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Tax Credits Up-rating Regulations 2011

Volume 726: debated on Wednesday 23 March 2011

Considered in Grand Committee

Moved By

That the Grand Committee do report to the House that it has considered the Tax Credits Up-rating Regulations 2011.

Relevant documents: 17th Report from the Joint Committee on Statutory Instruments.

My Lords, I shall also speak to the draft Guardian’s Allowance Up-rating Order 2011, and the draft Guardian’s Allowance (Northern Ireland) Up-rating Order 2011. In my view, the regulations and orders are compatible with the European Convention on Human Rights.

The Government inherited an exceptional fiscal challenge. It is important to sketch out the background to these important statutory instruments and to put them into proper context. The state is borrowing one pound in every four that it spends, and just paying the interest on the nation’s debt costs £43 billion—around £120 million a day. The unprecedented scale of the deficit has meant that the Government had to make tough choices in the June 2010 Budget and in the spending review about how taxpayers’ money is allocated.

We believe that fairness starts by taking the right decisions to tackle the deficit so that future generations are not burdened with unsustainable debts, meaning higher taxes and diminished public services. Tackling the deficit in a fair and responsible way means that those that can contribute do and those who are less able to do so are supported. Analysis shows that after combining the impact of tax, tax credit and benefit and public service spending changes announced by this Government, the top 20 per cent of households will make the greatest contribution towards reducing the deficit as a percentage of their income and benefits in kind from public services. That is a statement that was true after the Budget and spending round as of last year, which encompassed the measures we are talking about, but of course it remains true and confirmed in the numbers that came out with the Budget today.

The regulations and orders before the Committee put into effect a number of reforms to tax credits, announced in the June 2010 Budget and the spending review. These changes will ensure that we tackle the deficit in a way that is fair and ensures that tax credits are targeted at those who need them most. Tax credit elements which were previously uprated by the retail prices index will be uprated this year by the consumer prices index, apart from the basic and 30-hour elements of working tax credit, which will be frozen. The rate of guardian’s allowance will also be uprated by CPI. However, significant above-indexation increases to the child tax credit will help those households with children.

Under the current system, tax credits are available to families earning up to £58,000. If households have an increase in income up to £25,000 in a year, they can earn up to £83,000 and still benefit from tax credits. This means that people in the top income decile are eligible, which is unjustifiable within the current economic climate. Reforms to tax credits included within these regulations and orders mean that support for higher income households will be reduced by increasing the rate at which tax credits are withdrawn, while reducing the threshold at which tax credits are paid. Households will also no longer experience an increase in household income of up to £25,000 without their tax credit eligibility changing. Under the current system, around nine out of 10 families with children are eligible for tax credits. Once the tax credit changes have been introduced in April this year, seven out of 10 families will still be eligible for tax credits.

Spending on tax credits has increased from £18 billion in 2003-04 to an estimated £30 billion in 2010-11. The system of tax credits under the previous Government was not only unsustainable in fiscal terms; it was also unrealistic in terms of meeting its stated policy objectives. From 2004, progress on relative poverty stalled. However, the previous Government continued to pump money into the tax credit system. They spent more than £150 billion on tax credits since 2003.

Although a large proportion of tax credit spending was directed at children, the Institute for Fiscal Studies has estimated that meeting the 2020 child poverty target would require an extra £19 billion of welfare transfers. The previous Government had a static view of poverty, believing that it could be reduced, or even eradicated, by directing money at it. The way that child poverty is currently measured means that, perversely, reducing the income tax paid by millions of lower earners, or providing additional support to low-income pensioners, could push up the poverty line. This would increase the number of children calculated as being in poverty. We want to take a long-term, strategic view to tackling poverty, which is about more than just welfare transfers. This is not about moving families and children above an arbitrary line—where one day they are in poverty and the next they are not—but is about transforming their life chances.

The Prime Minister asked Frank Field and Graham Allen to undertake reviews on poverty and life chances. Findings from both reviews have fed into the child poverty strategy, which will be published shortly. While awaiting the conclusions of these reviews, the Government have used some of the savings from withdrawing child benefit from families with a higher rate taxpayer to fund significant above-indexation increases in the child tax credit over the next two years. This means that the child tax credit will increase by £255 in 2011, benefiting 2.4 million of the poorest families. This increase is better targeted at low-income families and will ensure that the spending review will have no measurable impact on child poverty in the next two years.

As well as targeting financial support at low-income households, the spending review introduced a new fairness premium, which will fundamentally change the prospects of the poorest children by offering real opportunities to raise them out of poverty for the long term. The fairness premium is worth over £7.2 billion over the spending review period and will include a £2.5 billion premium to support the educational development of the poorest pupils. It also protects cash funding for Sure Start to support the poorest in early years and at every stage of their education.

Despite the last Government’s spending on tax credits, working-age poverty actually increased under Labour, as there are now more working-age adults in poverty than there were in 1997. The current welfare state too often traps people in dependency. Almost 2 million children are living in workless households. The spending review announced radical plans to reform the welfare state. The new universal credit, which will be introduced over two Parliaments, will replace the current complex system of means-tested working-age benefits with a single, streamlined payment. The universal credit, which will cut through the complexity of the existing benefits system, will ensure that work pays.

In that context, I commend these regulations and orders to the Committee.

My Lords, in the context of the overall fiscal position in which we find ourselves, it is not surprising that we are having to make some pretty unpalatable changes to some tax credits. As the Minister has said, expenditure on tax credits rose in cash terms by two-thirds over the seven years from 2003. In the current environment, that is simply unsustainable.

Although there are some aspects of the changes that we find quite difficult—for example, reducing the proportion of reclaimable childcare is not something that we would have done willingly—other elements are long overdue. It is crazy that people earning £50,000 or £60,000 or even £70,000 have been able to claim an element of child tax credit. Of course, the concept that parents find themselves in financial stress when they have young children is not new; it is dealt with at great length in Malthus’s great essay on population, where he talks about how poverty comes to young families at the point when they have children. However, that was talking about an era in which most people were poor for the whole of their lives. That simply does not exist today. A circumstance in which nine out of 10 families were eligible for tax credit does not really have any sense. Even with the changes, some seven families out of 10 will continue to get tax credits. That certainly encompasses all those who could even vaguely be said to be in need.

The situation we now find ourselves in at this end of the income scale was exemplified to me by a colleague in another place yesterday, who was telling me that she had had a letter from a constituent grumbling that the changes to tax credits and child benefit meant that she and her family would no longer be able to have their second foreign holiday that year, and asking what the MP was going to do about it. I suspect she got a fairly shirty response, but many people at upper income levels have been regarding tax credits and child benefit as not necessary for the ordinary running of the family but for luxuries, so to see that curtailed in the overall scheme is very welcome.

Slightly down the track comes the really welcome introduction of the universal credit. Just as, at the top end, people are getting some benefits who, frankly, do not need them for the good functioning of their families, at the bottom end there are still huge disincentives around work and huge anger among people who are trying to make a living and do the right thing.

At the recent Lib Dem conference in Sheffield I went to get my papers from a kiosk in the shopping centre in the centre of Sheffield, and the young woman behind the kiosk asked rather aggressively what I was doing there. I said very timorously that I was at the Lib Dem conference. She said she was a Labour voter. I was prepared for a tirade about how flinty hearted we were and I got a tirade, but the tirade I got related to the fact that because she was a single mum with two young children she could only work part-time and earn only £6,000 a year and her sister, who was 28 and had never done a day’s work in her life, was getting more from the state. At this point her colleague in the kiosk joined in. They were so intent on telling me about this injustice in the system that everybody else who was trying just to buy a paper had to come up in a very shamefaced way so as not to interrupt this flow of invective, which was being directed at politicians generally. I was able to tell her that the universal benefit was on its way and thereafter life would look somewhat fairer from her perspective.

I have two questions for the Minister around these proposals today. The first relates to what he said about Sure Start. There has been an awful lot of noise about Sure Start. He said that the Government are protecting the cash funding for Sure Start. I know that every Liberal Democrat council is able to maintain Sure Start and I know some councils cannot. Can the Minister tell me why, if the Government are protecting the cash funding for Sure Start, some councils might be choosing to cut it?

Secondly, the whole area of child poverty is to be the subject, I believe, of a child poverty strategy document due for publication shortly. Under the terms of the Child Poverty Act it is due to be produced by the end of March. It is now almost the end of March and I would like the Minister’s assurance that that document will, indeed, be winging its way to us over the next few days.

My Lords, I had thought that the problems with these statutory instruments would be that our contributions might be not so much after the Lord Mayor’s Show as coincident with it, as the Budget Statement was made today. The other place and all the media are concentrating on the 2011 Budget while here we are, engaging in a debate on instruments that relate to last year’s decisions. I therefore assumed that the Minister would stay fairly close to the technicalities of the instruments and that we were unlikely to engage in a substantial debate on the economy, but no such luck.

The Minister, not content with successive Thursday debates that string out ahead ad infinitum and in which he will regale the House with his perspective on the economy, has taken this rather modest measure as another opportunity to inveigh on those issues which, I suppose, pass for coalition home truths about the situation that we are in. Well, if we must engage so be it. I had not really come prepared for this but I have one or two obvious rejoinders to the noble Lord’s position ready to hand. I am not quite sure why he is not prepared to engage in the debate on how far and how fast, regarding deficit reduction. He presents the issues in terms of the inevitable: that slash and burn is the only response regarding support and the public contribution. Of course, that is because the British economy is very close to the Greek, the Irish and the Portuguese economy—teetering on the brink of utter collapse, with stupendous interest rates and the collapse of the known world. That is specific and special pleading.

The noble Lord rarely addresses an economy that is marginally more significant than the German or Irish economies by looking at the United States. If he looks at its response to this issue, the question is whether destroying so much of the support given at present will grievously affect demand. He is therefore stuck with the fact that the one word he did not mention at all is that which presently revolves around every conceivable contribution in the other place: namely, growth. The decline in growth predicted by the OECD is now confirmed by the figures that the Chancellor made in his Statement today. What does the noble Lord think that lower growth represents? It means more people unable to sustain themselves. I heard him lament the fact of working-age poverty. What on earth does he think will happen to that as unemployment rates in this country begin rapidly to increase?

We have not yet seen the burden of the cuts but, my goodness me, it is quite clear that the nation is already alert. It is not as if this date, 23 March, is not insignificant in the nation’s awareness of the implication of cuts. In three days, on 26 March, a very substantial proportion of our people will indicate that a Government who go too far, who reduce potential for growth and who massively increase unemployment and promote poverty can ill afford to parade the idea that there is no other way, when in fact other Governments—whose economies are at least as significant as ours—are pursuing very different strategies indeed. However, I did not come here for peroration. I came just to look at the gentle terms of this instrument. I thought it somewhat otiose to engage today in a debate on government policy when our youngers—and, if not our betters, perhaps our more committed—at the other end are involved in that exercise, debating the 2011 Budget while we are dealing with instruments that derive from last year’s Budget.

Within the terms of the instrument, I accept some aspects of the Government’s attention to the problems that beset the less well-off in our society. I appreciate the fact that there is an above-indexation increase in the child tax credit of £180 for next year and a little less the year after for those of very limited means. I respect the fact that there is some attention to the particular problems of those who are least well off in our society. I do not accept the Government’s position, supported by the noble Lord, Lord Newby, on child tax credits. I shall make the obvious point on the eradication of child poverty: it is a massive target. We all know the projection on how long it takes and how much it costs but, despite this gesture, the Minister never makes the slightest reference to the tremendous onslaught on child poverty which was the product of policies pursued over the past decade through many strategies, the effectiveness of which he is proposing to reduce. To make the most obvious point, what we now have enshrined in stone for the future under this Administration is one criterion and one index for how much uprating will occur. This is an uprating measure. The RPI, currently at 4.6 per cent, is buried and the CPI is now confirmed as the rate that will obtain across the benefits. It is now 3.1 per cent, or two-thirds of the RPI inflation rate, which many households would regard as a far more accurate definition of the challenges that they face in making ends meet.

I appreciate other aspects of the measure. I heard the noble Lord, Lord Newby, say that people should not expect to get tax credits if their income is over a certain amount. He can make that case if he wishes. He knows the outcry that has occurred as a result of the change from £50,000 to £40,000 in the threshold for credits. He knows very well that ordinary working families, on whatever income, budget according to their expected income and how they run their life. Significant government changes in this area cause distress. The noble Lord, Lord Newby, may regard that distress as synthetic. We shall see the response the nation makes to that significant change in tax credits.

The guardian’s allowance uprating is a minor aspect that reflects the fact that a very small number of beneficiaries are covered by these orders in Great Britain and Northern Ireland. We should notice what indexation means at a certain level: just minuscule increases per week are represented by these figures. I am all too well aware that there are limitations on the public purse and that generosity from the Government—“tax giveaways”, the Chancellor said this morning—were not the order of the day. We understand that, and it is bound to be the case, but that should not alter the fact that we should appreciate that a failure by Government to take proper concern for welfare support could be a very grievous failure indeed. We are moving into a position where, without the slightest doubt, a greater number of our people will be plunged into hardship. The Government’s response, as evidenced by these statutory instruments, shows that the Government put deficit reduction as their supreme objective, at whatever cost to our community.

My Lords, I am very grateful to noble Lords. As is becoming a pattern here, we have had a small, focused and to-the-point discussion. I am disappointed that the noble Lord, Lord Davies of Oldham, did not appreciate my approach this afternoon. On other occasions, when I have gone perhaps to excessive lengths to point out every detail of measures, I did not always seem to be grasping his attention right through, so I thought I would try another attempt and go for the sunny uplands this afternoon, but it seems that that has not worked either. I shall have to try some other approach next time. I do not want to be drawn too much into the big picture because, as the noble Lord, Lord Davies, said, we shall have a long debate tomorrow and another one next Thursday. However, I cannot entirely let his remarks go unanswered.

Every commentator, from the IMF to the OECD through to all the domestic commentators, has reiterated the fact that the Government need to stick to the clear deficit reduction plan. To be fair to the noble Lord, he recognises that, as he says that he understands that we cannot give away money through taxes or otherwise. I welcome his partial recognition of the reality. It is against the background of the situation last year and the background that still persists that we bring these measures forward.

Welfare spending now accounts for one-third of all public spending. As I said in my introduction, spending on tax credits has increased from £18 billion in 2003-04 to an estimated £30 billion in 2010-11. My noble friend Lord Newby made the point that in respect of what we are discussing this afternoon, it is unsustainable and, in significant respects, unfair. The reforms to tax credits outlined within these regulations and orders are fair and proportionate. They tackle the deficit in a way that ensures that tax credits are targeted at those who need them most. Again as my noble friend Lord Newby points out, it is in the broader context that the critical move to the universal credit over this and the next Parliament gets driven forward.

I was grateful to the noble Lord, Lord Davies of Oldham, for recognising that we will use some of the savings from withdrawing child benefit from families with a higher-rate taxpayer to increase the child element of the child tax credit. That is important. It is an increase of a further £30 above indexation in 2011-12, and a further £50 above indexation in 2012-13, in addition to the above-indexation increases of £150 in 2011-12 and £60 in 2012-13 announced in the previous Budget.

While we are on indexation, I hesitate to take the opportunity to give a reminder to the noble Lord, Lord Davies, who raised questions about RPI and CPI. As he says, it is correct that RPI is now 4.6 per cent. However, the previous Government were intending to uprate by applying RPI minus 1.5 per cent. Of course, 4.6 per cent less 1.5 per cent takes one back to 3.1 per cent. So, in practice, there is no difference in these rates between the old and the new policy.

I will get back to my noble friend on his specific question about funding for Sure Start because I want to make sure that I have my facts right. I certainly agree that if, under the flexibility and the money that councils are allowed, some councils are able to continue I am not sure why others cannot. I will check the details of that.

To conclude, I believe that reforms at the Budget and the spending review, of which these are an important element, have been carried out in a fair and responsible way. We have ensured that everyone who is able to contribute to the deficit does so, while those with the lowest incomes continue to be supported. The critical test is that, after combining the impact of tax, benefit and public services spending review changes, it is the highest quintile of earners who will make the greatest contribution towards reducing the deficit as a percentage of their income and benefits in kind. I commend these regulations and orders to the Grand Committee.

Motion agreed.