Working Tax Credits

Wednesday 30th November 2011 Westminster Hall

16:12

[Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)]

It is a pleasure to have been able to secure a debate on which I have been trying to be successful in the ballot for some time. It is a pleasure to serve under your chairmanship, Mr. Robertson, and to welcome the Minister to her relatively new job. I warmly congratulate her on it. She is surely further proof that all the best parliamentary careers begin in the Whips Office.

I am pleased to see a number of other hon. Members present. Several changes have been announced to working tax credit, not least those yesterday in the autumn statement. I will try to accommodate any colleagues who might wish to highlight their concerns or those of their constituents. For my part, in the time available, I want to discuss the changes to working tax credit that were announced in the spending review in October 2010. Specifically, from April 2012, the total weekly hours that a couple with children need to work in order to qualify for working tax credit will go up from 16 to 24, with one partner needing to work at least 16 hours a week. At present, couples whose annual income is less than about £17,700 a year qualify for tax credit if at least one of the couple works 16 hours a week. I want to talk about what these changes will mean for working families, how many of those families will be affected and what it will mean for couples where one partner has caring responsibilities.

[Ann Coffey (Stockport) (Lab)]

I congratulate my hon. Friend on getting this important debate. We are all sorry that it is not longer.

My hon. Friend might be interested to know that I recently sent out a survey to find out about the child care arrangements of parents in my constituency. Interestingly, a number of grandparents replied; they all made the similar point that, without the free child care that they provided, parents would be facing mounting debts because of the squeeze on their family incomes and long-term financial problems. Does he agree that the Government have not properly thought through the cumulative affect of their policies on families?

[Jonathan Reynolds]

I agree with my hon. Friend. If we had had one of the longer slots for debate, perhaps we could have discussed in more detail the interaction between working tax credit, child tax credit and the child care allowance. The interconnection between them is crucial. I shall ask the Minister near the end of the debate what transitional arrangements could be considered for some of those who are most badly affected by the changes.

Working tax credit has played an important part in recent development of the welfare state. When working tax credit was introduced in 2003, it balanced the goal of eradicating child poverty with promoting work. It currently offers around £4,000 for families on lower incomes and aims to ensure that families will always be better off in work. Until it was introduced, too many families had complained that going out to work might leave them less well off financially. Working tax credit was introduced to ensure that work always paid. It did so much more. Encouraging people back into work concerns more than just the contents of their pay packet. Work is about skills.

[Bill Esterson (Sefton Central) (Lab)]

My hon. Friend has done well to secure this debate. He is talking about the difficulties of getting into work. This is particularly true for part-time staff. The change in the threshold from 16 to 24 hours is of great concern to people in my constituency, particularly those in the retail sector, where shifts will not be available because of the dire economic situation we face. Those people are among the 200,000 families who potentially will lose up to £4,000. This measure could force families back on to benefit and out of work. Surely this is not the right way to proceed.

[Jonathan Reynolds]

I agree with my hon. Friend. It is specifically the impact on people working in, for instance, the retail sector that has prompted me to apply for this debate. I am sure that my hon. Friend and I agree that we do not want to see anything that makes it potentially less attractive for people to go out to work.

Couples and single parents who currently work for at least 16 hours a week are eligible for working tax credit. According to the Government’s proposals, from April couples will have to work an extra eight hours in order to qualify. Failure to secure additional work will exempt claimants from the credit completely. The reality is that about 280,000 families in receipt of working tax credit currently work less than 24 hours a week. Under the proposals, they could lose up to £4,000 a year.

[Stephen Timms (East Ham) (Lab)]

This is a very important point. Will my hon. Friend confirm that they will lose not only their working tax credit, as he said, but their child care tax credits if they use child care, as many will? They could lose another couple of thousand pounds there.

[Jonathan Reynolds]

Absolutely. They stand to lose even more when child care is taken into consideration. There is an internal tension between the Government’s stated ambition on universal credit and these actions. It would be interesting to hear the Minister’s views on how those two aspects interplay.

[Mr Andrew Smith (Oxford East) (Lab)]

I join the chorus of congratulations extended to my hon. Friend. I hope that he gets time to make some points between interventions.

Does my hon. Friend agree that this represents an incredible retreat from, and abandonment of, the historic pledge by the previous Government to eradicate child poverty within a generation? Will this not have the opposite effect, in terms of the welfare to work agenda—perversely forcing some people to go back on to benefit because of all the losses they will suffer, as hon. Members have said?

[Jonathan Reynolds]

Indeed. A family currently on £18,000 a year could lose £4,000, which is a huge loss. It will, as I understand it, push as many as half a million children back below the poverty line.

The Minister may say to me that the simple solution is for claimants to work an additional eight hours. For some people in receipt of working tax credit, the demands of caring, child care or limited health may make it difficult for them to work those additional hours. These changes make no allowance for that.

I was first alerted to the scope of this issue when I was contacted by a resident in my constituency who was hit by a car 11 years ago. He was previously employed as a printer and would routinely work 12-hour shifts a day for his family. He has not been able to work since the accident and needs some degree of care. His wife, as well as caring for her husband and their young daughter, works 17 hours a week in a before and after school club. She cannot increase her hours at the school because the club runs only for those 17 hours a week. With the caring responsibilities for her husband and daughter, she would struggle to find a second job with sufficiently flexible hours. The money they receive though working tax credit makes a real difference. Under the Government’s plan they would lose it.

I acknowledge that, rightly, the Government do not plan to increase the hours of work required by single parents, in recognition of the additional pressures they face. However, they also need to consider the impact that these changes will have on families where one member is disabled, or one member has a caring responsibility, or both. They should urgently consider whether additional exemptions should be applied. Indeed, I put a range of parliamentary questions over the past six months to the Exchequer Secretary, to try to ascertain how many of the 280,000 couples that this will affect have a partner with caring responsibilities or a disability, and to get a more detailed breakdown. However, the Government could not provide much of that information, and what they could provide was extremely limited.

As I have said, the promotion of work is at the heart of the working tax credit scheme. The principle of asking people to take on work to qualify for working tax credits is a positive one. But if the amount of work we require is unrealistic, it will hurt rather than help some of the most vulnerable people in our society.

[Cathy Jamieson (Kilmarnock and Loudoun) (Lab/Co-op)]

I thank my hon. Friend for giving way and for securing this debate. I am sure he will be aware of this, but will he comment on the point made by the trade union USDAW that 78% of the couples it has surveyed who work between 16 and 24 hours say that there is no way in which they could increase their working hours, and that the retail sector is particularly squeezed at present, meaning that overtime that may have been guaranteed in the run-up to Christmas in previous years is no longer available ?

[Jonathan Reynolds]

Absolutely, and I am very grateful to USDAW for its support in giving me research and case studies relevant to this debate, because these proposed changes will particularly impact on the retail and service sectors, where there is a prevalence of part-time work. They are rightly concerned about the impact it will have on their members. I have seen their tax credits survey, which suggests that 79% of their members who receive working tax credit would not be able to secure additional hours from their employers before next April. Indeed, they have already talked to members who have repeatedly tried to secure extra hours from their employers, but been told that the work is not available. Where additional hours are available they are often late at night or very early in the morning. The lack of public transport means that members cannot take them.

An added complication is that there is often a mismatch in the retail sector between the hours staff are contracted to work and the hours they actually work. In recent years there has been a trend for retailers to cut the hours staff are contracted to work, with an expectation that they will work longer, additional hours at busy periods. That means that under the proposed changes couples actually working more than the 24 hours that makes them eligible for working tax credit might not get it because not all of their hours are contracted.

I put it to the Minister that that would be completely unconscionable, and I respectfully request that she address this point when she responds to me later in the debate.

I do not yet believe that the full impact of these changes has been considered or identified by the Government. The Government claim they are still committed to ending child poverty, but this is a measure that has the potential to push many families well below the poverty line. It is a regressive step that will concern many Members.

I would hope that the withdrawal of working tax credit from those who could not secure additional work would not prompt a return to the old idea that work will not pay. But that is the risk, and that would be the tragedy, not only for the employees concerned but for the parts of industries that rely on a flexible work force willing to work just a few hours a week.

In these tough economic times I would rather that the Government reviewed their plans, but I do not think that they will do that. Instead, may I implore them to do two things? I ask them, first, to exempt couples where one partner is either disabled or a carer from these changes; and, secondly, to increase awareness of the change among employers and employees, to ensure that they have the best chance of working together so that they can fulfil the requirements for eligibility for working tax credit payments. In addition, if these changes are to go ahead, will the Minister consider what help the Government can give to the most badly affected couples in terms of transitional arrangements?

This change will impact on the lives of many thousands of struggling families, many of whom are my constituents, and I am extremely grateful to be able to highlight this matter before the House this afternoon.

16:23

[The Economic Secretary to the Treasury (Miss Chloe Smith)]

First, may I congratulate the hon. Member for Stalybridge and Hyde (Jonathan Reynolds) on securing this debate, and thank him for his kind words about my role at the beginning of his comments? He has asked me a number of specific questions, which I shall be happy to address. In addition, I would like briefly to set out the various reforms to tax credits. I will talk a little about child poverty and, of course, about work incentives, before addressing fully his main point about the 16 to 24 hours change.

[Bill Esterson]

In her reply, will the Minister deal with the central issue of fairness? Does she think that targeting the poorest families by cutting tax credits is a fair approach as a deficit reduction measure, or does she think that this is wrong, and that the Government should target the bankers?

[Miss Smith]

I will happily tackle that. In fact, the hon. Gentleman brings me straight to the main point with which I must preface my comments, which is that we are in a very difficult position, economically speaking. That cannot have escaped the attention of anybody sitting here, least of all the right hon. Member for East Ham (Stephen Timms), who I know is very alive to all such matters. However, the fact is that when faced with a very difficult economic situation, we have to make very difficult choices. We must be mindful of the fact that to leave the country struggling under an enormous debt burden does not help anybody; normal working households would not thank us for failing to deal with that situation. So that is one view of fairness to which I shall return throughout my speech.

[Mr Andrew Smith]

I am very grateful to the Minister for giving way. If we accept for a moment the premise of her argument—tough times, difficult choices—is it not all the more important to have the closest regard to fairness, the point that my hon. Friend the Member for Sefton Central (Bill Esterson) was making? How can it be fair to target these working people in the way the Government are doing?

[Miss Smith]

I am unsure from his comments whether the right hon. Gentleman accepts the premise that we are in difficult economic times. I do not know which parallel universe he is living in, but if he is in the same one as I am, he will know that, yes, of course we must do what we do as fairly as possible. He will also know that our bank levy is raising more every year than his party raised in one year, and with that I shall, I hope, lay that topic to rest, unless the hon. Lady would like to take it further.

[Debbie Abrahams (Oldham East and Saddleworth) (Lab)]

Would the Minister confirm that 100,000 extra children will be pushed into poverty as a result of the reduction in working tax credit that was announced yesterday? Will she confirm that that was what the OBR says the additional number of children in poverty will be?

[Miss Smith]

I can confirm that that figure relates to the measures of child poverty as set out by the Child Poverty Act 2010 and by the current debate. No doubt, the hon. Member for Stockport (Ann Coffey) is already rubbing her fingers with glee about that. I will come on to that in my comments as well. I wish to introduce the idea that we need to move on to tackling the causes of poverty rather than the statistical method of counting poverty.

[Mrs Sharon Hodgson (Washington and Sunderland West) (Lab)]

As we realised from the autumn statement yesterday, the Chancellor seems quite fond of giving with one hand and taking away with the other. We can see what has been taken away: up to £4,000 from these families. Is there anything that these families will get in return that would help to fulfil the Government’s promise that they would be the most family-friendly Government in history? From what we have heard today so far, there is not, but could the Minister enlighten us?

[Miss Smith]

I thank the hon. Lady very much for her consideration in the sequencing of interventions and I will come on to exactly that point.

I will continue to speak briefly about the high level need for action which drove yesterday’s announcements. As hon. Members will know, the UK economy is recovering from the biggest financial crisis in generations. June 2010’s Budget set out the Government’s plans to reduce the deficit and rebuild the economy. However, since then—and this is the crucial point from yesterday’s analysis which accompanied the OBR’s figures, and both must be taken together in my view—the UK economy has been hit by a number of shocks. The OBR names three: first, higher than expected inflation, which the OBR calls an “external shock”; secondly, ongoing instability from the euro area crisis; and; thirdly, the full and permanent damage done by the 2008-09 financial crisis.

It is unwise not to recognise those three major factors. It is absolutely vital that we tackle our debts. It is absolutely vital that we react appropriately and wisely to the economic situation presented to us, and I think that households know that. No household would thank a Government who, instead of dealing responsibly with that situation, carried on spending, carried on borrowing and carried on racking up the debt to do so.

[Debbie Abrahams]

That still does not explain—to pick up a point one of my hon. Friends made—why the Government are choosing to punish honest, hard-working families instead of taxing bankers. It is about a four-times greater punishment in terms of taking away money from these families, compared to what the Government are taking away from bankers.

[Miss Smith]

Let me reiterate, first, the incontrovertible point that we are taking more from bankers every year than the Labour party did in one year of operation. Furthermore, I must point this out and, I hope, lay the matter to rest: the distributional allowances published alongside the autumn statement yesterday clearly indicated that it is the top 10% of the income band that is contributing.

Let me turn briefly to a summary of what was announced yesterday and previously. The Chancellor said that we will uprate the disability elements of tax credits in line with prices, and increase the child element of the child tax credit by £135 in line with inflation too. We will not, however, uprate the other elements of the working tax credit this coming year. Hon. Members have highlighted the fact that, given the size of the uprating this year, we will no longer go ahead with the planned additional £110 rise in the child element over and above inflation.

I must make a further comment, which is that of course the Government believe that the welfare system must remain fair and affordable while protecting the most vulnerable. We must also note within the figures I have just given that by April 2012 the child tax credit will have increased by £390 since last May, and that is of course per child.

A number of reforms to tax credits were announced in the June Budget and the spending review. The point is that the previous Government spent more than £150 billion on tax credits since 2003. This was unsustainable in many ways, and I will give an example before moving on. Under the previous system tax credits were available to families earning up to £58,000. If households had an increase in income of up to £25,000 in the year then they could have earned up to £83,000 and still benefited from tax credits. Taking on board the principles raised by hon. Members, that means to me that we had to act in a situation that appeared to be very unfair, in that people in the top income decile were eligible for tax credits. That is unjustifiable, unfair and very unsustainable in the current economic climate.

[Stephen Timms]

I know that the Minister was a member of the Welfare Reform Bill Committee, and so is very familiar with the advantages of universal credit set out to the Committee, which include it being available to people working just two, three or four hours a week. The Secretary of State for Work and Pensions frequently draws attention to that advantage, yet with this measure her Department is moving in the opposition direction by limiting the availability of tax credits only to those working more than 24 hours as a household. That is the opposite of what her right hon. Friend is doing.

[Miss Smith]

Regrettably, I thought that the right hon. Gentleman wanted to respond to why higher earners would have received tax credits under the previous system, but I will come to his point in the bulk of my comments.

[Jonathan Reynolds]

May I bring the Minister back to the specific move from 16 to 24 hours? The figures I have from the Treasury estimate that this change will save £380 million a year. Yes, that is a substantial sum, but the context is one of a Government now borrowing £158 billion more over this Parliament than they said they would just a year ago. If a family’s income goes from £18,000 a year to £14,000, based on this change, will they not feel some angst at a statement that focuses only on higher earners having their tax credits taken away and the wider economic impact? To go from £18,000 to £14,000 is a very big change for a family in my constituency.

[Miss Smith]

Let me move on to the change that the hon. Gentleman highlighted, which is the move from 16 to 24 hours. As he explained, under the current system couples with children can claim working tax credit if one partner works 16 hours a week. The hon. Gentleman will know that at the moment lone parents must also work at least 16 hours to qualify for the working tax credit. As he said, however, under the 2010 spending review, from April next year couples with children will have to work 24 hours between them, with at least one partner working 16. In response to the interventions made, this change makes the system fairer by reducing that disparity between couples and lone parents. I would not like to stand here to defend why those two groups should be treated differently. I can see the hon. Member for Stalybridge and Hyde twitching but I must move on in order to tackle two of the points he specifically asked me to address.

There are exemptions where couples may have a limited capability to work. That means that couples with children will continue to qualify for working tax credit where one member works at least 16 hours a week and that person is eligible for the working tax credit disability element. In addition, there will be an exemption for some couples with children where only one member works at least 16 hours a week and the other adult does not work, for example where one adult is incapacitated. A couple with children will continue to qualify for working tax credit at 16 hours if one partner is in receipt of disability living allowance.

Moving on to how else we can increase support for lower and middle income earners and improve the rewards to work. On work incentives, which I said I would cover, universal credit has already been mentioned and it is in that area—

[Cathy Jamieson]

I thank the Minister for giving way. Before she moves on to work incentives, will she address the point about low-paid workers who would find it difficult to get that extra eight hours to stay on the working tax credits, and who will potentially see their incomes drop from £18,000 to £14,000 in a year? What consideration has the Minister given to transitional arrangements or help for that particular group?

[Miss Smith]

The point I was about to make was that the introduction of universal credit is where the Government anticipate making the most major transitional arrangements, and I note the hon. Lady’s points—and those of other Members in earlier interventions—in particular in relation to retail sector work, for example. Everybody appreciates that the economic climate is hard at the moment—the ideal world is not out there for everybody. I take her point.

Moving on very briefly to the work incentives provided by the universal credit, the phrase has already been used that work must always pay and be seen to do so. One of the key features of universal credit—the hon. Lady will know this—is that it will be paid in and out of work, and that the hours rule will disappear to smooth the transition into work and ensure that that it pays.

[Stephen Timms]

The Minister’s Department is making the hours rule worse now. It will be better in the future; why is she doing the opposite in her Department?

[Miss Smith]

We need to move in one direction in this economy, which is to tackle the deficit. I made that point very strongly up front. We must also look to major reforms such as the universal credit, and perhaps before that the Work programme in some cases. There are a number of examples that I look forward to the Government delivering. I have given some; let me give some more that will also answer the points made about what people might get in return.

The Government are investing a further £380 million by 2014-15 to extend the offer of 15 hours of free education and care a week for disadvantaged two-year-olds, which will cover an extra 130,000 children. That is only one element of what the Government will do to help working families. Support has been focused on those on out-of-work benefits—this is a key point that I have no doubt the right hon. Member for East Ham will appreciate. They need greater protection against rising prices than people on working tax credit who are, of course, not solely reliant on this income; they also have income from work, which is key. I do, though, take the points made regarding the difficulty of getting a job in the palm of one’s hand before asking for it.

The Government, however, remains committed to making work pay. As the Chancellor made clear yesterday, the best way to help working people is by taking them out of tax altogether. In April 2012 we will make a £630 increase in the income tax personal allowance, taking it to £8,105. This is in addition to the £1,000 increase in April this year. Together, these increases will benefit 25 million individuals and take 1.1 million low-income individuals out of tax from April 2012.

As I started to articulate, there is then the reform to which I look forward. Universal credit will unify the complex current system of means-tested out-of-work benefits, tax credits and support for housing into one single payment. The award will be withdrawn at a single rate, with the aim of offering a smooth transition into work and encouraging progression into work.

For parents currently on working tax credit, and in the future, the Government continue to provide support for 70% of child care costs—I am conscious that hon. Members have mentioned child care today. That goes up to a weekly limit of £175 for families with one child and £300 for two or more children. Under the universal credit this support will be extended to those working fewer than 16 hours, which will allow 80,000 additional families to receive help with child care costs. That will give second earners and lone parents, typically women, a stronger incentive to work, and I am proud of all those measures.

I shall deal briefly with child poverty and the way in which the Government see it before concluding. Poverty is about more than income; it is about a lack of opportunity, aspiration and stability. We are keen to tackle its root causes, and ensure that children born in low-income families realise their full potential. I have suggested measures that will help, both in the short and long term, but policy in this area has been distorted by a preoccupation with counting the number of children below a certain line, rather than moving families over a real line, as opposed to an imaginary one.

[Jonathan Reynolds]

Surely, that is the purpose of working tax credits. As has been said, with universal credit, the Government are going in the opposite direction from the policy that the Minister is pursuing; it disincentives people who wish to go out to work, which goes against what she said about the wider impact and causes of poverty. Incentivising people to go into the workplace is the best solution, but this policy moves in completely the opposite direction.

[Miss Smith]

Indeed, we need to incentivise people to go into the workplace. However, we have less money than we thought, and we have less money than any previous Government cared to highlight. We have to prioritise who we spend that money on. I would rather give it to people who have no other source of work—in other words, those on out-of-work benefits, rather than those on in-work benefits. That is a sensible principle.

To conclude, the Government have had to take urgent action to tackle what is unsustainable in broader economic terms as well as an unsustainable Welfare Reform Bill. Spending on tax credits has increased from £18 billion in 2003-04 to an estimated £30 billion last year, which is unsustainable and unfair, given the examples that I have mentioned. If we look at the cumulative impact on households of tax, tax credits and benefit reforms introduced both yesterday and before, the top income decile sees the largest reduction in income, both in cash terms and as a percentage of net income. I will take no lectures from the Opposition on believing in more spending, more borrowing and more debt, spent unsustainably and spent unfairly across the income range. I do not think that any working household will thank them for that.