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Tax Credits: Impact of Cuts

Volume 764: debated on Monday 14 September 2015


Asked by

To ask Her Majesty’s Government what assessment they have made of the impact of cuts in tax credits on middle- and lower-income working people.

My Lords, the Government are placing more emphasis on support to families on low incomes by increasing the personal allowance and introducing the new national living wage, rather than on topping up low wages through tax credits. Taking the welfare changes in the Budget together, with the record increases in the income tax personal allowance and the introduction of the national living wage, eight out of 10 working households will be better off in 2017-18.

My Lords, will the Minister confirm that 3 million of the poorest families will be £1,000 worse off and that the increase in the minimum wage will simply not offset the cut in tax credits? To put it another way, is it not true that 5 million of Britain’s poorest children will lose an average of £750 each?

My Lords, the trouble with this subject is that we could sit swapping statistics all day long. The evidence for children in poverty is clear that work is the best way for families to stay out of poverty. Children in workless families are nearly three times as likely to be in poverty. So we are increasing pay and raising the personal allowance so that families keep more of what they earn. Work and education are what matters, so we are extending free entitlement to childcare to 30 hours for working parents of three and four year-olds.

My Lords, research by the Centre for Policy Studies showed that, by 2012, more than half the families in this country were net takers from, rather than contributors to, the state. Would my noble friend agree that that situation is both unhealthy and unsustainable, and that changes in tax credits are just a step towards redressing the balance?

My Lords, this is a strategic change in how we deal with welfare in this country. It is worth bearing in mind the problem: we produce 4% of the world’s GDP and 7% of the welfare payments, and nine out of 10 families were on tax credits. I completely agree with my noble friend that we want to increase people’s pay and lower the amount of tax they pay so that all families benefit in this country.

My Lords, despite the Minister’s disdain for statistics, he will be aware of the Institute for Fiscal Studies report last week that demonstrated that, among the 8.4 million working-age households currently eligible for benefits and tax credits but containing someone in work, the average loss from the cuts to benefits and tax credits is £750 per year. Among this same group, the average gain from the new minimum wage is estimated at only £200 per year. Does he accept that statistic?

My Lords, I assure the House that I do not have any disdain for statistics. In fact, I have an enormous pack full of statistics that I have tried to learn. The problem with the IFS study is that the £12.5 billion of net cuts to benefits and tax credits and the estimated £4 billion increase in wages do not compare like with like for working families, because the reduction in benefits includes cuts to those families out of work.

My Lords, would the Minister agree with the fact that wages have risen faster in the past six months than since before 2007? Has that anything to do with the tax credit reforms?

My Lords, I did not know that they had risen that fast. The former Chancellor, Alistair Darling, said that tax credits were never intended to subsidise lower wages. However, the current Chancellor has been very careful not to claim that tax credits have depressed wages. The fact is that we want to increase people’s wages. We introduced the national living wage and we want people to keep more of what they earn, rather than subsidising people through the benefits system.

My Lords, is the Minister aware that, despite his statistics, the majority of children in poverty have parents in work? It is therefore not true to say that work is the best route out of poverty unless that pay is topped up by tax credits. Otherwise, a single person and a family get the same wage. Tax credits lift children out of poverty. Can we therefore hope that the Minister will take that information back to the Treasury so that, when we face the battle over welfare reform cuts, alleviating child poverty is at the heart of this House’s attack on poverty?

The noble Baroness is well respected for her mastery of the detail in this reform. We will address child poverty comprehensively in the Welfare Reform and Work Bill. I am sure that the noble Baroness will be involved in that. We still think that work is the best route out of poverty. The number of children growing up in workless families is at a record low, down by 390,000 in the last Parliament. We are particularly trying to help those on the lowest incomes. Families will still be able to earn up to £3,850 before the awards are taken away.

My Lords, bearing in mind that two-thirds of children who live in poverty are in in-work families, how will the Government monitor the impact of the proposed changes? In particular, will they review the exclusion of income-based measures from the suite of life chances indicators being brought in?

The right reverend Prelate is correct to focus on these statistics and forecasting child poverty is very difficult. The IFS, for example, forecast in 2011 that there would be 2.8 million children in relative poverty and the actual figure was more than half a million less. We have considered the impact of the policy changes on children in poverty carefully in the summer Budget and we will continue to do so.

My Lords, just saying something over and over again does not, sadly, make it true. If the Minister is mostly concerned about children in working families, will he look please at the independent academic research for the Resolution Foundation, which found that, as a result of the Budget changes, most working families would be net losers? They may gain some income, but they are going to be worse off as a result of cuts in tax credits. How does that help tackle child poverty?

My Lords, I do not agree with that. Eight out of 10 working families with children will be better off when you take into account the tax credit changes, the national living wage and the increase in the personal allowance.