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Social Security (Contributions) (Re-rating and National Insurance Funds Payments) Order 2007

Volume 689: debated on Thursday 22 February 2007

rose to move, That the draft order laid before the House on 24 January be approved.

The noble Lord said: My Lords, for the convenience—and, I hope, with the will—of the House, I shall speak also to the other orders in my name on the Order Paper. In my view, the regulations and orders are compatible with the European Convention on Human Rights.

First, the order concerning national insurance contributions increases contribution rates and thresholds for the self-employed and the weekly rate of voluntary class 3 contributions, broadly in line with inflation. The review of contribution rates is accompanied by a report from the Government Actuary detailing the effects of the draft order and the draft order up-rating benefits laid by my right honourable friend the Secretary of State for Work and Pensions on the National Insurance Fund. I am pleased to say that, for the eighth year in a row, there is no expectation that the fund will need a Treasury grant. Nevertheless, a prudent provision of 2 per cent of all benefit expenditure is made.

Northern Ireland has a separate national insurance scheme from Great Britain, but the two schemes are closely co-ordinated and maintain parity of contribution rates. This draft order covers both Great Britain and Northern Ireland.

On the other orders, tax credits, together with child benefit, deliver financial support to the vast majority of families with children in the UK and are vital to our commitment to tackle child poverty. I am pleased to introduce the regulations and orders, which increase certain elements and thresholds of tax credits and raise the rates of the child benefit and guardian’s allowance.

Turning to the Tax Credits Up-rating Regulations 2007, tax credits play a major role in ensuring that work pays and in helping people to move up the employment ladder. Overall, nearly 6 million families containing nearly 10 million children are benefiting from tax credits. These regulations increase the child element of tax credit by £80, in line with earnings, to £1,845 a year from 6 April 2007. This element has increased by £400 since its introduction in April 2003, benefiting 6.8 million children. In addition, the regulations increase the disabled child elements of child tax credit in line with inflation.

The elements of working tax credit will also increase in line with inflation. The working tax credit provides support to low-income working families, including people who do not have children. The tax credit system has been designed to offer support to people as they move between jobs and as their circumstances change. Building on the lessons from the first two years of tax credits, the 2005 Pre-Budget Report announced a package of measures to improve the system. These measures will ensure that the system strikes the right balance between providing a stable award and maintaining the ability to respond to changes.

I turn to the Child Benefit Up-rating Order 2007 and the guardian’s allowance orders. Child benefit is payable to 6.7 million families for around 13 million children and young people, providing almost all families in the UK with a worthwhile contribution towards the cost of bringing up their children. These instruments increase rates in line with inflation. From 9 April 2007, child benefit will be worth £18.10 per week for the first child and £12.10 for each subsequent child. The Government are committed to increase child benefit in line with prices. As a result of these increases, the rate payable for the oldest qualifying child remains more than 25 per cent greater in real terms than the rate payable in 1997. The guardian’s allowance will increase to £12.95 per week.

With the increases effected by these instruments, we will be delivering even more support next year. We remain committed to the Government’s long-term aim of eliminating child poverty within a generation and halving it by 2010. Tax credits and child benefit will remain a key part of this. Indeed, in his Budget, my right honourable friend the Chancellor of the Exchequer made a commitment to increase the child element of the child tax credit at least in line with average earnings until the end of this Parliament. I commend these regulations and orders to the House. I beg to move.

Moved, That the draft order laid before the House on 24 January be approved. 8th Report from the Statutory Instruments Committee.—(Lord Davies of Oldham.)

My Lords, as we heard, the first of these orders deals with the resetting of rates and levels of national insurance contributions; the regulations increase the thresholds of child and working tax credits; and the other three orders provide for the uprating of the level of guardian and child benefit. Overall, we welcome these orders, which are a necessary response to inflation over the past year. However, I would like to address a few issues that arise from the presentation of the orders and probe the Government about their future plans.

I shall start with tax credits. I am sure the Minister is not surprised that I do so, but the facts alone make the point. The statistics on the tax credit system as a whole are telling: the finalised awards for the tax year 2004-05 show that only 56 per cent of tax credits were paid correctly and that £1.8 billion were overpaid and £550 million were underpaid, leaving nearly a million households without the support to which they were entitled. That led to 2 million recipients having to pay back the overpaid money from the payments they received in the subsequent year. That this situation is not acceptable is evidenced by the fact that even Labour Members criticise it. In October last year, David Blunkett was quoted as saying that the system was a shambles. The Comptroller and Auditor-General, Sir John Bourn, called it ridiculous. It is so complicated that the Prime Minister appeared to forget last summer that he abolished working families’ tax credit three years ago. If even he is unable to keep track of the complexities of the system, it is unsurprising that those applying for the credits are equally confused.

What is just as worrying is that these tax credits are clearly failing to achieve their primary purpose, which is to reduce child poverty. A reduction in the number of children being brought up in poverty is an objective shared, I am sure, by all Members of the House. However, when tax credits cost the equivalent of 5 pence off the standard rate of income tax and the target for reducing child poverty is still missed, noble Lords may wonder whether there are not better ways of going about improving the welfare of children.

That brings me to the last three orders that we are discussing today. First, I shall raise a point that I have been wondering about for a while. Can the Minister explain to the House why the guardian’s allowance is set at a lower rate than child benefit? I am curious about whether there is any rationale to that. The costs of bringing up a child are identical whether you are the biological parent or not. Is it just a long-running inconsistency that no one has taken the time to address?

I also hope that the Minister will be able to shed some light on the Government’s plans concerning child benefit and associated tax credits. Do they have any plans to give child benefit a larger role within the tax and benefit system, as has been suggested? I understand that they intend to undertake a wholesale reorganisation and simplification of child benefit and the associated premiums and tax credits. Is that correct? Simplification is certainly needed because the UK now sits 67th in the world for the complexity of our tax system. If the Government have such plans to do so, can the Minister give us an idea of when more precise plans will be announced?

I should also be interested to know whether there are any plans to move tax credits, child benefit and child trust funds from the Treasury to the Department for Work and Pensions, where common sense suggests they should be placed. The high levels of fraud and mis-payment of funds are clear testimony to the inappropriateness of the current arrangements. The Treasury's role should be one of keeping a close watch over the spending of taxpayers’ money, ensuring that it is spent effectively and reducing inefficiency in other government departments.

I should like to finish by referring to the index used to measure the rate of inflation against which the level of upgrade is calculated. These orders up rate the benefit levels at the rate of inflation determined by the retail price index. Although that has been the most common and convenient measure of inflation in use for a long time now, I am sure the Minister will agree that it does not paint the full picture. It, of course, neglects to include higher-than-inflation tax rises, council tax rises or more expensive mortgage repayments in the calculations. It is also a general measure that fails to identify the particular patterns of expenditure of the young families for whom these orders seek to make provision.

It therefore increasingly fails to give a representative picture of the true cost of living for those people whom it is intended to help. Over time, the use of the RPI erodes the value of the benefits the Government intend to provide for in these up ratings. It is, of course, tax credit benefits that are intended to help those most in need and who are struggling to cover inflating expenditure with incomes that do not rise as fast, but, as I have pointed out to the House, the tax credit system is severely and fundamentally flawed. I hope that, as inflation rises, and tax increases rise even faster, the Government will reflect on the efficacy of their key benefit tool, the tax credit system, and consider how it can be remodelled or whether they should be considering a replacement.

My Lords, I am pleased to follow the noble Lord, Lord Taylor, and I concur with much of what he has said. Our uprating system is a quintessentially important part of the process for delivering benefits. These are important orders, and I am grateful to the Minister for introducing them so eloquently.

There is a sense that people get frightened by the technicalities in some of these orders and pay less attention than maybe they would because they are overwhelmed by those technicalities. In a sense these are very technical orders. However, the Minister will agree that there are some very big principles and sums of money involved in what the House is considering this afternoon. I want to look at some overarching principles, which I think are important, and I want to look at some of the technical details.

This is an important annual occasion, which gives us a chance to look at how the Government are reviewing the relative values and benefits in front of us. It also gives us a chance to look at the coherence and complexity behind the system. Finally, it does and should give us a chance to look at what is happening in the long term because I believe that there is a predisposition—it is perfectly natural—to think, “Well, the change from last year is pretty understandable; it is related to prices” or to some other factors.

So, from year to year there is not very much change. But the House should look very carefully at the change that happens over years. You do not need to be an economist to understand that if the main mechanism for uprating is always anchored to prices, and earnings are going ahead thanks to the wonderful way the Government are discharging their duties in relation to the economy, there is a differential that is a built-in gap which is exacerbated as we go forward. Therefore, every year, although we look at the perhaps relatively individually small increases, we have to look back over the period since these benefits were put in place—they were all put into place for very good purposes—and ask ourselves whether over that period the balance is correctly kept in place as we go forward.

My first question for the Minister, although I do not expect him to spend a lot of time at this stage of the day explaining this in his reply, concerns the process of review. Under the Social Security Administration Act 1992, the Government have a duty to review. I suspect that a bit of a desktop exercise goes on. A bit of computer software is plugged into a machine. You insert the RPI, prices, earnings or something and the figures come out the other end. That is presented to Ministers, who then sign it off, and that is the result that appears in front of us this afternoon.

I have been trying for nearly 20 years to find out exactly what is involved in that duty to review. How much ministerial involvement is there? Are there meetings? Are there papers? I am not looking for state secrets—well, actually, I am always looking for state secrets, but not necessarily in this instance. It would give me more confidence to know a little more about the process that goes on. I am being a little facetious; I am sure that it is not done casually. But I would feel better if people were really spending some quality time thinking about the consequences. Obviously there is a large number of benefits and that cannot be done for every benefit every year but there are some very high-quality people in the Treasury and in the Department for Work and Pensions who know about these things. If I could be given some assurance that a meaningful deliberative process goes on year by year, I would sleep easier in my bed.

For example, is differential inflation considered? As we all know, inflation affects different groups of claimants, or customers—whatever we like to call them—differently. Is that looked at annually carefully before the final benefit uprating is decided? The UNICEF report was obviously too late to be considered for this year’s uprating, because it was only released in the past week or so, but are such external reports considered year by year?

I say that particularly because, as the House will know, the Treasury extracted, for some daft reason that I do not understand, important benefits, such as child benefit, from the grasp of the DWP and thereby, at a stroke, took them out of the purview of the Social Security Advisory Committee. That committee is a confidence-building measure. It looks at these things from an independent and very expert point of view and can give an independent assessment of what the Government are doing on benefits administered by the Department for Work and Pensions.

None of the benefits that the Minister has brought before the House this afternoon has been subject to that rigorous scrutiny. That is a worrying fact that we need to bear in mind. The duty on Treasury Ministers to give an explanation and detailed background when dealing with such benefits is perhaps greater than it is for the social security uprating order coming next week, which will be presented by DWP Ministers. Finally, on whether the process considers different factors, the whole question of fiscal drag has a profound effect over the longer term on how benefits are deployed and how their relative value changes over time. I hope that the process before the laying of the orders has also taken that into account.

There are a couple of technical things that I genuinely do not understand. I cannot understand why the guardian's allowance order that has been laid is necessary. It is necessary only because the guardian's allowance is in the wrong part of an Act of Parliament. It used to be a contributory benefit. For the life of me, I cannot see why it is necessary to single out this benefit. Actually, I think I know that the reason is that it used to be a contributory benefit and so it has to be uprated especially by itself. According to the order, the cost is negligible. The important point was made by the noble Lord, Lord Taylor, that the simplification of benefits unit, if it is doing anything, should be finding ways to move the guardian's allowance from one part of a previous statute to another. I shall make him an offer, which I hope he thinks is generous. The next time a social security Bill comes through this House, I will move an amendment myself to relocate the benefit in the statutory process. Then he will not need to move these orders in future. I cannot say fairer than that; I am doing the Minister’s job for him. If it is a negligible amount of money and an historic anomaly, simply systematically going on because it has aye been, as they say in Scotland, is not a big enough justification for bringing it before the House. Perhaps the Minister will look at that.

I absolutely concur with what the noble Lord, Lord Taylor, said about child benefit. I absolutely accept that the Government have done a huge amount to increase child benefit levels although, as the noble Lord, Lord Taylor, reminded the House, they missed the targets just recently. I bet a monkey to a mousetrap that they will miss the 2010 targets by a much bigger amount unless these uprating orders for child benefit do not improve in forthcoming Budgets. You do not need to be an economist to do the extrapolation. Child benefit must reflect the Government’s own policy intentions and ambitions. Of course it has been uprated by prices. That is great, but it is not enough to meet the Government’s own targets. The Government are running out of time to meet the 2010 targets because these amounts of money take time to feed through and make a difference to the children in families who are in poverty. It is acknowledged that this is an improvement, but it is not good enough in terms of the Government’s own measures. Therefore, the House needs to ask the Government to think about that again.

On the social security contributions order, I do not know, and I cannot understand, why provision is made for a 2 per cent Treasury grant. The Minister said that it was a kind of safety measure and that we needed 2 per cent of the benefit spend just in case we needed it. That is great, except that the Government Actuary report that accompanies the orders makes the apposite point that,

“no Treasury grant will be needed in the period to 31 March 2012”.

The Government Actuary advises the Government to keep 16 per cent of benefit spend as a safety measure. I forget what the actual percentage of the benefit spend is now, but the Government Actuary says that we do not need this money. We have always had this provision for a government grant of 2 per cent, but if the Government Actuary is telling us that we do not need this money until 2012, why do we need this paragraph at all? It might be money for a rainy day. I do not know, but 2 per cent of the benefit spend is a huge amount of money. I cannot remember the last time it was used. There is a table at the back of the Government Actuary report, which noble Lords might like to look at, which shows that the fund is in substantial balance. Indeed, in 2011-12, there will be an end-of-year balance of 91.8 per cent of the benefit spend. The Minister does not need his 2 per cent. If he does not need it, he should not have it in his order.

I have two other quick points to make. Again, I concur with the important points made by the noble Lord, Lord Taylor, that the administration of tax credits needs a serious amount of work. I do not know how the maladministration affects the ability to keep the accounts properly in order year on year, but it is completely incoherent to have the child element of the child tax credit increased by earnings at the same time as we freeze the family element of the tax credit system. There is no rhyme or reason to this, and it makes the complexity much worse if we use differential rates of benefit increase in a way that simply baffles me. I can see why the Government did this at the beginning, but I see no justification for their continuing to do so.

Finally, the orders are welcome and are important to the families that they serve. I recognise the work that the Government have been doing. Perhaps the Minister should go back to the department and look at the value of benefits as a percentage of GDP or any other relative merit measure. These have been changing over the past 25 years. On looking at such periods, some of these benefits are eroding in value substantially, which is often hidden by the fact that we look at these uprating orders year by year. You do not see it happening year by year, but if you look over a period, the evidence is staring Ministers in the face. If we do not do more, not only will the Government miss their targets, families who are in abject poverty—there still are some in this country—will continue to suffer because these upratings are not sufficient for the purpose.

My Lords, I am grateful to both noble Lords who have contributed to this interesting debate. I appreciate that both welcomed the orders while presenting some limited criticism of them. Let me emphasise to the noble Lord, Lord Taylor, that I hear him when he talks about keeping up with inflation. I do not think I emphasised that we are talking about inflation under this Government: low levels about which the preceding Administration would have only dreamt. He will recognise, therefore, that these adjustments are taking place against a background of considerable economic stability, which, after all, is very important for everyone—as much for those who are less well off as for any other.

The noble Lord emphasised the problems of the overpayment of tax credits, and he is right. We recognise that we have considerable work to do to refine and improve the system, and we have already made considerable improvements. Tax credits are a very important dimension of our welfare policy. More low- and moderate-income families receive support through tax credits than in any previous system of income-related financial support. Although I will of course take on board the proper anxieties expressed by the Opposition about the operation of the system, I emphasise that we have made considerable progress, particularly in tackling child poverty. The noble Lord, Lord Taylor, upbraided me on that as well.

With slightly more generosity, the noble Lord, Lord Kirkwood, also mentioned that we missed the target. We narrowly missed the target against a background of, as is known, a very substantial inheritance of child poverty to tackle. In the 1980s and early 1990s child poverty doubled in this country, but in 2004-05, despite having narrowly missed this target, 700,000 children were lifted out of relative poverty. We want to hit targets, and I hear what the noble Lord, Lord Kirkwood, says about his gloom with regard to the more distant target. He can indulge in gloom if he likes—economists, after all, made their reputation indulging in gloom—but the Government are committed to hitting that target and are already making substantial progress towards it.

I want to reassure the noble Lord on the overall position. I think he was asking me whether the Government take into account broader issues that may crop up which impact on low-income families and tax credits. Would a review have sufficient breadth? I understand what he says about the technicalities of the narrowly based review, but he will understand that no intelligent Government with the kind of priorities that we have in tackling child poverty would do anything other than look very closely at a report like that of UNICEF, to which he made reference, which identifies the tasks to be undertaken. While there are certain dated figures in the report, points are also made that show just how far this country had to come to emerge from the position that obtained before we came to office and the length of time it will necessarily take us to effect an amelioration. However, I want to assure the noble Lord that the policy is evolving within the context of a real appreciation of the broad objectives that we have set ourselves and the priorities we have identified.

On the detailed points raised by the noble Lord, Lord Taylor, on overpayments, there have been difficulties but the improvement has been considerable. We did much better in 2004-05 than in the preceding years, with overpayments running around a fifth lower over that period, so we are moving rapidly in the right direction. Furthermore, the measures announced in the Pre-Budget Report 2005 will reduce overpayments by about a third when fully implemented. It is not an easy task. Overpayments made to the least well-off among our citizens present real problems regarding recovery, and we have to approach the issue with understanding and the recognition that we must not create hardship through a failure of the system. That is why there are costs involved.

I want to assure the House that we are making significant progress in that area, as we are in tackling fraudulent claims. The noble Lord knows that there have been significant issues on fraud and overpayments. It is of course the Government’s responsibility to keep a careful watch over taxpayers’ money, and we are confident that we have got the measure of this development, one which has cost the nation and which needs to be remedied. I do not have precise figures on the improvements to hand, but we think that they will show that the very significant levels of fraud which occurred earlier have been sharply reduced. Indeed, I am confident about my statement in those terms.

As is the wont of the Official Opposition, the noble Lord again asked me about inflation measurements, a matter we have discussed in the House recently. He will recognise that the inflation index we use puts us into a position of direct international comparison and is an appropriate and proper measure of inflation. However, both he and the noble Lord, Lord Kirkwood, emphasised that there are different inflation rates for different people. As he knows, the Office for National Statistics is working on this issue as a guide to policy, but that is not the same concept as relating benefits directly to inflation, which needs a clear, accurate and definitive measure that we will continue to use. Obviously the Government will take into account, in their aim of eliminating child poverty, those factors where the inflation rate may be higher for certain categories and therefore need to be taken into account. However, I must say that those factors will vary a great deal between families. There is no easy measurement of those figures and we would be looking for fool’s gold if we thought that there was. That is why, although I am chided by the Official Opposition, I think I would be on fairly safe ground in saying that they are unlikely to produce a policy initiative indicating that they will have variable rates of inflation for a whole range of people entitled to benefits from the state. I am therefore not able to give a great deal of reassurance on that point.

The noble Lord also asked why the guardian’s allowance is lower than child benefit. The guardian’s allowance is not a substitute for child benefit and tax credits but is paid in addition to those benefits. It gives support to all families with children and recognises that a person is taking responsibility for a child whose parents have died and has additional costs. There is no obvious reason why it should be exactly the same as any other benefit; it is an additional concept. So that is the basis of that.

The noble Lord, Lord Kirkwood, suggested that the best way to get the inflation problem out of the way is to base all these benefits on earnings. He said that there is a comparative loss if earnings are rising faster than prices and people receive these credits only on the basis of prices. I shall not accuse the Liberals of going quite that far at this stage but the noble Lord should be careful about how much he chides me on this matter. I understand what he says. We have had this debate in regard to pensions and he will know how constructive the Government are being in the Pensions Bill which is currently before the House of Commons. He will have to be satisfied with that as an earnest of the Government’s intent at present.

I am conscious that I have been asked for a number of very precise details which I may have inadvertently glossed over, not through intent but through an inability to master entirely the detail, particularly when I know that the noble Lord, Lord Kirkwood, has a long history of work in this area which we all respect. This is probably true of the noble Lord, Lord Taylor, as well, although I know his work rather less well. My history is painfully thin and therefore, on this occasion, I must indicate to the noble Lord, Lord Kirkwood, that there are areas on the path he invites me to go down which I must resist lest I fall into the morass.

At one stage the noble Lord suggested a wager on the child poverty target. He said that he would bet a monkey to a mousetrap. My response on behalf of the Government is that we are not going to take that wager on, because neither side seems to be particularly advantageous to us.

On Question, Motion agreed to.