It’s the Constitution, Stupid!

Well last night was a pretty sobering night for George Osborne.  The bill setting out the reduction in the income threshold at which tax credits can be claimed was dealt a serious blow in the House of Lords this evening.  The Government was defeated on two votes; one to pause introduction until an independent study on the impact of the cuts has been carried out; and one to provide financial assistance to those set to lose out. For those receiving tax credits, who on average stood lose £1300, last night’s proceedings will come as a relief.

Many commentators (I’m sure encouraged by Conservative MPs, to deflect from the damage done by the defeat) were discussing the possibility that a constitutional crisis could ensue because the Lords voted against a financial measure. This is despite parliamentary convention stating that the House of Commons has primacy when it comes to matters of taxation and expenditure, a convention dating back to the 1911 Parliament Act.  However, the Tories tried to pass the legislation using a device called a statutory instrument, to ease its passage through parliament and avoid the level of scrutiny that would normally apply, instead of either including it with the rest of the July 2015 Budget measures, which would have ensured that it passed, or using a separate bill to introduce it, which would have delayed the changes but which would have avoided defeat in the upper house.

Since 2000, the Lords have defeated statutory instruments on four occasions.  On this occasion they argue (and rightly so, in my opinion) that because the Conservative Party manifesto only alluded to £12bn in welfare cuts and didn’t specifically mention the cut in tax credits, the Salisbury-Addison convention, under which the Lords agree to allow manifesto commitments to pass, did not apply in this instance.

The protestations from Cameron, Osborne and other cabinet members about the Lords overreaching are sure to ring hollow. The very nature of this piece of legislation and its impact on those receiving tax credits was sure to attract interest from the House of Lords.  Indeed, the level of discomfort on display on the Government benches was enough to convince them that it may be wise to give Cameron and Osborne a chance to reconsider the measure.  Former Conservative chancellor Nigel (now Lord) Lawson was also encouraging the Government to rethink.

So what now? As I mentioned earlier, it will suit the Government to move the argument on to one about the Lords abusing their constitutional position, as opposed to focusing on a very public rebuke on a key piece of legislation.  To ensure that this fiasco doesn’t happen again and that future legislation passes smoothly, the Government could flood the upper house with a raft of Conservative peers, where they are currently in a minority.  Quite apart from the constitutionality of such a move, it would be particularly controversial as it would be seen as appointing peers in order to take money from poor people.  The Government could also introduce legislation that would only allow the Lords to delay legislation for a period of 3-6 months.  Another option may be to go back to the Commons and introduce the tax credit measure in a bill, which the Lords would ultimately pass.

It will certainly be interesting to watch developments over the next few weeks, particularly with the chancellor’s autumn statement coming up at the end of November. While the Tories will be seething this morning, the Lords may have done them a favour in the long run and actually saved them from themselves.  In 2020 very few will remember this, but they would surely remember losing £1300.

  • OneNI

    One of the consequences of this of course could well be a tighter squeeze of Departmental spending – including the NI Block Grant

  • AndyB

    Yep. If it had been a Finance Bill it would have passed immediately, and similarly if it had been a manifesto commitment. Even if it had been normal Primary Legislation, the Lords could only have amended it and returned it to the House of Commons or caused it to be delayed due to the Parliament Acts.

    Of course, it was none of the above. The SI in question was prepared under the authority of the Treasury to make regulations concerning the rates at which tax credits are paid – authority granted by the Act governing tax credits. As with many SIs, it had to be passed (without the opportunity for amendment) by both Houses of Parliament, and as such the normal conventions, other than with regard to manifesto commitments, do not apply.

  • MainlandUlsterman

    I wonder if the Tories regret now being such stick-in-the-muds over constitutional reform and an elected House of Lords? Only have themselves to blame. Haha!

  • Richard Gadsden

    And a normal Bill, even if rejected by the Lords, would probably have obtained a certificate as a Money Bill, reducing the delay imposed by the Lords to just one month, rather than the usual one year.

  • Korhomme

    It seems that Dave and George hadn’t decided before the election where
    the welfare cuts were going to be, only that they wanted to save £12bn.
    When pressed, Dave responded that child benefits wouldn’t be cut, but
    didn’t give a clear answer about credits.

    George is now in a hole of his own digging. The Lords were right to block his attempt to get this done on the QT.

    It’s now suggested that the effect of the credit cut will be an effective
    tax rate of 80% if hard-working people work even harder. The 1% wouldn’t
    stand for that.

    The Lords, the Tories complain, are unelected; well, they had a chance of reform before and didn’t do it. And are the Tories in the Commons ‘elected’? They have a parliamentary majority, a majority of the electorate didn’t vote for them.

  • Kevin Breslin

    Would’ve have got smaller number of constituencies and a stronger majority too.

  • MainlandUlsterman

    great point. They were repeatedly pressed before the election on what the £12b of cuts were – and wouldn’t answer. Some would have said that failure to explain was unprecedented and ‘unconstitutional’, but they did it and got away with it because they could. They can’t now say the Lords can’t take the same approach of doing what is possible.

    Much of our constitution is contained in conventions – habits and practices that have developed over time. The Tories have always argued the merits of this over a clearer written constitution. Another way in which they have, like Rosenkrantz and Guildenstern, been hoisted by their own petard.

  • Greenflag 2

    So the House of Lords has a use after all. Perhaps Chancellor Osborne might consider imposing a tax on the millions of high speed international currency transactions flitting around the world from the City via Wall St , Shanghai , Frankfurt etc . A small fixed tax on the value of transactions and a variable rising one on the number of transactions executed by a particular financial institution /hedge fund etc would probably raise several times the 12 billion he’s trying to save .

    Taxes (VAT ) are imposed on buying and selling goods and services so why not taxes on financial transactions in todays hi speed nano second buys and sells on the worlds exchanges ?

  • Korhomme

    That type of ‘transaction’ tax has been suggested by many people; Piketty thinks it’s a very good idea. So small that the influence on an individual transaction is barely visible, but with so many transactions—many/most now performed by algorithms—that the cumulative benefit would be immense. The naysayers usually point out that international agreement would be needed, and such agreement doesn’t seem to be forthcoming.

  • Greenflag 2

    True . The naysayers benefit from the current under the radar currency wars which bilk millions a day for those connected to the algorithmic financial universe . The cumulative benefits for underfunded and tax revenue poor governments everywhere would be significant and would help if directed in the right areas counteract the emisserative effects of financial globalisation .

    Even better the financial institutions which have wreaked such havoc on the world’s economies and on large numbers of people within the developed economies would be paying their fair share and contributing to the political stability of an economic system which enables their institutions to prosper and survive .

    You never know it might eventually lead to banksters and hedge fund managers being perceived as even honest and ethical and even considered as being on a moral plain with gangsters , lawyers , prostitutes and religion hawkers and dare I say it politicians 😉 Whether that possibility would be enough to persuade the swine or not I would hesitate to answer . Leopard and spots come to mind ;(

  • Reader

    Korhomme: but with so many transactions—many/most now performed by algorithms—that the cumulative benefit would be immense.
    And you think the financial institutions won’t notice the ‘immense’ cumulative costs and change their behaviour?
    The nano transactions are chasing micro profits. If there’s a charge for them, then they aren’t worth doing.

  • Korhomme

    Changing the behaviours is certainly a possibility. Any better ideas?

  • Korhomme

    Bit hard on the harlots, aren’t you?

  • Korhomme

    The Graun has a piece about Andrew LLoyd Weber voting in the Lords for the benefit cuts:

    http://www.theguardian.com/culture/shortcuts/2015/oct/27/andrew-lloyd-webber-vote-in-favour-tax-credit-cuts

    scroll down for the comments.

    Anyway, he got £300 just for turning up. A hard working person, on the minimum pay of £6.70/hour would need to put in nearly 45 hours for the same amount.

  • Greenflag 2

    True especially the Babylonian variety and the young Eartharlots . Guilty as charged;)

  • Reader

    It’s as though you thought that transactions were inherently bad, and a bit of deterrence was required…
    A tax that presumes that the number of transactions will stay the same will be disappointing in its results – the number of transactions will plummet. So far as it actually raises revenue, the tax will hit pension funds, as almost any tax on business will do.
    Instead, I would like to find a way to deter rent seeking – the presumption by bankers that, since they handle vast sums of other people’s money, they ought to be vastly rich themselves. Taxing commissions and fees might do the job, but only with international cooperation. Without international cooperation, the transactions, commissions and fees go abroad, and the government takes in less tax, not more.

  • Korhomme

    There’s a new fibre optic cable between New York and Chicago. Costing, IIRC, $300m it’s a bit straighter, and thus shorter, than the old one. This gives traders a few nanoseconds advantage. I just can’t see this as something really productive.

    As for rents, that’s another of Piketty’s problem areas; he can only suggest higher taxes. This too needs international cooperation. And if he can’t suggest something better, I certainly can’t.

  • Greenflag 2

    ‘ I just can’t see this as something really productive.’

    For who ? For the users it’s been the difference between tens of millions and hundreds of millions profit . Here’s a good read if you haven’t read it already on the nitty gritty of high frequency trading

    http://www.goodreads.com/book/show/24724602-flash-boys

  • 23×7

    Oh but they are inherently bad. Where is the value being created? “Won’t someone think of the pension funds!” is such a lazy excuse.

  • Korhomme

    I’ve read reviews of the book, but not read it. I still don’t think that this sort of trading is ‘productive’. Perhaps it’s my Puritan roots; I can see that making things, whether it’s the cobbler or a factory, is ‘productive’ and that services such as the barber or accountancy are also ‘productive’, but by ‘productive’ I’m really meaning something like ‘added value’. Before Calvin, usury (lending money at interest) was a sin for Christians; the Jews didn’t have this concept, so were tolerated for as long as you needed to borrow. But Calvin, inventing the Protestant work ethic, reckoned that ‘usury’ of 5% was acceptable; much of Protestant northern Europe still seems to have this idea, together with a much more long-term approach than the Anglo-American one.

    This high-frequency trading is only productive if you come out on top; for all the gains surely there are equivalent losses. In a bull market, even the losers can make gains, though not as great at the winners. But, and this is a central problem with capitalism, every 20 years or so, there is a ‘correction’. Sometimes this is mild, but recently is was a major one. The banks, selling all sorts of debt repackaged as AAA grade investments mostly didn’t know what they were doing; and Black-Scholes takes you only so far. So the banks get ‘bailed out’, we have financial stimuli such as quantitative easing—which seems to largely to disappear into the black holes in the banks. And then the taxpayer is expected to somehow shoulder the burden, though the recession that they sparked is repackaged in the UK as ‘Labour’s mismanagement of the economy’. And to pay off our debts—the banks’ debts—we reduce credits to the poorest in society—which is where this discussion began.

  • Reader

    23×7: Oh but they are inherently bad
    You forgot to point out why the transactions were bad. And if you do believe that transactions are bad, wouldn’t you rather ban them than tax them?
    Meanwhile – what happens if you do apply a transaction tax:
    http://www.iea.org.uk/blog/the-financial-transactions-tax-folly

  • Korhomme

    Thinking a bit more about this. To add to my previous comment; such high frequency trading must surely be a zero sum game in the short term between traders.

    But, more significantly, the infrastructures that such high frequency traders have invested in mean that they can pick up when pension funds are going to invest, get in just ahead of them, buy the stock, and then sell it on to the pensions.

    I’ve seen pension funds managers complain that such activities loose the funds, and thus the returns to pensioners, around 1%. So, in the longer term, as usual, it’s the poor who must bear the burden.