rose to move, That the draft regulations laid before the House on 6 February be approved.
The noble Lord said: My Lords, I shall speak to the three orders this afternoon as well. Tax credits, together with child benefit, deliver financial support to the vast majority of families with children in the UK and are vital in our commitment to tackling child poverty. I am pleased to introduce these regulations and orders, which increase certain elements and thresholds of tax credits, and raise the rates of child benefit and the guardian’s allowance. In my view, the regulations and orders are compatible with the European Convention on Human Rights.
First, I turn to the Tax Credits Up-rating Regulations 2008. Tax credits play a major role in ensuring that work pays and in tackling child poverty. Overall, nearly 6 million families, containing nearly 10 million children, benefit from tax credits. These regulations increase the child element of child tax credit by £175 above the earnings index to £2,085 a year from 6 April 2008. This element will have increased by £640 since its introduction in April 2003, benefiting 6.9 million children. These regulations also increase the disabled element of child tax credit in line with prices.
In the 2007 Budget, the Government announced the next stage in modernising the tax and benefit system. This included increasing the thresholds for working tax credit by £1,200 to £6,420 in April 2008, and raising the withdrawal rate to 39 per cent for those who have income above the threshold. These regulations bring this into effect and further strengthen the incentives to work while retaining the current focus of tax credits. They also increase most of the other working tax credit elements in line with prices.
I turn to the Child Benefit Up-rating Order 2008 and the guardian’s allowance orders. Child benefit is payable to over 7 million families for around 13 million children and young people. Almost all families in the UK who have to bring up children receive a worthwhile contribution towards that cost. These instruments increase rates in line with prices. From 7 April 2008, child benefit will be worth £18.80 per week for the first child and £12.55 for each subsequent child. The Government continue to meet their commitment to increasing child benefit in line with prices. As a result of these increases, the rate payable for the oldest qualifying child remains over 25 per cent greater in real terms than the rate payable in 1997. A family with two children now receives more than £31 per week.
The guardian’s allowance will increase to £13.45 per week. With the increases introduced by these instruments, we will deliver even more support next year. We remain committed to our long-term aim of eliminating child poverty within a generation and halving it by 2010, and tax credits and child benefit will remain a key part of this strategy. As a result of all changes to the personal tax and benefits system since 1997, by April 2009 families with children in the poorest fifth of the population will be £4,000 a year better off. I commend these regulations and orders to the House, and beg to move.
Moved, That the draft regulations laid before the House on 6 February be approved. 10th Report from the Joint Committee on Statutory Instruments.—(Lord Davies of Oldham.)
My Lords, I thank the Minister for introducing these orders, which are one of the highlights of the Treasury calendar. They are not in themselves controversial, but as usual they give us an opportunity to raise related issues with the Minister. Let me deal first with the indexation basis of the child benefit and guardian’s allowance orders. These have to be uprated in line with the general level of prices. The figure that has been used, give or take rounding, is 3.9 per cent, which is what the RPI stood at last September. That sounds generous, but the experience of inflation varies with underlying expenditure patterns, and many families, especially those on lower incomes, are experiencing much higher levels of inflation than is reflected in the RPI. Crucially for them, fuel costs are rising at a multiple of RPI and even some basic foodstuffs like bread are rising at a very high rate, so the apparent generosity of an RPI uprating may not help those who most need those benefits.
I turn to the tax credit uprating, where things are not so simple. Here we have the Section 41 report, which obliges the Treasury to publish the rates of tax credit that would result if they kept pace with the rate of inflation. Here, the Treasury appears to be using a general inflation rate of 4.1 per cent. RPI was 4.1 per cent last August and also again in January this year. Can the Minister explain why different rates of general inflation have been used for the different orders before us today? I find it confusing. More importantly, can he explain the rationale for the different uprating increases in the different categories of tax credit? Working tax credits are rising by the general inflation rate of 4.1 per cent, while child tax credits are all over the place. The family element gets no rise at all and therefore falls in real terms. Most of the other elements rise by something over 7 per cent, but the child element rises by over 13 per cent. I would be grateful if the Minister could explain those.
We need no explanation for the standstill applied to the income rise disregard of £25,000. This hugely costly element of the tax credits scheme—Ministers last year were finally forced to admit that it would cost approximately £850 million a year—was put in place to save the face of the Prime Minister and conceal the fact that the tax credits scheme was a shambles. The fact that it remains at £25,000 is a tacit admission that the scheme remains a shambles. This view is endorsed by the Public Accounts Committee in another place, which reported on tax credits in its eighth report of this Session. It is worth quoting several paragraphs from the summary of that report that pull together the mess that the Prime Minister invented:
“HMRC has paid £65 billion to tax credit claimants since the scheme was introduced in 2003 … The Department overpaid £6 billion in the first three years of the scheme. By the end of March 2007 it had collected £2 billion of this debt and written off £0.7 billion. £3.3 billion of these overpayments remain to be collected. It is unlikely to recover £1.6 billion of the debts.
Although the administrative cost has increased from £406 million in 2003-04 to £587 million in 2006-07, there is little evidence the Department has the scheme under control. Many claimants continue to struggle to understand tax credits and why they are overpaid. There have been many complaints about the process for recovering overpayments and the Ombudsman continues to receive and to uphold a large number of complaints.
Tax credits continue to suffer from the highest rates of error and fraud in central government. HMRC estimates that claimant error and fraud led to incorrect payments of between £1.04 billion and £1.30 billion in 2004-05. This level of error led the C&AG to qualify his opinion on the HMRC Trust Statement for the fifth year running. The Department still has no targets for reducing error and fraud”.
I do not doubt that tax credits have helped the finances of many families, but they cannot be counted a success because they have inflicted misery on too many other families. When are the Government going to look again at the scheme? Does the Minister think that it can ever be counted a success while it has embedded within it an income disregard level which approximates to the value of average full-time earnings in this country?
The Minister will no doubt seek to justify the high level of child tax credits in terms of reducing child poverty. He referred to the Government’s targets when he introduced the orders, but he did not say what I am sure he knows—that the Government are failing to achieve their own target of halving child poverty by 2010. Yes, the Government have made some progress but, as the Work and Pensions Select Committee in another place pointed out at paragraph 44 of its second report published earlier this week:
“On current projections, the Government will miss the 2010 target by close to a million children in poverty when measured before housing costs and close to 1.5 million when measured after”.
The trouble for the Government is that they simply cannot buy their way to meeting the target. The Institute for Fiscal Studies estimates that it would cost another £3.4 billion in credits or other benefits to meet it. We obviously await next week’s Budget but it does not take a genius to work out that, with one of the largest budget deficits in Europe, the Chancellor has little room for manoeuvre.
In any event, although we support the aim of reducing and then eliminating child poverty, we do not believe that state handouts are the right way forward. They may improve the statistics in the short term but they can increase welfare dependency in the long run. Britain already has the highest proportion of children in workless households in Europe and the incentives to work have weakened in recent years. That was the conclusion of the research carried out by the Joseph Rowntree trust and the Institute for Fiscal Studies some 18 months ago.
For more than 2 million people, benefit withdrawal rates—not just for tax credits but all the other social security benefits that attach themselves to the poor and/or out of work—are higher than the marginal tax rates of well paid people such as the Minister. For some, the marginal rate is over 90 per cent. We have yet to hear more than rhetoric from the Government about tackling this and focusing on work as the most viable way of avoiding mass poverty.
I have one final point for the Minister on tax credits. For social security benefits, the Government’s policies and practices are scrutinised publicly by the Social Security Advisory Committee. We know that its reports are often unwelcome to government, which in turn gives confidence that this body is no mere cipher. When the tax credit system was introduced, the Treasury—then led by the Prime Minister—refused to allow tax credits to be subjected to SSAC scrutiny. Instead, there is a Memorandum of Understanding that effectively gags the SSAC when it considers tax credits. In its 2005-06 report, the SSAC called for a review of the Memorandum of Understanding but its 2006-07 report noted that virtually no progress had been made and that this was of considerable concern to stakeholders. That concern is unsurprising, given the mess that tax credits are in, as I have already mentioned. Will the Minister say whether a proper review will now take place and, further, will he agree that openness and transparency should now be extended to the tax credits work of the SSAC?
My Lords, I do not propose to follow the noble Baroness, Lady Noakes, in her detailed questions, many of which we support and look forward to hearing the Minister’s reply to, but I want to ask one specific question about the method of uprating or calculating the uprating and then ask some wider questions and point to wider problems on the Government’s overall record on fighting child poverty, of which tax credits are at the heart.
I come first to the specific question. The Explanatory Memorandum shows that Section 150(1) of the Social Security Administration Act 1992 states that the Secretary of State shall in each tax year review the rates of child benefit,
“in order to determine whether they have retained their value in relation to the general level of prices obtaining in Great Britain estimated in such manner as the Secretary of State thinks fit”.
Why does the Treasury think fit to estimate the general level of prices—a comprehensive description of retail prices in this country—for those purposes at the retail price index, when it uses the much less generally representative consumer price index as its chosen method elsewhere?
I turn to the Government’s failure on child poverty, and, as I say, tax benefits are the keystone of the policy. I have picked up from the Printed Paper Office a glossy document called the DWP Autumn Performance Report 2007. In particular I want to ask the Minister about the child poverty targets. In this wonderful Civil Service language one cannot fail on PSA targets. Ongoing targets can be met early, which means that there is no possibility of subsequent slippage during the target’s lifetime; we can be ahead, which means that progress is exceeding plans and expectations; we can be on course, which means that progress is in line with plans and expectations; or we can have slippage. Progress is slower than expected; for example, by reference to criteria set out in a target’s technical note.
All four key child poverty and development targets—(1)(a), (1)(b), (1)(c) and (2)—three of which are DWP and one is joint with the Treasury, have slippage. The noble Baroness referred to the overall failure to make relevant progress towards the child poverty target, but let me ask one or two more detailed questions. On page 16, it is pointed out that the,
“baseline figure for the number of children in households with less than 60 per cent of contemporary median income is 3.4 million”,
and to date, over the period from 1988-89 to 2005-06, there has only been a fall from 3.4 to 2.8 million. Last year, there was an increase of 100,000, which, in these charming words,
“while not specifically significant, represents slippage against the target”.
It is certainly statistically significant if we are meant to be making significant reductions. I would not call that slippage; there is not so much as a snowball’s chance in hell of meeting the Government’s target.
The second target is to reduce the proportion of children living in workless households by 5 per cent between spring 2005 and spring 2008. In whatever party, we all agree how vital reducing that proportion and increasing the number of working households with children is. It is again described as slippage.
The baseline for the target is 1.7 million children. It is now 1.76 million children, so it has gone up. That is not slippage; it is steady movement in the wrong direction. In this charming language that only civil servants and Governments speak, they say that,
“The increase in the worklessness rate amongst lone parent households means that the achievement of a 5 per cent reduction by Quarter 2 2008 is now challenging”.
It is very challenging. As the graph makes out, it clearly will not happen. There is a similar picture on the graph for the proportion of parents with care on income support/jobseeker’s allowance in receipt of maintenance, and, finally, perhaps even more worryingly, on the graph for the proportion of children reaching a good level of development. That has shown progress in the wrong direction recently—indeed, not progress at all but failure—and a widening of the gap between the most disadvantaged “Super Output Areas”, as they are called, and the rest of England from 16 to 17 per cent. How the Government can claim that they are making progress when they are so clearly failing on all their own targets as regards helping children is beyond me.
My Lords, I am grateful to both noble Lords who have contributed to this short debate. I note that the noble Baroness, Lady Noakes, sought to lull me into a false sense of security by suggesting that these orders are not controversial and then she succeeded in producing quite a challenging speech. She will be relieved to know that I paid the most critical attention to everything she said. If I am not able to answer everything in quite the detail required, I shall of course write to her. I hope I am able to address the main points that she made.
The noble Baroness emphasised a number of important issues. We recognise that whichever index of inflation the Government choose, there will be a challenge. Such is the variation of the impact of rising prices on different families that it is always possible to point to a significant section of the population where particular rises hit adversely and, therefore, the generalisation does not hold as well as it does for others. It has to be accepted that there is bound to be a certain arbitrariness about the index. Households spend different amounts on various goods and services and that shows different price movements, particularly when there are price movements in significant areas. It goes without saying that the increase in fuel prices is significant to many households. It will also be noted that the Government have, for a considerable time, sought to deal with the issues of fuel poverty and the winter fuel allowance provides a cushion for families who face increased prices. The impact on families depends a great deal on the nature of the winter that we undergo and the amount of fuel that is therefore consumed by families in facing the rigours of the—
My Lords, I am a little confused about which families benefit from the winter fuel allowance.
My Lords, we are mindful as a Government that there are needs as regards the winter fuel allowance and that is why we distribute it to individuals. I hear what the noble Baroness says, but I was seeking to make the general point that, of course, we recognise that in particular areas we have to address ourselves to fuel issues. She will recognise that this year there have been exceptional increases in fuel costs. We know the reasons for those. This has not been a winter of massively heavy fuel usage, which is why the margins for the fuel utilities have been wider than would otherwise be the case. I hope she recognises that the Government would have addressed this issue if it showed itself in a particularly acute form this year. After all, her party is continually challenging our Administration on the costs borne in relation to benefits.
My Lords, I was not quite sure what I heard there. Was the Minister saying that the Government would review their policies and arrangements if there was a particularly hard cold snap in the next few weeks? It sounded rather like that.
My Lords, I cannot be so peremptory as to suggest what will happen in the next few weeks, but the noble Lord will recognise that the Government look carefully at fuel costs for families. Certainly, if poor families were subject to very exceptional burdens we might address that issue. I was merely commenting on the obvious fact that we have not had to approach those issues with quite the insistence suggested by some this winter.
What I am really defending is that the Government have to choose one index and, in so choosing, they are bound to be open to criticism that some families suffer against that index. That does not alter the fact that what is represented by all four statutory instruments is a proper and welcome increase in the allowances. I have not seen an enormous clamour, certainly from the Official Opposition, for increases in specific terms in any of these allowances. When I hear that, I might take some of their criticism a little more seriously.
The noble Baroness asked what the Government will do about the Memorandum of Understanding as far as the SSAC is concerned. The review is under way, under Ann Chant. All the main stakeholders are being interviewed and are being given the opportunity to contribute. The report will be produced in the not too distant future and the substance will be reported to the FST for consideration. I cannot make a commitment now but I appreciate what the noble Baroness was at pains to point out: there are weaknesses in the existing situation that need to be addressed. We are subjecting it to review and we will produce that analysis in the fairly near future. She is pushing at an open door because progress has been made. Considerable work is being done in a difficult area. Nevertheless, I agree with her general proposition that openness and transparency is a virtue to which government should as far as possible adhere on all occasions.
I also heard what she said about the criticisms of the PAC and tax credits. They have been well documented, but we make no bones about the fact that the tax credit system presents very real challenges in administration. The record over the last few years indicates that. However, that does not alter the fact that it is an excellent strategy for increasing support for families while providing an incentive to work.
We are concerned about error and fraud, which are issues that the noble Baroness raised. This year has seen an improvement over previous years. The PAC recognises that and that there are unacceptable levels of performance in the system. We have a long way to go on that.
The role of the Opposition is to be critical of what the Government do, but also to indicate what alternatives they would introduce to address these challenging issues of support for families in changing circumstances. The particular advantage of the tax credits system is that it takes account retrospectively, with the effect that support is given to families. The final evaluation is bound to be retrospective, which raises real administration issues. On the other hand, it also means that effective support for a large number of families is given when needed. I await a time when the Opposition are in a position not just to criticise what is done by the Government on tax credits, but to make a clear exposition of an alternative scheme of superior support for families than that achieved through tax credits, given that we are improving on both fraud and on misallocation each year. There will always be difficulties, because families’ circumstances change over the course of the year. There is bound to be a retrospective element within it.
I accept the noble Baroness’s chiding when she indicates that the tax credits system must be looked at with the closest scrutiny each year so that we continue to improve how that support is offered to families. The noble Baroness also raised how well we were doing on child wellbeing. The noble Lord, Lord Oakeshott, pointed out with his usual precision areas of underperformance in lifting children out of poverty. Those areas of slippage—he suggested that they were a little more than just slippage—are matters of concern to the Government. We always said that the 2010 target was challenging. It is; there is not much point in having targets if they are not. We are all too well aware of the fact that this past year has not seen the progress towards that target which we would have wished.
Nevertheless, since 1997, the Government have produced a very significant reduction in child poverty through our strategy for support for children. There is a long way to go to achieve elimination by 2020, which remains the Government’s target. Of course, it is only right that the opposition parties point out to us when we fall short of our high ambition. Again, it will be for those parties in due course to indicate the extent to which they subscribe to the ambitious targets which the Government have set and made so much progress on over recent years.
I respect the questions which have been asked. Those which I have not answered, I will write to noble Lords about. They are proper questions and identify both where we wish to see improvements in performance and areas of conspicuous need. On the other hand, opposition parties are pressing a Government who support families to a level not contemplated by past Administrations. We fall short of our ambitions, but are none the less reducing the level of poverty in this country—particularly child poverty—by significant amounts. These orders help to contribute towards that.
On Question, Motion agreed to.