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Robert Halfon (Harlow) (Con)
It is a pleasure to serve under your chairmanship, Mr Robertson.
Tax cutting is as much about politics as about economics. Of course, the economics have to work too, but here is a statistic that should worry us: the Institute for Fiscal Studies and the Joseph Rowntree Foundation have shown that almost all the growth in household income since 2001 was wiped out by the financial crisis. At kitchen tables up and down Britain, it feels as though the last decade of growth simply did not happen.
It is hard for any Government to tackle that situation. Why? Partly because we—I am talking about the Conservative-led coalition—have allowed our political opponents to caricature tax cuts as measures that are only for our rich friends in the City, rather than a means of creating and sharing the wealth in society. Now, more than ever, we have to show that tax cutting is a moral creed that is about lifting workers on low incomes out of poverty and creating jobs for the unemployed. Hence my campaign to restore the starter rate of income tax at 10p, which was scrapped in 2008 by the last Government.
I believe that restoring the 10p rate would help the coalition to counter the war cry of its political opponents that it is only interested in cutting taxes for millionaires. It would prove to the public that “lower taxes for lower earners” is not just a soundbite but that it can be a reality, first by raising the threshold to £10,000 and then by bringing back the 10p rate for the lower-paid.
The Treasury has confirmed to me in a written answer that the move would cost around £7 billion a year, if it benefited everyone. Interestingly, the Chancellor told the House last year that the same amount of money was lost when Labour brought in the 50p rate of tax, and that has been confirmed by the IFS. I am arguing that when the top rate of tax falls to 45p the extra revenue that the Government say will be raised ought to be put towards restoring the 10p rate of income tax.
Not everyone agrees with my view. The campaign for a 10p tax rate has been opposed from the left, from the right and by our colleagues, the Liberal Democrats. Let me deal with each one in turn.
When Labour was in power, its main response to low wages was tax credits. The aim was a noble one—to help the poor—but the policy was flawed. For example, Dr Jamie Gough from Sheffield university recently told The Guardian:
“Tax credits enable employers to pay below a living wage, and thus subsidise their profits.”
Tax credits have also left the Department for Work and Pensions with a hugely complex system of overlapping handouts that taxes workers on low pay only to recycle the money back as benefits. Reporting on tax credits, the ombudsman has said:
“Many are unaware of them and DWP staff often fail to invite claims.”
The idea is fine in theory, but many people lose out in practice.
Other people take a gentler approach. The Living Wage Foundation has been asking employers to voluntarily pay £8.55 an hour in London. Again, that is a worthy aim, and perhaps larger corporates can afford it, but what about smaller firms and micro-businesses that cannot? I am a supporter of the minimum wage, but recently the Low Pay Commission warned against forcing it higher, because
“Firms may be reluctant to create jobs by recruiting inexperienced or young staff, because they are put off by the increased wage bill.”
John Stevenson (Carlisle) (Con)
I am grateful to my hon. Friend for giving way and for securing this debate on an important subject. Does he agree that linking the personal allowance with the minimum wage would be an excellent way to take everyone who is on the minimum wage out of income tax?
Robert Halfon
My hon. Friend has an interesting idea, which I would like to explore further, but I believe that the focus of all the resources that the Treasury has, which of course are not much, should be on restoring the 10p rate, for the reasons that I will go on to describe. I have argued that we need a solution for everyone, not just for the lucky few. That is why I was pleased to see Kevin Maguire in The Daily Mirror today supporting the 10p campaign.
Mr Andrew Smith (Oxford East) (Lab)
I congratulate the hon. Gentleman on securing this debate on an important subject. I want to take him back to the point that he was making about tax credits supposedly allowing employers to pay lower wages. Presumably the basis for that argument is that tax credits raise the take-home pay for the worker at no cost to the employer. However, why does he not employ the same argument to the tax reduction that he is advocating, which again will raise the take-home pay of workers? In a properly competitive labour market, would that not allow employers to pay less?
Robert Halfon
That is where the philosophical difference between the right hon. Gentleman and me lies; I believe that we need to move away from a handout society, in which people’s taxes are recycled to hand out to various groups, to a hand-back society, in which people are handed back their own money through the tax system.
Some people on the right, especially in the think-tank world, oppose the 10p tax rate on the grounds that it is not radical enough. They say that it might undermine the case for a flat tax in some future Parliament. The problem with that—again, as the IFS has set out—is that a flat tax would be deeply regressive and it would be hard to defend as fair. While that remains true, a flat tax is unlikely to happen.
For example, the IFS has shown that merging income tax and national insurance contributions to a flat rate would literally take from the poor and give to the rich, unless the state was shrunk to a size that is politically impossible. Where I agree with people on the right, and with thoughtful commentators such as Ryan Bourne from the Centre for Policy Studies, is that the Government must do much more to generate support for broader tax cuts. My point, however, is that surely the best way to achieve that is to show that tax cuts are moral—to use a Blairite phrase, “for the many and not the few”—and that they will help millions of hard-working people, not just millionaires.
Mr Jim Cunningham (Coventry South) (Lab)
I do not have any difficulty with the hon. Gentleman’s proposal that there should be a 10p tax rate; in fact, it was a Labour Government who actually introduced that rate. Regarding a living wage, which the hon. Gentleman alluded to, I understand that there are no proposals—certainly, they would not be put forward by Labour—to legislate for a living wage. It is a voluntary thing, and it is down to employers, in fact, to decide whether to pay it.
The hon. Gentleman also referred to the minimum wage. I can certainly remember in my constituency many years ago that under the previous Conservative Government there was—what was it called? I think that it was called a “family supplement”, or something, for people on low wages. On one occasion, which really led Labour to legislate for a minimum wage—
John Robertson (in the Chair)
Order. Will the hon. Gentleman finish his intervention?
Mr Cunningham
I will do in a minute. The fact was that in my constituency we had people on £1 an hour. As I say, I have no difficulties with the hon. Gentleman’s proposal, but whatever Government are in power, at the end of the day, the big threat is from the Exchequer. It is the Exchequer that will probably try to torpedo his proposal.
Robert Halfon
I thank the hon. Gentleman for his intervention. As I said before, I agree fundamentally with the minimum wage; it is a moral right that people are paid a certain wage, and I am glad that my party now supports that, but I have questions about the living wage. First, how do we set it? I believe that it puts enormous burdens on smaller businesses; the big multinationals will be able to deal with it. I do not want it to act as a disincentive to employment, and I believe that the burden of responsibility for the living wage should not be on businesses but on the Government: the Government should reduce taxation.
John Robertson (in the Chair)
I hope that the intervention will be shorter this time.
Mr Cunningham
Frankly, if it is voluntary, then it is not forced on small employers. It is the big employers who can pay it.
Robert Halfon
Of course, if businesses want to pay their employees a living wage, that is all well and good; I would be delighted at that and would have no problem with it whatever.
My hope is that once the threshold reaches £10,000, we will consider bringing back the 10p rate for the lower-paid. Some Liberal Democrats disagree; they have suggested that the best way to help families is to raise the personal allowance even further, to something like £12,500 a year. I absolutely agree the coalition should fulfil its £10,000 commitment, but it would be unwise to raise the personal allowance even further. Everyone should feel that they have a stake in the state, and they should have some stake in the tax system even if they pay only a small amount, because they need to realise that public services are not free and that there is no magic money tree. My fear is that the Liberal Democrats want to pay for their policy, which will cost £14 billion if applied to everyone, by dragging even more workers into the 40p band. That is what has happened historically. The problem is that we will soon have families with not very high wages paying a marginal rate of 40p, and that will include police officers, shop owners, managers and senior nurses in the national health service.
George Eustice (Camborne and Redruth) (Con)
That point goes right to the heart of my hon. Friend’s argument. The aim of this policy should be to encourage people on low incomes to take higher-paid work, to work longer hours and to start the transition up the income scale. That is why he is right that we need to introduce a 10p tax rate in the interim; otherwise, people will go straight from their tax-free allowance to being taxed on any income above that. Does he agree that, in an era where there is downward pressure on many benefits, some of which affects the working poor, the 10p tax rate could be a good counterbalance, so that people keep their income in the first place?
Robert Halfon
My hon. Friend is exactly right. What he is saying is that we will create a hand-back society, where we give people back their own money, rather than just a handout society, which recycles benefits through the tax system.
Taxing the people I describe at the 40p rate is a brake on aspiration, and it has hit single-worker families the hardest. We started this Parliament with about 3 million workers paying the 40p rate, and the number will be closer to 5 million by 2015. We should not add further to that figure, as my hon. Friend says. Restoring the 10p band is more affordable than raising the personal allowance to £12,500. Most low-income workers would still have a stake in the tax system, and it would avoid dragging more families into the 40p band. That is why I support it over the Liberal Democrat proposals.
The fundamental point is, as the Government say, that we lost £7 billion when the high tax rate went up to 50p. If we get more revenue from having a 45p tax rate, the moral thing to do will be to put those extra billions towards funding the 10p tax rate.
Of all the things the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown) did, the one that genuinely amazed me was that he scrapped the 10p band, given what the Labour party stood for. I accept that he introduced it in the first place, but when I watched him scrap it, I genuinely could not understand why he was doing it. Overnight, the change crushed working people with a £232 tax rise. Why should the Government not set themselves the goal of reversing that unpopular decision? There is a strong case for doing so. As I said, tax credits are flawed; small firms cannot afford the living wage; a flat tax is not going to happen and is unfair; we do not want to drag any more families into the 40p band; and everyone should have some stake in the tax system.
I suggest to my hon. Friend the Minister that the policy would be popular, that it would be a symbol of the Government’s economic mission and that it would help to tackle the desperate stagnation in incomes that Britain has suffered in the past 10 years.
Jim Shannon (Strangford) (DUP)
I congratulate the hon. Member for Harlow (Robert Halfon) on bringing this matter to the House for consideration. I want to give a Northern Ireland perspective and to discuss the importance of small and medium-sized businesses, particularly for my constituency, but also for constituencies across the rest of the United Kingdom.
Times are tough for many families throughout the UK. They face stagnating wages, coupled with rising costs. Many small businesses are struggling and cannot afford annual pay rises. The question in many families is, is it better to be in or out of work? The cold reality of the market out there has pressed many of them to make a decision about that.
The Government have shown that they are attempting to address the situation through the uplift of the personal allowance threshold. That should mean that approximately 250,000 workers on low pay no longer have to pay income tax, which has to be good news. The same uplift will also mean that most basic and higher-rate taxpayers will pay £47 less tax from April, after the Chancellor increased their tax-free limit to £9,440 a year.
The Chancellor has indicated that the steps the coalition has taken have increased the number of low earners lifted out of tax to 2.2 million. Again, that is good news, and things are going the right way. The amount of tax paid by people on the minimum wage will have been cut in half by next year. From next April, the personal allowance will rise by a further £235, so the total increase next year will be £1,335—the highest cash increase ever. Over the past two years, the Government have announced total increases to the personal allowance of £2,965, with the aim of reaching a £10,000 allowance in this Parliament.
I read the report of the debate about paying a living wage, which would help many people. Northern Ireland has the highest proportion of people earning below the living wage in the UK, at 24%, and is followed by Wales, at 23%. The lowest proportion of sub-living-wage earners is in London and the south-east; in both cases, it is 16%. However, the number of people affected in London is 570,000. In the north-west, it is also 570,000, while in the south-east, it is 530,000. In terms of the numbers, therefore, those are the most affected areas, but they do not compare with Northern Ireland in percentage terms.
A study showed that workers in the hospitality industry are the worst affected, with 90% of bar staff, and more than four out of five waiters and waitresses, or 85%, paid less than the living wage. The study also showed that 75% of kitchen and catering assistants, as well as launderers and dry cleaners, were paid less than the living wage. Similarly, 70% of cleaners and florists received less than the living wage. Clearly, those figures are of some concern.
Mr Jim Cunningham
There has been a whole range of price increases on things such as travel, as well as benefit cuts. In tax terms, would the reintroduction of the 10p tax rate offset that and take people to the level of the living wage?
Jim Shannon
I wish I knew how that would work. I cannot answer that question; the person who can is perhaps the Minister. I hope that that would happen, but I cannot say that it definitely would. Perhaps the Minister can comment on that when he responds.
Small and medium-sized businesses make up more than half the UK’s business population. As such, they are not a minority, and they should not be overlooked or ignored. That is what I want to focus on. The Federation of Small Businesses has said that Northern Ireland has the highest concentration of SMEs—companies with fewer than 250 employees—in the UK. There is not one business in my constituency that employs more than 250 people, so SMEs are very important for the people I represent. Those SMEs account for 81% of all private sector employment and 79% of all private sector turnover. In contrast, less than 1% of the private sector consists of large firms, which account for less than 20% of total employment and 21% of turnover.
Small businesses employ 65% of the private sector work force in Northern Ireland, compared with 62% in Wales, 48% in Scotland and 46% in England. Small businesses account for a greater proportion of turnover, contributing 60% of all private sector turnover, which is, again, higher than in Wales, at 46%, in Scotland, at 40%, and in England, at 36%. Some 54.5% of gross value added was produced by small businesses, which are those with nought to 49 employees, while a further 27% was produced by medium-sized enterprises, which are those employing between 50 and 249 people. In total, SMEs accounted for 81.6% of GVA.
Those figures indicate the importance of SMEs, which are critical for the future, particularly in my constituency. The Prime Minister has indicated that he wants to build up the private sector, but we need to do that before we try to downsize the pubic sector. The statistics show how essential those businesses are to the economy. I wonder how many of them could afford, in these difficult days, to up their wages bill when they are already struggling to stay afloat.
This year will be critical for a great many industries, in my opinion and the opinion of many others more expert than I am. I know of more than one business in my town that has downgraded from two shops to one, but which has kept the same staffing levels in the hope of reducing overheads and not having to make staff redundant. For the owner, the most important thing is not to make staff redundant—not to send people to the unemployment queue. He cares about his staff and does not want them to be out of work. However, he has children to feed, as they do, and if we asked him to pay his eight staff more wages, he could not. He would either have to lay some off, or close altogether. I know that that story is being replicated throughout the UK, as even businesses that were thought to be established call in the administrators and close their doors. Can we honestly expect the small retailer to take up the slack? We hope that he or she can do it, but we are not sure.
Can we force the onus of economic recovery on to shop owners, or does it lie in this place? I believe it lies in Parliament and with the Assemblies. We must encourage small businesses to pay their staff what they can; but there is also a need for decisions for growth and the encouragement of business investment in local economies, and for the creation of employment and spending power. A living wage is a great target to aim for, but that will be brought about not through legislation but through good governance from the House and the devolved Assemblies; the Northern Ireland Assembly has a particular role to play. We need to focus on those issues, and when economic conditions are right—which we hope will be soon—we can expect employers to play their part in making things better for their employees.
Guto Bebb (Aberconwy) (Con)
I congratulate my hon. Friend the Member for Harlow (Robert Halfon) on securing this important debate. It is a great pleasure to follow the hon. Member for Strangford (Jim Shannon) who always speaks so passionately on behalf of his constituents in Northern Ireland. I noticed time and again from the statistics he offered that Northern Ireland and Wales are often classified as the poorest parts of the United Kingdom. That makes the 10p tax rate an incredibly important issue for my constituents in north Wales.
We must congratulate the coalition Government on the significant increase in the personal allowance. It has meant a huge cost to the Government, but it is the correct decision and it highlights the coalition’s strong belief that the best way to help people is to allow them to keep more of the money they earn. That is the big difference between the coalition and the Labour Opposition, who believe that the best way to help the poorest in society is to take money from them and give some of it back, depending on their circumstances. I strongly believe that we should try to ensure that people keep as much of the money they earn as possible. However, my hon. Friend the Member for Harlow made another important point: I support the aspiration of a £10,000 personal allowance, but we must ensure at some point that people understand that they must contribute to society.
I welcome the movement in the personal allowance, which means, for example, that the husband and wife who run a small business as owners of a small guest house in my constituency can earn £20,000 from it without paying tax. That is an incentive for them to work and make a success of the business; but it is important that people understand that there is a point where they must contribute towards what the state provides. It is all very well to ask and demand more from the Government, but there is an understanding, which includes everyone, of a need to contribute. That is why it is important to focus our attention, once the £10,000 personal allowance is secured, on continuing to support the lowest paid, but in a possibly more cost-effective manner. Let us be honest: a 10p tax rate would cost half the amount of an increase in the personal allowance. There would be an impact on more people. We should support the aim of securing a new 10p tax rate, because it would help the poorest paid but also emphasise the need for everyone who works to contribute to society at some stage. I strongly support that aspiration.
I have nothing but sympathy with the Minister on the issues that the Treasury faces. The previous Government left them with a terrible situation—and I am not talking just about the financial deficit. The complication beyond recognition of the tax system is frankly shameful. In a recent article Philip Booth included a table that highlighted the fact that the marginal tax and benefit withdrawal rates are now out of tune. That results in a situation where someone earning between £8,000 and £38,000 is paying, between benefit withdrawal, tax payments and national insurance payments—if that person has a family of three children—a 73% marginal tax rate. That then falls to 42%; then it goes up again if people earn more than £100,000, because of the personal allowance withdrawal. Then it goes down again. The progressive tax system, which everyone in this country believed in, has been completely distorted by a process in which benefits, personal allowances and so forth have been withdrawn in response to a financial crisis. That has left a distorted tax system that goes against something the coalition is strongly in favour of—the aspiration to support people who want to support themselves. It is difficult to see how a tax system that now has so many distortions is doing the job it is meant to do, of supporting such people.
The Treasury faces a huge job in dealing with the deficit, but in due course it will need to think carefully about how to make the tax system fairer, with a progressive element rather than the present slightly distorting effect. There are opportunities to change it. Universal credit will deal with many anomalies at the lower end of the income spectrum, but we must recognise our responsibility to see the tax system for what it is—a failing system whose distortions run counter to the work ethic. The counter-productive element of the tax system is reflected in the fall in the 40% tax rate threshold. The fact that it will hit people on an income of £34,000 from April is counterbalanced by an increase in the personal allowance, but we must be aware that people in fairly modest positions in society are now being expected to pay a higher rate of tax, something that previous generations would not have anticipated. We have a responsibility to deal with that issue. The important thing for the Government is to try to provide circumstances that will support people in work.
The Northern Ireland situation has been discussed, and it is similar to that in Wales. We need to congratulate the Government on the fact that the tax payments of a person on the minimum wage, for example, have been halved as a result of changes to the personal allowance. There is a question whether it is justifiable to call something a minimum wage while still expecting someone to pay tax on it. However, I want to sound a note of caution about the living wage. I support the aspiration, but I question the affordability of it. I specifically question the fact that local authorities in Wales are saying they will pay all their staff a living wage. Is that a reasonable way to deal with the issue? In effect, it is using money raised in taxes from people who are often not particularly well paid to provide a benefit for people in the public sector, who may have better benefits than other workers. I question that: by bringing in a living wage for some workers, the public sector in some local authorities reinforces the view that people who work for the public sector somehow deserve better pay than those who work in the private sector. I am hugely concerned about it.
There is a saying in Welsh, which I hope that you will allow me use, Mr Robertson: “Hael yw Hywel ar bwrs y wlad,” which means it is very easy to be generous with other people’s money. When I hear of local authorities in Wales that are thinking about taking that course, I ask them to reflect on where the money comes from in the first instance; because 75% to 80% of local government expenditure in Wales is from general taxation, so lower paid workers in other parts of the economy will be contributing to enabling councillors to feel good about themselves. The aspiration should be for people on comparatively low pay not to have to pay significant amounts of tax. Therefore the increase in the personal allowance, coupled with the 10p tax rate, would make a huge difference.
I support the aspirations behind the debate today, but we must consider the issues in the context of the complexity of the tax system, and the challenges to the Government in dealing with the deficit. However, a challenge that is equally crucial is to set out plans to introduce a 10p tax rate and deal with a tax system that is no longer progressive in the way it collects taxes from families. That may be something for a second term, but I am confident that there will be one. I am sure that after 2015 a Conservative Government will be able to deal with the anomalies and ensure that the tax system is fair to all—whether those at the lower end of the tax spectrum or a family earning perhaps £40,000 or £50,000 per annum.
John Robertson (in the Chair)
I hope that the hon. Gentleman is ready to help the Hansard people with his speech.
Martin Vickers (Cleethorpes) (Con)
I hope not to be as challenging for the Hansard reporters as my Welsh colleague, my hon. Friend the Member for Aberconwy (Guto Bebb).
It is a pleasure to serve under your chairmanship, Mr Robertson. I congratulate my hon. Friend the Member for Harlow (Robert Halfon) on securing the debate. He is a worthy champion of such issues and I hope to give him my support.
Although my Cleethorpes constituency is best known as the premier resort of the east coast, it is a highly industrial area that takes in a large section of the Humber bank. Although there are highly skilled and well-paid jobs in some of the factories, my constituency, and indeed the region, is an area in which pay is considerably below the national average.
Seaside resorts are heavily reliant on part-time, often seasonal work. In some cases, that is not necessarily what people would like, but it is what is available. For other people, the work fits perfectly with their family responsibilities and is a useful supplement to the family income. The Conservative party has traditionally been the low-tax party, and so it should and must remain, but it must be low tax for all, with the emphasis on the low-paid. The coalition Government have done an awful lot in that respect, most notably through the massive increase in personal allowances. However, as my hon. Friend the Member for Harlow pointed out, we risk jeopardising much of the political benefit if we allow our opponents to paint us wrongly as the party of the rich and privileged.
Mr Andrew Smith
The hon. Gentleman refers—rightly, I am sure—to the importance of part-time, often low-paid workers in his constituency, but does he accept that the coalition’s withdrawal of working tax credit from part-time workers has hit those workers very hard and represented a disincentive to work, which is contrary to his argument?
Martin Vickers
I acknowledge that that has not been welcomed by many of my constituents, but what is important is the balance the Government have achieved to support and supplement the incomes of the lower-paid.
My hon. Friend the Member for Harlow is to be congratulated on keeping this issue high on the political agenda. Indeed, it has been a theme of Conservative thinking for decades and, in recent years, it was taken up by my noble Friend Lord Forsyth, who argued strongly in favour of simplification in the tax reform commission’s report. Paragraph 6.1 of that report states:
“The personal tax system should be characterised by low tax rates and simplicity. Allowances, reliefs and loopholes should be cut where possible and compliance costs reduced. The least well-off in society should be taken out of tax altogether. Many of the lowest paid pay tax while receiving benefits and tax credits. This recycling of money is a waste of resources. It is a waste of time for the individuals and the government. It should be reduced and eliminated where possible. Personal tax rates are also too high.”
The abolition of the 10p tax rate by the previous Government in 2008 represented a tax rise of £232 for working people. For someone earning today’s minimum wage, the reintroduction of that rate would be the equivalent of a tax cut of some £250 a year.
Reducing the rate of tax is the most effective way in which the Government could contribute to achieving the living wage without forcing employers to pay more or creating further barriers to employment. It would also ensure that working people would keep more of their money in their pockets. When considered alongside the universal credit, a 10p tax rate would enable more people to escape their reliance on benefits. Of course, I recognise that achieving the 10p tax rate would have a significant cost—£6 billion, I understand—and I appreciate that Treasury Ministers must balance that cost against the potential boost to the economy derived from any tax cut, but a commitment to movement in that direction would be most welcome.
Today, in an excellent article on the “ConservativeHome” website—I am sure that Opposition Members have read it—my right hon. Friend the Financial Secretary to the Treasury, who, like many Government Members, has impeccable working-class credentials, says:
“We must be the party of ordinary working people. The party of people who want a decent job to support themselves and their families; the security of a home of their own where they can be stable and settled; reliable back-up from well-run, caring public services; and enough money left in their pay packets to afford a car, a holiday, savings for a rainy day and a reasonable pension in retirement.
These are not the demands of those who think the world owes them a living. It is an attitude to life distinguished by quiet responsibility, mutual reliance and family loyalties. That which is asked of government is…to provide a shield from risk and turbulence—instead of adding to life’s uncertainties.”
I would say that they are very Tory views, and I echo them 100%.
My parents were proud to describe themselves as working-class Tories. They came from the generation that had seen the war and the post-war years of austerity. It was a generation of self-reliance, and my parents took great pride in the fact that they were self-reliant. Whatever label we use—working-class Tories, blue-collar Conservatives or whatever—the policy advocated by my hon. Friend the Member for Harlow is a rallying cry that we can all welcome.
A commitment to a 10p tax rate would send the clear message that we are indeed all in it together. It would further cement in the minds of voters that Conservatives now, as always, represent all members of our communities, and it would also emphasise the damage done—if I may misquote Harold Wilson—by 13 years of Labour misrule. Such a commitment would send a clear message to my constituents in Cleethorpes and people elsewhere that in the future, as in the past, it is the Conservatives who can best help working people.
Catherine McKinnell (Newcastle upon Tyne North) (Lab)
It is a pleasure to serve under your chairmanship, Mr Robertson.
I commend the hon. Member for Harlow (Robert Halfon) on securing this debate on what is undoubtedly a crucial issue, not just for families on low incomes, but for our society and economy as a whole. We both share a great passion for promoting the importance of apprenticeships, and I believe we were among the first Members to employ an apprentice in our offices. Given today’s debate, it also seems that we share a passion for ensuring a fair distribution of wealth, for eliminating poverty and for creating incentives to work. That is why I am delighted that he secured the opportunity to debate this important subject, and particularly the benefits of a living wage, although I fear that our views diverge on the solutions that we would pursue to achieve those aims.
I commend hon. Members who contributed to the debate. The hon. Member for Strangford (Jim Shannon) made a powerful speech about the plight of low-paid workers and the striving private sector in his constituency. The hon. Member for Aberconwy (Guto Bebb) also made a comprehensive and powerful speech, although I dispute some of the issues that he raised, and particularly something that many hon. Members have talked about today—the idea of taking money away and giving it back.
No one, however, mentioned the impact of some of the Government’s changes. The strivers’ tax that was voted through by Government Members last night will have a devastating impact on many women across the country. Huge support is given to help women to cope with their child caring responsibilities and to support them to stay in work by making work pay, despite the significant costs of child care and taking maternity leave. That seemed to have been completely overlooked in the debate, so I wanted to draw attention to it.
Mr Rob Wilson (Reading East) (Con)
Will the hon. Lady let us know whether the Labour party is in favour of a 10p tax band or against it?
Catherine McKinnell
At the moment, the key issue is the impact of the Government changes, particularly on low-paid workers. The Government present the rise in the personal allowance as a benefit for some of the lowest-paid workers, but the reality is that several of the measures announced in the Budget and the recent autumn statement are impacting on those very workers whom Government Members profess to want to support. After one does the maths, there is huge concern regarding making work pay for those people.
The hon. Member for Cleethorpes (Martin Vickers) talked about the withdrawal of tax credits and keeping more money in people’s pockets, but Government Members have overlooked the major issue of the increase in VAT, which has had a massive effect on many people’s pockets. There is talk about how people should be required to make a contribution, yet low-paid workers throughout the country are making a contribution every day because of the additional VAT that is levied on them.
Catherine McKinnell
I want to make a bit more progress on setting out our position.
I challenge the hon. Member for Harlow on his approach, given that he, along with Government Members, yesterday voted through a measure that is effectively a real-terms cut for millions of striving families throughout the country. He voted for £6.7 million in working-age benefits and tax credits to be taken away over the next four years, thus cutting such support in real terms. I will be interested to hear the Government’s response to his contention that the reintroduction of the 10p tax rate would be the solution to the devastating impact on many families of such changes.
We are all too aware that the economic situation in which we and the Government find ourselves is challenging, to say the least. As a result of the Government’s failure to generate jobs and growth, they are set to borrow £212 billion more than planned, and the Chancellor has had to admit that he is set to miss his target of getting the national debt falling by 2015. The Office for Budget Responsibility has revised social security spending up by £13.6 billion by 2015-16, which is the price tag of higher unemployment. Although it is welcome that the unemployment figures have fallen recently, if we look behind the headline numbers, we see that long-term unemployment is not coming down, and that unemployment rose in a third of England over the past month.
People are struggling to make ends meet due to a combination of under-employment, stagnating wages, rising food, fuel and child care costs, and the hike in VAT. The situation is leading many people to a point at which they are increasingly using food banks and are often forced to work two or even three jobs just to keep their heads above water. Only yesterday, an alliance of 100 energy companies, charities and businesses joined forces to warn the Prime Minister that Britain is heading towards a fuel poverty crisis as a result of the Government’s failure to tackle that problem properly, with perhaps up to 9 million homes affected by 2016.
We heard several interesting contributions about the living wage, especially from the hon. Member for Harlow. To some extent, they built on the debate earlier this month that was secured by my hon. Friend the Member for Erith and Thamesmead (Teresa Pearce) which, like the hon. Member for Strangford, I read with great interest. The living wage campaign has been around for just more than a decade, but events of recent years have meant that the policy has come of age and is now right at the top of the political agenda. There is no doubt that Labour’s national minimum wage transformed the lives of millions. The policy not only affected people’s personal finances, but meant that the Government had made a clear statement that there was a line under which pay for an hour’s work would be unacceptable.
Mr Rob Wilson
The hon. Lady is being generous in giving way and I hope that she will not mind me restating my question, but I have not yet heard the answer. I am not asking for a policy, only whether, in principle, she and the Labour party are in favour of a 10p tax band or against.
Catherine McKinnell
The hon. Gentleman is well aware that Labour introduced the 10p tax rate. In the context of levelling out income tax and the personal allowance, the tax rate went from 22% to 20% and the 10p rate was abolished. There were various debates about winners and losers at the time, and there is no particular move at the moment to reintroduce the 10p rate. We are more concerned about the impact of the Government’s economic measures on low-paid workers, which the hon. Member for Harlow was discussing.
The Labour party’s approach has been clear—to tackle issues of low pay and to ensure that work always pays. We therefore want support for those who need extra help to make work pay, to keep them off benefits and to ensure that they can afford necessities such as child care so that they can stay in work. We have made our policy clear and we are therefore proud of what we achieved through the tax credit system.
George Eustice
I am grateful to the hon. Lady for giving way on this obviously difficult point. Having been in opposition, I fully understand her difficulties with people trying to bounce her into writing a manifesto commitment for the next election, but can she say whether the Labour Government made the right decision to abolish the 10p rate or, with hindsight, was that a mistake?
Catherine McKinnell
I appreciate the hon. Gentleman’s concern, but I am trying to discuss the premise proposed for debate today by the hon. Member for Harlow, which is people on low pay and the living wage campaign, so I will return to my point on the national minimum wage, which transformed the lives of millions. The policy is now taken for granted, but it was implemented in the face of often strident opposition, in particular by members of the Conservative party. Despite significant opposition at the time, however, it now seems to be universally accepted as an important aspect of our economy in ensuring fairness across the board.
The squeeze on people’s incomes and the ever-increasing cost of living, of which we are all aware and which we have all seen among our constituents, mean that for many the national minimum wage is simply not enough to make ends meet. Thus, a higher rate of £7.45 per hour outside London and £8.55 per hour inside the capital has been calculated by the Centre for Research in Social Policy as the level required to enable people to provide for themselves and their families.
Guto Bebb
On the minimum wage, although I was not in this place for the debates, my recollection is that the issue was about the scale and level of the minimum wage. My real concern was that the state was imposing a minimum wage on small businesses but also helping itself to tax from that minimum wage. Surely it is a good thing that the coalition is ensuring that people on the minimum wage are now paying significantly less tax.
Catherine McKinnell
Could the hon. Gentleman repeat his premise about how the Government are helping people on the minimum wage to pay less tax?
Guto Bebb
The point is simple. The Labour Government brought in a minimum wage, and yet the Government of the day helped themselves to significant amounts of tax from that minimum wage. In other words, small businesses in constituencies such as mine felt that they were being forced to pay higher levels of wages in order for the Government to be able to help themselves to tax. Surely this Government, by increasing the personal allowance so significantly, have reduced the tax take from those on the minimum wage.
Catherine McKinnell
I accept that the Government have increased the personal allowance, but their other policy changes have impacted on those very people whom they purport to be helping, with a real-terms effect on families up and down the country. In fact, the hon. Member for Cleethorpes admitted that his constituents are certainly not happy about some of the changes and their impact. I know for certain that my constituents would agree, but the shocking fact is that almost 5 million people across the UK are currently paid less than the living wage, and 3 million of them are women. The Government may believe that the way to motivate people on low incomes is to pay them less, and the way to motivate those on the highest incomes is to pay them more, but the Labour party believes that this is an issue of dignity at work and social justice.
Mr Andrew Smith
My hon. Friend is doing a very good job of batting off the attacks from Conservative Members. Does she agree that the hon. Member for Aberconwy (Guto Bebb) must not be allowed to rewrite history? The Conservative party argued vigorously against not just the level of the minimum wage, but its very introduction. It said that it would destroy jobs, but after it was introduced, 1 million extra jobs were generated in the economy. I think the Government now accept the point, but the hon. Gentleman must not be allowed to get away with rewriting history.
Catherine McKinnell
I thank my right hon. Friend for making that important point. I said that there was fierce opposition, particularly from Conservative Members, when the national minimum wage was introduced, and he has given some colour to the debate that took place at that time. We are moving on to the next stage, and the Labour party is backing the living wage campaign, which is a perfect example of how we can deliver a one-nation economy in which everyone has a stake, and prosperity is fairly shared. That is why Labour councils are delivering a living wage throughout the country, despite straitened economic circumstances for many and in the face of swingeing Government cuts. We believe in doing the right thing for low-paid employees. Those local authorities include Islington, Lambeth, Wigan, Camden, Oxford, Preston, Southwark, Hackney and, from November last year, my city council, Newcastle, which is meeting the cost of paying the living wage entirely from a reduction in management costs.
Labour councils are paying a living wage because it is a powerful symbol of the change that the Labour party wants to see in our economy. We do not want the race-to-the-bottom approach backed by the Government, who seek to erode workers’ rights and make it easier to sack staff. We want to aim for a higher skilled, higher waged and more productive economy that can genuinely compete on the global stage so that workers are not forced into several jobs with no chance of spending proper time with their families.
It is vital that the Government, both central and local, take a lead, but it is not enough, as hon. Members have said, for just the public sector to implement the living wage. It is great news that around 140 private sector employers have taken that step, including notable firms such as KPMG, Barclays, Deutsche Bank, PWC, Lush, Westfield shopping centres and InterContinental Hotels Group. Many of those firms have been clear about the positive impact that paying a living wage has had on their companies. KPMG has reported higher employee morale, motivation and productivity alongside a reduction in staff turnover and absenteeism since the policy was implemented.
Mr Andrew Smith
Does my hon. Friend agree that the really important commitment is not just that large organisations commit to the living wage, but that they require their contractors and subcontractors to do so? Otherwise there is a risk that they will simply outsource their low-paid jobs while taking credit for paying the living wage to their direct employees. We want everyone to have it.
Catherine McKinnell
My right hon. Friend raises an important point, and I will come to the Government’s approach to procurement in the private sector as the ripple of understanding of the benefits that the living wage can bring spreads to employers throughout the supply chain.
Robert Halfon
The hon. Lady mentioned some companies that have supported the living wage. That is all well and good, but they are big corporate companies that can afford to pay it. The issue for me is that smaller companies will find it much harder to afford to implement it. Surely the best way to help the lower paid is what the coalition is doing—cutting tax for low earners and taking 2 million lower income people out of tax all together. Is that not a much more effective way of helping the lower paid?
Catherine McKinnell
As I have said, the impact of the Government’s changes and the raising of the personal tax allowance have provided some help for those on the lowest wages, but the real impact has been detrimental. The figures from the Institute for Fiscal Studies show clearly that a family with one working earner will be worse off, on average, by £534 by 2016 because of all the tax and benefit changes that have been pushed through. I take on board the hon. Gentleman’s point, but the Government’s policies are hitting lower paid workers, not helping them.
Robert Halfon
I thank the hon. Lady for being so generous. She is right if she takes the benefits changes by themselves, but if she then looks at the lower tax for lower earners, the council tax freeze and other measures the Government have introduced, lower income workers will not be worse off in the way she describes.
Catherine McKinnell
That is certainly not the case in the studies that I have read on the overall impact of the tax changes that the Government have pushed through. The hon. Gentleman raised the important point about the best approach. I am sure that he is aware that the analysis by the Institute for Public Policy Research and the Resolution Foundation suggested that introducing a living wage could lead to a net gain to the Treasury of more than £2 billion a year when the costs of paying it throughout the public sector are set against reduced benefit and tax credit payments, and higher income tax and national insurance receipts.
As the living wage campaign takes hold, wins the arguments and wins over more and more companies, including those throughout the supply chain and smaller companies, it will improve the economy as a whole, and help to put more money in people’s pockets to spend in the local economy. That is vital when so many high streets and local companies are struggling. We have seen many worrying examples of high street shops closing. That compares with the suggestion of the hon. Member for Harlow to reintroduce the 10p tax band, which the Library estimates would cost around £6 billion a year. The cost of the hon. Gentleman’s approach is indeed high, particularly when set against the gains made to the Treasury from its ill-thought-through cut in support for low-paid families that was voted through last night.
The hon. Gentleman has set out his suggested approach for supporting low-paid workers. The Government’s approach needs a little more inspection at this stage. Last night, the striver’s tax was voted through, and according to the IFS, 7 million working households will lose an average of £165 per year. Indeed, its calculations show that the impact of the changes announced in the autumn statement between now and April 2015 will be to reduce the real-terms income of a one-earner working family by £534 on average by 2015-16. We know that a further 200.000 children will be pushed into poverty as a result of the uprating measures that were voted through last night.
Despite what the Chancellor may like to believe and some of the rhetoric from hon. Members on the Government Benches, it will not be so-called shirkers who suffer the impact of the changes. The Children’s Society has calculated that up to 40,000 soldiers, 300,000 nurses and 150,000 primary and nursery school teachers will lose out as a result of the 1% uprating decision. I have mentioned the impact of the mummy tax on women. The Government are not content that two thirds of those affected by the 1% uprating of benefits and tax credits will be women; they want to impose an effective tax cut of £180 on working women through their real-terms cut in statutory maternity pay.
Those are just a few examples of the Government’s warped priorities for workers on lower incomes, and there are many more. People are angry that they are being asked to pay the price of the Government’s economic failure when they are already struggling to get by, and when—all credit to the hon. Gentleman for raising this—the Government have decided to give a tax cut to millionaires. They need to neutralise the perception that they are giving tax cuts to the rich.
Paul Uppal (Wolverhampton South West) (Con)
That point is well worn and made continually, and I am sure that all Members are aware of the top rate of tax being cut, but there is an element of financial amnesia here. As even people who only have a rudimentary understanding of economics will appreciate, the main way that wealthy people accumulate wealth is through wealth creation, rather than income, which is always variable. If we look at capital gains tax, the current rate is 28%, which is in stark contrast to the previous Labour Government, where venture capitalists were paying capital gains tax at a rate of 10%—often much lower than the cleaners who were cleaning their offices.
Catherine McKinnell
I appreciate the hon. Gentleman’s point. We always have to support business growth and creation. Unfortunately, many of the Government’s policies are impacting on individuals and on consumers who will buy the goods that such companies make. In reality, that is resulting in stagnation and no growth in the economy, which is taking the country backwards, not forwards, but I take his point on board.
I suggest that a simple and effective way of pulling off an image neutralisation attempt would be by not going ahead with that tax cut for the rich, and by not pushing through real-term cuts for people in work, but on low pay. The hon. Member for Harlow has put forward his alternative argument—the restoration of the 10p rate of income tax on income between £9,205 and £12,000. However, as he notes in his early-day motions, restoring the 10p rate of income tax would move workers on the minimum wage only
“about halfway towards earning the Living Wage”,
and that would be at a cost to the Exchequer of around £6 billion a year, according to the Library. I can see alarm bells potentially ringing in the Minister’s head at that prospect, particularly when the Government are forecast to borrow £212 billion more than they planned to borrow two years ago and are failing one of the key economic tests that they set themselves.
In conclusion, the Government have repeatedly stated that they support the living wage and encourage businesses to take it up where possible. That is laudable, and the Opposition agree that the living wage should not be mandatory, but we encourage as many companies as possible to implement it. I would be grateful if the Minister could provide us today with examples of measures that the Government have taken to encourage the uptake of the living wage, as well as specific examples of what firms are now doing as a consequence of the Government’s actions.
I know from my work on apprenticeships that the use of the public procurement system in encouraging take-up has been a particular area of interest for the hon. Member for Harlow. My right hon. Friend the Leader of the Opposition has suggested that we can learn from local government procurement to see whether central Government can use their buying power to insist that large firms winning major public contracts commit to being a living wage employer. I suspect that the Minister may cite EU procurement rules as preventing that from becoming a reality, but the European Commission has stated:
“Living-wage conditions may be included in the contract performance clauses of a public procurement contract ‘provided they are not directly or indirectly discriminatory and are indicated in the contract notice or in the contract documents’.”
Will the Minister clarify whether the Government have any intentions of taking that idea forward?
Finally, I would be grateful if the Minister outlined which Departments are now living wage employers and which are not. It is absolutely vital that the Government show leadership on that issue. Will he clarify whether the Treasury pays the living wage to all its staff?
Once again, I applaud the hon. Member for Harlow for securing the debate, and for highlighting the plight of low-paid workers and the squeeze on families in these straitened times. I am interested to hear the Minister’s response to the suggested approach; how that can be reconciled with the squeeze on low-paid workers that his Government forced through Parliament last night; and what his Government will do to encourage more businesses to pay their workers the living wage.
The Exchequer Secretary to the Treasury (Mr David Gauke)
It is a great pleasure to serve under your chairmanship, Mr Robertson, and to respond to this debate. I congratulate my hon. Friend the Member for Harlow (Robert Halfon) on securing it. He has such a reputation for being a strong representative of his constituents that it is not surprising that the hon. Member for Newcastle upon Tyne North (Catherine McKinnell) might even believe that his constituency was named after him—I know that Harlow is a new town, but a change of name might not be appropriate. However, he does a splendid job on behalf of his constituents as a whole and he does a particularly good job of representing hard-working, low-paid people up and down the country. If I may, I shall describe them as strivers, and my hon. Friend represents them very well. He sets out the case for a 10p rate clearly, with great eloquence and understanding, and I hope to respond to his points.
I thank other hon. Members who have participated in the debate, particularly those who have made speeches: my hon. Friends the Members for Aberconwy (Guto Bebb) and for Cleethorpes (Martin Vickers), and the hon. Member for Strangford (Jim Shannon). I also thank other hon. Members who have participated through their interventions.
During my remarks, I hope to set out what the Government are doing to help the very people that my hon. Friend the Member for Harlow identified as being in need of support: those hard-working, low-paid individuals who are taxed in circumstances where they do not have a lot of money. None the less, they have income tax deducted from their salary, and I will set out what we are doing to help such people.
I would like to take us back to the abolition of the 10p rate, which has obviously featured heavily during our debate this afternoon, and set out a little more information about the arguments that were made at the time and perhaps discuss some of the difficulties that those of us who were in the House had in getting to the truth of the impact of the 10p rate’s abolition—perhaps I should say the doubling of the 10p rate of tax, because that, in truth, is what happened.
In 1997, the Labour party’s manifesto stated that it was Labour’s long-term objective to have
“a lower starting rate of income tax of 10 pence in the pound.”
In the 1998 Budget, the then Chancellor, the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown), confirmed his intention to bring in such a starting rate
“When it is right for the economy”.—[Official Report, 17 March 1998; Vol. 308, c. 1104.]
The measure was implemented from April 1999, with taxpayers paying only 10p in the pound on their first £1,500 of taxable income. The rationale was to put work first and to ease the poverty trap, whereby people on low pay were discouraged from climbing the earnings ladder due to high marginal deduction rates. The 10p rate remained in place until the announcement in the 2007 Budget, which was the last to be delivered by the right hon. Gentleman. Those of us who were there will remember that the intention behind the abolition was pretty clear. It was a theatrical coup to conclude the last Budget by that Chancellor with a reduction in the main rate of income tax from 22% to 20%. Other measures were taken with regard to the indexation of personal allowances for those aged 65 and above and the retention of the 10% rate for savings income, but what was clear was that great, theatrical moment just before the then Leader of the Opposition stood up, not able to see all the details, and there was this surprise tax cut. Of course, questions then started to be asked about how that was to be funded in what was a fiscally neutral set of tax measures.
At the time, it became clear, once we saw the Red Book, that the Government estimated that the removal of the starting rate of income tax would yield the Exchequer an additional £7.3 billion in 2008-09, so where would the extra cash come from? It was a little difficult to get all the answers at the time. The Budget book at the time set out a list of all the people who would be winning from the changes, and the Budget statement said that four out of five households would either gain or remain in the same position as a result of the Budget measures, but we did not get much detail on the one out of five households that would lose.
The IFS confirmed that 5.3 million households would lose. A senior Treasury official, giving evidence to the Treasury Committee—I should inform hon. Members that I was a member of that Committee at the time—confirmed that that number was in the right ball park. The very next day, the Chancellor of the Exchequer came along to answer questions on the Budget. He was asked five times by my right hon. Friend the Member for Sevenoaks (Michael Fallon) about the 5.3 million households that were going to lose out, and five times he refused to confirm that number. There is a lesson to be learned from that whole episode. We should be more transparent about the impact of policy decisions, and the present Government have taken significant steps to do that.
Mr Andrew Smith
In the light of that commitment to transparency, will the Minister give us his estimate of how many people lost out through the vote last night?
Mr Gauke
The reality is that one has to look at all the measures that we are undertaking, which is what I would seek to do. It is worth pointing out that working households will gain an average of £125 in 2013-14 as a consequence of all the measures that we are undertaking. The right hon. Gentleman raises an important point—I shall return to the 10p rate in a moment—but let us remember the context in which we are having this debate now about the steps that we can take.
I will set out a case about the way in which the Government have taken substantial steps with regard to the personal allowance to help low-paid workers. We have done that at a time when we inherited an enormous deficit, and we have had to make difficult decisions about how we reduce that deficit. We have been clear in the distributional analysis of where the contributions are coming from. The facts are very clear. The top 20% of earners are making the biggest contributions, not just in cash terms but in relative terms, to reducing the deficit.
Let me return to the people who lost out from the abolition of the 10p rate of income tax. People under the age of 65 with non-savings income between £5,435 and £19,355 would have paid more, because they lost more from the abolition of the 10% rate than they gained from the cut in the basic rate. It is worth reminding ourselves that a Labour Government took that measure and that those low-paid workers would have paid more tax. The loss was greatest, at £232 a year, for someone earning £7,755—the top of where the 10% band would have been. Those most affected by the abolition of the 10p rate appear to have been those below the age of 65 with an income under £18,500 who were in childless households. The effect was greatest on those households where no individual was above the age of 60, because the household would not then benefit from the higher winter fuel allowance. That is the legacy of the last Budget of the right hon. Member for Kirkcaldy and Cowdenbeath.
Let us now consider what we have done in this difficult financial situation. We should remember that 2007 was still the age of apparent plenty; we have been in a much more difficult situation. Rather than reintroducing the 10% rate of tax, we have taken steps by increasing the personal allowance; we have taken real steps towards making the first £10,000 of income free from tax. I am grateful to a number of hon. Members for supporting that policy this afternoon. Since 2011, we have announced successive increases in the personal allowance, totalling £2,965. That includes a £1,100 increase announced in the 2012 Budget and a further £235 announced in the autumn statement last month. Following those announcements, the personal allowance rises by £1,335—the largest cash increase in history—to £9,440 from April 2013. Taken together, those changes will benefit 25 million individuals and provide a real-terms gain of £443 to most basic rate taxpayers in 2013-14. More than 2.2 million individuals with low incomes will have been taken out of income tax altogether.
I shall give some more examples of how the changes work. Let us take the context of the national minimum wage. My hon. Friend the Member for Carlisle (John Stevenson) referred to the personal allowance matching the national minimum wage for full-time employees, but let us examine what has happened to a person on the national minimum wage in full-time employment. In 2010-11, someone earning the national minimum wage would have had earnings of £10,979 and paid income tax of £901. In 2013-14, someone earning the national minimum wage will have estimated earnings of £11,691 and pay estimated income tax of £450. In other words, their bill will be halved. Another way to look at it is that, in 2010-11, such a person would have been able to work only 22 hours a week tax free; they can now work 29 hours a week before starting to pay income tax.
Another way to look at the situation is by comparing the approach that we have taken in increasing the personal allowance with the approach that the previous Government took in doubling the 10p rate of income tax. I talked about those who earn £7,755 a year and lost the most—£232 a year—as a consequence of the doubling of the 10p rate in 2008-09. In that year, an individual would have paid £344 in income tax. Under the present Government, in 2012-13, such an individual, with income adjusted for inflation to £8,299 a year, will pay about £39 in income tax—not £344 but £39 in tax, which is a saving of £305. In 2013-14, again with income adjusted for inflation, such an individual will pay no income tax at all. That is a contrast that I am very happy to highlight.
Catherine McKinnell
The Minister is setting out an interesting argument. Is he therefore making the case or suggesting that the Government will support the hon. Member for Harlow in his call for the reintroduction of the 10p tax rate?
Mr Gauke
The argument that I am making is about the contrast that can be drawn with the approach taken by the present Government, who have focused on reducing the tax bill for low-paid workers. That could be done in different ways, but we have undoubtedly, as a Government, reduced the income tax bill for low-paid workers. That compares favourably with the approach taken in the last Budget of the right hon. Member for Kirkcaldy and Cowdenbeath, in which he introduced a measure that increased pretty substantially the amount of income tax that low-paid workers had to pay. It is worth highlighting the point that we as a Government have done more, in very difficult circumstances, for those low-paid workers than the previous Government did.
I think that my hon. Friend the Member for Harlow agrees that we should meet the £10,000 target. The debate is then about where we go next. I will not be drawn into going beyond the firm commitment that we have in the coalition agreement and that has been evidenced by the steps that we have taken at every Budget and in the last autumn statement to make progress towards meeting that £10,000 target for the personal allowance.
My hon. Friend has set out very clearly the case for focusing on reintroducing a new lower rate. There are pros and cons of such an approach, and the debate on that will continue. As he would expect, I will not make any commitments on the matter. Clearly, there is a substantial fiscal cost in reintroducing a 10p rate of income tax. However, the Government’s values are clear. The overall cost of the personal allowance by the end of this Parliament will be around £9.5 billion a year as a consequence of the measures that we have taken. Clearly, where we can, we have been prepared to take substantial steps, at quite significant cost, to reduce the income tax bill for those on low earnings. That is something of which we should be proud, and as a number of my hon. Friends have said, we should be communicating that out there, because it demonstrates our values.
George Eustice
I give credit to the Government for everything that they have done to help those on low incomes get out of the tax bracket altogether by increasing the thresholds. I entirely understand that the Minister will not want to predict what might happen in the future, but, looking to the recent past, will he explain what the Government believe the advantages are of lifting thresholds as an alternative to a 10p tax rate? In other words, why did the Government decide to lift the thresholds rather than reintroduce a 10p rate?
Mr Gauke
There is a case for simplicity in focusing on the increase in the personal allowance. My hon. Friend the Member for Cleethorpes quoted the Forsyth Commission, which looked into this matter, and there is a question why we should ask people who are on quite low wages to be contributing income tax. I appreciate the arguments that everyone should make a contribution, and I do not in any way dismiss them, but when we are asking people earning such relatively low amounts to pay income tax, there are the significant questions of work incentives and simplification. The Government must bear those in mind when considering whether to reintroduce the 10p rate. There is a debate to be had on both sides. There are pros and cons both to personal allowance increases and to a new lower rate. In our coalition agreement, we rightly set out our determination to get to £10,000. Fiscal drag had brought more people into income tax than was right, and we have rightly made it our priority to address that.
Robert Halfon
Does the Minister accept that raising the tax threshold to £12,500—the minimum wage—would cost around £14 billion, whereas reintroducing the 10p tax would cost between £6 billion and £7 billion?
Mr Gauke
I should perhaps check the numbers, but I believe that my hon. Friend is in the right area. Those are, I think, the realistic costs. I am not here to make any further commitments beyond what we have said in the coalition agreement, but it is right that we have this debate. It is also right that we acknowledge that we are all trying to do the same thing, which is to reduce the tax burden on those hard-working, low-paid workers who have to pay more tax, partly as a consequence of a specific decision taken by the previous Chancellor in 2007 to double the 10p rate.
Catherine McKinnell
We are nearly at the end of the debate, and I am conscious that the Minister has not really addressed any of the issues that relate to the living wage and what the Government might do to promote that policy as well.
Mr Gauke
The Government are supportive of the living wage, which the hon. Lady has described as commendable or laudatory. However, unlike the Opposition, the Government do not believe that it should be mandatory. She appears to be in search of a dividing line on that issue. [Interruption.] I am pleased to see her shaking her head. There is cross-party consensus that the living wage has a useful role to play. We support it; we welcome it when organisations adopt it; but we do not believe that it should be mandatory. There are risks involved. In some circumstances, it might increase the cost to the taxpayer in higher salaries, and in others, it might result in higher unemployment. That is why we do not think it should be mandatory and why, I assume, she feels the same way, unless she has a different rationale.
Catherine McKinnell
I was seeking clarity on the questions that I raised and whether the Government are taking positive steps to promote the living wage.
Mr Gauke
It is very much for organisations and institutions to determine their own remuneration policy. We support such a wage in principle, but we will not make it mandatory, and there is cross-party consensus on that.
I turn now to the other steps that we are taking to support the low-paid workers whom my hon. Friend highlighted so well in his remarks. We have helped local authorities to freeze council tax for three years in a row, and we are proposing to set the council tax referendums thresholds at 2% for 2013-14.
I cannot, of course, go through a debate with my hon. Friend without referring to fuel duty. He is a keen campaigner on that point and he will be well aware of the steps that we have taken to ensure that average pump prices are currently 10 pence per litre lower than if we had implemented the fuel duty escalator. They will remain at least 10 pence per litre lower over the remainder of the Parliament than they would have been had we stuck to the plans that we inherited. In practical terms, it will cost £5 less for a typical motorist to fill their tank today and £8 less by the end of the Parliament.
We are taking numerous other steps to ease the load on those on low and middle incomes. We have capped average regulated rail and Transport for London fare increases at RPI plus 1% for the third year in a row. We have increased the basic state pension by £5.30 last year, which is the biggest cash increase ever, and we have introduced a triple guarantee, to ensure that it will increase each year using the increase in earnings, prices or 2.5%, whichever is highest.
I am conscious of the time, so let me say that I congratulate my hon. Friend on securing the debate and all the other attendees on their excellent contributions. As I have said, I think that my hon. Friend and I agree that the Government should reduce the tax burden on people on the lowest incomes. Our focus has been on increasing the personal allowance. I am confident that our policies, both on the minimum wage and the personal allowance, are exactly the right ones to achieve that.