The welfare pledge: Osborne is a prisoner of his own imagination

From the Guardian, the FT, the Spectator and the Sun it is the same refrain: the tax credit cuts are a choice not a necessity. Even George Osborne’s own backbenchers now agree that he did not need to target the working poor.

But mostly the source of Osborne’s undoing has been wrongly attributed, to his pledge to deliver a surplus budget. This is a policy that lots of economists don’t think much of, but it is not the obstacle blocking an Osborne climb-down. He could scrap all the tax credit cuts and still hit his surplus, assuming the fiscal forecasts don’t change too much today.

Instead it was Osborne’s pre-election promise of £12 billion of cuts to welfare that really did the damage and led inexorably to the tax credit reforms. First Osborne made the welfare pledge, then he protected pensioners and the severely disabled, and finally he realised that a Tory-only Treasury could not impose cash cuts on the very worst off who are not in work. There was no choice left but to hit the working poor.

It is sometimes said that George Osborne never expected to implement the £12 billion promise. It was designed only as a negotiating position in advance of post-election coalition talks. Whatever the truth in that, now the chancellor must let it go and cancel the cuts planned for existing tax credit claimants. And that also means increasing the value of the ‘welfare cap’, Osborne’s self-imposed straightjacket which he tightened at the last Budget and he can now loosen again.

Ditching the welfare pledge would be liberating, because if Osborne scraps that one promise he will suddenly have lots of options before him. He could go a bit easier on the deficit, by eating into some of the wiggle room he’s left himself in case of economic surprises. But he might reject this first option, given the government’s entire political and economic strategy is based on smashing the deficit.

Instead, he could delay planned tax giveaways for the rich, which you might think he’d consider too toxic when directly juxtaposed to cuts for the poor. It has been quickly forgotten that the summer budget included, alongside the tax credit reforms, almost £6 billion of tax cuts, half of which only benefit shareholders and rich households. If Osborne puts those plans on ice, at least for now, his welfare problems would largely melt away.

Even if those giveaways for the rich must stay, there’s a third option: distribute the fiscal pain evenly across more households. Osborne can do this at a stroke, if he examines the welfare payments and tax reliefs that typical families receive side-by-side. For both are measures aimed at raising family living standards and both cost billions of pounds.

Indeed tax reliefs cost more. The exchequer spends £94 billion on social security for children and working-age households. But it foregoes £138 billion on exempting the first portion of earnings from income tax and national insurance and a further £29 billion on the major VAT exemptions. By the end of the parliament, Osborne will be forgoing in the region of £30 billion each year just as a result of his 10 year programme of personal allowance increases. It will almost double in value from £6,500 in 2010 to £12,500 in 2020 and every one hundred pounds increase costs the government £800 million in revenue.

Once you start to think about tax reliefs and welfare in the round, finding three or four billion pounds becomes a much easier task. The chancellor just needs to see past the shibboleth of the right, that less tax is good and more spending bad. When tax reliefs and cash transfers go to the same people, they are effectively identical.

As a start, the chancellor could just delay his latest increase to the personal allowance by a year or so. The rise announced in the summer budget alone will cost the Treasury more than £1 billion in tax credit cuts. Tax reliefs are spread thinly and this is extra money people do not yet have, so this measure would be pain free, certainly when compared to the tax credit cuts they would replace.

But until George Osborne can see that tax reliefs and benefits do the same thing he will be a prisoner of his own imagination, as well as a promise he probably never meant to keep. The ground around the chancellor is littered with options far better than his tax credit cuts. If he chooses it, he can be free.