THE BLOG
27/10/2015 05:44 GMT | Updated 26/10/2016 06:12 BST

Tax Credits and the Danger of Political Gambles

It had been 100 years since the House of Lords voted against a fiscal policy backed by the Commons; that record has now been broken. Last night, the Lords voted in favour of workers, voting to delay the government's tax credits reforms until the chancellor comes up with an alternative strategy for supporting the lowest paid for at least the next three years.

It had been 100 years since the House of Lords voted against a fiscal policy backed by the Commons; that record has now been broken. Last night, the Lords voted in favour of workers, voting to delay the government's tax credits reforms until the chancellor comes up with an alternative strategy for supporting the lowest paid for at least the next three years.

Following the historic defeat, Mr Osborne responded: "I said I would listen to the concerns being raised and that is precisely what I will do.

"We can achieve the same goal of reforming these tax credits, securing the money we need to ensure our economy is safe, and at the same time helping in the transition to these changes and I will set out how we achieve that at the Autumn Statement."

The chancellor may have given himself time to lay down new plans for reducing the welfare bill, though time will hardly reduce the damage already done to his own office. Warning the Lords that they would cause a "constitutional crisis" if they voted against the government's plans for tax credits, David Cameron is now said to be plotting for a "rapid review" to ensure that peers cannot vote against government finance bills in the future.

In deciding their next move, Cameron and Osborne have a clear choice. Either they listen to the concerns raised in the Lords, a House in which the Conservatives do not have a majority, or, essentially, they don't. Ignoring the voices of influential peers could cause further damage to Cameron's administration, however, if they are inclined to rebel, it may be that Osborne still believes he can unveil an economic transformation that proves itself to be necessary in order to revive the British economy. If wages were to continue to rise against the backdrop of cuts to tax credits, he could hold his argument, though peers have clearly been skeptical of this type of thinking. Furthermore, it would be years before we would see any signs of proven economic benefit from such a proposal as any improvements made by the newly announced National Living Wage will not emerge overnight.

As a Chancellor, Osborne has openly revealed that he takes inspiration from the late Geoffrey Howe, a man who knew when to implement tough economic measures, but more importantly, also knew how to. In 1981, Howe rocked public consensus by issuing a Budget that imposed deep tax rises during a serious period of economic stagnation following the Winter of Discontent. At the time, 364 economists wrote an open letter to The Times suggesting that his Budget would undoubtedly cause further financial chaos. Only it didn't. Less than a day after the letter went to press, Britain's economy had already begun to show signs of recovery, which ultimately laid the foundations for a period of economic stability throughout the eighties. As a result, Howe's reputation as a chancellor of his generation remains prestigious. Osborne's trouble is that in contrast to Howe, he has chosen to hit only one sector of the nation in his quest to produce economic prosperity: the poorest. Such a move, as the Lords have now demonstrated, is not just about economics. It's about morals as well.