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Standing Committee Debates

Draft Tax Credits Up-Rating Order 2002

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Fourth Standing Committee on Delegated Legislation

Thursday 7 March 2002

[Mr. Roger Gale in the Chair]

Draft Tax Credits Up-Rating Order 2002

9.55 am

The Paymaster General (Dawn Primarolo):I beg to move,

    That the Committee has considered the draft Tax Credits Up-rating Order 2002.

Good morning, Mr. Gale. It is nice to see you on what is such a lovely morning. I hope therefore that the uprating order is uncontentious so that we can get back out before the sun goes down. Perhaps that statement is a cri de coeur from a Treasury Minister. Often I enter the Treasury in the morning and by the time that I leave it in the evening, the sun has unfortunately set. I did not mean to imply that we should take a long time to discuss the order.

The order increases the main rates and thresholds of working families tax credit and disabled person's tax credit from 9 April this year by 1.71 per cent., in line with the increase in the Rossi index. In addition, as part of a package of more help for families with children with disabilities, it increases the disabled child tax credit and enhances the disability tax credit for children within working families tax credit and disabled person's tax credit by an extra £5 above indexation. The Government announced their intention to take such action some time ago. The increases will boost the incomes of more than 1.3 million low-income working families and disabled people who work.

The order increases the amount of credit for an adult, child or young person, including the extra 30 hours tax credit, which a family receives when one earner works at least 30 hours a week, and the disabled and enhanced disability credit. The credits determine the maximum working families tax credit or maximum disabled person's tax credit that the family or disabled person may receive. The order also increases the income threshold for working families tax credit and the threshold for the disabled person's tax credit. The thresholds—or applicable amounts—are the levels over and above which income begins to be tapered away from the maximum award of the tax credits.

The increases will therefore provide a minimum income guarantee of £227 a week for a family with one child in receipt of the working families tax credit, £172 a week for a single person on disabled person's tax credit and £260 a week for a couple with one child on disabled person's tax credit. Those figures are based on one earner in full-time work, working 35

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hours a week and earning the national minimum wage.

The order ensures that the differentials between in-work tax credit and out-of-work benefits are maintained after the increases in the benefits. It provides extra help over and above indexation for families with children with disabilities. It reflects the Government's commitment to encourage people into work and to make sure that work pays, and to target extra support at those who need it most. I commend the order to the Committee.

9.59 am

Mr. Howard Flight (Arundel and South Downs): May I welcome you to the chair, Mr. Gale? As the Minister said, the working families tax credit and disabled person's tax credit are being increased by 1.71 per cent. under something called the Rossi index. I recollect that we had certain disagreements some time ago about the inflation indexes that we use for pension increases, so I would be grateful if the Minister would put on record what the Rossi index is, the time period it covers and how, if at all, it compares to Bank of England indices for inflation. If our objective is, as I assume, to inflate the measures in line with inflation, it is necessary, and would be useful, to know that the Rossi index is an accurate measure.

The Minister said that the disabled child tax credit—the enhanced disability tax credit for children—the working families tax credit and the disabled person's tax credit will have flat increases of £5 a week. I should be grateful if she would comment on what that represents in percentage terms and on the logic behind a flat-rate increase instead of a percentage increase. I think that I am right to say that there were flat £5 increases last year also.

Will the Minister give the total cost of the upratings? Paragraphs 3(a)(iv) and 4(a)(iv) relate to circumstances in which

    "the amount specified for the allowance in respect of a child or young person is NIL".

That, I think, applies to child care charges. I confess that I may have misunderstood the explanation. I wonder whether the meaning of those obscure words is that there will be no inflation-increase ceilings or floors for those who qualify for child care charges. If that is a correct understanding, I should like to know what the logic is, as the general approach is one of increasing credits by an inflation index.

This will be the last order in the short life of some of the measures, as they will be rolled into the new tax credits next year. I do not wish to revisit discussions that we have already had, but I should appreciate the Minister's confirmation for the record that the various credits will come back to life in the new tax credit arrangements.

10.2 am

Mr. Steve Webb (Northavon): I shall make just two brief observations on the way in which the credits and

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thresholds have been indexed. First, the Minister said that they have been indexed in line with the Rossi index, which as I understand it, is the all-items retail prices index excluding housing. The historic reason for using Rossi rather than the all-items RPI was that the housing benefit system existed to cover people's housing costs. People were meant to pay for everything except housing out of the tax credit, so we used a price index that included everything except housing. That was certainly a sensible basis on which to uprate income support, because there is a separate housing benefit system.

The problem is that very few people on tax credits these days get housing benefit. Because working families tax credit has become more generous relative to, say, family credit, more people on low wages have been floated off housing benefit. As a result, the people on working families tax credit have to pay for housing costs as well as everything else from their working families tax credit. As housing costs are going up, surely it would be appropriate to use an index that includes, rather than excludes, housing costs. That would be logical. Most of those on WFTC are not getting housing benefit; they have to pay their gross housing costs, so the index used to uprate WFTC thresholds should include those costs. I should be grateful for the Minister's comments on that.

My second observation is that we are applying a set of thresholds and tapers to an earnings distribution. Each year, on average, people's earnings rise faster than inflation, but we are only putting the thresholds up by inflation in the long term, apart from the odd discretionary change made to the provision for disabled children, for example. If the Government's long-term policy is price indexation, as the order suggest, because earnings rise faster than inflation–albeit by just a few per cent. each year–people will start to fall off the top end of the taper. The credit will become the child credit and will be subject to a taper. As people move up the earnings distribution relative to the thresholds, which are only price indexed, the scope of the support system will diminish.

Is the Treasury's long-term goal for such wage supplements gradually to become focused on an increasingly smaller group of people? That is the effect of annual price indexation. To give a simple example, over the past couple of years, the minimum wage has risen substantially faster than prices. Therefore households in which the wage earner earns the minimum wage will have risen further up the scale, relative to the thresholds. Most of the benefit of the minimum wage will be tapered away through cuts in family tax credit—if those involved receive family tax credit. People at the top of the scale may receive only a few pounds a week in working families tax credit. Price indexation for thresholds and earnings indexation of their earnings will remove them completely. Although the order will be fairly marginal in its effects, if we keep having this conversation every year—I look forward to doing

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so with great glee—the scope of the scheme will gradually diminish, excluding any discretionary changes that the Government might choose to make.

It would be interesting to know whether implicit in the rates and thresholds is a long-term strategy of price indexation and, therefore, of focusing the working families tax credit and its successor credits on an increasingly narrower section of the population. Indexation as in the order is no different from what one would have expected, but a strong case can be made for, at the least, more comprehensive price indexation. A case can also be made for earnings indexation—unless the Government want to narrow the scope of the scheme over the long term.

Dawn Primarolo: In responding to the questions asked by the hon. Members for Arundel and South Downs (Mr. Flight) and for Northavon (Mr. Webb), I shall first deal with the straightforward points and will then return to the point that the hon. Member for Arundel and South Downs made about the Rossi index and the wider point that the hon. Member for Northavon made about the relationship of indexation to the tax credits.

The estimated cost of the upratings for 2002–03 is £175 million. The estimated cost of uprating the disabled child tax credit and the enhanced tax credit for a disabled child by more than indexation is £10 million for 2002–03.

The hon. Member for Arundel and South Downs also asked why we opted for a flat-rate increase. We did so in order to ensure equality of treatment in the rate paid for a disabled child in both the disabled person's tax credit and the working families tax credit. The system was not working as smoothly as we wanted it to. The Government had previously announced that that was a problem in the operation of the two tax credits.

The hon. Member for Arundel and South Downs also asked why there was no increase in the child care allowance, which is 70 per cent. of child care costs. He is right to say that that is not an increase. The reason that it has not been increased is that the limits were significantly increased by far more than indexation last year. We increased the weekly payment for the first child from £100 to £135, which would be 70 per cent. of the costs, and for a second child—or more children—from £150 to £200. That cost had, therefore, already been significantly adjusted.

The hon. Members for Northavon and for Arundel and South Downs both referred to indexation. The order provides that indexation occurs using the Rossi index, which is the retail prices index less housing costs such as mortgage interest payments and rent. That is the minimum that we are able to achieve with indexation. The Government have closely monitored the short history of the working families and disabled person's tax credits, which have been adjusted above

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indexation in previous years. Although there is a floor in the indexation, the Government are able to increase above it.

The important point, which we discussed during the proceedings of the Tax Credits Bill, is what will happen in the future. An important series of decisions must be taken, as the hon. Member for Northavon said, such as how to keep the differential value of the tax credits at a level whereby their effectiveness is not gradually whittled away by the use of a different index. We discussed that issue when dealing with the Tax Credits Bill. Forgive me, Mr. Gale, because I realise that that is not the subject of this debate, but I need to put the issue into context. It may help members of the Committee because they will want to know what will happen in the future.

I acknowledge, as I did in our debate on the Tax Credits Bill, that the arguments about uprating are important. There will be a provision for uprating the new tax credits. However, the Government must look carefully at the issues outlined by the hon. Member for Northavon, such as what would happen if the value were gradually whittled away, as well as at the broader purpose of the new tax credits. When discussing the Tax Credits Bill, I asked the Committee to bear with me, as I do today, and to give the Government more time. I gave an undertaking that, by the time that the Bill was back on the Floor of the House, I would be able to give a clear indication to all hon. Members, especially those who have paid attention to the details in Committee, of how indexation would be calculated—what the minimum would be and what else the Government would have the ability to do.

Clearly, through the transition period in which we have had working families and disabled person's tax credits, which today's order revises, we have attempted to protect their value and keep the incentives and rewards that the policy is designed to underline. In short, I acknowledge what the hon. Gentlemen say about appropriate vehicles for the future and what dangers there might be. It is not the Government's intention to allow tax credits to be whittled away and there will be uprating provisions. All the points made today are issues that we are dealing with. I hope that I have covered specific questions about this order and that I have been

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helpful to the Committee by giving some indication of future policy, although it is not directly relevant. I am happy to respond to other questions from the hon. Gentlemen.

 
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Prepared Thursday 7 March 2002