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23 Mar 2009 : Column GC149
Grand Committee
Monday, 23 March 2009.
Arrangement of Business
Announcement
3.30 pm
The Deputy Chairman of Committees (Lord Colwyn): I will start with the procedural statement. Before the Minister moves that the first statutory instrument be considered, I remind noble Lords that in the case of each statutory instrument, the Motion before the Committee is that the Committee do consider the statutory instrument in question. I make it clear that the Motion to approve the statutory instrument will be moved in the Chamber in the usual way.
Tax Credits Up-rating Regulations 2009
Copy of the Regulation
7th Report from JCSI
Considered in Grand Committee
Moved By Lord Davies of Oldham
That the Grand Committee do report to the House that it has considered the Tax Credits Up-rating Regulations 2009.
Lord Davies of Oldham:I shall speak also to the Guardian’s Allowance Up-rating Order 2009 and the Guardian’s Allowance Up-rating (Northern Ireland) Order 2009.
Tax credits, together with child benefit, deliver financial support to the vast majority of families with children in the UK and are vital in our commitment to tackle child poverty. I am pleased to introduce these regulations and orders, which increase certain elements and thresholds of tax credits and raise the guardian’s allowance. In my view, the regulations and orders are compatible with the European Convention on Human Rights.
First, I turn to the Tax Credits Up-rating Regulations 2009. Tax credits play a major role in ensuring that work pays and in tackling child poverty. Overall, nearly 6 million families containing nearly 10 million children are benefiting from tax credits. These regulations bring forward the Government’s commitment to increase the child element of the child tax credit by £25 above indexation in April 2010 to April 2009. Added to the existing commitment to uprate the child tax credit, this means that the child element will therefore increase by £75 above indexation to £2,235 from April 2009. Since its introduction in April 2003, this element will have increased by £790, benefiting 7.2 million children. From April 2009, a family with two children, with a single earner working full-time on the minimum wage, will receive around £10 extra in tax credits per week compared to the previous year. Other rates and thresholds are also increased by these regulations. The disabled element of child tax credit and also most of the other WTC elements increase in line with prices.
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I turn to the guardian’s allowance orders. These will increase in line with prices to £14.10 per week from April 2009. We normally debate these orders in conjunction with the child benefit orders. However, as the Committee will be aware, we debated these increases before Christmas, as the Government brought forward their commitment to increase child benefit to come into effect in January 2009, rather than in April. A family with two children will gain £24 from bringing forward the increase to child benefit.
With the increases introduced by these instruments, we will be delivering even more support next year. We remain committed to the Government’s goals on child poverty, and tax credits will remain a key part of this. As a result of all changes to the personal tax and benefit system since 1997, families with children in the poorest fifth of the population will be £4,400 a year better off. I commend these regulations and orders to the Committee.
Baroness Noakes: I thank the Minister for introducing the orders, which we look forward to each year. The orders are not themselves controversial, but as the Minister knows, he never gets away with quite an easy ride as finishing at that point. I have three issues to raise with him.
First, there is uprating for inflation. I am well aware that tax credits are not uprated by inflation but there is a requirement for the Treasury to review tax credits each year in line with the general level of prices and to publish the result of that review, which it has done. The Treasury decides which general level of prices to use; I understand that it uses the RPI—at least, it has used 5 per cent in its calculations in the document attached to the Explanatory Memorandum. Perhaps the Minister will confirm that.
With social security benefits that are income related, the Treasury uses the Rossi index; generally, it is lower than the RPI but last year it was higher. Tax credits are in effect income-related benefits. Why does the Treasury use the RPI rather than Rossi as its baseline for general prices; what is the logic of that? Linked to that, will the Minister comment on deflation? Tomorrow, we expect the RPI to go negative; doubtless Rossi will follow in due course. I do not ask the Minister to forecast the path of the RPI. Most commentators believe that when we get round to this autumn’s numbers, which will be used to drive a number of benefits, we will have a fall of as much as 4 or 5 per cent in the level of the RPI. Will the Minister set out the Government’s policy to items such as tax credits when we hit a period of falling prices? Will they leave tax credits the same in nominal terms, which would imply a significant real increase, or will they consider reducing the nominal amount to recognise the fall in price level?
The second issue concerns the impact of tax credits on the Government’s child poverty targets—we have debated that and the Minister referred to it. When the tax credit changes were announced in the last PBR, it was claimed that there was no additional contribution to the child poverty targets because the reduction in the number of children in poverty was measured from the 2007 Budget and did not change between the Budget of 2008 and the PBR of 2008. The PBR was a sort of standstill in terms of child poverty. The Government
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The latest research from the Joseph Rowntree Foundation and the Institute for Fiscal Studies shows that the number of children in poverty with parents in work has risen as a percentage of all children in poverty and that more than half of all children in poverty are now in families with working parents. That suggests that the tax credit programme as opposed to the benefits system is failing to have any real impact on the child poverty figures. It also shows that the Government have failed to create an environment in which work lifts families out of poverty. We firmly believe that in the long run work is the only viable route out of poverty and we thought that the Government shared that view. However, the statistics suggest that the Government’s policies are running in the opposite direction.
Will the Minister update the Committee on the Government’s approach to halving child poverty by 2010? That target does not look achievable. The Joseph Rowntree Foundation and the Institute for Fiscal Studies calculated recently that, using benefits or tax credits alone, it will cost £4.2 billion to achieve the 2010 target. I do not think we will be kidding ourselves that, in the context of the shaky finances we find in our country, the Government could even contemplate that scale of redistribution. So what will they do?
My third topic is the role of the Social Security Advisory Committee. I was pleased to see that during last year, the Treasury gave up its obstinate refusal to allow the SSAC to report publicly on its work on tax credits. Doubtless, that has something to do with the change of Chancellor, but, whatever the reason, the decision is welcome. Somewhat later than expected, a revised memorandum of understanding was entered into in January of this year. The SSAC’s reports on tax credits should now be made publicly, but we do not have a report before us to assist in our consideration of these orders. Was the SSAC given those draft orders for comment and has it raised any issues? If so, why is there no report in the public domain?
Lord Oakeshott of Seagrove Bay: Like those of the noble Baroness, Lady Noakes, our questions and comments focus on the appropriate index for uprating and the outlook for inflation on the one hand and the affordability and complexity of child credits on the other. On the indices, people perhaps do not realise that retail prices are already clearly falling. Because we are mesmerised in this country by looking just at the 12-month rate, unlike a lot of professionals in the market who look at all sorts of indices including three-month rolling figures, the retail price index has already fallen by 3.8 per cent over the past four months and clearly has a good deal further to fall. Deflation has well and truly arrived.
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In particular, what will happen next year to these upratings? For what it is worth, my central forecast is that money GDP over the next year will fall by 10 per cent; that is, a 5 per cent real fall in economic activity and a 5 per cent fall in prices. As the noble Baroness said, it is very much common ground among all serious commentators that we are looking at a period of falling prices. Can we have a categorical assurance that however fast prices fall over the next year, benefits will not be cut?
As regards whether or not the policy instrument is working, do the Government not see that tax credits are not getting through to the people who need them? They are far too complex, and there is too much error and fraud. In addition, too much is going to people who do not need them at all, particularly to those who are well up the income scale with family incomes of as much as £50,000 a year. Is that really a priority for public expenditure in today’s recession and these difficult economic times?
Clearly, the Government are failing abysmally on the child poverty target. Does the Minister recognise—the noble Baroness did not mention this—that this is a relative target? The Government have failed partly because of the rapid increase, under them, of incomes at the top end of the income scale. When will the Government do something about excessive greed and rapidly rising incomes at the top? Unlike the Conservatives, we on these Benches do not think that giving tax breaks for dead double millionaires through inheritance tax is either affordable or sensible in a recession. That sort of policy will only make the achievement of the child poverty target much harder. It is a relative target, which depends on relative incomes. Do the Government recognise and will they face up to that fact?
Lord Jones: I thank my noble friend for his cogent and helpful explanation of the regulations. Hard-pressed families really do need every possible help. The Government have done good things for families and I should like them to have greater credit. Paragraph 10.2 of the Explanatory Memorandum refers to a considerable sum, which must be important to families in a time of serious recession and domestic financial strain. So today’s news has to be welcomed. Can the Minister indicate by how much cash the payment has been increased since the payments were introduced some years ago?
In paragraph 7.2 of the Explanatory Memorandum on the guardian’s allowance, the uprating is indicated. Again, will the Minister state what the original first-time payment was? This allowance seems to be very helpful indeed to families, particularly to children. I am looking to see by how much Her Majesty’s Government have increased the benefit since it was introduced, because the credit and the allowances are very important in today’s circumstances.
3.45 pm
Lord Davies of Oldham: I am grateful to noble Lords who have spoken on the order for the succinct way in which they presented their enormous questions. I shall be involved in a rather less succinct reply if I am not careful, although I am not sure that the noble
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On the question of which index we use, tax credits are part of the tax system, and we use the same indexation measure as other parts of the tax system, namely the RPI. Income tax allowances and rate bands are increased every September by the September RPI each year, unless Parliament determines otherwise. Child benefit uses this RPI because that is the uprating used for other non-income related social security benefits. There is a problem with Rossi because, as the noble Baroness says, it would produce rather different figures. At present and in the immediate future, Rossi excludes housing elements, which is appropriate for benefits such as housing benefit and council tax benefit, which are aimed to support housing costs. It is not appropriate for tax credits, which is a further reason why we should use RPI. There is nothing new in that.
The noble Baroness suggested that we have been very limited in our onslaught on the challenging issue of child poverty, as did the noble Lord, Lord Oakeshott, who was not overly complimentary about the Government’s progress thus far. I understand that it is the function of the opposition parties to indicate their ambitions, should office ever arrive for the Liberal party or, even less likely, for the Conservative Party, when they would have to translate such ambitions into action and face up to issues in somewhat different terms than merely asking questions.
It is clear that in the PBR 2008 we recognise the need for help now, as far as low-income families are concerned. Low-income families and children will benefit not only from these upratings but from wider measures on personal taxation and VAT. I know that the party of the noble Baroness in particular—I am not sure that the Liberal party was that far behind—was somewhat scathing about the 5 per cent reduction in VAT.
Lord Oakeshott of Seagrove Bay: Actually, we were the first to be scathing.
Lord Davies of Oldham: In which case I withdraw that remark and offer the noble Lord my apologies. It is nice to know that he is on the side of the angels—
Baroness Noakes: Could the Minister remind me of when the Government reduced VAT by 5 per cent?
Lord Davies of Oldham: What I seek to emphasise is that we had been concerned to introduce the lower VAT rate because we are all well aware that VAT disproportionately affects lower income families. They will have benefited from our position on VAT. We are going to introduce a range of changes over the next few months, but the noble Baroness is right to say that
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More important is that the noble Baroness’s question is fundamentally important. It involves Budget judgments for which we have to wait only a matter of three to four weeks before they are delivered. Those judgments will need to evaluate a situation which has been transformed since last year, and of course will set out the Government’s forecasts and plans on uprating. However, she will rejoice in one factor, and that is that a negative RPI means that even if uprating did not take place, a negative RPI would be an advantage for families because of the consequent drop in the cost of living. Although we have a range of monumental problems around the credit crunch and the recession to which the Budget must be addressed, one of the plus factors for families is that a move towards negative inflation—which the noble Lord, Lord Oakeshott, also predicted with finality and, I am sure, great accuracy—may change the lengths to which their existing incomes will actually stretch. However, the noble Baroness will be the first to recognise that a debate on the financial situation and macroeconomic policy is a little beyond the range of this Committee and marginally above the pay grade of the Minister replying to this debate on child benefits.
In response to the more general points, I recognise the anxieties expressed about the 2010 target. The noble Lord, Lord Oakeshott, followed the noble Baroness in upbraiding the Government on it. The target was always an ambitious one and in difficult times it will prove to be even more so, but since 2007 we are expecting to have lifted around a further 500,000 children out of poverty, while before that year we had lifted 600,000. We recognise that the target we set for 2010 is yet to be attained and that there are real challenges attached to it, but I am absolutely confident that my noble friend Lord Jones will give the Government full credit for their achievements thus far in lifting children out of poverty through child tax credits and other related measures.
There has been substantial investment in tackling this issue, which we are sustaining. Prevention is at least as important as cure in the form of support. The problem with prevention is that in a period of savage decline in the global economy and the increase in unemployment in all advanced countries, including the United Kingdom, extra burdens will be placed on the Government in terms of giving help to those in very real need. Changes will be introduced over the coming months. We have proven our commitment thus far to achieving our ambition of removing child poverty and to the targets for 2010 and 2020. However, in these difficult economic circumstances, I do not underestimate the fact that those targets will become even more difficult to achieve. However, on the broader
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As regards the rise in tax credits over time, the guaranteed minimum income—my noble friend asked about this—for a working couple without children has risen by 52 per cent in real terms since 1999 from £117 per week to £232 per week as a result of consistent increases to the national minimum wage and to the working tax credit. I am sure that my noble friend will recognise the value of those changes.
Lord Jones: I am grateful to my noble friend for those comments. The record and the increase are very good. However, I should like the appropriate arm of Government to promulgate these successes a little more effectively than has been the case previously—not that I direct that friendly criticism at my noble friend.
Lord Davies of Oldham: That is kind of my noble friend. He interrupted me as I was in full flow, extolling the virtues of the Government’s achievements. As a result of all changes to direct tax and benefit since 1997, by October of this year, families will be on average £2,100 a year better off in real terms, and families with children in the poorest fifth of the population will be on average £4,400 a year better off, which shows where we have directed our priorities in terms of tackling child poverty and helping poorer-off families. I accept my noble friend’s congratulations on behalf of the Government. I am with him on the necessity of sustaining this progress as far as we can. I beg to move.
Lord Oakeshott of Seagrove Bay: I am sorry if I missed this point in the noble Lord’s reply, but will he answer my simple question on whether benefits such as these will be cut if inflation is negative over the next year? If he cannot give that assurance, it will be very worrying for many people who rely on these benefits.
Lord Davies of Oldham: As I indicated, we shall have to wait a month to hear the Chancellor set out in the Budget the Government’s broader strategy on managing the economy. The noble Lord would be the first to emphasise that we live in greatly changed times. However, he will appreciate that it is clear from the regulations that we are committed to this year’s increases, but that decisions have not yet been taken for the future. I emphasise that a falling index is an unparalleled feature in his and my lifetime. I am a few years older than the noble Lord and I cannot remember a falling index.
Lord Oakeshott of Seagrove Bay: I think that there was one briefly in 1961.
Lord Davies of Oldham: Certainly this one will be more protracted. It is expected that the Government and wider society will have to respond to it in very different ways than was the case with the incident to which the noble Lord refers. In fact, we have to go back to the 1930s before we see parallel circumstances. However, that debate is a little wide of today’s regulations and I shall resist the temptation to enter it, although the noble Baroness might provoke me to do so.
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Baroness Noakes: I was merely going to ask the Minister if he had any comments on the Social Security Advisory Committee. I welcomed its involvement on a non-confidential basis and asked why we did not have anything before us to assist the Committee in consideration of the orders.
Lord Davies of Oldham: I apologise to the noble Baroness; she asked that specific question and I failed to answer it although I had a note on it. We do not consult the SSAC on uprating orders because they are an annual occurrence. That allows both Houses to debate these increases in detail, as we have the opportunity to do today. That is a standard convention, which all Governments have followed. We have not consulted on this; after all, we consult the bodies that matter—the two Houses of Parliament.
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