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Worklessness (West Ham)

Volume 464: debated on Wednesday 17 October 2007

I shall take this opportunity to talk about the unfairness in the benefits system, which ensures that many of my constituents are unable to work or keep a roof over their heads. Until the system is changed, key Government aims and objectives—in particular, our determination to eradicate child poverty by 2020—cannot and will not be realised in London.

I bring to this Chamber the problem as expressed to me by local people and charitable agencies. I know that I may be criticised at the end of the debate for not offering many solutions, but my purpose is to try to persuade the Department for Work and Pensions and, indeed, the House, that the situation urgently needs a solution. I shall highlight the problems faced by my constituents in particular and more widely by those on low incomes across London who wish to work and to advance in life, but who are frustrated by the combination of high housing and child care costs, and by the way in which the benefits system plays with their incomes.

We must seek a solution to the disincentive that confronts 1.7 million low-paid families, who lose 60 per cent. or more of any increase in their wage packet because of the benefit configuration. If we as a Government are to hit our target to end child poverty by 2020, we must tackle poverty in London—not the London of the champagne Charlies, but the London of real economic hardship and deprivation, in which many people, such as the unemployed and those on low incomes, struggle to survive. Some 41 per cent. of London’s children grow up in poverty. Excluding pensioner households, half of income-deprived households have someone in employment servicing and enabling London’s economic success and thus the country’s economic success. However, that work does not lift them out of poverty.

Housing benefits impact on the Exchequer—I have no doubt about that. Combined with council tax benefit, housing benefit is almost equal to all the other means-tested benefits added together. It is clear that we must get housing benefit right, and not spend it in a way that is counter-productive to the Government’s wider objectives. Almost 30,000 families in the London borough of Newham are on the housing waiting list. The wait for a three-bedroomed property is nearly 12 years, and for a four-bedroomed property it is almost 13 years. While those families languish—there is no other word for it—in temporary accommodation, housing benefit spending in my council is £245 million. That is just a single London borough. Nearly one third of that £245 million—£67 million—is spent paying private landlords.

The rents average £300 per week, or £1,200 per month. That rent does not secure a pleasant house, such as those on some of the television makeover shows that create properties for the buy-to-let market, but a flat situated over a shop or takeaway outlet. The average amount of housing benefit paid to council tenants in Newham is £70 a week. The average payment for housing benefit in temporary accommodation is £350 a week—five times the housing benefit paid to council tenants. That figure illustrates a disparity in rent and employment levels. The cost of housing has created a divide between those able to work and those for whom there is little incentive to do so, or even a negative incentive. The failure to provide enough affordable housing has created a boom in the buy-to-let sector. Temporary tenancies are often on short-term leases and tenants face the prospect of regularly having to move. The Minister will agree that that is very distressing and unsettling for families, particularly for young children who either have to change school or face long journey times to school every time that they move house during the 12 year wait for local authority housing. That is extraordinarily disruptive.

That would all be bad enough, but the problems caused by a lack of public sector housing are compounded by the impact of the benefits system. I am bombarded with evidence from constituents about housing benefit and the way in which it combines with other sources of income, benefits and tax to create a poverty trap for those in low-paid work. I have constituents who asked their employers to retract their wage increases because they were worse off after the increase. Others work part-time, but want to increase their hours to full-time, make progress at work, have a career and access housing associations’ joint-housing purchase schemes, but they simply cannot afford the additional rent that they would have to find for private, rented accommodation because, by dint of the additional wages that they would receive for additional hours worked, their housing benefit would be reduced. They are simply unable to take that first step, so they cannot find their way out of the poverty trap.

At the centre of the problem is the 65p in the pound withdrawal rate of housing benefit as income increases. John Hills, who is a professor of social policy at the London School of Economics and director of the Centre for Analysis of Social Exclusion, said:

“Housing Benefit is a major contributor to the ‘poverty trap’, where people’s net incomes rise by only a very small proportion of any rise in gross earnings. The higher the rent paid, the wider this zone. As a result, although the level of someone’s rent has no effect on their net gain from working at all, it can make a large difference to their net gain from extra earnings. For example, a couple with two children paying a typical private rent of £120 per week would gain only £23 if their earnings rose from £100 to £400 per week (as a result of reduced benefits and tax credits and higher tax and national insurance).”

I shall come to my own example in a minute, but my community would kill for such a rent level. Let us take Professor Hills’ example, which represents an effective marginal tax rate of 94 per cent. on the poorest in society. The Secretary of State for Innovation, Universities and Skills has expressed concern about the lower level of job retention for those returning to work. Despite recent falls in the likelihood of their leaving work, lone parents are still almost twice as likely to leave their job as non-lone parents. Fewer than one in five lone parents who leave income support return within six months; over one quarter return within a year, one third within two years and almost two fifths within three years.

Lisa Marker’s report on child poverty, published at the end of last year, projected figures that showed that if the rate of job exits among lone parents was reduced to the level of those among non-lone parents, the Government’s 70 per cent. employment target could be met without any increase in the number of lone parents entering work. That is a remarkable finding, but before we think about putting further pressure on lone parents, it is important that we recognise that that evidence implicates the state in what has happened, as it has created an imbalance in work incentives, and we must do something about it.

I asked the excellent social regeneration unit at Newham council to analyse an example for me, so that I could present the Minister with the impact of the problem on my community. The unit used the example of a lone parent paying an average private rent—not the top figure—with two small children. If that parent had a job paying the minimum wage, she would earn £10,075 a year, which in London, with our high costs of living, is nothing short of a pittance. After the loss of benefits she would be just £50 a week better off than she was on income support. I suppose we can call that an incentive to work.

Let us take the analogy a little further. Let us assume that she is a bright and motivated young woman—why not?—and applies for another job, which she gets, along with a pay increase of £5,800 a year before tax and benefits, so that she is on £15,000 a year in London. Again, it is not a high wage, but what does she get at the end of the day? She is £7.78 a week better off than she was with her £10,000-a-year job. Can we honestly imagine how disheartening that would be? A new job, promotion and an additional £5,800 a year, but no new clothes to help with the new job, no additional socialising with colleagues, no holiday with the children and no impact at all upon their lives. If we are to incentivise lone parents to return to work, we must analyse the benefits system. The 65p in the pound housing benefit tax rate is at the core of the issue.

To develop the story, I shall discuss tax credits so that we can begin to understand why almost two fifths of lone parents who leave income support return within three years. I realise that responsibility for tax credits rests ultimately with the Treasury, but in these days of joined-up government I am justified in briefly mentioning the way in which the system disincentivises the work force. My hon. Friend the Minister will know that any increase in earnings one year will have a knock-on effect on tax credits the following year. In some ways, the system is excellent: it cuts overpayment and gives the person returning to work a buffer, as they receive additional money for the remainder of the financial year. The lone parent receives a promotion and additional income, she comes off income support and climbs beyond housing benefit and council tax benefit, so she loses fewer benefits. She is out of the poverty trap, and she feels great. However, the increases are due to the frozen tax credit. Next year, a new calculation will be made, her tax credits go down by what can be very significant amounts, the family struggles and work is no longer incentivised.

To give an example of the system’s impact, before I entered the House, as part of my job I organised focus groups with residents in a London borough to discuss local service provision. I was staggered to discover that at least four fifths of the women whom I interviewed had recently returned to work only to leave because they could not afford to stay on. The realities of work—how little additional income the returnee would receive, given the additional expenditure that work requires and the journey times between work and school—had not been properly costed or considered by their back-to-work adviser. As a result, those women left employment with significant debt in some cases, because they were struggling to carry on. They were totally demoralised and fearful of trying to work again. They were not bad, feckless or lazy women, nor had they taken unaffordable foreign holidays or bought wardrobes of new clothes for their new jobs. They were women who wanted to be parents in hard-working families. They knew that there would be a positive impact on their children if they returned to work, they wanted to have pride in themselves and they were aspirational, but they were let down by the system.

Surely to goodness we can see that that situation will not provide us with what we desire—a fair and equal society in which we offer

“the best of chances for all families”;

in which all children have the best of chances when growing up; and in which

“all families who work hard can build a better life for themselves”.

We must look at the tax system again. We must consider making regional variations in tax relief for those on low income; raise the taxable allowance at the bottom end of the income scale; and raise child benefit radically, and make it taxable at the top end. I accept that those measures go far beyond the scope of the debate, but I seek an undertaking from the Minister that we will investigate the impact of tapering housing benefit at a slower rate, even if only in certain regions and until house building in London and the south-east has begun in earnest.

I am not alone in making that call. The Harker report recommends a proposal to reduce the 65 per cent. withdrawal rate, as does the London Child Poverty Commission. Housing benefit is at the bottom of the food chain, and it is calculated on net income, so making it more generous does not have knock-on effects elsewhere, unlike tax credits. Overhanging all those arguments is the desperate need for affordable housing on a huge scale in London. It is the only solution that begins to depress housing costs generally, and I heartily welcome the Government’s renewed commitment to the issue.

The Government have been considering the problems that I have outlined for some time. Pilots in communities, including my own, are testing different models of intervention, but they are all short-term and time-limited, and families may be significantly worse off once they have concluded or the grace period has expired. A young woman with three children came to my surgery last week. She went back to work on one such pilot, which finished, but the organisers did not tell her. She is in debt by £17,000, which she owes in backdated rent. She believed that her rent was being paid by the pilot which, however, was time-limited.

In truth, the pilots tell us what we already know. If we make it easier for families to afford a roof over their head, and if they can access affordable rents, they work. If families can afford to work, they want to do so. If they are allowed to aspire to a better standard of living, they tend to grab the opportunity. When my right hon. Friend the Member for Barrow and Furness (Mr. Hutton) was Secretary of State for Work and Pensions he admirably expressed the aspiration that

“every generation deserves the opportunity and support to raise and fulfil their aspirations; every individual the support to lift themselves and their families free from poverty and dependency.”

I agree. What then are we going to do about housing benefit?

I congratulate my hon. Friend the Member for West Ham (Lyn Brown) on her contribution to the debate. She spoke with much conviction and force about an extremely important subject, and clearly she represents very effectively her constituents, who face the challenges that she ably described.

May I begin by telling my hon. Friend that Ministers in the Department for Work and Pensions need no further persuasion of the importance of the subject, nor, indeed, of its complexity, which she rightly identified? She called for more fundamental reform of housing benefit, and interestingly, I think she said that in her borough, £60 million of housing benefit is paid to private sector landlords. She will know about our introduction of the local housing allowance, which will begin to take effect from April next year for new claimants. It represents a fundamental reform to housing benefit in the private rented sector, and if she has not seen already the analysis that we received from the pilot areas that tested the allowance in the private rented sector for up to two years, I can tell her that its impact on people’s willingness and ability to move off benefit and into work is very encouraging. I hope that as the allowance moves into her borough from April next year, she will begin to see in her surgeries some of its beneficial effects. I shall certainly be interested to hear how she thinks it is going once it is in effect.

I agree with the point towards the end of her speech that the fundamental solution is an increase in the supply of affordable housing. That is absolutely right, and I am pleased that she acknowledges that the Government have picked that up and that, although the debate is about housing benefit, the fundamental issues points to a story more of housing than of benefit. The benefit story is a consequence of the current position of the housing supply. If we can get to work and make progress on the housing supply, we shall certainly start to get a grip on the problem.

On housing benefit, we recognise that the current system may be perceived as a barrier to work. We have already taken steps to address that problem, for example by reducing bureaucracy and trying to provide a better service to customers. We are also considering ways to make customers more aware that housing benefit can be claimed while they are in work, as evidence shows that that knowledge may have an impact on their employment decisions.

Together with the Department for Communities and Local Government, we are supporting the working future pilot, which is led by the Greater London authority and the East Thames Group. It is testing how lowering rents and increasing training opportunities and employment support for those in leased temporary accommodation can help them to overcome some of the barriers to work. It will provide us with valuable information on the impact of high rents and work-based initiatives on tenants’ incentives to move into work. As my hon. Friend may know, the project started in September 2005 and is expected to last two years. Evaluation will take place continuously and in the latter part of this year after the pilots have been completed.

My hon. Friend also mentioned the effects of the housing and council tax benefit tapers on the poverty trap, which is an important and complex subject. Since 1997, the number of people facing marginal deduction rates of more than 70 per cent. has fallen by about 500,000 as a result of changes to the tax credit system. Benefits provide a secure source of income for individuals who are out of work or who receive a low income from their work. As a claimant’s income or capital increases, they are expected to contribute more towards their living costs. The more they earn, the higher their expected contribution and the lower their benefit entitlement. It is therefore inevitable that marginal deduction rates are affected by the withdrawal of help as income rises.

People are better off under tapered benefit arrangements than under schemes that operate a cliff-edge cessation of benefit. Such schemes remove all entitlement to benefit when income exceeds a certain level. The high housing benefit taper directs support at those most in need, by ensuring that those with very low incomes receive sufficient support with housing costs in work while those with higher incomes float off benefit and thus have sufficient incentives to increase their earnings.

When we include the effects of taxation, the highest possible marginal deduction rate that a claimant could face is set at about the 95 per cent. mark that she mentioned, but housing benefit accounts for only a quarter of that total rate. The biggest contributors to that high rate, as she correctly identified, are national insurance contributions and taxation. Reducing the taper in housing benefit would reduce the severity of the poverty trap faced by those on benefit, as each pound of increased income would be accompanied by less withdrawn benefit, making the system more generous. However, because the system would be more generous, the level of income required to float off benefit entirely would be increased, thereby extending the poverty trap to more claimants with relatively high earnings. It is therefore important to have a taper rate that balances those two opposing effects—reducing the severity of the poverty trap and increasing its extent. In addition, reducing the taper rate from 65 per cent. to 50 per cent., for example, would incur public expenditure of about £400 million.

We conducted research that highlighted areas in which we need to improve the basic awareness and understanding of housing benefit and council tax benefit as in-work benefits among Jobcentre Plus staff and customers. In general, claimants do not take account of those benefits in their better-off calculations, which distorts their decisions about moving into work. The lack of awareness of in-work housing and council tax benefits implies that marginal deduction rates are not at the forefront of people’s minds when they consider a move into work. Evidence reveals that if some clients had been aware, or been made aware, that those benefits could be claimed in work, it would have had an impact on their decision to take up employment. We are currently pursuing strategies designed to address the problem.

My hon. Friend gave an example of a lone parent who gains a promotion and sees her tax credit award fall suddenly a year later. The purpose of the working tax credit is to offset the impact of taxes on the earnings of low-income individuals. It is income-related, so it is reduced as the income earned increases. That is logical, and the same principle applies to all income-related benefits. However, in the case of tax credits, a person’s entitlement is worked out annually and a change in income up to £25,000 does not change their entitlement for the year. That makes the system more efficient in administration and less of a burden on the customer. It means that in the example that she gave of the lone parent, the customer’s earnings increase in the tax year but she continues to receive her working tax credit at the rate decided when she was earning less. In effect there is a buffer between her salary increasing and her tax credit being reduced as a result.

In addition, as part of the Government’s wider service transformation agenda, my Department and Her Majesty’s Revenue and Customs have established a programme of joint work. The first project in the programme looked at improving the overall service given to customers who move in and out of work. The trial proved particularly successful in showing that practical ways can be found for the organisations to work together on working age benefits, housing benefit and tax credits.

Cities, most importantly London, pose one of the biggest challenges if we are to achieve our long-term aim of an 80 per cent. employment rate. The 10 biggest cities account for one fifth of the UK’s total working-age population. Through our cities strategy, we have created 15 pathfinder local authorities with responsibility for developing and delivering targets and outcomes to tackle worklessness. Giving local areas more flexibility enables them to tailor provision and support to help move local residents into employment. The cities strategy should play a significant role in increasing local employment rates, ensuring that the most disadvantaged people in the labour market receive the help and guidance that they need.

West Ham will benefit from the additional funding that we have provided in London for training in English as a second language. That additional provision was announced in the 2007 Budget and it recognises the diversity of need and the extent of deprivation among parents living in London who, in addition to the other problems that my hon. Friend correctly identified, must often overcome language barriers to return to work. She also referred to the role of tax credits in addressing poverty. As she knows, they provide support to 20 million people, including 6 million families and 10 million children—more than any previous system of income-related financial support. She also knows that we recently announced an increase in the child element of the child tax credit. That and other policies designed to make work pay have contributed to the record level of employment that we now have; indeed, it is the highest since records began.

We are also supporting lone parents into work by extending the availability and number of Sure Start child care centres and through the extended schools programme. As my hon. Friend will know, an issue that lone parents in particular face is not just the in-work calculation in the transition from benefit to earnings but the cost implications of child care, which are part of the calculation that they have to make. I hope that I can reassure my hon. Friend that we understand completely the importance of the points that she has made. We understand the specific needs that exist in London, particularly in her borough. I shall not try to pretend that reform is straightforward or easy, but I wish to reassure her that the issue is very much on our agenda and that a number of programmes are running. We are giving further thought to issues specific to the capital city, and work is under way. I appreciate the fact that she has raised the issue, and I look forward to hearing from her again as the reforms that have been introduced are rolled out.