Gordon should be proud of tax credits

As a means of helping working families on low and middle incomes, tax credits are not working well. But that doesn't mean the end itself is wrong. It must be right to concentrate resources on people who need the support most.

This gives policymakers a choice. The easy option would be to increase spending on old-fashioned benefits. But the message of such a policy would be that parents who aren't in a position to earn huge salaries should not bother going out to work at all.

The alternative chosen by the chancellor rewards parents who are in employment. Families that are earning up to £58,000 a year are now effectively paying lower tax bills. There is an incentive for them to contribute towards the nation's wealth, rather than to simply claim benefits.

So far, tax credits have benefited six million families, with 10 million children. That's a fantastic achievement, of which the Treasury can be proud. Do those who criticise the bureaucracy of the tax credits system really think we should tell all those families that the principle of supporting people in work is being completely abandoned?

At the same time, some crucial reforms are needed if people are ever to have confidence in tax credits. It can't be right that families who unwittingly receive too much in tax credits are suddenly asked to pay the money back. In many cases, these families find their tax credits have been completely cut off, leaving them destitute.

One problem is that currently, a computer system makes arbitrary decisions about who is paid what and when. Revenue workers have far too little discretion about the way the rules are applied - they're often powerless to override a decision made by a machine, even when it is patently unfair.

Tackling the overpayments issue is the key to solving the problems dogging tax credits. When the Treasury set up the system, it wanted people to be able to claim varying amounts of tax credit cash, as and when their circumstances changed. Some of that flexibility may now have to be sacrificed, in order to get things working better.

Some good news at last for millions of people with endowment-linked mortgages and long-term pension plans. The Financial Services Authority says with-profits investments have performed strongly over the last year. The surplus of insurers' assets over their liabilities has grown by 16 per cent since last summer. That should mean larger pay-outs for endowment and pension savers.

With-profits plans smooth out the ups and downs of the market over time, but many funds were unable to cope with the three-year plunge in share prices that began in January 2000. As a result, bonuses on with-profits investments fell , and many companies introduced penalties to prevent savers withdrawing their money.

Now markets are rising again, one insurer, Norwich Union, has already increased its pay-outs.

However, don't get over-excited about the upturn. With-profits funds still face a long road to recovery, not least because many insurers heavily reduced their exposure to the stock market before share prices began rising again.

d.prosser@independent.co.uk