1. What estimate he has made of the likely change in the number of people who will claim tax credits as a result of the abolition of the 10p starting rate of income tax in the financial year 2008-09; and if he will make a statement. (149004)

Tax credit take-up is rising, and is 97 per cent. among families with children that are on incomes of less than £10,000. Tax credits mean that households will be £100 a year better off on average, that 200,000 children will be lifted out of poverty and that 580,000 pensioners will be taken out of income tax.

Given the right hon. Gentleman’s reputation for being concerned about social justice, is he not worried that his predecessor’s doubling of the marginal tax rate now means that many more people will be forced to claim tax credits? The right hon. Member for Sheffield, Brightside (Mr. Blunkett) described the system as a shambles. Last year, 50 per cent. of all assessments were proved to be wrong and 25 per cent. of those entitled to tax credit found the system so complex that they failed to claim it. Does he not think that the whole matter needs re-examination?

I think that the basic proposition behind tax credits is right. The hon. Gentleman will recall that, back in 1997, one of the problems that we faced was a disincentive to working—work did not pay. The tax credit system was designed to ensure that when people went into work they saw the benefit, and that we could help people with additional costs such as child care and so on. However, the hon. Gentleman is right to say that there were administrative problems following its introduction. The National Audit Office report, which is published this morning, highlights some of them. They are comparable to some of the problems with the previous Government’s introduction of jobseeker’s allowance in the middle of the previous decade. Clearly we need to sort out the problems, but if the hon. Gentleman is asking whether I believe that tax credits are right in principle, the answer is yes, I most certainly do, because they are helping approximately 20 million families, and that is important.

I welcome the Chancellor to his new position and wish him every success, for the country’s sake.

My right hon. Friend knows that the Treasury Committee is interested in errors and fraud in the tax credit system. This morning he sent me, and others, a letter detailing the credit and working tax credit error and fraud statistics. The Select Committee does not condone any fraud in the system, but we want to know whether the Government have made progress in ensuring that there is less fraud. My right hon. Friend mentioned jobseeker’s allowance. Has any improvement been made in the past 10 or 12 years on reducing fraud?

I thank my right hon. Friend for his good wishes. He has done some excellent work as Chairman of the Select Committee in the past few years and I look forward—if that is the right phrase—to appearing before him and the Committee at some stage.

Her Majesty’s Revenue and Customs report was published this morning. I wrote to Opposition spokesmen, and I hope that they got the report. It was due to be published this afternoon, but I thought—not necessarily to my advantage, because of the NAO’s comments—that it might be better to draw it to their attention. I am concerned about the extent of error in the system. My right hon. Friend asked about JSA, which was introduced in the mid-1990s. The error rate then was approximately 13 per cent. and it has now decreased to about 5 per cent. I well remember, from my time as Secretary of State with responsibility for social security, that error in the social security system is a problem, although, after years of bearing down on it, we are beginning to see some results.

Let me revert to the central point. The tax credit system, like the tax system, operates on a basis of annual assessment. We set it up that way so that it would be flexible, and people would not be subjected to weekly income tests as they are in most parts of the social security system. There were inevitably some administrative problems following its introduction—we are all aware of that. They need to be sorted out, and they will be sorted out. However, it is important to keep sight of the fact that tax credits have benefited nearly 20 million families, and that many people with children are much better off as a result of our actions. There are times when I wonder whether the Opposition are against tax credits themselves, rather than being concerned about errors in the system.

I, too, welcome the Chancellor, and I hope that he enjoys his honeymoon—until the day that he has to say no to the Prime Minister. If the Government are so keen to encourage the take-up of the working tax credit, which is as low as 25 per cent. for childless couples, why are people expected to fill in a 10-page form, with 57 questions and 60 pages of explanatory notes, compared with the user-friendly four-page note that is required to get non-domiciled tax status? Why do the Government make it so difficult for poorer people to claim entitlements and so easy for rich people to avoid paying tax?

I thank the hon. Gentleman for his good wishes. I do not know when the honeymoon will come to end; in fact, I think that it has come to an end already—but I thank him all the same. Of course I am willing to look at the application forms for tax credits, but he will appreciate that the simpler a form can be, the more difficulty that can raise later on. I have no doubt that he will focus on that possibility today, because of an apparently simplistic promise to cut income tax by 4p, which would cost him nearly £19 billion. He will find it quite hard to explain how he is going to fill that gap—to do so through fuel duty, for example, would mean something like 39p a litre on fuel. I look forward to hearing how the Liberal Democrats are going to explain their tax changes, and who will lose and who will gain.

Have not tax credits proved a valuable way of taking families, and particularly children, out of poverty? Will they not prove to be more effective than, say, offering £20 a week for couples to get married and stay married?

I agree with my hon. Friend. The married couples allowance was steadily reduced under the previous Government. Indeed, it was Lord Lamont who did that, and at the time he was being advised by somebody—I think that it might have been the Leader of the Opposition. The problem is that the married couples allowance throws up all sorts of anomalies. For example, if the husband in a couple is killed in a tragic road accident, his widow and children will be left without support—so when we think through the consequence, we see that bringing back the allowance is not the right thing to do. Helping families with children, and the fact that the working families tax credit has lifted more than 600,000 children out of poverty, are things that we should keep in the front of our minds. All of us in the House say that we are concerned about cutting child poverty, and we have a target to do so. Our measures have helped to lift 600,000 children out of poverty, and that is why tax credits are so important to us.

I of course welcome the right hon. Gentleman to his new job and wish him well in his post. It will be fun shadowing someone with whom I am actually on speaking terms—[Interruption]—for the moment, at least. Unlike most Chancellors, he cannot blame his predecessor for the undoubted mess that he has inherited, and there is no greater mess than the tax credits system and its administration. Will he confirm that the figures that he published 30 minutes ago show that in 2005-06, the last year for which the Inland Revenue has published figures, it overpaid £1.7 billion of taxpayers’ money and underpaid £549 million. That is well over £2 billion in mistaken payments that bring hardship to many hundreds of thousands of families, and, of course, cost the taxpayer dearly. Does the Chancellor accept, in his second week in the job, that that is a totally unacceptable scandal? Will he promise that the level of error and fraud will be reduced while he is Chancellor?

I thank the hon. Gentleman for his good wishes. May I congratulate him, too, on holding on to his position? I see that there was some speculation as to whether he would be moved, but I am glad to see him here. I hope that we shall remain on speaking terms—we shall try for the next 50 minutes or so and see how we get on.

On the hon. Gentleman’s point about tax credits, of course it is unacceptable to have such high levels of error. Following the introduction of tax credits, I can well see how those errors arose, especially with a system that allows for annual assessment, and when there are many families whose incomes and circumstances may change quite a lot during that period. However, as a constituency MP, I know, as I am sure that most hon. Members will know, that we all have cases in our constituencies where things have gone wrong and the sums have added up very quickly, and that clearly causes distress. As I said a few moments ago, just as with the social security errors of a decade ago, so with tax credits. We need to do everything we can to reduce those errors. I still think that it is better to model the system on the tax system, and try to work on an annual basis, rather than moving to a far more complex system of assessment. However, the hon. Gentleman is quite right: we need to get the levels of error down and ensure that the right sums are being paid to the right people.

I thank the Chancellor for that answer, but, to be honest, he did not actually respond to the question that I asked. Will he make a commitment that during his time as Chancellor he will reduce the levels of error and fraud? I say that because, as he will have read, the Comptroller and Auditor General’s report, which is part of the HMRC accounts, says that there is currently no evidence to demonstrate that there will be lower figures in the next published year. Indeed, the report also shows that the Treasury is still trying to collect almost £4 billion of overpayments from people out there in our constituencies, and that it has given up on £1.6 billion altogether. I therefore put the question to the Chancellor again. Does he believe that during his time as Chancellor he will be able to reduce the totally unacceptable levels of error and fraud, which cause hardship to so many of the people whom we represent?

As I have said, I think that the level of error is too high and I want to see it reduced. That will take time, as I know from my experience in dealing with jobseeker’s allowance eight or nine years ago. However, as I said to the Chairman of the Select Committee, my right hon. Friend the Member for West Dunbartonshire (John McFall), those error rates, which had stood at 13 per cent. during the last year of the Conservative Government, came down to 5 per cent., and we must apply the same pressure in relation to tax credits. We need to deal with that, but we also need to keep in the front of our minds the benefits that tax credits can bring. I hope that when the hon. Gentleman next gets to his feet, he will tell us whether he supports tax credits—because, as with so many other aspects of Tory tax policy, it is not entirely clear what the Opposition’s policy is on this, especially when they have made commitments to abolish inheritance tax, to reduce corporation tax by 1 per cent., to get rid of stamp duty—

Order.

You have got my drift, Mr. Speaker.

I, too, welcome my right hon. Friend back to the Treasury; what goes around comes around, in that respect. Does he agree that the tax credit system is an integral part of the campaign to abolish child poverty by 2020, as we can all see that it is having an effect in our constituencies? Does he also agree that the target date of 2020 is a crucial part of that strategy, and that it is the absence of such a date and such a determination from the social policy document that the Conservatives published this week that shows that they are dealing in words and not deeds when it comes to tackling poverty?

I thank my hon. Friend for his kind remarks. I know that he has been extremely concerned over many years in the House to ensure that the Government meet their ambitions to eradicate poverty, especially child poverty and pensioner poverty, which is also important. The fact that we have been able to lift children and pensioners out of poverty over the years, through tax credits and other measures, is important. The key thing to keep at the front of our minds is that if the Government are serious about tackling poverty, we must be prepared to spend sufficient resources to do it. There are huge question marks over the Conservatives in that regard, as I was starting to say a moment ago—but you will be relieved to hear that I will not continue with that line just yet, Mr. Speaker.

2. What recent steps he has taken to tighten controls on the movement of terrorist assets. (149005)

Earlier this year, we set out new measures to tighten controls on terrorist assets, including protecting the charitable sector from the risk of terrorist exploitation, licensing those who own or control a money service business, and promoting the proactive use of asset freezing powers, including the creation of a dedicated Treasury asset freezing unit. I am pleased to say that last week the Financial Action Task Force ranked the UK as the first country to be fully compliant with international standards on terrorist asset freezing. In the second quarter of this year, we made three domestic asset freezing designations under the orders on terrorism and al-Qaeda, and this week I made a further domestic designation.

Tackling money laundering also means, in the words of the Prime Minister, that there should be

“no safe haven for terrorists”

and

“no safe hiding place for their funds.”

If that is the case, why was Abu Hamza able to buy a £220,000 semi-detached house in Greenford for cash, two years after his assets were supposed to have been frozen by the Treasury?

The police have conducted their own investigation into that case, and I know that the hon. Lady’s colleague, the hon. Member for Hammersmith and Fulham (Mr. Hands), has raised the issue with my predecessor in an Adjournment debate. The police were absolutely satisfied that, because no asset was transferred to the designated person, there was no cause for concern.

I welcome my hon. Friend to her new responsibilities and wish her well in them. Britain, of course, cannot do this alone. Is it not important to work with international partners to ensure that what we do here is replicated in the European Union, for example? What plans does she have to work with our EU colleagues to ensure that they adopt practices similar to ours?

I am grateful to my right hon. Friend for his kind remarks, and I can reassure him that we are in constant contact with our European Union partners on this issue. Indeed, I shall be travelling to Brussels this evening for the budget ECOFIN, where we will support the EU budget lines precisely on these measures.

3. If he will make a statement on the impact on the economy of the level of personal bankruptcies and home repossessions. (149006)

The Treasury continually monitors the levels of household liabilities and assets, and their implications for the wider economy are examined as part of the pre-Budget report and Budget forecasting.

Hard-working families are facing a three-pronged attack of rising interest rates, rising debt and rising unemployment. That will feed through into greater home repossessions and personal bankruptcies, with a severe knock-on effect on the economy. Does the Minister agree that it is time to provide better access to free financial advice, time for health warnings on credit promotions, and time to show greater flexibility in the social fund at times of economic downturn?

I do not share the hon. Gentleman’s downbeat assessment of the economy. At the moment, the number of home repossessions is half what we inherited in 1997 and only a fifth of the 1991 rate. We have had a decade of stability, and strong and stable economic growth; net household wealth has actually risen in real terms by 65 per cent., so I do not recognise the rather gloomy place that the hon. Gentleman seems to inhabit.

Perhaps the underlying cause of house repossessions and bankruptcy is the level of personal indebtedness, so it is important to educate people about its effects, particularly if they are over-borrowing in relation to their income. Is it not sometimes too easy for people to become bankrupt, as they do not always realise the implications for future borrowing and for their future lives more widely?

I thank my hon. Friend for that question. We have set aside £120 million for the fund on financial inclusion and education, which seeks to teach some of those lessons and to counter some of the advertising that drives small numbers of people into over-indebtedness. That is one clear aim of the Government’s financial inclusion policy.

The hon. Lady will know that UK interest rates are now the highest in the G7 and are perhaps likely to rise higher. To what extent does she believe that the record levels of insolvency are at least in part due to that cause?

The hon. Gentleman is right in that interest rates have risen slightly over the recent period—[Hon. Members: “Slightly?”]—but they are still on average only half what they were during the Tories’ period in office. We need to remember that we have had a decade of stability with growth in incomes, employment and wealth. The hon. Gentleman is scaremongering about the current situation.

I welcome my hon. Friend to her new position and acknowledge her remarks about irresponsible advertising. More particularly, is she concerned about celebrities who endorse products that are totally unsuitable for the people at whom the advertising is directed, and does she have any plans to tackle the problem?

My hon. Friend makes an extremely good point about advertising in general, and the Financial Services Authority has been looking into it, particularly in respect of misleading advertisements, of which we have seen many examples of late. It is important that the industry adhere more effectively to the voluntary codes presently in place. If there is no sign of improvement, we will certainly look into what more the Government can do through regulation.

I congratulate the hon. Lady on her move into the Treasury team. Does she agree, however, that our country faces a growing crisis of young people in debt? The latest figures from the Insolvency Service for the first quarter of 2007 show a 24 per cent. increase in personal bankruptcy on the same period last year. In my constituency, the citizens advice bureau tells me that people in debt in their 20s are now the largest group with whom it deals. Does she not accept that in taking away the 10 per cent. tax rate at the last Budget, and disproportionately taxing young people more, the Government are now part of those young people’s problems in trying to service debt? Does not she agree that the Government should look closely at the matter, and decide on severe action, instead of taxing those young people more?

I thank the hon. Lady for the welcome to me, and return that welcome to her on her first Front-Bench appearance. I hope that she will have many more such appearances, and that she enjoys her time on the Front Bench—[Interruption.] On the Opposition Front Bench, that is.

With regard to young people in debt, financial education is an issue, and that is why recent announcements have been made about changing the curriculum. We must ensure that the £120 million put aside in the financial inclusion fund is spent on increasing the sophistication of financial understanding to match the ongoing sophistication in the financial services industry and the techniques sometimes used by the advertising industry to tempt people into debt.

The hon. Lady must remember that although debt levels are higher, asset levels are also higher, because we have had a stable economy. Therefore, the £1 trillion in personal debt is set against £7 trillion in assets. As the economy grows, asset values grow. Because we have low inflation—at half the rate that the hon. Lady’s party managed when it was in office—people can sensibly borrow more money than before. That is what is happening.

My hon. Friend will be well aware of the worrying increase in the use of individual voluntary arrangements. Those are totally inappropriate for many people who find themselves in financial difficulties. What more can be done, either directly or through the regulator—the Financial Services Authority—to make sure that those arrangements are used only when appropriate?

My hon. Friend is right to say that it is extremely important for the new IVAs to be used in the appropriate way. They were introduced to ensure that bankruptcy was not the only option, and they can be appropriate in certain circumstances. It is important that the Insolvency Service, the financial services industry and our education system teach people how to use the instruments introduced to deal with debt in a way appropriate for them. It is important that people do not rush into uninformed decisions.

4. If he will implement the recommendations of the Goodison review of museums and private giving. (149007)

The Government have implemented 29 of Sir Nicholas’s recommendations, and will continue to keep the further issues raised under review.

I welcome the Chief Secretary to his post. Is he aware, however, that it is now three and a half years since the publication of the Goodison review—a report that was commissioned by one of his predecessors as Chief Secretary? When will the Treasury respond to the report’s tax recommendations, which have universal support in the arts world as a means of substantially increasing private giving at relatively modest cost? May I draw his attention to the unanimous recommendation of the Select Committee on Culture, Media and Sport to that effect?

I thank the hon. Gentleman for his kind welcome, and pay tribute to him for having the courage to be the first Tory to raise the issue of museum funding for at least four weeks. As I said, many of Sir Nicholas Goodison’s recommendations to the Treasury have been implemented; others have proved more challenging, although we keep those matters under review. I hope that he will accept that museums and galleries get about £6 million from gift aid, which is a significant contribution. I warn him that such tax changes would have to be funded, and if he is considering doing so by introducing museum charges, that would be a somewhat backward-looking and elitist policy.

I, too, welcome my right hon. Friend to his new position. Does he agree that museums have played a critical part in education and the strengthening of our economy, not only in the arts and culture but in improving pupils’ understanding of science, technology and maths? Is not free admission crucial to the rolling out of our education plans and helping to improve our economy?

I could not agree more. Since Lord Smith of Finsbury had the courage to introduce the policy, there has been a huge increase in the number of people visiting our museums and galleries, many of them for the first time. My hon. Friend is right to highlight the link between education and museums, and the need to make museums even more accessible to school children and school parties. I can give her an absolute guarantee that we will maintain the policy of free entry to museums and galleries, principally because it has brought enormous cultural benefits to all the country’s major cultural centres.

I, too, welcome the Minister to his hew position. The House should be as one in dealing with the art, culture, tradition and heritage of this country. Historically, patronage—which has recently been given rather a bad name—has played a major role in arts and heritage. Will the Minister and the Treasury team look more favourably on expanding patronage of the arts, which is one of the best ways of obtaining money from those who have it and investing it in what we believe in—arts, heritage and tradition?

I thank the hon. Gentleman for his welcome. I will give him a commitment to keep these matters under review, but I recall from my time as an adviser at the Department for Culture, Media and Sport—it seems many years ago now—that most museums are still able to display only a small part of their collections. If there is new money to come into the museums sector, be it from tax relief or from direct grant, we must consider how it can best be used to strengthen further the renaissance and the cultural boom that we have seen since this Labour Government came to power.

Can my hon. Friend assure me that the Government will continue to give financial support to the exciting new developments in national museums in Liverpool as part of the city’s regeneration? What impact does he think a policy of charging for admission would have on the development of the museum?

I pay tribute to my hon. Friend for her support for Liverpool’s status as European capital of culture. I have visited Liverpool a good deal recently and seen the changes taking place in the city, and it gives me—as a native scouser—huge pride to see it on the up, and ready to enjoy a fantastic celebration of culture next year. If we were to bring back museum charges at this stage, just as we are about to throw open the doors of the marvellous national museums and galleries in Liverpool, it would be a complete dereliction of our duty to the people of my hon. Friend’s city and this country.

5. What assessment he has made of the trend in real disposable household incomes over the last 12 months; and if he will make a statement. (149008)

Real household disposable income grew by 0.3% in the 12 months to the first quarter of 2007, supported by high levels of employment and growth in wages and salaries. The Budget forecast is for disposable income to grow by 2 ¼ % to 2 ¾% over the whole of 2007.

The Minister sounds very enthusiastic, but is she aware that family income tax has risen by about £1,300 and council taxes by 92 per cent. since 1997? There has also, of course, been a £100 billion raid on pensions. As the Minister knows, for the last two quarters disposable income has fallen as a consequence of all that. How will she reverse the trend?

It is important to recognise that over the last decade real disposable incomes have risen by an average of 2.6 per cent. a year. During the last 10 years of Tory government, it rose by only 1.6 per cent. In a decade of stability, real disposable incomes have risen by 20 per cent., earnings by 40 per cent., and prices by only 21 per cent. You do not need to be Mr. Micawber to work out how that makes you feel.

Has the Minister assessed the incomes of the poorest working people in our society who, as a result of Government policies, are now going to pay income tax at the rate of 20p in the pound rather than 10p? Is that fair?

Tax credits compensate for that, but I hear that the Opposition want to get rid of them.

The Government have rightly set a target of ending child poverty by 2020 and halving it by 2010. They have made enormous strides by reducing the numbers affected by 600,000 so far, but what will my hon. Friend do for the lowest fifth of those with disposable incomes so that, by 2010, we have made a significant difference, especially as it appears that, over the last year, the progress made has slowed? Are there any new initiatives to ensure that we end child poverty in this country?

The strategies to end child poverty rely on making work pay and on giving people the opportunity to earn more money as they stay in work. We must ensure that the labour market is open to them, that they have training opportunities and that they have opportunities to upskill. We also need to ensure that we carry on making progress with Sure Start and with affordable child care to allow many women who look after children to have an opportunity to work. We have a multi-pronged approach and, in the pre-Budget report and subsequent Budgets, the Treasury will take account of how we are doing with our unprecedented targets to end child poverty.

In the last few months, a considerable number of nurses in my constituency have either written to me or visited me in my surgeries to express grave concern that their disposable household income will be falling as a result of their below-inflation pay award. Given the fantastic work that they, ancillary workers and others do in the NHS, why are they being punished in this way?

We have to look at what has happened to public sector pay overall. There has been a 25 per cent. real increase in health service pay in the last period. It was important in this round of pay rises to ensure that we kept inflation under control, which is why the pay increase was staged. Inflation is forecast to be back below its 2 per cent. target by the end of the year, which means that the money in nurses’ pockets will not be eaten away by inflation getting out of control. That is an important part of the stability that we have been able to deliver in the last 10 years. Although it is difficult at the moment and nurses in England might not be happy, they will benefit from getting inflation back down under control by the end of the year.

Does my hon. Friend realise that work needs to be done on household incomes and their effect over the life cycle? As a young person purchasing my first home and bringing up the work force of the future, I had less liquidity at the end of the week than when the amount of mortgage taken out of my wages every week was diminishing. If I had been offered the opportunity to offset my capital investment at the start of my life cycle, I would have been able to bring up my children with a better standard of living and met the cost at a later part of my life. Has she considered this?

That philosophical question implies a complete change in the way in which we do the national accounts. It would require massive inter-generational transfers between individuals when they are young and individuals when they are older; pensions and savings are the only examples I can think of. My hon. Friend will be glad to know that the success of individual savings accounts, which have now become available to lower income people much more than tax-exempt special savings accounts were, gives a chance for some of that transfer to take place. Perhaps we should also rely on the endless ingenuity of the financial services sector to see what it can make of my hon. Friend’s question.

What does the Exchequer Secretary estimate will happen to disposable incomes in the next 12 months, particularly those of people on low incomes who will be particularly hard hit by the abolition of the 10p tax rate? Although the Minister has said that tax credits might offset that, many groups of people are ineligible for tax credits, such as the under-25s. Does the Minister have any plans to soften the blow for such important groups?

We always keep such issues under review, but the hon. Lady must explain how her party’s new proposals for a 4p cut in income tax, which will give 75 per cent. of the £18 billion sum involved to the wealthiest 40 per cent. and less than 1 per cent. to the bottom 10 per cent., will help the low paid.

Given that the Chancellor’s predecessor has boxed him in by setting tax and spending levels for the next three years and that Monetary Policy Committee decisions will largely determine inflation and growth, will the Exchequer Secretary tell us what policy tools remain available to the current Chancellor to address the fall in real disposable income?

There are plenty of policy tools that can be employed and nuances and changes that can be made—

What are they?

Order. It is good manners to let the Minister reply.

I was remiss; I should have welcomed the hon. Member for Runnymede and Weybridge (Mr. Hammond) to his new position in the shadow Treasury team.

As I was saying, in the period between the pre-Budget report and the Budget there are many opportunities to change structures and approaches, both fiscally and in terms of monetary policy, to fit in with new issues and situations that arise. The hon. Gentleman would not aspire to sit on the Government Benches if he did not think that he would have some options if he were in the Treasury.

I welcome my hon. Friend to her new post; her promotion is as welcome as it is overdue. Labour Members put the interests of children first, and children of the poorest families are our highest priority. With that in mind, will my hon. Friend tell me what proportion of low-income families with children have taken up tax credits?

My understanding is that the take-up of tax credits by low-income families with children is very high—the proportion is in the high 90 per cent. range. I thank my hon. Friend for her generous welcome to me.

6. What assessment he has made of the impact on pension funds of the abolition of dividend tax relief in 1997; and if he will make a statement. (149009)

When my right hon. Friend the Prime Minister was the Chancellor and he ended dividend tax relief and announced a 2p cut in corporation tax in 1997, he considered a wide range of factors.

Various figures have been bandied around as to the effect of the abolition of dividend tax relief. To put the record straight, what is the most recent Treasury figure for the cumulative effect of that annual smash-and-grab raid on our pension funds?

The only figures that have been bandied around have come from the Conservative party. The decision that the then Chancellor took was right. We wanted to ensure that investment decisions were taken for good business reasons, rather than for tax advantages. The hon. Gentleman will no doubt bear it in mind that under the previous Conservative Government the rate of dividend tax relief was cut on no fewer than five occasions. The last time it was cut was in 1993 when the then Chancellor, Lord Lamont, was being advised by the current leader of the Conservative party. Not only did the Conservatives cut the rate of dividend tax credit, but they failed to cut corporation tax at the same time.

Rather than continuing to look at the change in corporation tax, will my right hon. Friend look at what I think is the real cause of pension funds getting into trouble and subsequently having to receive help from the financial assistance scheme: the pension holidays that many of them took? I have been asking questions requesting the publication of information on how many of those funds had previously taken pension holidays, but the Treasury has as yet failed to answer. I hope that the Chancellor will change his mind and look into the issue, because it is the cause of the subsequent problems.

I agree with my hon. Friend. The causes of the difficulties that many pension funds encountered in the early part of this decade were many. There was the stock market collapse, following the collapse of the dotcom bubble in 2000. Many pension trustees had allowed a pension holiday through the 1980s and 1990s, and many did not realise until the beginning of this decade that their beneficiaries were living a lot longer than they thought. Moreover, a change to the accounting rules made companies bring on to their balance sheets their occupational pensions, which unfortunately led to many deciding to curtail their benefits or to end the schemes altogether.

Encouragingly, since that time the stock market has recovered, trustees are being more realistic and the Government have introduced legislation to help the victims of failed pension funds. The new pensions Bill, which will come before Parliament in the next Session, will provide further help, and we want to restore the link between earnings and pensions. In addition, we have introduced the winter fuel payment that has helped pensioners throughout the country, and the pension credit, which has helped to lift pensioners out of poverty. A range of things needs to be done, but my hon. Friend is right—people have to remember that what they get out of a pension has a lot to do with what they put into it, and the pension payment holidays did have a damaging effect in the 1980s and 1990s.

May I, in welcoming the right hon. Gentleman to his grand and historic office, remind him that yesterday, when I asked the Prime Minister about the massive blow that he struck, as Chancellor, against occupational pension funds, he replied by hiding behind the stock market crashes to which the right hon. Gentleman has just referred, and pointed out that pension fund assets had doubled? That being the case, how does the present Chancellor explain the fact that so many well-managed and profitable businesses now have very large pension fund deficits, and that almost all firms—including even the Bank of England—are closing their final salary schemes, which are so much more beneficial to pensioners than the alternatives now on offer?

I thank the hon. Gentleman for his opening remarks. I know that he has seen a good few Chancellors in his time, although I am not sure whether he was here when we joined the gold standard some years ago. I know that he has a keen sense of history, so he will know that before 1997, Chancellors of the party that he supports steadily decreased the amount of dividend tax credit. They started in 1979—when, incidentally, the Conservatives doubled VAT, even though they said during that year’s election that they would not—and they did it again in 1986, 1987, 1988 and 1993.

What has that got to do with it?

It has got a lot to do with it. The hon. Gentleman was critical of the decision that my right hon. Friend the Prime Minister took, as Chancellor, back in 1997. It was the right decision to take in the long-term interest of this country, and it is the long-term interest that we will keep our eyes on. It is very important to ensure that we have a climate in which people are encouraged to invest for good business reasons, and that the system is not distorted because of tax reasons. On the hon. Gentleman’s point about pensions, I refer him to what I said a few moments ago. Pension funds have got into difficulties because of a combination of factors. I mentioned the stock market collapse and the change to the accounting rules, which had a profound effect on pension funds. Other factors also had an effect, such as the pension holidays that such funds took. However, we are determined to do everything that we can to help pension fund trustees, as well as helping pensioners present and future.

Will my right hon. Friend confirm that tax credit dividends were simply a perverse incentive not to invest in one’s business the profits that one achieved, and that the long-term growth in the value of businesses as a result of the abolition of such tax credits is precisely the reason why the hon. Member for Louth and Horncastle (Sir Peter Tapsell) was able to allude to the fact that the value of pension assets has risen from £500 billion to more than £1 trillion during the period in question?

My hon. Friend is right and I can only assume that he has been looking at the papers that were made available to the former Chancellor, Norman Lamont, and released under the Freedom of Information Act 2000, which make it abundantly clear that at the time the Treasury was aware of the distortion. Of course, the document then went on to note:

“Everybody is being asked to pay more tax”—

in that Budget—

“and exempting institutions must play their part.”

The Conservative Government made the changes because they had run out of money; we made them because we wanted long-term sensible arrangements to encourage long-term investment in this country.

May I, too, welcome the Chancellor and congratulate him on his appointment? I press him to answer the question put by my hon. Friend the Member for Scarborough and Whitby (Mr. Goodwill). In 1997, the Chancellor was perfectly happy to say that

“there is no question that in the long term and the medium term”

the abolition of dividend tax credits for pension funds

“will be good for companies and it will be good for pensioners”,

despite the advice he received from Treasury officials. Independent experts say that the cumulative cost is something like £100 billion—at least. The Treasury must have made its own calculations. Let us hear what they are.

The hon. Gentleman refers to the advice that my right hon. Friend received in 1997, which was of course the subject of a debate in April—a debate that the Opposition may now wish they had not brought up. It was quite clear that all the predictions made when the Chancellor tested what might happen after the changes did not come to pass: the stock exchange rose afterwards and the amount of contributions to pension funds continued to rise. The hon. Gentleman needs to reflect on the fact that nobody—not the Conservative party, no one else in the country, no one else in Europe and the developed economies of the world—is actually calling for the restoration of that system of dividend tax credits. As the shadow Chancellor himself has said, the test of whether he is ready for government is whether or not he can resist additional calls for public expenditure. He is right on that point, even if not on most others.

7. What estimate he has made of the likely change in the number of tax credit claimants following the abolition of the 10 per cent. starting band of income tax in the financial year 2008-09; and if he will make a statement. (149013)

I refer the hon. Gentleman to the answer I gave to Question 1.

He was not here.

Actually, I was here. May I, too, congratulate the Chancellor on his new job, and also on his relatively reasonable response to my hon. Friend the shadow Chancellor about the shambolic and chaotic situation regarding tax credits? Given that almost half the claims have been mispaid and that of those, nearly 2 million people have received demands to pay back money, which of course they have already spent, does he think it sensible that by abolishing the 10p tax rate, instead of first sorting out the system, more people will become eligible for it and thus sucked into that shambolic and chaotic situation?

There are two points and I think that the shadow Chancellor touched on the first when he made the perfectly reasonable point that people had been overpaid, the sums can be substantial and if they are on modest incomes that is one of the reasons why it takes longer to get repayments and there is more money outstanding. We have to be sensitive about people’s ability to pay. However, on the second point, I do not follow the logic of the hon. Member for Blaby (Mr. Robathan) at all. If changes are made to the tax system that relate to people with children, it is important that we use the tax credit system to help them. The changes that the then Chancellor announced earlier this year in the Budget mean that more families with children are being helped, which is something that I want to continue to happen.

The Institute for Fiscal Studies is hardly a cheerleader for our party, but its assessment of the Budget in this regard is broadly very positive indeed. The IFS indicated that of the 10 deciles of income where it had assessed the impact the lowest two had benefited most from the changes. However, will the Chancellor respond to the IFS’s one observation of concern, which is that those who lost out due to the changes were disproportionately low-earning, single people, with no dependent children? Will he promote take-up—

Order.

I agree with the point that my hon. Friend made in relation to the IFS, which was extremely complimentary about the budget changes; but of course, I recognise what he said. The former Chancellor increased the threshold for working tax credit. He increased the child tax credit itself, which will help us to take 200,000 children out of poverty. We increased the age allowance, so low-income pensioners over the age of 65 will be no worse off and 580,000 will be removed from tax altogether. As my hon. Friend has said, the IFS showed that the biggest proportion of gainers are those at the lower end of the income distribution, which stands in stark contradiction to what the Liberals are proposing today.

8. When he expects to complete his consideration of the tax liabilities of those with non-domicile status. (149015)

I saw the hon. Gentleman make his entrance halfway through our time this morning, and I am pleased that he has found the time to join us.

The Government’s review of the residence and domicile rules is ongoing. The Government are mindful that any change to the current system would need to balance carefully the principles of ensuring fairness and of promoting the UK’s international competitiveness.

I thank the Financial Secretary for her courteous welcome.

The review was started in 2002 and seems to be taking an inordinate amount of time. Is that in any way connected with the large sums of money given to the Labour party by those who qualify for non-domiciled status, such as Lakshmi Mittal? While we are on the subject of this new sleaze-free environment that the Prime Minister has created, can we have an absolute guarantee that neither the Prime Minister nor the Chancellor will appoint as an economic adviser anyone who qualifies for non-domiciled tax status?

To deal with the general point about non-domiciled status, it is important to keep such issues in context and perspective. Resident non-domiciled people remain a relatively small group who are liable to pay UK tax on their earnings in the UK. Indeed, the Exchequer benefits to the tune of £3 billion. It is rich for the Liberal Democrats to come here and seek to lecture other hon. Members, given the circumstances in which some of their donors are living.

Does my right hon. Friend not acknowledge that this issue is now a rich source of public concern, a great deal of complication, which makes money for accountants, and a great deal of abuse? Britain’s reputation as an offshore tax haven and the concern expressed by tax authorities in the United States about that must be addressed. We cannot run the tax economy of this country as a large-scale version of Chelsea football club.

Contrary to recent press claims, the International Monetary Fund does not categorise the UK as a tax haven, despite some recent publicity attached to an IMF working paper, which was seeking to develop a methodology to identify tax havens. Under that proposed methodology, the UK would have counted as a tax haven, but the methodology is seriously flawed. I could go into the detail of why that was so, but I suspect that I would try your patience if I did so, Mr. Speaker. However, I acknowledge the concerns that my hon. Friend has raised and appreciate that a debate is taking place about the matter, and I will keep it under very close review.

Although I have some sympathy with the concerns addressed by the hon. Member for Lewes (Norman Baker), at least in relation to donors to the Labour party, may I tell the Financial Secretary that it is of great importance to the City of London and to ensuring its place as a pre-eminent global financial capital that we ensure that we have the very best talent here? Will she therefore ensure that, whenever the report comes into play—five years seems quite a long time for it to be ongoing—there is a balance between the interests of London as a global financial capital, which benefits all of us, and the issues of non-domiciled status?

I am grateful to the hon. Gentleman for those comments. I acknowledge the very serious point that he makes. As I said earlier, fairness in the tax system is one of our primary objectives, but it is also important to promote the UK’s competitiveness, by remaining an attractive place to do business.

The Financial Secretary will be aware that a Select Committee is looking at private equity and non-domiciliary taxation as an aspect of private equity. It is clear already that those matters are costing the Treasury and the taxpayer considerable sums of money and that they are rewarding the main participants—the self-proclaimed masters of the universe—with grossly inflated sums of money, without any real risk. Can the Financial Secretary confirm that the review set in train on those taxation measures is still under way and will report at pre-Budget time?

I can confirm that the review is under way and that it will report. If my hon. Friend will excuse me, I will not be drawn into a discussion on the particular issues that he raised, because it is a much wider subject. Estimates of the tax loss to the UK as a consequence of the use of the remittance basis by those who are not domiciled in the UK are not routinely made. We do not hold information on overseas income and gains that do not give rise to a tax liability in the UK, but, as I have said, individuals claiming that they are resident but not domiciled declare approximately £9.8 billion in taxable income, which leads to a UK tax liability of about £3 billion.

9. What account he took of the estimated number of people who would be subject to a higher marginal rate of taxation as a result of Budget 2007 in taking the decision to abolish the 10p rate of income tax. (149016)

I would have referred the hon. Lady to the reply that I gave to Question 1, but I do not think that she was here when I gave it. My right hon. Friend the Prime Minister looked at a range of factors before deciding to reduce the basic rate of income tax to 20p from next year.

I thank the Chancellor for that reply. Obviously, my question was different from Question 1. I have seen from his written answer that the Treasury’s own figures show that 5 million households are worse off as a result of abolishing the 10p tax rate, and it is those on low and middle incomes who are suffering most at the hands of the Labour Government. Will the new Chancellor rise to the challenge of creating a fairer tax system, or will he continue his predecessor’s habit of acting like Robin Hood in reverse?

The hon. Lady would do well to read in Hansard tomorrow the exchange in relation to Question 1, which she might find interesting. As I said just a few moments ago, when she was in the Chamber, we increased the working tax credit to help people without children. We also increased child tax credit, which helps people on low incomes. I suggest that before she next gets to her feet to speak she should have a good look at her own party’s proposals, because the benefit they provide to people on low incomes is very small indeed. Green taxes are interesting, but they can sometimes hit people on low incomes very hard, and she needs to think about that.