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Welfare Reform

Volume 721: debated on Monday 11 October 2010


My Lords, with the leave of the House, I shall repeat a Statement on welfare reform made earlier today in the other place by the Secretary of State, Iain Duncan Smith. The Statement is as follows:

“Today’s Statement is in three parts: first, the launch today of a new approach for those on incapacity benefit under the work capability assessment; secondly, more detail on the new work programme, which I will set out; and, thirdly, our plans for wider benefit reform as we look ahead to a White Paper and welfare reform Bill.

The economic backdrop is severe. We have the largest deficit in the G20—at £155 billion, the largest in peacetime history. With net interest of £120 million a day, that is £43 billion in 2010-11. Under the previous Government’s deficit reduction plan, which the Opposition now seem not to favour, Labour’s plans had annual debt interest spending rising in only five years to almost £70 billion.

Reform is urgent. We are at a critical point, with 5 million people on out-of-work benefits, 2 million working-age people claiming incapacity benefit, of which 900,000 have been claiming for an entire decade, and a system that has left Britain with the highest rate of jobless households in Europe. These statistics reveal the human cost of leaving our welfare system unreformed.

With this comes an ever increasing financial cost. The working-age welfare budget rose by 40 per cent in real terms from £63 billion in 1996-97 to £87 billion in 2009-10. A staggering £133 billion was spent on incapacity benefits in the past 10 years, with benefit spending forecast to be over £152 billion in 2010-11—about 10 per cent of GDP. Today, we spend £1 in three on British welfare, yet youth unemployment is higher, inequality is greater and there are actually 800,000 more working-age adults in poverty than in 1998-99.

It is in this context that we also announced reform of child benefit. I do not think that it is right to tax the poor to fund child benefits for those above the higher-rate tax threshold. We can save £1 billion, protect 85 per cent of families and secure fairness as we support people into work. This is tough, but it is fair. At the same time, we announced that we will cap benefits for workless households to average earnings, which are around £26,000. This cap will be net of income tax and national insurance, so in practice equates to gross earnings of £35,000 a year. Equally, we will exempt the disabled and those on working tax credit, so we encourage work incentives. This is fair and we will announce the detail in the spending review.

Today, we launch two trials for those on the old-style incapacity benefits under the work capability assessment. My right honourable friend the Minister of State for Employment is travelling to Aberdeen and Burnley today to see those trials get under way. This is about giving many thousands of people the opportunity to move from the margins of society into mainstream employment. This new assessment will put an end to a system that has simply abandoned people to a life of dependency and exclusion. Under this system, we will assess people on the basis of what they can do, not what they cannot do, and thereby support people to meet their aspirations for work. We are determined to get this right, which is why not only will we learn from these trials, but we have also set up an independent experts group to scrutinise the assessment.

We are committed to supporting everyone going through the assessment. For those deemed unable to work, we will ensure that they continue to receive the support that they need and, for those deemed able to work, we will ensure that they are fully supported to do so. People who are found fit for work will move directly to the work programme, an integrated package of support that will provide personalised help based on individual needs, not the benefit that they are on. Using the best of the private and voluntary sectors, this will help people to get into work as quickly as possible. It will operate a true payment-by-results system that pays providers not simply for getting someone into work but, more important, for keeping them there. We have had 790 expressions of interest from providers to join the programme and in December we will invite bids for contracts ready for national rollout next year.

The work capability assessment and the work programme are critical to helping people into work, but alone they are not sufficient. Underpinning this support must be a benefits system that incentivises work. We have to make work pay. That is why the coalition Government aim to bring forward a White Paper shortly and a welfare reform Bill in the new year.

The introduction of a universal credit will restore fairness and simplicity to a complex, outdated and wildly expensive benefits system. As we get the benefits system working, we can get Britain working—the best way to get the deficit down, drive the recovery and get the economy moving. Welfare reform is critical; it is also the right thing to do—to move people into work and create a pathway out of poverty for the 5 million people on out-of-work benefits. This is a cause that should unite this House.

The new leader of the Labour Party has said that he will not be in opposition for opposition’s sake, so let him and his shadow Cabinet colleagues do the right thing and support us in delivering a welfare system finally fit for the 21st century. I commend these welfare reforms to the House”.

That concludes the Statement.

My Lords, I am grateful for this Statement—although, given that Parliament was sitting last week and given the contents of paragraph 9.1 of the Ministerial Code and paragraph 6.35 of the Companion, it would have been much better to have had the Statement last week. I disagree with the Minister’s characterisation of the macroeconomy, but we can debate that some other time. Suffice it to say, given that the UK has one of the lowest debt-to-income ratios in the G7, the pace of reform is a choice and not an inevitability.

As my right honourable friend the new shadow Secretary of State said today in the other place, we are not against reform and much of the reform is a continuation of what we did in office. But there are of course a number of questions. On the migration of incapacity benefit claimants through the work capability assessment, rolling this out nationally is, as I am sure the Minister would agree, a huge undertaking. What is he doing to increase capacity in the market for providers of those assessments? Furthermore, given the bleak projections by the Chartered Institute of Personnel and Development and others of rises in unemployment due to the speed of public spending cuts, what proportion of providers’ income will be paid by results on the basis of job outcomes? What is the Minister’s prediction of the unemployment rate when the work programme starts next summer? Given that the bidders of the programme are, with their financial backers, having to make predictions on successfully getting people back to work, I do not think that he can any longer hide behind the mantra that I used that Ministers are not in the business of making predictions.

What is being done to encourage employers to take on those who have been long-term sick when, with the claimant count now rising, they could take the recently unemployed, recent graduates or highly motivated EU migrants instead? Finally on this point, what will be done differently by providers in this programme from that done by those who deliver the old Pathways to Work programme with such mixed success, where the private sector did not outperform the public sector?

I shall move on to the proposed benefit cap of £500 per family per week. To some, that may sound reasonable, but it will cover not just the main income replacement benefits such as jobseeker’s allowance, not just child benefit and child tax credit, and other benefits such as carer’s allowance, but crucially it will also include council tax benefit and housing benefit. In many of our urban areas and in the south-east, the high cost of rented housing and council tax means that, if you lose your job and have a larger family, it will not be long before you lose your home as well, as you will not be able to afford the rent. Does the Minister think that that is fair and will really help those families back into work?

As regards child benefit, has the Minister seen the report in Thursday’s Guardian where the right honourable Secretary of State for Work and Pensions said that child benefit will be rolled into the new universal credit from 2017 and will therefore be means-tested? Can he confirm that the Chancellor’s new wheeze for clawing back child benefit from higher rate taxpayers is only temporary? What discussions took place between Ministers in the Department for Work and Pensions, especially those responsible for child poverty, and Ministers in the Treasury before the announcement was briefed last weekend? In the other place today, the Secretary of State claimed that the unfairness of the child benefit changes was due to the unfairness of the taxation system. Has the Minister seen the comments of the Institute for Fiscal Studies, which stated:

“Using the means-test in tax credits could be considered fairer to single-earner couples, and would not distort incentives so dramatically”?

Is it just not-invented-here syndrome that prevents the Government from using the tax credits system to do this?

Finally, the Chancellor repeated in the media last week that his proposed changes would affect those paying the higher rate of tax—about 1.2 million families. That was also repeated by the Secretary of State in the other place. What is the Minister’s latest estimate of the number of higher rate taxpayers who will lose out due to the child benefit changes, given the reduction in the threshold for higher rate taxpayers announced in the Budget? Surely, if the higher tax threshold is lowered as part of moving to meet the Liberal Democrat ambition of a starting tax threshold of £10,000, there will be many more than 1.2 million people affected by this measure.

The announcements of welfare reform are in large part welcome in principle, because they follow from what my party, and I, pursued in government. The announcements about child benefit last week were frankly a shambles. I hope that this Minister, whom I know to be a good and noble Minister, will clarify things for the benefit of Parliament.

I thank the noble Lord, Lord Knight, for some general supportive words, although he also asked some specific difficult questions, which I shall endeavour to answer as they came up. He started off by saying that he welcomed the general thrust and claimed that it builds on existing processes. To be fair, we have tried very hard to build on the present system. There is an argument for being radical, but just ripping everything up and starting again can be dangerous.

Let me start with the noble Lord’s question about the work capability assessment process for people on IB. We are indeed taking steps to increase capacity with the provider, Atos. One control of the process, by which we do it over three years, is exactly to take account of the capacity available.

On the noble Lord’s point about unemployment in general, one of the most shocking stories that I read last week was not in the Guardian but in the Financial Times, which stated on the front page that the total number of jobs that had so far been lost in this recession by people living in this country was roughly 600,000. However, people from outside this country had taken 200,000 more jobs. That tells you something about how we have locked people up in inactive benefits.

The whole point of what we are trying to do with the universal credit and the work programme is to take people out of this trap—being defined as inactive and unable to seek work—certainly on a flexible basis. Once we have a universal credit in place, people will be able to take any amount of work gradually and we can have a great deal more flexibility as we steadily get rid of the 16-hour rule and the 30-hour rule. It is not just about the unemployment rate; it is very much about the nature of the employment that is available. The work programme is designed to take people and unleash their capacity by making them available for the particular jobs that are there.

The noble Lord’s next question was: what will be done differently? He pointed out that Pathways was a disappointment, as indeed it was. It was a disappointment because it was a prescriptive programme based on six work-focused interviews and was underresourced to do very much else. The point about the work programme is that it will allow providers to discover and build on the things that are working. The difference between past programmes and the work programme is that past programmes have looked on outside contractors as a price discovery mechanism, whereas this programme looks to providers to unleash their creativity and the competitive pressure to get the things that work copied and used.

The noble Lord asked whether the £500 benefit cap is fair. Many hard-working families do not achieve a rate of £35,000 gross. It puts things into context for them when people on benefits can get more than that. Therefore, our aim is to cap what people can get. This will come in towards the end of this Parliament and we have a lot of measures, including the cap on housing, to work the process through. So, yes, it is fair.

I was asked whether there is a plan to roll child benefit in with universal credit. At the moment, there is no such plan. Within this spending review, the child benefit change will be introduced in the way described using the tax system as a measure. It is clear that beyond this spending review, once universal credit is in place, there can be decisions to use that, but at the moment there is no such decision.

I was asked about the discussions on child poverty. We have done an immense amount of modelling on the impact of the universal credit. The models change on a regular basis, but the effect of the universal credit at the moment is to take some hundreds of thousands of children out of child poverty. The current model—it may not stay at this rate, so the figure is not rigid—would take 300,000 children out of child poverty and would raise others much nearer the line. It has a most powerful effect on poverty. One of the most attractive things about the universal credit is that it takes a lot of people out of poverty.

I am conscious that I need to give other people time, so I will stop and come back to some of the noble Lord’s other questions.

I thank the Minister for his Statement. I am particularly interested in the work programme and the way he announced that it will bypass the jobseeker’s allowance. Can he give us an estimate of the prospects for lifting people out of poverty as a result of this new programme? Will a big attempt now be made to ensure that that happens as a fundamental principle? The Minister mentioned expressions of interest from providers. Will they include people from the third sector or people who can deal with people who are further from the job market? There is a fear that those who are closest to the job market are the easiest to deal with and will be dealt with by private contracts.

The core difference between the work programme and past programmes is that we are determined to put price differentiation into it because otherwise, as the noble Lord pointed out, the financial incentive for providers is to concentrate on the easiest people. To neutralise that effect, we need to give providers a higher reward for helping the more difficult people. That also has the effect of encouraging the consortia which are formed to be rather rich in terms of their capability. As the noble Lord pointed out, the third sector has some of the greatest expertise in the most difficult people to help. Once you pay for that, it encourages consortia to form which include them. That price differentiation mechanism is one of the most powerful aspects of the work programme for lifting people out of poverty into jobs.

My Lords, I very much support the Government’s approach in their 21st Century Welfare paper on making work pay and on the running particularly of benefits alongside low hour working in order to reduce the risk of returning to work. That approach is absolutely right and well done on that point. However, for most people of whom I have had experience the issue is not whether work paid, because people have an irrational attachment to being in work, it is whether you can reduce the risk of returning to work. If the job folds and as a result you have to go back on benefits, which may take three to four weeks to come through, and you are only two tins of baked beans away from not being able to feed your children, you may prefer the security of a low but steady income than the risk of work. I hope that the Government’s approach on that will identify that problem, but it is to be welcomed and very much supported.

I have two key questions, to which my noble friend referred, on child benefit. Perhaps the Minister can help us. One shocking consequence of the proposals is that at the moment, if you are on child benefit, through the passporting of HPP—home protection payment—being a carer of a child until your youngest child is 12 years old gives you credits into the state pension. Women who stay at home to bring up their children—all credit to them—whose husbands earn above £44,000 will lose their child benefit. At the moment, those same mums will simultaneously lose a huge chunk, potentially, of their state pension credits. That is completely and utterly unacceptable. If that is not amended, I am sure that this House may have a view which differs from that of the Minister as at present exposed. It would be good if he could help us on this. To penalise stay-at-home mums twice over with the loss of child benefit and the loss of credits into the state pension is completely unacceptable.

Secondly, I turn to the connection between JSA and HB with the threat that HB will be cut after 12 months on JSA. This assumes that what is stopping people on JSA after 12 months going into work is their unwillingness to work and that, therefore, they need to be sanctioned by an additional sanction of 10 per cent on their HB. On this point, I should declare my interest as chair of Broadland Housing Association. I had the stats done for me by the House of Lords for July. In July in Norfolk, 15,900 people—just under 16,000 people—were on JSA. The number of job vacancies in Norfolk was 3,500. The people who get those vacancies will be those who have been most recently made unemployed because they are the most attractive to the employer. Those of us involved in social housing will have on our books young people, who are sometimes difficult to place in jobs, who will have been on JSA for far more than 12 months by virtue of the job shortages that currently exist. Yet they will face a sanction of 10 per cent on their rent.

As a chair of a housing association, I can either accept that rent arrears will mount or I can evict them. They will become homeless and then they may squat. But if I keep them and their rent arrears go up, I do not have the money to put in the solar panels et cetera to reduce the fuel poverty of elderly people. What choice would the Minister have me make? Should I evict those young people who through no fault of their own cannot get a job where there are 16,000 people unemployed and 3,500 vacancies or deprive elderly people of the opportunity to reduce their fuel poverty? No Government should force socially responsible landlords into having to choose between those two categories. I hope that the Minister today will assure us that that will not be the choice we will have to make.

I thank the noble Baroness, Lady Hollis. Again, I take comfort from her general support for the universal credit. The point I would like to emphasise is that because we have two systems, an out-of-work benefit system and an in-work tax credit system, the risk of moving from one to the other is enormous. One has only to experience doing a job which does not work out, having to fall back into out-of-work benefits with perhaps a delay of three months as the bureaucracy is sorted out and thus not being able to afford the baked beans mentioned by the noble Baroness, to realise that that kind of risk is highly unattractive. We have created a very conservative group of people who should be prepared to take that risk, by which I mean conservative with a small “c”. On child benefit, we have not made a full announcement of what is going to be in the spending review on 20 October, at which point the detail will be revealed, so I am not in a position to answer.

On the second point made by the noble Baroness, noble Lords will be aware that what we are looking at in the numbers is flows. Any work programme tries to balance the disadvantage experienced by people who have been out of the job market for a period and what it takes to get them back into work against those who have only just lost their jobs. Effectively, that is what all programmes try to do. Clearly, we need to ramp up the speed with which we can get people back into work, and this is one measure that is designed to encourage and put pressure on them.

My Lords, one of the Government’s aims is to reduce the number of employment support claimants by around half a million. I respect the Minister’s expertise in this area and, indeed, his commitment to produce a more efficient system. However, can he assure the House that he will not introduce, for example, the time-limiting of benefits to six months or a year, as has been mooted, for people with severe and enduring mental health problems and other long-term disabilities? Has he made it clear to the Chancellor of the Exchequer that the cost of long-term hospitalisation of these people if their benefits are removed will be a great deal higher than maintaining them on benefits? Finally, will he delay the introduction of the new medical tests until the evidence makes it abundantly clear that they are fit for purpose for all, including for people with fluctuating and long-term disorders, most particularly of course for those with severe and enduring mental health disorders?

I thank the noble Baroness for those questions. We do not have a target for the transfer of IB claimants into JSA, but we estimate that 23 per cent will move straight over. However, it is an estimate and one point of the trials that have been launched today is to find out what the figure might be. The process by which we move people over from IB to ESA means that a substantial proportion will move on to unconditional support allowance so that they are fully supported. However, we would like to make sure that the work-related activity group within ESA moves through the process so that it does not become another place to park people. We are therefore looking at ways to ensure that those in the work-related activity group move through so that they go into JSA as fast as possible. The worst thing is for people to remain inactive for a week longer than necessary.

My Lords, my noble friend will not be surprised to learn that I am broadly supportive of the plans he repeated today. However, I wish to ask a specific question about the Atos programme of work capability assessments for those on ESA—in other words, the programme to ascertain which people currently on ESA are suitable to move into work preparation and perhaps into work. My noble friend will have noticed that recently there have been big complaints in the press about the work capability assessment. There was a suggestion in at least one of the papers over the past few days that 40 per cent of people who have been assessed as capable of work or working towards work have successfully appealed. My right honourable friend the Secretary of State said in the Commons that actually around 5 per cent were successful in appeal. None the less, it seems that the assessment needs to be looked at critically. Can my noble friend give me an assurance that it will be?

I thank my noble friend Lord Skelmersdale for his question on the work capability assessment. He will be aware that there has been an internal review of the work capability assessment and that four changes have been made to it. In practice, these changes will come into the work capability assessment next spring. On top of that, in June we employed Professor Malcolm Harrington to review how the work capability assessment worked on an annual basis. He is supported by a scrutiny group, which includes Paul Farmer, the chief executive of Mind, and three others. I mention Paul Farmer in particular because of the importance of mental health and the fluctuating conditions to do with mental health. We are determined to make sure that the work capability assessment does the job it needs to do.

My Lords, I welcome the Statement made by the Minister to the effect that we have to make work pay. I agree—but does that mean that the Government will be inclined to bring pressure to bear on low paying employers to ensure that they are prepared to pay a living wage? I do not see why the taxpayer should subsidise employers who are paying extremely low wages.

As to unemployment, I suggest that there may be particular difficulties in certain areas of the country where manufacturing industry used to exist and does not exist any more and there is a decline in suitable work for people. What steps can be taken in such areas to ensure that there is work available for people who can demonstrate a capacity to work but where there are no jobs available because of what has happened to local industry? Where the local industry does not provide jobs, because there are no jobs, people are simply resigned to spending the rest of their lives on benefit.

I thank the noble Baroness for that. She makes the real point that if we do not get the universal credit right we could encourage underpaying employers. We are fully aware of that and are looking into the situation. On her other point about unemployment black spots, it is always a tragedy when an area loses its economic rationale. However, what makes the inevitable adjustment process worse—and perhaps stops it—is a benefit system which hides people away. The shocking story of Merthyr Tydfil is an example. When the steel plant there closed—I do not have the exact figures—there were approximately 4,000 people working in it; two years later there were 3,800 people on incapacity benefit. That meant that no potential entrepreneur or employer would go to that part of the world thinking there was labour there to be used because the system had locked that labour away. If we can get people back on active benefits, we will at least encourage the necessary, and sometimes painful, adjustment process to happen at the fastest speed possible.

My Lords, perhaps I may return to the important question raised by the noble Lord, Lord Skelmersdale. Does the Minister accept that there is real concern about whether the work capability assessment is fit for purpose? In the pilots established in Aberdeen and Burnley, will Professor Harrington be able to look at the medical versus the biopsychosocial dimensions of the tests? Some of us believe that the tests are far too medical. My experience working with the Wise Group suggests that people have not medical problems but biopsychosocial problems, which do not admit of an easy medical solution. Will Professor Harrington be able to look at that and give advice to the Government on improving the tests?

I thank the noble Lord, Lord Kirkwood, for concentrating on the important issue of what good health and ill health are, which is extraordinarily difficult to pin down. I am sure that he believes as I do that the well-springs of health are around basic social skills and a sense of meaning and community. When we put people on inactive benefits, we are taking away from them the well-springs of health. It is vital that we help people back into work, which is such an important contributor to their psychosocial well-being. We will watch the WCA very closely to make sure that it does its job, so that we can have the opportunity to get people back to work.

My Lords, I apologise to the Minister for missing the beginning of this Statement, but I have listened with great care to what he has said in response to questions. I think that all of us in this House will share the objective of supporting back into work those who are able to work. However, all this is predicated on jobs being available. The Minister spoke about 600,000 jobs having been taken out of the economy already. The Government’s own policies, particularly public service expenditure cuts, are destined to lead at a conservative estimate to about half a million jobs being lost, with an equivalent knock-on effect in the private sector. There is some difficulty therefore in encouraging people to go back to work while the Government are taking away the very jobs that they can do. What discussions has the Minister had with ministerial colleagues? What discussions has the Secretary of State, Iain Duncan Smith, had with his ministerial and Cabinet colleagues not on job cuts, which we know have taken place, but on job creation?

I thank the noble Baroness for that question. The state of the economy is a fluid entity in terms of where jobs are. While jobs may be lost in some areas, new ones are created elsewhere. We have already seen a good pick-up: 280,000 people went back to work in the last quarter. Independent forecasts for the next couple of years from organisations such as the IMF and OBR are for 2 to 2.5 per cent growth. That would create net new jobs. The jobs will be there, but they may be different jobs.