Tax Credits and Guardian’s Allowance Up-rating etc. Regulations 2018
Motions to Approve
That the draft Regulations laid before the House on 15 January be approved.
My Lords, these draft regulations, which have passed in the other place, make no changes to the structures of the national insurance and benefits systems, and are a routine annual exercise to account for the rise in prices. As noble Lords know, this Government are committed to a welfare system that is fair to the taxpayer while also protecting Britain’s most vulnerable.
To put the regulations in context, the Welfare Reform and Work Act 2016 legislated to freeze the majority of working-age benefits, including child tax credit and working tax credit, for four years—in other words, up to 2020. The Act helped to put our welfare system on a sustainable long-term path. Exempt from the freeze are the disability elements of the child tax credit and working tax credit. The guardian’s allowance is also exempt. As in previous years, we are now legislating to ensure that the guardian’s allowance and the disability elements of child tax credit and working tax credit increase in line with the consumer price index, which had inflation at 3% in the year to September 2017. Alongside our commitment to fiscal discipline, the Government, through the draft regulations, are exercising their demonstrable commitment to protecting those who need protection the most.
What the regulations mean in practice is that we will maintain the level of support for families with disabled children in receipt of child tax credit and for disabled workers in receipt of working tax credit. The regulations also sustain the level of support for children whose parents are absent or deceased. To add further context to these regulations, universal credit is replacing a number of means-tested working-age benefits, including tax credits. Once all tax credit claimants have migrated on to universal credit, the uprating of tax credit elements will no longer be necessary.
The social security regulations make changes to the rates, limits and thresholds for national insurance contributions and make provision for a Treasury grant to be paid into the National Insurance Fund if required. These changes will take effect from 6 April 2018. Re-rating increases these figures by inflation to protect taxpayers from rising prices and increases to the costs of living.
These regulations will result in around £130 billion of national insurance contributions to the Exchequer, working directly to support the NHS, pensioners and the bereaved. On class 1 national insurance contributions, the lower earnings limit is the level of earnings at which employees start to gain access to contributory benefits. These include the state pension, contributory employment and support allowance and contribution-based jobseeker’s allowance. The lower earnings limit will rise in line with inflation from £113 to £116 a week, or £6,032 on an annual basis.
Employees have to pay class 1 NICs at 12%. The primary threshold is a level of earnings—£8,424 on an annual basis—above which class 1 NICs have to be paid. The threshold will rise with inflation to £162 a week. The upper earnings limit is the level at which employees start to pay class 1 NICs at 2% instead of 12%. The Government have committed to align this threshold limit with the UK’s higher income tax threshold of £46,350 on an annual basis.
Employers have to pay national insurance at a rate of 13.8% from an earnings level called a “secondary threshold”. This threshold will also rise with inflation to £162 a week, as it has been aligned with the primary threshold for employees since April 2017. The Government are also committed to reducing the cost to businesses of employing young apprentices and young people. The level at which employers of people under 21 and of apprentices under 25 start to pay employer’s contributions will therefore rise from £866 to £892 a week.
Class 2 NICs provide access to contributory benefits for the self-employed—in other words, the state pension. The weekly rate of class 2 NICs that has to be paid will rise in line with inflation to £2.95—a flat rate for all the self-employed. The small profits threshold is the level of profits above which the self-employed have to pay class 2 NICs. This threshold will rise with inflation to £6,205 a year.
The self-employed also have to pay class 4 NICs, at a rate of 9% on profits above £8,164 a year. That limit will now rise with inflation to £8,424. The self-employed then pay 2% instead of 9% above what is termed an upper profits limit. That limit will rise from £45,000 to £46,350 a year. Finally, class 3 contributions allow people to voluntarily top up their national insurance record. This allows access to the state pension. The rate for class 3 will increase in line with inflation from £14.25 to £14.65 a week.
The regulations also make provision for a Treasury grant of up to 5% of forecasted annual benefit expenditure to be paid into the National Insurance Fund, if needed, during 2018-19. This would be a routine transfer with no wider fiscal impact. A similar provision will be made in respect of the Northern Ireland national insurance fund.
I trust that this has been a useful overview for noble Lords of the changes that we are making, and I commend the draft regulations to the House. I beg to move.
My Lords, I do not wish to detain the House for long today but I want to ask the Minister some questions specifically about the tax credits and guardian’s allowance regulations. I should say that I asked a Minister similar questions in a debate last week on social security. I had asked her some questions about the freeze on tax credits, child benefits and child tax credits, and she responded by saying:
“I respond by simply saying that the Treasury is responsible for these benefits and it announced the 2018-19 rates”,—[Official Report, 27/2/18; col. GC 13.]
and so on. I decided that as a former Treasury Minister it was a good idea to come today to ask a former Treasury Minister, and a current Treasury Minister in this place, some questions about child benefit.
I am grateful for the noble Lord’s introduction of the orders, but I want to focus on the question of rising inequality and poverty among children in our country. According to the Resolution Foundation, inequality is projected to rise to record highs by 2022-23, and it says that this is a sad,
“story of the poorest working-age households being left behind”.
The driver of this is the freeze in most working-age benefits. According to the Resolution Foundation, by 2020, child benefit beyond the first child will be worth less than 32 years ago and child benefit for the first child will be at its lowest level in real terms in the past 20 years.
Child poverty is on the increase, and absolute child poverty, in particular, is rising. Yet we see the shocking prospect, in a country which has the sixth-largest economy in the world, of more and more children’s and families’ lives being blighted by poverty. The Child Poverty Action Group says that as a result of the cumulative cuts to social security, we are pushing more children into poverty. Its analysis is that 1 million more will be in poverty, two-thirds of them in working households.
Does the Minister accept those figures as correct? Does he accept that as a result of the freeze, 10.5 million households will see their average yearly income cut against a backdrop of rising food prices, now standing at 4.1%, at exactly the same time as the Treasury is saving £4.7 billion, more than originally estimated, by the freeze in those benefits?
I am sure that the Minister will say, and I would not disagree, that the best way out of poverty is work, but he knows as well as I do that families face precarious work situations, zero-hours contracts and rising inflation. It is a heady cocktail that they cannot fight by themselves, and the Government need to step in.
The Explanatory Memorandum which accompanies the orders makes it clear that the Treasury was not required to review the impact of the freeze on child benefit, as the decision had been taken before. I ask the Minister three simple questions. How will the Government stop the rise in child poverty? Will he agree to publish an assessment of the benefit freeze and its impact on child poverty? Finally, will he go back to the Treasury to persuade it that it needs to reconsider the decision to freeze child benefit, bearing in mind the vast amount of money that it has saved, to share some of it with mothers by giving it to them as an increase in their child benefit so that they can spend it on their children in times of desperate challenge for families?
My Lords, it is a pleasure to follow the noble Baroness, Lady Primarolo, who has a lot of experience, having been a Treasury Minister. I agree largely with her plea for a better context in which to consider these orders. Like her, I was in the Grand Committee last week when we looked at the social security uprating order, which is a sister order. In the normal annual review that we have had in the past, they are normally considered, pari passu, together, in a way that enables a more joined-up debate to take place. I absolutely agree with what has just been said about the importance of the context of what we are considering.
The Minister, in his usual efficient way, explained exactly what these orders are doing, and he is right. I am perfectly prepared to believe that the orders are legal and accurate and what is required by law. But if we are talking about £130 billion of contributions through the national insurance fund, £24 billion of which is allocated now to the National Health Service, I think we deserve a better context in which to discuss these things.
This is a procedural point rather than anything else, but I am getting more and more worried about how the deregulation provisions that we passed in the Act some years aback are now being used more and more to deflect some of the routine things that Parliament needs to be consulted about. It is called “ambulatory provision”, for those who are students of these things. I am getting frightened that the consideration of these important orders, including the social security uprating orders that we considered last week, is being pushed further and further into the long grass. I do not need to tell the Minister, because he was there at the time but, in the old days, when we were all in the House of Commons, these were big debates. It was understood that it was a significant sum of money. The biggest spending department in the Government by a mile was under examination and scrutiny in Parliament. We now do that through these restricted orders, which, stricto sensu, as the noble Baroness, Lady Primarolo, said, is technically out of order. I agree with her—and in a moment I shall indulge in the same kind of latitude that she took.
My point is that the Minister is a very experienced hand in this. Will he go away and reflect how we can, particularly at the beginning of a Parliament—and this is a new Parliament, with its first Budget—think about sustainability and affordability and about the adequacy of benefits, child benefit being principal among them, as well as about the social change that surrounds that? The world of work has changed quite dramatically in a number of respects, particularly in relation to self-employment. I want to talk about class 2 and class 4 contributions in a moment.
The Minister understands these things perfectly well. There should be some occasion, maybe a day in government time, to which these uprating orders are appended, when we can have a proper discussion on the context in which these contributions are being raised and the benefit spend is being agreed. That would give some of us more confidence, at least once at the beginning of every Parliament, that the Government were willing to open themselves and be transparent about their longer term aims and ambitions. Basically, I guess that they would say that they were doing their best with universal credit and doing their best to try to understand the challenges when disability costs are increasing. But we should have a grown-up discussion about that—it is not for now, but I hope that he will go away and reflect on that carefully.
I turn to the kind of stuff that we get in the Explanatory Memorandum about, for example, the contributions order. Paragraphs 8, 9 10 and 11 talk about the kind of things that the Government are doing in these orders. They give the impression that nothing at all has happened. There is no consultation; the guidance on the regulations poses no new obligations. Paragraph 10 states that there is no impact on business or the public sector and that a,
“Tax Information and Impact Note has not been prepared”.
Against the background of a spend of £130 billion, that is not right. Nor is it right to talk about class 2 and class 4 national insurance contributions without understanding the significant change there has been in self-employment in this country. It is not just the extent to which people are engaged in it, but how it relates to universal credit and the minimum income floor, and all the problems attendant on those who try to act in good faith by getting into some kind of gainful employment through a self-employed route. Just looking at the contributions does not begin to address some of the problems that they face. That is just one example; I could think of others under the social security contributions order.
On the tax credits and guardian’s allowance, the Government will need to return to the four-year freeze in the course of this Parliament. It is not just child benefit; a whole range of benefits is subject to the freeze and will need to be looked at. If we do not make some alterations, that will have counterintuitive effects in terms of family breakdown and increase the likelihood of household debt and homelessness. None of these is an intended consequence. It was all done when we were looking at austerity in the days of Chancellor Osborne. He was predicting inflation at rates that we now know were underestimates. We are now looking at interest rate changes and a whole range of different circumstances that were not known when the Act imposing the freezes was put in place. It is perfectly reasonable for Parliament to say that, in the course of the four-year benefit freeze, we should have a long, hard look at the consequences.
I warmly welcome the disability and guardian’s allowance exemptions, but we will need to come back to them as well. The intelligence I am getting from the disability pressure group community is that there are still serious problems that need to be addressed. At least the CPI inflation of the elements that deal with disability is welcome so far as it goes.
In conclusion, these orders need to be improved. We are lucky to have a Government Actuary who is so assiduous in setting this all out. I read the quinquennial review, based on 2015 but published in 2017. There are some serious challenges for Treasury grants, not in the short term, but in the longer term where the actuary identified some serious problems about the increasing dependency ratio that the country is facing. That is not a forecast: we are facing it come what may, because it is based on demographics that we can make estimates of now. The increase in the new state pension has a lot of variables. The National Insurance Fund is very sensitive to how the cost of that works out. Speaking for myself—this is not my party’s policy—I do not think we can afford a triple lock any more. Pensions should be linked to earnings in the future because we cannot afford the triple lock in perpetuity.
Finally, I agree very strongly with the Minister’s colleague, the noble Lord, Lord Willetts, who made an excellent speech at a Resolution Foundation event earlier this week. He pointed out that we need to find new sources of resources in the middle to longer term. That probably means looking more at wealth than income from which to derive extra resources to deal with some of these problems. It probably also means that people of my generation and, indeed, the Minister’s might be asked to pay a little more to cover the benefits that we have experienced in our life journey and to pay for some of the social care charges that will pose challenges in the future. These regulations, so far as they go, are legal and I am happy to allow them to pass. However, politically, they are inadequate and not fit for purpose.
My Lords, I am not having a good afternoon. The Minister stole my speech on the previous set of regulations and my noble friend on the Back Benches has stolen most of my speech on these regulations, so I will not repeat her remarks.
I largely agree with the general point made by the noble Lord, Lord Kirkwood, that these regulations, together with the measures we discussed last week, are part of a very big debate. We should have that debate. I shall certainly press through my channels for a day’s debate in government time on the whole issue of the charges, the uprating and the overall problems. As the Minister well knows, there is not the slightest chance of this Front Bench opposing these regulations because, if we did so, we could win a vote. That would produce a constitutional crisis for which I would be drummed out of the House of Lords so, of course, we will not object. However, I have a technical question: to what extent are any of these regulations, and the parts thereof, anything more than a formality, because as far as I can see they simply approve measures that have already been announced and do not include any discretionary decisions that would alter previous government statements.
These regulations are, of course, a small part of the total picture and a small part of a massive and highly successful programme, to which I think the Minister referred as fiscal discipline and I refer to as a programme to take from the poor and give to the rich. As the noble Lord, Lord Kirkwood, said, the four-year freeze has not been debated: that is, the four-year freeze on child benefit, jobseeker’s allowance, employment and support allowance, income support, housing benefit, women’s state pension age, local housing allowance rates, child tax credit, working tax credit and universal credit. These regulations contain only one substantive element—namely, that CPI inflation is 3%, which is a great deal higher than the 1.7% figure which I believe was envisaged when the freeze was first introduced. Indeed, for the people concerned, for whom food is a very high proportion of their expenditure, food inflation was 4.1% over the period when CPI inflation was 3%. Therefore, the people in the freeze zone are getting substantially poorer. Indeed, the Resolution Foundation takes the view that the freeze will save the Government some £4.7 billion by 2020, and this saving will fund tax cuts for middle and higher-income earners. Austerity has not worked. The Government—be it the coalition Government or the present Conservative Government—have missed every fiscal target they have set. In fact, I am not quite sure where we are now; it is possible that the Government have given up setting targets, which at least aligns with reality. Our failure to oppose these regulations does not mean that we in any way support the evil policy of which they are part.
My Lords, I am genuinely grateful to all noble Lords who have taken part. We have had a thoughtful debate, with no specific objections —on the contrary, with welcome for the measures in the regulations before us. However, noble Lords have pegged on to that some broader issues which deserve a response, and I will do my best to address them.
The noble Baroness, Lady Primarolo, and I have been debating these matters for over 20 years. Sometimes she has been the Minister and I have been in opposition, and sometimes the roles have been reversed. However, it is good to see that dialogue being maintained in this House, in the same cordial way that it was in the other place.
It may be helpful if I first put in the broader context the reasons for the freeze on certain benefits, because that is the backdrop, then address specifically the points that fall within that of the impact on child poverty, and then address some of the issues that have been raised during the debate.
First, I quite understand the points noble Lords made about the impact of the freeze of in-work benefits on families now that inflation is higher than it was, although I note that it is predicted to fall back to 2% next year, having peaked at 3% in the final quarter of last year. However, just to put that decision in context, spending on welfare had trebled in real terms between 1980 and 2014, and had contributed to a record level of debt: 83.7% of GDP in 2015-16. This was unsustainable. Also, in 2013, the UK had the highest spending on the family out of all OECD countries as a percentage of GDP. That is the backdrop.
Secondly, between 2008 and 2015, average earnings went up by 12%, whereas most working-age benefits, such as JSA, increased by 21%, and child tax credit rose by 33%. A four-year freeze helped to reverse that trend and reinforce the incentives to work.
Thirdly—this has not been mentioned during the debate—the Government have taken steps elsewhere to help the incomes of those in work by raising the national living wage to £7.83 per hour and by making progress on the manifesto commitment to raise the personal allowance to £12,500. Put in that overall context, and with the exemptions we are debating today, the policy is defensible.
I will address some of the issues raised during our debate. Real household disposable income grew at its fastest rate in 2015 to reach its highest-ever level. On the specific issues around child poverty, the noble Baroness quoted the Resolution Foundation; other reports by the Institute for Fiscal Studies and the Child Poverty Action Group focused on the issues raised by the noble Baroness. Since 2010, there are 200,000 fewer children in absolute poverty, before housing costs, and 608,000 fewer children living in workless households, which is a record low. We are committed to taking action to help the most disadvantaged, with a focus on tackling the root causes of poverty in workless households. As the noble Baroness anticipated, it is indeed our view that work remains the best route out of poverty. In 2015-16, 9% of children were in households where all adults were working with relative low income before household costs, compared with 48% in workless households. Since 2010, there are over 3 million more people in work and 954,000 fewer workless households. Therefore we are taking action to ensure that work always pays.
The noble Baroness asked whether we could publish an assessment of the benefits freeze. I understand that it is quite difficult to isolate its impact but, when the freeze was announced, an impact assessment was published, and the Treasury publishes a wider distribution analysis at the Budget.
It seemed to me that some of the strategic issues that the noble Lord, Lord Kirkwood, raised could be dealt with by the Select Committee in the other place that he chaired so ably. In another place one could have Opposition day debates on the more strategic issues, but I take his point, which was raised by others in the debate, that there might be value in a broader debate about social security. I am more than happy to raise that issue with the business managers to see whether that might take place.
We do not consult on the specific measures. They are routine and everybody expects them. I am not sure that it would be a tremendously valuable exercise to consult on the rather narrow annual uprating each year.
The noble Lord, Lord Kirkwood, said that the whole range of benefits is subject to the freeze. However, I am sure that he knows that pensioner benefits and benefits for the additional costs of disability and care are exempt from the freeze and continue to be uprated as part of our commitment to protect the most vulnerable.
He mentioned the quinquennial GAD report, which estimates that the NIF will run out of money in the 2030s. Looking to the foreseeable future—to 2024-25—we expect the fund to have a surplus. However, in the long run he is right: life expectancy and other demographic trends will continue to pose a challenge for the public finances. He mentioned my noble friend Lord Willetts, who came up with his own solutions to how those challenges might be responded to. Again, that is the sort of issue that might be raised in the broader debate that he would like to get under way.
We are committed to the triple lock for the duration of this Parliament. It has been an invaluable element in addressing the issue of pensioners living in low-income households. That peaked in the late 1980s at over 40% but the proportion of pensioners living in low-income households is now down to 16%.
Finally, the noble Lord, Lord Tunnicliffe, complained that he had been robbed by the first-class speeches from those on the Opposition Benches. He asked whether there was an element of discretion in the measures before us. The Explanatory Memorandum says that Section 41 of the Tax Credits Act 2002 requires a review of certain monetary amounts in each tax year to determine whether they have retained their value in relation to prices. Therefore, we have to do that. We discovered that they have not retained their value, so the Government have taken the action that they have. In one year, we did not uprate because inflation at the time was negative. It is government policy to uprate in line with the regulations before us, and I suspect that if we did not, we would be before the courts.
I have tried to answer all the points raised and commend the regulations to the House.
House adjourned at 7.03 pm.