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Mr. Willetts rose

Dawn Primarolo: Does the hon. Gentleman want to intervene before I move on to compliance and fraud? I know that I am going to regret giving way.

Mr. Willetts: I intervene only because the hon. Lady said "finally", and I wanted to clarify a simple point of principle to which she has not yet referred. Will she pledge to the House that no families will lose as a result of the changes in the Bill?

Dawn Primarolo: The hon. Gentleman tries again to introduce the subject of thresholds and tapers. Families are considerably better off than they would have been had we had the misfortune of his party being re-elected.

On compliance and fraud, it is important to ensure that only people who are genuinely entitled to the tax credits receive them. Everyone suffers if money goes to the

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wrong people, including the people who receive that money and then have to return it. The compliance regime for the new tax credits will be based on two principles: encouraging people to claim everything to which they are entitled, and providing an effective deterrent to the small minority—it is small—who try to cheat the system.

The Bill contains provisions to deal with non- compliance, including inquiry and information powers to uncover false claims, financial penalties when tax credits are falsely claimed, and powers to investigate and prosecute cases of criminal fraud. The Inland Revenue has a long history of tackling fraud successfully. The compliance strategy for the new tax credits will make full use of the automated systems and data sources available to the Inland Revenue, which will enable it to use systematic risk screening techniques to identify the riskiest cases. It will also be important that such a regime does not deter people who are entitled to the tax credits from claiming them.

The Bill builds on our achievements in the last Parliament, but we need to go further. It is the next step in the programme to tackle child poverty and make work pay. It will produce a more coherent and streamlined system of support, and will extend the coverage of that support.

Child tax credit will provide a secure stream of income for families with children, regardless of whether they are in work. It will bridge the gap between welfare and work more effectively, and reduce stigma. Working tax credit will improve work incentives by making work pay, relieve in-work poverty, and extend the principle of in-work support through the wage packet to those without children.

I urge Members to support the Bill, and ensure that we continue our fight to eradicate poverty in our society.

4.15 pm

Mr. Howard Flight (Arundel and South Downs): The Paymaster General has presented a "motherhood and apple pie" case for supporting the Bill's objectives rather than appraising whether it can deliver them effectively, and identifying the various problems that the changes raise.

In fact, Parliament is being asked for a blank cheque. We shall not know the amounts or the costs of the proposed benefits until next summer. Many of the important details have been presented sketchily, and await prescription in subsequent regulations. The Law Society fears that many important issues and principles relating to the new tax credits and their administration will not be considered properly by Parliament as a result.

As has already become apparent, we do not know whether a million families in which both parents are working will lose out under the new child tax credit arrangements next summer. Nor, indeed, do we know whether the Chancellor or the Prime Minister has won in the row over tax credits. The Paymaster General noticeably refused to be drawn into answering that question.

The Prime Minister, we understand, believes that the Chancellor's tax credit schemes will be too expensive and too complex to yield a political payback, and wants Government expenditure to be directed more towards clear-cut objectives such as higher health spending.

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Moreover, the Chancellor confirmed in his pre-Budget report that the forecast for Government expenditure did not take into account the additional costs resulting from the new tax credits, as financial decisions on rates have yet to be made. Under sections 20 and 23(b) of the Government's "Code for Fiscal Stability", the extra expenditure should have been noted as a special fiscal risk in the pre-Budget statement.

What I think we all know is that Britain cannot afford massive extra spending on health, transport and education, as well as very generous tax credits, without major tax increases that could damage the economy in the present uncertain economic climate. Some journalists have suggested that the Chancellor is trying to warm us up for tax increases by focusing on the needs of the national health service, when his real additional spending intentions are more modest. Health expenditure equal to the European Union average of 8 per cent. of gross national product back in 1998, which the permanent secretary described last week as the Government's target, actually represents only 0.2 per cent. more than the Government's existing plans to increase health expenditure to 7.8 per cent. of GNP.

Phil Hope (Corby): The hon. Gentleman seems to be saying we are spending too much on the health service and on education, and will now be spending too much on what I think he described as "generous" tax credits. Which area of spending would his party cut if it were in government?

Mr. Flight: The hon. Gentleman should not waste the House's time. [Interruption.] It is the Government who are governing. The point that I have made, quite simply, is that as the Government have agendas in all those areas it would be helpful if they told us precisely what they are, and to what extent they will be affordable.

The bill for the Chancellor's tax credits, and including pension credits, is likely to top £10 billion by 2003-04 and to rise substantially thereafter. Has Prudence Brown experienced a major character change? Is he becoming a big spender, or is he up to his old tricks of spinning more than he intends to deliver?

The real issue is: have the Government got the approach right this time? The Chancellor repeatedly trumpeted the working families tax credit as his main flagship of welfare reform. It was described as a once in a lifetime shake-up of the tax and benefit system. The working families tax credit took effect only in 2000 and the children's tax credit only in April this year, but now the Government are ending those and proposing a different, more complex system of credits.

Aside from the substantial work and costs to the Department for Work and Pensions and to the Inland Revenue, the different arrangements will be confusing for beneficiaries, who are only just getting on top of the working families tax credit and children's tax credit systems. Labour Members should take that matter seriously, because one of the problems has been lack of take-up. The Paymaster General was extraordinarily reluctant to comment on what the number eligible for working families tax credit has been, but the Bill effectively admits that the previous measures were not

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correct, and that the Chancellor did not get it right last time. Many of the Opposition's criticisms of the working families tax credit and the children's tax credit have proven to be correct.

The Government made great play of the 1.5 million eligible for working families tax credit but after two years, less than 1.3 million have claimed it. This very day the Government argued that over-spending on working families tax credit has been the result of the number claiming it being greater than expected. How can that be when the Government said that 1.5 million were eligible and less than 1.3 million have actually claimed it?

It is a serious point that claimants will find the new system very different. The conflicting aims of targeting and, allegedly, simplifying credits have forced a compromise on simplicity and predictability for families whose income and composition may change significantly during the year. The new arrangements will heighten existing complexities. The adjustments required to pay-as-you-earn records are complex and a significant burden for employers, who may not be able to implement changes promptly.

Entitlements to the credits must be based on annual income—either annual income in the previous year or an estimate of annual income for the current year. The arrangements will not be capable of operating in the way that was promised in the Queen's Speech, or of responding more quickly to changes in a family's situation to meet their financial needs effectively. There is no evidence that the Inland Revenue responds more speedily and appropriately than the Department for Work and Pensions and the Department of Social Security have in the past.

Kali Mountford (Colne Valley): The hon. Gentleman is making a case against the whole principle of tax credits. Does he intend to return to a benefit-based system? If so, what was it about that system that he so loved?

Mr. Flight: I am grateful that the hon. Lady expects us to return to power and to address those issues, but the task of the Opposition is to raise the issues and the problems. As the right hon. Member for Birkenhead (Mr. Field) would say, the issue is whether a tax-based system is indeed capable of dealing more effectively with people's needs, particularly poor members of society, than a Department for Work and Pensions-based system. I did not hear the Paymaster General cite arguments on why greater success is achievable under such a system. I will come to many of the problems and criticisms that have been raised, but may I comment first on the underlying principles?

Hon. Members will recollect that it was the Conservatives who introduced family credit, as the Paymaster General said, from which 817,000 people benefited. We pioneered the case for pricing people into work and making work pay, at a time when for many the welfare system had acted as a disincentive to work. The Chancellor, in his pre-Budget speech, drew particular attention to the failures of the rest of the EU and made the point that if we had the EU system we would have double the level of unemployment—another 1 million people out of work. It was also the Conservatives who, 30 years ago, examined the arguments for a negative

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income tax, which is largely what is proposed in the Bill, but we concluded that it would be less effective in addressing real needs than the social security system.

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