative to average earnings, reducing spending on tax credits as a share of GDP. Cuts in support for first children and families with more than two children also reduce average awards.

    Our March 2017 forecast revised down spending on tax credits by £0.4 billion a year on average. In particular, spending was revised down by £0.6 billion in 2016-17.

    Chapter 4 in the March 2017 Economic and fiscal outlook explains the changes made to the tax credit forecast compared to March:

    In 2016-17, the main change is spending on tax credits – down £0.6 billion relative to our November forecast. That comes on top of the downward revision we made then. The number of claimants continues to be lower than expected and has now fallen in each of the past six years. The explanation remains unclear and we continue to work with HMRC to understand it. In the meantime, this forecast is subject to greater-than-usual uncertainty.

    Tax credits: changes since previous forecast

    taxcredits

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  • Previous forecasts

    Our forecast for tax credits spending has been revised down in most of our recent forecasts. Lower tax credits spending partly reflects caseloads being lower than expected, but we have not yet been able to get to the bottom of the ultimate cause of this trend. This is an area where we will continue to work with HMRC forecasters to gain a fuller understanding. The sharp fall in spending in 2016-17 in our July 2015 forecasts reflected the policies announced in the Summer Budget 2015, which would have reduced the income threshold and increased the taper rate in tax credits. These announcements were reversed in the November 2015 Autumn Statement, before they had been implemented.

     

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  • Policy measures

    Since our first forecast in June 2010, the Coalition and Conservative governments have announced around 40 policy measures affecting our forecast for tax credits spending. The original costings for these measures are contained in our policy measures database and were described briefly in the Treasury’s relevant Policy costings document. For measures announced since December 2014, the uncertainty ranking that we assigned to each is set out in a separate database. For those deemed ‘high’ or ‘very high’ uncertainty, the rationale for that ranking was set out in Annex A of the relevant Economic and fiscal outlook.

    Some of the largest measures include:

    • Switching to CPI indexation from 2011-12 (June Budget 2010)
    • Freezing the basic and 30 hour elements of working tax credit for three years from 2011-12 (Spending Review 2010)
    • Increasing working hours requirement in working tax credit for couples with children to 24 hours (Spending Review 2010)
    • Remove over indexation in child tax credits (Autumn Statement 2011)
    • Increase tax credits by 1% for three years from 2013-14 (Autumn Statement 2012)
    • Freezing tax credits for 4 years from 2016-17 (July Budget 2015)
    • Limiting child element of tax credits to 2 children for new claims (July Budget 2015)

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