George Osborne performed the biggest U-turn of his Chancellorship today, by announcing that his proposed tax credit cuts will not go ahead. The reversal comes after an embarrassing defeat in the House of Lords, opposition from Labour MPs, and much public outcry that the cuts would heavily affect the worse off in society. Many expected Osborne to announce changes to the policy, but scrapping the plan altogether came as a huge surprise.

Balancing the budget by the end of the parliament has been the cornerstone of Cameron and Osborne’s “Long-Term-Economic-Plan”. With this in mind, the question on everybody’s lips is, how can they afford it? Cutting tax credits would have saved over £4 billion a year. Handily for Osborne, the Office for Budget Responsibility – the independent public body that analyses and forecasts government finances – reassessed its projections on tax revenue and interest payments, which instantly gave the Chancellor an additional £27 billion to play with. Of course, Osborne could have decided to go ahead with the cuts anyway and use the additional revenue to either fund other programs or reach a surplus sooner, but it seems like he chose the politically savvy thing to do. By backing down on the controversial cuts, he has given the impression that he has listened to the demands of the public, whilst at the same time, stayed on course to balance the books by the end of his term.

Critics argue that even without the cuts, the tax credit system is going to be slashed anyway when it is brought under the new Universal Credit system. According to Ashwin Kumar, the director of Liverpool Economics, for “a couple both working full-time on £20,000 per year with two young children, come April they would find themselves £1,030 a year worse off” if they are on Universal Credit.

The Chancellor made the announcement as part of the Autumn Statement and Spending Review, in which he revealed a number of other plans, including:

  • The introduction of an apprenticeship levy, at a rate of 0.5% of an employer’s pay bill, hoping to fund three million apprenticeships.
  • Disincentives to buy-to-letters by increasing stamp duty by 3% on additional properties.
  • Somewhat surprisingly, no cuts to the police budgets.
  • £12 billion on capital investments.