The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud)
My Lords, I join the noble Lord, Lord Knight, and others in congratulating those noble Lords who have made maiden speeches today. I enjoyed all of them. The noble Lord, Lord Boateng, pointed out the importance of young people at risk and in care, with all the passion that we would have expected from him. The noble Baroness, Lady Donaghy, reminded us that poverty is a complex set of issues. My noble friend Lord Shipley’s focus was on reducing the number of children in poverty and trying to reinforce the cycle of aspiration. Finally but certainly not least, the noble Lord, Lord McFall, with his deserved reputation for calling the Government to account, gave us, and me in particular, fair warning of continuous scrutiny in the years to come. I await that with some trepidation.
I thank all noble Lords who have taken part in this debate. I thank the noble Lord, Lord McKenzie, in particular for giving us the opportunity to tackle the issue of poverty in Britain today. It is an issue close to my heart, and I know that that is shared widely in this Chamber.
The issue, as I have mentioned, is complex, so it is worth putting the impact of the Budget in context. Many of the measures in the emergency Budget were taken in the face of a potential eurozone economic crisis. This was a legacy that we inherited from the previous Administration, with borrowing forecast at a stunning £149 billion this year, the second largest in Europe. The Budget simply had to tackle borrowing and get that deficit down.
We are now on track to cut debt. The figure is £116 billion for next year and £89 billion for the year after. We will get the structural current deficit into balance by 2015-16, when borrowing will be down to £20 billion. Undoubtedly, reducing the national debt to stabilise our finances and get the economy back on track left us with some extremely tough choices. Those choices were made with some key principles in mind. We wanted to align efficiency and value for money with long overdue and much needed strategic reform. We wanted to protect the vulnerable and ensure that our reforms were made with fairness and responsibility uppermost in our minds. In this context, it is worth raising something that always puzzles me and puzzled me today when the noble Lord, Lord McKenzie, excoriated the measures. The previous Administration were also planning very large cuts. They were a little smaller than the ones that we have put through but they were large nevertheless. I am always puzzled by what exactly they would be, since every single measure that we have taken is wrong. However, the Opposition would have had to take at least three-quarters of them in their own programme.
The Budget measures revolve around three key objectives: to make work pay and reinforce responsible behaviour; to reform the welfare system to make it fairer, improve targeting and reinforce conditionality; and to protect the most vulnerable while tackling the deficit. As I said, underpinning the approach is a commitment to fairness. That is why we increased the personal allowance to boost rewards for work for low and middle-income people. As a result, around 23 million basic rate taxpayers will pay up to £170 a year less in tax in 2011-12 and 880,000 people will be taken out of income tax altogether. Wherever possible we have made sure that this is a fair and progressive Budget, tackling the deficit while maintaining the right balance between taxation and spending. Even though we had to make a tough choice on VAT to avoid even greater spending cuts, VAT on such everyday essentials as food and children’s clothing remains zero-rated.
At the same time, we wanted to use the Budget to reform our welfare system and make it fit for the 21st century. My right honourable colleague Iain Duncan Smith has talked extensively about the need for radical welfare reform. I know he will be grateful for the support of the noble Lord, Lord Haskel, for that today. Iain Duncan Smith has pointed out that reform is so urgently needed because so many people are left without incentives to work and abandoned on long-term benefits. That was a point also made by the noble Baroness, Lady Donaghy. Iain Duncan Smith is looking at how we can implement reforms through a far simpler benefits system, and concentrating absolutely on the huge social and economic advantages we will gain as a society if we can move to a more dynamic system that gets this right once and for all.
The case for urgent reform is clear. The welfare budget has spiralled out of control in recent years, rising in real terms from £63 billion in 1996-97 to £87 billion in 2009-10. That includes tax credits. The true cost of our welfare system is not measured purely by the increasing burden on the taxpayer, great though that is. The price of worklessness and welfare dependency is paid by the individual, their families and their children, who get trapped in a cycle of inter-generational poverty. To change that, we need a fundamental reappraisal of the benefits system. As the noble Lord, Lord Bilimoria, said, we need to support those who genuinely need help, but we do not need to put them in a benefits trap. We have already announced our proposals for a new work programme, and in the near future we will introduce key measures to reform and simplify the benefit system to make it fit for the 21st century.
Housing benefit was mentioned by several noble Lords, particularly the noble Lords, Lord McKenzie and Lord Knight. The housing benefit reforms are an excellent example of how we have aimed to balance much needed and long overdue reform with fairness and value for money. In real terms, the cost of working- age housing benefit has jumped by £5 billion in five years, and was projected to reach £21 billion in 2014-15. In his excellent speech, the noble Lord, Lord Best, talked about the cuts in housing benefit. I emphasise that we are not talking about absolute cuts in housing benefit, even in real terms. We have put brakes on the sledge as we go down the run. All we are doing in practice is reducing the £21 billion figure by £1.8 billion. According to the projected forecast, it will still go up by £3 billion in the next four years. However, cost is not the only problem. The scale of these payments has meant that housing benefit has become a disincentive to move into work and has created distortions in the social rented market.
The figures show that 75,000 people get more than £10,000 a year in housing benefit and that some—admittedly, a small number—get more than £100,000 a year, which means that housing benefit is often unfair as some hardworking people could not hope to afford the properties available to some people on housing benefit. It is interesting to note that recent reports in the press indicate that many people agree that the system needs a major shake-up. That is why we have capped local housing allowance levels to the rate for four-bedroom properties, introduced size restrictions to the social rented sector, and changed the percentile of market rents for local housing allowance rates from 50 per cent to 30 per cent. These changes are vital and will reset the balance, making housing benefit fairer and creating reasonable incentives for people to move into work. Tomorrow we will publish the impact assessment on housing benefit so that everyone can see exactly how these reforms will work in practice. I thank the noble Lord, Lord Best, for his recommendations, which we will take back and consider.
As I said, we have had to make very tough choices in order to tackle the deficit, but at the same time our overarching concern is to protect the most vulnerable. That is why many of the measures are progressive, including tax credit reforms that target support away from the better-off and towards lower-income families by increasing the child tax credit.
I pick up the point made by the noble Baroness, Lady Jones, on the freezing of child benefit. That impact is redressed for the poorest by the move on child tax credit. The Budget package recycles £1.2 billion of savings back into child tax credit next year, and £1.84 billion in 2012-13, offering enhanced support to poorer children and families. As a result, the child element of the child tax credit will be increased by £150 next year and by £60 in 2012-13, above the level of indexation. I should also point out that the Budget package has no statistically significant impact on child poverty over the next two years.
I should add something on which I assured the House on 15 June; we are committed to our goal of eradicating child poverty by 2020, and the Prime Minister has asked Frank Field to lead a review on poverty. I hope that that addresses the concerns raised by the noble Baroness, Lady Jones, and the noble Lord, Lord McFall.
The reforms to disability living allowance rebalance our support for the most severely disabled people to ensure that their needs are better met. We remain absolutely committed to supporting those with severe disabilities so that they can live with dignity and independence in their own homes. However, costs have ballooned to £12.1 billion, with the number of claimants increasing by more than half a million in just five years. This suggests that some laxity has crept into the system, which is why we have taken the decision to introduce a new DLA assessment from 2013. This will ensure that the system is fair and that properly targeted support is available for those who need it.
We are applying the same principled approach to reform to benefit pensioners, too, so that older people can enjoy dignity and security in old age. The legacy that we have inherited includes 1.8 million pensioners living in poverty—nearly one in six. We aim to remedy that situation in the long term and encourage people to save responsibly for their future. That is one of our key goals for long-term reform, but we have to be fair and sensitive to the needs of those already in or nearing retirement. This is important, because while we have the levers to tackle dependency and poverty at working age and in an intelligent way, we have to recognise that tackling poverty beyond retirement age is an entirely different proposition. That is why we are doing more to protect pensioners, and why the Government have committed to restoring the earnings link with the basic state pension from April next year with a triple guarantee. This means that pensions will be raised in line with earnings, prices, or by 2.5 per cent—whichever is higher. That is a good start. In reality it is rather better, because we have paid for the unfounded 1.5 per cent clawback that the previous Government left for us when we arrived—a £300 million hole in this year’s DWP budget.
I appreciate the issue raised about using the CPI rather than the RPI, but, as has been pointed out, the CPI is the standard measure used by government and in many cases most accurately reflects the costs borne by pensioners. Let us not forget that pensioners can continue to rely on housing benefit and council tax benefit, as well as benefit from our decision to keep winter fuel payments, bus passes and TV licences. However, the Government are well aware of the need to keep driving reform to ensure that we have a simple, coherent and sustainable pension system.
I have very little time to deal with the many interesting questions asked, although I think that I have dealt with the majority. However, perhaps I may pick up the point about the economy and the pace of fiscal consolidation, which was raised by, among others, the noble Lords, Lord Haskel and Lord Watson. The fiscal challenge in the UK is, by some measures, more serious than in any other advanced economy. That is why consolidation will support recovery, underpinning private sector confidence and creating the space for business to grow. In particular, it will reduce the burden of public sector debt and the effect of interest payments, which, if they get out of hand and we lose the confidence of the markets, will tend to have a significant depressive effect. It is almost a race between those two factors.
The noble Lords, Lord McKenzie and Lord Haskel, talked about the VAT rise, saying that it was regressive. The Institute for Fiscal Studies, which has been much quoted today, has said that total expenditure is arguably a better guide to lifetime living standards, as households smooth their expenditure over their lifetime. Therefore, analysis by expenditure, rather than income level, is a better measure of the impact of the VAT increase and, on this basis at least, the VAT increase is progressive.
A number of noble Lords argued that the poorest families will bear the biggest burden. The noble Lords, Lord Watson and Lord Boateng, and the noble Baroness, Lady Jones, made that point. This is a progressive Budget, with every part of society contributing to dealing with the deficit, but the rich are paying more than the poorest. There is a handful of questions that I do not have time to deal with, but I shall of course write to noble Lords to pick up those points.
In conclusion, we live in a wealthy country, yet more than one in four working-age adults do not work, 5 million people are trapped on benefits, 1.4 million people have been receiving out-of-work benefits for nine out of the past 10 years, and a higher proportion of children—2 million of them—grow up in workless households than in almost any other country in Europe. That is why the measures that we introduced in the Budget could not just be about getting the deficit down; they also had to form an integral part of the long-term reforms that Britain needs to reinvigorate the economy and tackle poverty—not just the symptoms of poverty but the causes, too. Our welfare and pension measures, combined with our plans to support private sector job creation and reduce the impact of the proposed jobs tax, will allow this country to move forward from the recession stronger, fitter and more resilient to take on the challenges of the future.