Middle class families will lose out, says the IFS

There were cheers for the Chancellor's announcement to spend an extra �1bn for tax credits in his pre-Budget statement. But while it may help him meet his child poverty targets - it might not be such good news for middle class recipients of the new credits.

The extra pounds are being pumped into boost the child element of the Child Tax Credit from next April.

The Treasury says as many as 3.7m families and 7.2m children will benefit from the increase, which will boost the amount people can get by as much as �3.50 a week or �180 a year.

It is good news for Britain's poorest families - and will help the government's desire to beat child poverty.

Prime Minister Tony Blair spoke in March 1999 of his ambition to "eradicate child poverty within a generation".

The government wants to eradicate child poverty by 2020, halving it by 2010.

The Institute for Fiscal Studies predicted before the pre-Budget report that another �1bn was needed for the government to meet its target.

Someone who receives the Child Tax Credit does not need to be in employment.

By directing money into this part of the tax credits, the chancellor is able to boost the incomes of a whole range of poor families who may not be in work.

Frozen allowances

While it's good news for these families, not so welcome news is emerging.

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In the tax year 2004/2005, nine of these elements of both the Working Tax Credit and the Child Tax Credit are being frozen.

By freezing elements of the credit, payments will not be keeping up with inflation.

Freezing the upper income threshold, lower income threshold and the family element is the equivalent to a real cut of 2.8%, says IFS.

The IFS estimates the Treasury will save �240m next year.

By tax year 2008/2009, it estimates the Treasury could save itself �1.2bn by not uprating elements of the credits.

Mike Brewer of the IFS says: "Overall, the changes will redistribute support from middle- and higher-income families with children to low-income families with children."

Guarantees

In the 2003 Budget the government offered guarantees on a few of the credits' elements.

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It said the child elements of the Child Tax Credit will rise in line with the annual increase in average earnings for the lifetime of this Parliament.

The single person, couple, lone parent and disabled worker elements of the Working Tax Credit will increase in line the Retail Prices Index (RPI).

Guarantees for the other elements of the credits were not mentioned.

The Treasury says that it can only comment on what's happening next year, not beyond that.

But if elements were eroded over the next few years, middle and high income earners could see their Child Tax Credit cut by 13% in 2008/2009, says the IFS.

Tax credits, despite their traumatic start, have been a success if success is measured in uptake.

There are now 5.9m families claiming the credits.