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Baroness Carnegy of Lour: My Lords, before the noble Baroness sits down, I hope the House will forgive me if I take a moment to ask her the following question. In her opening remarks she told us how many families are below the poverty line. I think that was probably a quote from the Chancellor. Can she tell us the definition of the poverty line because it is a difficult matter to understand when it seems to be a movable line. What is the definition?

Baroness Lockwood: My Lords, this may not be the official definition, but my definition is those receiving half the average wage.

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5.9 p.m.

The Earl of Buckinghamshire: My Lords, the noble Baroness the Minister has clearly outlined with her customary skill the details of the Bill and, of course, she has extolled the virtues of the Government's decision to replace family credit from October 1999 with the working families' tax credit and the disability working allowance with the disabled person's tax credit. I admired her ready reeling off of the initials of each of these items. I seem to recollect WFTC, DPTC, IS, DWA and NICs. My revenge will be that when we come to the Welfare Reform and Pensions Bill I will retaliate with PUPS, PILS and EPBs!

I shall confine my brief remarks on the Bill to the working families' tax credit. That is not because I regard the disabled person's tax credit as not being important but because I knew that the noble Lord, Lord Rix, would be speaking on that aspect. I was delighted to hear what he had to say and I am very supportive of it. It will be no surprise to the Minister to hear that I am more closely in tune with what was said by my noble friends Lord Higgins, Lord Freeman and Lady Carnegy of Lour. I listened with great interest to the exposition of the noble Lord, Lord Goodhart, and I am close to the views which he expressed to the House.

The working families' tax credit will initially be a tax credit administered by the Inland Revenue but from April 2000, for those employed it will be directly paid by employers through the pay packet while for the self-employed it will continue to be paid directly by the Inland Revenue. From a number of sources, including Treasury press releases, the family credit statistics quarterly review inquiry and noble Lords taking part in the debate, we have heard that family credit has been a success, with take-up on cases in excess of 70 per cent. and by expenditure in excess of 85 per cent. It has reached some 757,000 families at a cost to the Exchequer of £2.35 billion in 1997-98. The working families' tax credit is more generous than family credit. That is partially because of its higher income thresholds, with a gentler taper in its effect on incomes, and because of its more generous help with childcare costs. Consequently, the Treasury expects the numbers of families covered to increase from the 757,000 I have just mentioned to approximately 1.4 million at a cost of around £5 billion a year.

I should like to consider this tax credit against a number of criteria. For those in receipt of the credit for children, the threshold will range from £31,000 to between £37,000 and £38,000. Is that a sensible level at which to set it? My noble friend Lady Carnegy has already expressed concern on this point. Secondly, will the tax credit system work more efficiently than family credit? In other words, would it not have been better to build on to what was already there, even if that is anathema to the Benches opposite? Thirdly, will it be simpler to administer? Having listened carefully to the Minister, I have come to the conclusion that it will probably not be simpler to administer. I have already mentioned the fact that a good deal of money will be spent on the scheme. Will it be money well spent?

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If one of the objectives is to reduce welfare dependency, a threshold of between £31,000 and £37,000 or £38,000 (for a higher rate taxpayer), depending on whether one has, say, five children, seems at first sight to be somewhat generous. The noble Baroness, Lady Lockwood, asked why, as the Conservatives were in power for 18 years, they did not get round to integrating both systems. I should point out that the systems of collecting tax and giving benefits do not sit easily with each other. With the increases in basic credit and the under-11 child credit announced in the Budget, there will also be a danger of increasing welfare dependency, not reducing it. So I have some concerns about the level of the upper thresholds.

Will the new tax credit system work? Well here, I suppose, you need to revert back to the Government's task force report which claimed four major advantages over the now to be replaced family credit. They are: first, a tax credit will reduce the stigma associated with claiming in-work support; it will be more acceptable than social security benefits to most claimants; as it is paid through the wage packet it will emphasise the rewards of being in work rather than being on welfare; and it could help to lower marginal tax and benefit withdrawal rates. It remains to be seen whether those virtues of the new tax credit system will be achievable. Will it, as the Chancellor said in his Budget speech of March 1998, tackle the unemployment trap, ensuring that work will always,


    "pay more than benefits [ensuring] that the more you earn, the more you take home".--[Official Report, Commons, 17/3/98; col. 1105.]

The omens are not good. The Institute of Fiscal Studies stated:


    "There are ... significant incentives for second earners to leave employment altogether". That must be of some concern to us. The stigma associated with claiming support under the current system is not proven, as the Joseph Rowntree Foundation found in January 1998. Even Martin Taylor, who headed the Government's task force, admitted in his evidence to the Select Committee that,


    "as far as stigma goes, the hard and fast evidence in all these non financial and psychological matters is difficult to come by".

Then, unfortunately, there is the question of fraud. The Select Committee on Social Security expressed concern that not enough attention had been paid to this issue. Furthermore, the US system--and the Canadian system--upon which much of the UK tax credit system is significantly based suffers from fraud and certainly an explosion of costs, with spending in the US on its system increasing from 1.7 billion US dollars to 18 billion between 1986 and 1996. I was particularly interested to hear the noble Lord, Lord Goodhart, say that he expected that at some stage the tax credit system would have to be cut back because of its expense.

There is also the impact on the family. Under the family credit system, payment is made most frequently to the mother. The new tax credit system, with payment through the pay packet, is, as the TUC pointed out in its 1999 Budget submission,


    "likely to divert assistance away from the primary care giver in the family".

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    The noble Baroness, Lady Lockwood, asked the Minister to clarify this area of concern. So despite the increased numbers of families that may be reached, there is the curious side effect that those who need the money most--the mother and child--may well receive less.

So far the best that I have been able to say is that more families are likely to be eligible for cover through the new tax credit system and that it is a more generous system than was in place under family credit. But, paradoxically, as I have already mentioned, less financial help may reach those most in need at a greater cost with a knock-on impact on increasing welfare dependency without increasing the motivation to work.

So what about administration? From April 2000 this will be passed largely from the Inland Revenue to employers for those in employment, despite the fact that the Inland Revenue will calculate it. This will raise cash-flow issues as the employer funds the tax credit. There are also significant administrative problems as the tax credit system is linked to a 26-week cycle whereas PAYE is on a 52-week cycle. As we heard from the noble Lord, Lord Goodhart, the Bill makes no provision to ease cash-flow problems for employers, particularly small employers; and there is no mention in the Bill of assisting with the administration costs, the size of which sounded significant.

It is reasonable to say that, although there is much merit in the Government's intentions of which we on these Benches would be very supportive, the additional costs incurred on a cost-benefit analysis possibly do not add up.

I might be more positive if I did not consider the Bill to be thinly drafted. The noble Baroness, Lady Lockwood, said that complaints about having a new Bill in this area are misplaced because we have the opportunity to debate this important subject yet again. Unfortunately, we are debating it in the face of a very thin Bill, to be followed by secondary legislation through regulations which are not subject to parliamentary scrutiny. It already needed an amendment on Report in another place to include childcare benefits. That is a somewhat surprising omission given the Minister's assertion on the "Today" programme on 26th July 1998 that


    "the really important element for women is the presence of child care credits". Noble Lords probably listen to the programme if they get up at six o'clock in the morning.

In addition, I fear that the Government, as with many other financial proposals, are playing a game of poker with us, the taxpayers. The tax credit is counted as a tax cut although in fact it represents an increase in social security spending, which this Government were committed to cut.

I conclude by hoping, perhaps somewhat perversely from these Benches, that this tax credit will help to lever families out of the unemployment and poverty traps. I am sure that we on these Benches will help to improve the Bill in order to assist the Government in achieving that objective.

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It has already been mentioned once during this debate that this is a flagship Bill. Rather like American aircraft carriers, which are flagships, there is always an Achilles heel, a weakness in the construction. In the case of US Fleet carriers, apparently the Chinese have found, through the bibulous activities of a lieutenant commander in the US Navy, that their weakness lies in the thinness of the hulls at the level of the keel. I suggest that the weakness of this Bill lies at the keel. Unfortunately, the Government think that in many areas there are easy solutions. In this area, which is extraordinarily complex and in which there are many intractable problems associated with the unemployment and poverty traps, I fear that they may well have under-estimated the difficulties that lie ahead.

5.22 p.m.

Lord McNair: My Lords, this is indeed a highly technical Bill. I hope that I am being brave rather than foolish in venturing to take part in this Second Reading debate. I listened with great interest to the speech by my noble friend Lord Goodhart. I agree with the noble Lord, Lord Freeman, that it was not a long and boring speech. In fact it took up less time than the two preceding speeches. It was carefully detailed.

As noble Lords are well aware, I am not an expert in either tax law or social security as they are presently understood. In fact, I feel myself to be rather an ugly duckling on a lake full of swans in terms of the academic background and experience of other contributors.

I did say, "as presently understood". My main reason for joining in this debate is precisely on account of the complexity of the proposals in the Bill--not only the complexity of the proposals but the inevitable complexity of the administration of the proposals once they become law.

There is a fundamental law of engineering that, whenever you insert any control mechanism into a flow system, you lose a minimum of one-third of the energy throughput. So if you have, let us say, £1 million to distribute the control mechanism will "cost" £330,000. In the case of this Bill money is made available on the basis of, in the last resort, the legal sanctions described in Clause 9. So if you have some kind of test of entitlement, you have the cost of administration; the leakage from the system from evasion, or in this case non-entitlement; the cost of enforcing the legal sanction; and the cost of enforcing the financial penalties provided for under the clause.

My locus, if I can claim one, for joining in this debate is that I am chairman of the UNITAX Association. UNITAX is the mechanism of the resource economics proposition. Copies of the literature on resource economics have been circulating among several departments, including the Treasury. It is possible that Treasury officials had some sight of these proposals before the Budget.

UNITAX is a once-only tax on primary energy resources, which makes possible the huge simplification of the tax and benefits situation, which is the proposition's great advantage. If it was indeed studied

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by Treasury officials prior to the Budget, then perhaps I should own up to some responsibility for today's traffic jams.

It is of course widely accepted that a little knowledge is a dangerous thing, and I most sincerely hope that the Treasury, the Department of Social Security and all other relevant departments, will study the material and consider its possibilities and implications carefully so that, in time, by implementing the full package, they earn the gratitude as well as the brickbats of the people.

I realise that the Government are wedded to this further complexification of the tax and benefits system for the best of motives. I support and applaud those motives. But implementing the basic income provision of the resource economics proposition would cut through the Gordian knot which the Government are bent on tying even tighter in their laudable efforts to make life easier for those on low incomes, whether parents or the disabled.

I understand the Government are attempting to reward contribution rather than non-contribution, and in a sense that is how it should be. Resource economics offers a basic income for every citizen of £117 per week, derived from a resource tax, as I mentioned earlier. This Bill attempts the impossible. Resource economics and UNITAX achieve the otherwise impossible.

By giving every citizen of this country such a basic income as of right, non-selectively and without means test, and at the same time ending all direct taxation--yes, the figures work and the system does provide such a possibility--we should remove from the equation any possibility of discrimination between legally married and cohabiting couples with children. It would also end the awful cohabitation rule by treating each person over 16 as an individual in his or her own right. I call the cohabitation rule "awful" because its effect is to force couples who fear detection or wish to obey the rules but who, on very little money, are worse off as a couple to live apart. The basic income made possible by UNITAX has the opposite effect; it positively rewards cohabitation or marriage if that is the choice made by the couple concerned.

Finally, I ask the Minister to consider one of the points made by CARE, the Christian Action, Research and Education organisation. This point was raised by my honourable friend, Steve Webb, in another place. Like the DPTC, the WFTC aggregates a couple's income and savings to restrict the amount of credit. But unlike the DPTC, the WFTC does not give a larger credit to a couple. As a result of this "heads the Exchequer wins, tails the couples lose" approach, families headed by couples will lose out. That will result in some better-off families receiving more help than poorer families. The different treatment of two adult families under the WFTC and DPTC was raised during the Third Reading debate in another place, but the Minister did not provide an answer. I hope that the noble Baroness will do so at this stage.


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