Thousands of working West Midlands families will be better off on the dole when changes to the tax system are introduced next month, Ministers have admitted.
Families where an adult currently works part time and earns the minimum wage could be richer if they simply stay at home instead, Work and Pensions Minister Chris Grayling revealed.
Figures published by the Government reveal that the change means 22,675 households in the West Midlands will lose their entitlement to the credits.
In the constituency of Birmingham Hodge Hill alone, 1,825 families will be affected, while another 1,590 will be hit in Birmingham Hall Green, 1,385 in Birmingham Ladywood, 1,115 in Birmingham Perry Barr and 850 in Birmingham Yardley.
Mr Grayling was forced to confirm that some families will actually be penalised for going to work as a result of the changes, in a response to a written Parliamentary question from Labour.
The remarkable gaffe is a result of reforms to the complicated system of tax credits, introduced by Labour.
Ministers say a new benefit called Universal Credit will ensure it pays to go to work again, when it is introduced in October 2013. But in the meantime, some families will effectively be penalised for going to work.
The anomaly was revealed as George Osborne, the Chancellor, comes under pressure over a range of tax policies in the run-up to the Budget later this month, with some Tories demanding changes to plans to axe child benefit for high-rate taxpayers and employers calling for a rethink over plans for a massive 5.6 per cent increase in business rates.
The Government has announced changes to Working Tax Credits, which are currently paid to people on low salaries who work at least 16 hours a week.
Under new rules coming into force on April 1, the credits will only be paid to people working at least 24 hours a week, or to couples who work for 24 hours between them.
Asked how the changes would affect a couple earning the minimum wage and working 16 hours a week, Mr Grayling said in a written response: “On the assumption that this couple has two children: (a) Prior to April 2012, this household would be entitled to working tax credit and they would have income of around £330 per week. This includes around £19 a week in council tax benefit.
“(b) In 2012-13, this household would not be entitled to receive working tax credit and would have income of around £257 per week. This includes around £19 a week in council tax benefit.
“(c) If this household was out of work their income would be around £271 per week. This includes around £19 a week in council tax benefit.”
The figures show that the household would lose £73 a week as a result of the change – and end up £14 poorer than if they were out of work.
The revelation led to angry exchanges in the House of Commons as Birmingham MP Liam Byrne (Lab Hodge Hill), Labour’s Shadow Work and Pensions Secretary, challenged his opposite number in the Cabinet, Iain Duncan Smith.
Mr Byrne said: “Let me give the Secretary of State a simple lesson in economics: the more people who are in work, the more tax comes into the Treasury; the more people who are on the dole, the more we pay out in welfare payments. That is why welfare payments are going through the roof.”
He added: “Will the Secretary of State promise us that in the Budget he will fix the situation whereby it no longer pays to go out and get a job?”
Mr Duncan Smith told him: “I do not expect anyone to give up work, because the job centres and the job centre staff will work with people to ensure that, as far as possible, they work up the hours and take advantage of the benefits that come with working more hours.”
Mr Osborne faces a series of dilemmas in the run-up to the Budget on March 21. Some Conservatives want him to reverse or modify plans to axe child benefit for families where anyone pays the higher rate of income tax.
Critics point out that, under the current plans, a family with one earner on a salary of £43,000 will lose child benefit but a family where two parents each earn £42,000, giving a total salary of £84,000, will not.
Then there is the question of the 50p income tax band charged on earnings above £150,000. Business organisations and some Tories want this axed, but Vince Cable, the Lib Dem Business Secretary, is urging the Chancellor to replace it with a new tax on properties worth more than £2 million, dubbed a “mansion tax”.
And a row has also broken out over plans to increase business rates by 5.6 per cent in April.
The increase is based on the retail price index for September last year. But some Tory and Lib Dem MPs argue that the 5.6 per cent figure was a “spike” in the RPI, and businesses should not suffer a major tax rise because inflation was high for a short period last year.
A Commons motion calling for a two per cent cap has been signed by four Conservatives and five Lib Dems, including Solihull MP Lorely Burt.
Birmingham Chamber of Commerce also issued a statement warning that a 5.6 per cent business rate rise will have “a devastating effect on businesses”.
West Midlands MPs have met Treasury Ministers to urge them to back the West Midlands, including by supporting expansion of Birmingham Airport, in the run-up to the Budget.
Mark Garnier (Con Wyre Forest), Robin Walker (Con Worcester), Paul Uppal (Con Wolverhampton South West) and James Morris (Con Halesowen and Rowley Regis) met Treasury minister Mark Hoban.
Labour leader Ed Miliband urged the Government to back manufacturing in a speech to the Engineering Employers Federation.
He said: “There should be a standard Made in Britain mark that is backed, not just by industry, but by government... we can’t recognise or celebrate our strength in manufacturing unless we know what is designed, invented and made here.”