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The Lord Bishop of St Albans
To ask Her Majesty’s Government what is their assessment of the impact of rising inflation on families affected by the freeze of working age benefits.
The Lord Bishop of St Albans
My Lords, we are at risk of failing a substantial number of children and some of the most needy people of this country. If a society is to be judged by how it treats its most vulnerable, unless we are prepared to put aside party differences and make common purpose in addressing inequalities in our system of social security we will surely be found wanting. So what are the principles we should use when assessing the design and implementation of benefits policy, particularly the freeze on working-age benefits? We on these Benches are not ignorant of the Government’s substantial financial challenge. An ageing population, a sizeable deficit, and the need for additional expenditure on the NHS and on our education system put limits on the Chancellor’s options.
Understanding these challenges, the Church of England’s General Synod in a debate in 2009 asked that policies intended to reduce the deficit be judged against three principles: fairness, generosity and sustainability. The first of those principles, fairness, I know is important to many Members of this House, although we might have different ideas about what fairness is. Nevertheless, a fair benefits system needs to be transparent and consistent. On this point, I simply note that treating those in receipt of benefits fairly will require recognition of their individual dignity and sensitivity to individual circumstances.
Secondly, the notion of generosity in welfare provision is contentious. As I said in a debate earlier this week, this point is illustrated in the Bible where the community is called to ensure the welfare of the widow, the orphan and the stranger, although, as St Paul so succinctly put it, a person who is not prepared to work should not expect to eat. It was Archbishop William Temple who popularised the phrase “the welfare state”, and it is right to want fellow citizens to thrive and flourish. As such, the welfare system should be an instrument that facilitates mutual responsibility, especially for those who for reasons beyond their control do not have enough to survive on. To that end, profitable companies and the wealthiest members of society should seek to fulfil rather than avoid tax obligations, even if their activity meets the letter of the law. After all, the reason why so many international companies do so well here in the UK is that they benefit from an educated, healthy workforce and a world-class social infrastructure. In return, they need to make a fair contribution towards the funding of these things.
Thirdly, the welfare state should be sustainable. Incentivised reliance on the welfare system inhibits individuals’ ability to flourish, yet a society that allows large numbers of its citizens to live in poverty risks social disorder and disintegration.
All this brings me on to the current welfare system. The four-year freeze in most working-age benefits was announced by the then Chancellor in the 2015 Budget to last from 2016-17 to 2019-20. The stated intention of the policy at the time was to correct perceived policy issues: first, an alleged unfairness that benefits were rising at a faster rate than wages and, secondly, to make sure that people were better off in work than out of it. Despite this, in part owing to stagnating wages and rising prices, we find that benefit cuts are making families, even those in work, worse off. According to the IFS, absolute child poverty is projected to rise by four percentage points between 2015-16 and 2021-22 and relative poverty by around seven percentage points, primarily due to the impact of the continued freeze of benefits. A rise in absolute child poverty in this country is unprecedented, and I must say that it is unacceptable. That the burden of the freeze weighs disproportionately on children is revealed when it is estimated that in the same timeframe pensioners will see a 2% decrease in absolute poverty and their relative poverty will remain unchanged. This is fundamentally an unfair burden for children to bear.
At the same time, the impact of the freeze is intensified by rising inflation. Yesterday the ONS announced the most recent inflation statistics, reporting that food and non-alcoholic drink prices last month were 4% higher than in October last year. That is the fastest rate of growth since September 2013. Gas and electricity prices are also up by 6%, hitting the poorest families hardest. The cost of essentials has been rising faster than inflation since 2006. While benefits and tax credits will have risen by only 3% over the seven-year period between 2012 and 2019, prices are expected to rise by at least 13% on average over the same period. Families relying on benefits to supplement their income are simply unable to keep up with the rising cost of living.
The effects of this policy are felt intensely by the families affected. Its impact is huge, equivalent to taking £7 billion every year from family budgets, yet this is easily overlooked because its effect is incremental and works not by reducing the amount of benefits or tax credits that people receive but by reducing what they can buy. Families may be receiving all the benefits they are normally entitled to but are able to stretch them less and less far. Moreover, the majority of affected families are working families, which undermines the Government’s objective of making work pay. The National Audit Office reported in September this year that the freeze in local housing allowance rates has contributed to private rental properties becoming less and less affordable for families, which in turn is likely to be contributing to rising homelessness. Shelter estimates that the freeze on local housing allowance puts more than 1 million households at risk of homelessness by 2020. Since 2006, the maximum award for childcare costs that can be claimed under tax credits has been fixed. This effectively amounts to a decade-long freeze in the refundable element of childcare costs for low-income families. As the cost of essentials rises and families have less money for childcare and housing, the benefits freeze actually serves as a barrier to work rather than enabling it. The status quo is unsustainable.
There is room for reassessment. The benefits freeze will actually save considerably more than originally anticipated due to rising inflation. Ending the freeze a year early or uprating benefits by 1% a year for the next two years could still achieve the same overall savings originally planned. I hope that all parties will commit to making this change. Raising the personal tax allowance is not an effective solution because most of the benefits go to better-off households. Only £1 in every £6 spent on raising the personal tax allowance will go to households in the bottom half of the income distribution, with a negligible impact on poverty.
On Tuesday, the Governor of the Bank of England, Mark Carney, warned that the lack of a Brexit deal could see inflation rise further, putting even greater pressure on poorer people. A fundamental reconsideration of the benefits freeze, in light of the principles that should guide welfare policy, is urgently needed. I hope that the Minister will not only assure the House that Her Majesty’s Government are listening but will respond by committing Her Majesty’s Government to reconsider the freeze, which is already causing so much misery.
Lord Beecham (Lab)
My Lords, I congratulate the right reverend Prelate on securing this debate. I am sorry that the congregation—if I may put it that way—is not quite as large as it should be, but we have already had a very interesting debate partially touching on similar issues. But it is as well that the right reverend Prelate draws our attention to particular aspects of the situation facing far too many people in this country. I again refer to my interest as a Newcastle city councillor. As I was happily reselected for the forthcoming elections, I hope to be able to continue saying that after whatever date they are on next year.
As I think I have said previously, I live just 12 minutes’ drive from the ward I have represented for the past 50-plus years. For every minute of that drive, life expectancy falls for people in that ward by a year. In other words, life expectancy is 12 years less in the ward I represent than in the ward in which I live, which says something about the problems faced by far too many people—and not only in the city of Newcastle. That manifests itself in many ways. Fortunately we have a very strong voluntary sector and a very caring community. But it is sad that teachers at the local primary schools bring in food for breakfast clubs for children attending their school because they cannot be certain of having an adequate breakfast and start to their school day. It is a measure of the deprivation that is unfortunately too prevalent. In a way, a more dramatic example of that is the West End Foodbank in Newcastle, run by the Trussell Trust, which has done wonderful work all over the country. The food bank in my ward is the busiest in the entire country. Again, it gives a sense of the deprivation, which is not universal but is certainly far too widespread for us to feel at all comfortable about it.
In an area with these problems and people struggling with them, many issues are making matters worse, reflected in a range of government policies. One of those is the bedroom tax, which has not been mentioned much latterly but which inflicts an average annual loss in the ward I represent of £777 on 243 households, amounting to £189,000 in just this one ward in the city. Across the whole city, the figures are 3,950 households, and the loss of income—and loss to the local economy—is £3,263,000, a formidable amount. On a national basis, I have not done the arithmetic but your Lordships will not find it difficult to acknowledge that we are talking of billions of pounds lost nationally to the local economy by this measure. Those numbers, of course, are expected to rise over the next few years. In general, dependency is likely to rise over the next few years.
The Resolution Foundation projects a total saving, at the expense of the most vulnerable and impoverished, through two more years of the benefit freeze and less in-work support under universal credit—which we have debated at some length already—of £6.8 billion a year by 2021. Money is not going into households and into the local economy, particularly in areas that need it most. We need to recall—although one would not imagine that readers of the Daily Mail and Daily Express would ever get to know—that 60% of benefit payments go to working households. Poverty among those in work is greater than among those without work. That is not to say that we should not be encouraging and facilitating people getting into employment—well-paid employment, we hope—but part of the problem that we have faced over the past decade or so is that earnings have not risen proportionately to the cost of living. In that way, people’s standards have fallen substantially.
In addition, there are government policies that make matters worse. In particular there is the pernicious restriction of benefits to the first two children in a family, mentioned in an earlier debate with reference to the kinship situation—which, I confess, I have not been alerted to, although I should have been—which is uniquely barbarous. However, it is bad enough for those restrictions to be imposed on any family. Some 900,000 are affected by this measure. The Rowntree Foundation, which does enormously valuable work in reviewing the state of our society, predicts that 470,000 more people will experience poverty by 2021, and a two-child family will be £832 a year worse-off than if benefits had kept pace with prices, or £676 for a two-child family with a single parent. Either way, that is a lot of money to support children in a very low-income family.
What is the justification for freezing benefit levels, especially now that the cost of living is rising rapidly? The cost of food, particularly, is rising substantially. The cost of living looks as though it is rising by a smaller amount but, for the people we are talking about, it is the basics—food, fuel and accommodation—that are the most telling calls on their budget. With Brexit, one imagines that food prices will continue to rise, probably at an ever faster rate.
There are also serious implications for the housing sector—both for social housing and for privately rented homes. ALMOs, the arm’s-length management organisations that provide much local council housing and manage it nationally, reveal that 31% of their tenants are in arrears to the extent of £414 per household, which brings a figure of £68.5 million a year in arrears. Of those who are universal credit claimants, 73% are in arrears, more than half of whom—this is telling—were not in arrears before universal credit began to be applied. In the private sector, as we have heard from time to time in your Lordships’ House, a vast number of people—4.7 million—are now in poverty after paying rent, where they can afford to. Where they cannot afford to, all too often they are faced with eviction, and society has to pick up some of the consequences of that through alternative provision.
The benefit cap has mainly affected single parents with multiple children. Indeed, 63% of those with three children or more are more likely to find it difficult to get into work or to be able to make up the difference. Yet against this background, the Government can find money effectively to reduce inheritance tax by increasing the threshold on family homes by an additional £125,000 for each spouse or partner, while their vaunted increase in the level at which income tax becomes payable benefits the higher paid proportionately more than those with very low earnings. There is also the anomaly that national insurance kicks in well below the tax threshold. Is it not time to review the relationship between these two forms of taxation? One of these two aspects of taxation receives attention from time to time, while the other apparently does not.
While we are talking about taxation, what about council tax? With bands unchanged for 25 years, the difference between the lowest band and the highest remains only threefold. In a street near where I live, there is a house on the market in band H where the asking price is just under £4 million, and the council tax will be in the order of £3,000. The smallest, cheapest flat in the ward I represent will be in band A, and the council tax will be £1,000. That is a ludicrously narrow ratio. I should make clear that my own home is in band F, and I estimate that it is probably valued at six to seven times the price of new houses being built in my ward—but my council tax is only twice as much. It is no longer the case that the poorest are protected by what used to be called the rate rebate scheme.
These are issues that need to be addressed if we are to protect people from the hardship that the right reverend Prelate so rightly outlined.
Lord Kirkwood of Kirkhope (LD)
My Lords, it is a pleasure to follow the noble Lord, Lord Beecham, who brings a wealth of valuable experience from his local government work. I am very grateful to the right reverend Prelate for this debate. It is something I was trying to get on the agenda myself, as it meets my intrinsic need to replace the now-gone annual uprating debates that we used to have on social security. I held the record for attending 27 years in a row without missing one. I wanted the box set until the Government went and did this dastardly act, and now I have to rely on the Church to give me the opportunity to go through the 37 means-tested benefits that are covered in this benefits freeze in my nine-minute speech.
I have a very simple point to make. I endorse what the right reverend Prelate said, but it seems to me that, in Parliament, one of the important defence mechanisms in our social protection network was that we accepted the principle that there would be a valorisation of the benefit levels—that the rates, which had to be considered by the Secretary of State for Social Security every year, were in some way linked to a cost of living measure. You could have arguments about whether RPI or CPI was right or wrong, but that for me was a cardinal protection for people. I would be prepared to go on any doorstep in the United Kingdom, however prejudiced the household might be, and argue with them that as wealth increases—or decreases—the people who are supported by our social network protections should both share in any increase and take the decrease if that is what the economy is facing. That seems to me to be an unanswerable proposition for securing annual rates for benefits.
It is a real disappointment to me that the Government set their face against making these cuts on an annual basis, because they had the power that enabled them to do that, through the existing uprating mechanism. They set their face against that, which suggested to me that they were prepared to coldly and calculatingly accept some of the rates of poverty that we now know exist. The right reverend Prelate set them out clearly, particularly in relation to child poverty. I agree with that. We know what we are doing and we are making children poorer.
It would have been a much better position for the Government to say, “We will look at this every year, and if adverse circumstances apply”—and they do—“we will justify the increase or decrease year by year”. That would give me more confidence that all these very competent people in the DWP doing the research and monitoring these things are not just doing other things, such as Brexit Bills or something. I would like an assurance from the Minister, if he can give it to me, that someone is actually doing that and looking at it. We may not have to do this work, because we are not covered by the annual uprating requirements, but somebody in the DWP should be doing it and making sure that a line is not crossed—because the circumstances have dramatically changed since 2016. We had an inflation rate of 0.3% and now we have a rate of 3%. I do not know that we expected that, although I thought it would happen—and it is important to remember as well that it is 4% for food and drink.
The noble Lord, Lord Beecham, knows about this better than I do, but as much as anything, the ability of local authorities to soak up some of the downstream consequences, which are inevitable in terms of public services, is diminished in a way that in 2015 and 2016 I did not expect to see. So for all these reasons, it is not safe just to say, “This is it for four years, and we’ll come back and look at it in 2020 or whenever”. I would be grateful for any comfort that the Minister can give me about how we are handling the interim period between now and then, and monitoring some of these issues.
The Resolution Foundation, the Joseph Rowntree Foundation, the IFS and CPAG are serious, well-respected organisations. We are extremely well served in the United Kingdom by these organisations, which are beyond reproach. Of course they are making forecasts and estimates, and they do not have a crystal ball, so you have to look at the assumptions carefully, but they are well respected across Europe for the work that they do, and they are all queueing up and showing the RAG lights on the risk analysis as amber going red on this. I am not sure that we can go through the four-year freeze without risking public disillusion, mistrust and misery. If we allow that to happen, it will be a great shame.
I could not say this in the earlier debate, because I was so generous to the Chief Whip with my time, but the seven-day waiting period applies to these benefits as well. We may be in the business between now and next week of making some mitigation to the seven-day period, which used to be three days—and there was a big row when it went to three days, although you can understand that when you are trying to deal with a situation that avoids churn in the labour market. Another ask from me would be whether, in gremio of the wider consideration of universal credit, the seven-day wait could not be looked at as well.
I say absolutely openly that I would much rather the Government considered postponing the increase in the personal tax allowance to £12,500. They can still get there by their manifesto commitment period if they miss a year. If the Minister is looking for money—and it would need big money to mitigate some of these benefit freezes—the £2 billion or £3 billion that you could save by not introducing that promised tax cut, which affects higher-income households disproportionately, would be a good place to start.
I do not know whether the Minister has had a chance to look at it, but I was very struck by the recent survey the Financial Conduct Authority published, which was based on a huge sample of 13,000 people, divided into families that are struggling, squeezed and cushioned. The fragility that that survey revealed surprised me. I look at these things as closely as anybody, and it is worrying that we are sitting on a level of household debt that is bound to increase. If that is the base from which we are starting, we really have significant problems—not to mention withdrawing from the European Union, because the economy is bound to take a hit from doing that.
I have a final ask. We have the Social Security Advisory Committee available to us. It is another gold-standard institution. It is very experienced in all of this. I think that the Government should ask SSAC to monitor the remainder of this four-year freeze because it is big enough and ugly enough at telling the truth to Ministers privately in a way that might cause the Government to change their mind. It has a busy agenda and does not have an awful lot of extra resources, but it would be money well spent. If that were to happen, I certainly would sleep slightly easier in my bed at night. I hope that the Minister will think about that carefully.
Lord Elton (Con)
My Lords, I recognise, first, the depth of my ignorance of this subject compared with those who have spoken and those on the Front Bench. Secondly, I recognise what was established very well in the debate last week on the report from the noble Lord, Lord Farmer: namely, that the family is an essential building block in a stable society and that what you want in the family is stability. I am well aware that children in families perform better in school, have longer lives and so on.
On the point of longer lives, the noble Lord, Lord Beecham, touched on a very tender point when he referred to the reduction in expectation of life mile by mile as he approached the ward or borough that he represents. At 87, that speaks to me very loudly. I feel that I am extraordinarily lucky and I recognise the misfortune of those with short lives much more clearly that I would have done 20 or even 50 years ago.
I therefore speak with a tender conscience. It is tender also, as I say, because I am largely ignorant of the field—but there are certain simple, salient facts. As I said, there is the fact that families produce stability. There is also the fact that families are in great difficulty in various percentiles of our income spectrum—if that is the right language. I realise that an across-the-board mitigation of the policy that was established by the freezing benefits would be hugely expensive. This is not necessarily something that any Government could contemplate at this stage of the economic cycle and the budget cycle. Equally, this Government are compassionate and experienced and it seems to me therefore that any mitigation should be aimed where it is needed most—and it is needed most by the children who are the product of the families, and by those children who have no families.
I would have thought that this meshes very closely with a launch that took place two days ago under the chairmanship of the right reverend Prelate the Bishop of Chester on the effects of taxation on the family. What that revealed—incontrovertibly, in my view—is that there is a taxation bias. It is not deliberate, and the calculations are immensely intricate. The interaction of various factors means that families are worse off than they would be if they were not families and that, in particular, in-work parents under taxation are treated less favourably than those out of work. Therefore, my simple, not eloquent and not very clever suggestion is that if it is too expensive to mitigate across the board—which I assume it is—it would be sensible and compassionate to make the mitigation relate to the children in the spectrum, and in particular to children in families.
Baroness Sherlock (Lab)
My Lords, I commend the right reverend Prelate the Bishop of St Albans for choosing this subject and for managing to get it debated the week before the Budget, which I think is a very coveted spot indeed. In doing so, he has highlighted one of the greatest and most overlooked scandals of the austerity policies pursued in recent years. With apologies, I am going to go through some of the history to this and what I think is wrong with this approach to deciding benefits and then look at why I think it is being done.
Previously the default position was that social security benefits and tax credits were indexed to inflation so they would keep their value. Before 2011 they were linked to the retail prices index or ROSSI—a variant on RPI which excluded housing and some council tax costs. From 2011 they were linked to the consumer prices index and, as the noble Lord, Lord Kirkwood, pointed out, that was contested but did at least preserve the stated intent of ensuring that benefits and tax credits remained in real terms at the level at which Parliament had decided to set them. It meant that Parliament knew what it was voting for when it approved changes to benefit levels.
That changed when the coalition Government decided to limit most working-age benefits to a 1% annual increase for three years from 2013-14. This Government went further and froze those benefits at their 2015-16 cash levels for another four years so they will not rise again in cash terms again until 2020. The frozen benefits include payments on which the poorest families in our society depend. I suggest there are two major problems with this change: one of process and the other of impact. First, it means that Parliament has no idea what it is signing up to—a point made by the noble Lord, Lord Kirkwood—when something is set for four years at a time. The impact assessment for the Welfare Reform and Work Bill, which brought this policy in, showed a projected saving to the Treasury of £3.5 billion by freezing the benefits as opposed to uprating them by CPI, although it noted that:
“These savings will continue in future as increases will be from a lower base”.
But of course inflation changes so the exact saving to the public purse and the corresponding cost to those who get the benefits and tax credits are variable quantities. So the Government asked Parliament to adopt a policy when they could not know the precise impact on the people who would be affected by it.
That is the second problem—the impact has turned out to be severe. This freeze cuts in real terms the incomes of affected households year on year. Inflation is now higher than when the Bill was passed. The impact assessment helpfully cited the OBR inflation forecasts for CPI inflation for every year of the freeze period. They varied between 0% and 1.9%. The forecast for this year was 1.2%. In fact, the CPI 12-month rate last month was 3%. That is good news for the Exchequer which scores a saving much higher than predicted. As David Finch of the Resolution Foundation points out, by 2020 the estimate is that the freeze will have saved the Exchequer some £4.7 billion, a full £1.2 billion more than previously forecast. With CPI at 3%, that makes year three of the benefit freeze alone worth £1.9 billion to the Treasury.
The bad news is, of course, that it is £4.7 billion which would have gone into the budgets of those who get benefits and tax credits and use them to feed their children and pay their rent, and now they will not. As the right reverend Prelate the Bishop of St Albans pointed out, it is worse for the poor because they have to spend more of their income on essentials, such as food, and the inflation rate for food and energy is higher than the 3% general inflation rate. Most forecasts suggest that it will get worse. My noble friend Lord Beecham has revealed the effect of that in his area, and also the significant impact on housing.
CPAG analysed the effect of the freeze before the latest rise in inflation and found that in a universal credit system, the four-year freeze to UC and child benefit uprating will cost the average single-parent family £710 a year and the average couple with children £430 a year. I commend the concern for families of the noble Lord, Lord Elton, for whom I have a great deal of respect, and I admire him for it. One of the reasons I am most worried about this freeze is that it affects most families with children, and that is where the damage is being done. I appreciate his raising that issue.
What will this do to inequality? That was set out in painful detail in a recent report by Hood and Waters of the IFS, Living Standards, Poverty and Inequality in the UK: 2017-18 to 2021-22—there have been catchier titles, I grant you. It uses Treasury and OBR data and macroeconomic forecasts to model the impact on household incomes. Its projections showed this: inequality will rise over the next four years; the official rate of relative poverty after housing costs will rise by two percentage points, driven entirely by child poverty, which will rise by seven percentage points; absolute poverty will remain the same, but pensioner poverty will fall and absolute child poverty will rise by four percentage points. Children must be looking enviously at the triple lock enjoyed by pensioners.
Prices are rising but the real incomes of poor households are falling, and most of those had nothing to spare in the first place. What does the Minister think those families should do? More to the point, why are the Government doing this? We know, because on 30 October, my noble friend Lady Lister asked the noble Baroness, Lady Buscombe, the Minister’s colleague, to describe the Government’s reasoning. The noble Baroness said:
“The benefit freeze is part of a package of welfare reforms that is designed to ensure that the system remains sustainable and to incentivise claimants into work. These reforms are working, and we have not had a lower unemployment rate since the 1970s. The changes we have made to the benefits system allow us to target the support we provide to those who need it most”.—[Official Report, 30/10/17; col. 1156.]
Let me take that Answer apart. First, it is part of a package of welfare reforms. The benefit freeze is not a reform: it reforms nothing; it is simply a cut every single year on year. Secondly, it is designed to ensure the system remains sustainable. Ministers often complain about rising social security spend without giving any context, or referring, for example, to the rising levels of age-related disability, or even without mentioning that spending on out-of-work benefits rises during recessions which, of course, is the safety net kicking in—automatic stabilisers, as economists put it, kicking in. A much better test of sustainability is the cost of social security as a percentage of GDP which has changed remarkably little in recent decades. However, if these cuts go ahead, the OBR Welfare trends report said that by 2020-21 social security spending in support of children and working-age people would be at its lowest share of GDP since 1990-91.
Thirdly, it is to incentivise claimants into work. But this benefit freeze affects people claiming ESA who have been deemed not fit to work yet. It affects mothers of children under one, whom even this Government do not think should work. It affects working tax credit and child tax credit which go to people in work. The same people whose incomes from wages have been squeezed are now finding the system that is meant to top up their household income is being slashed just when they need it most. Fourthly, the changes are to allow us to target the support to those who need it most. Yet the biggest losers overwhelmingly are families with children and especially single-parent families. How is that a good target?
Ministers keep telling us the country cannot afford to pay benefits at decent levels. The coalition Government famously said that,
“those with the broadest shoulders should bear the greatest burden”.
Yet a detailed study by Ruth Lupton et al of the coalition’s social policy record found that,
“the poor bore the brunt of its changes to direct taxes, tax credits and benefits”.
With the exception of the richest 5%, those in the top half of the distribution were net gainers from the changes. The study said:
“Perhaps surprisingly, overall the ‘welfare’ cuts and more generous tax allowances balanced each other out, contributing nothing to deficit reduction”.
Yes, those austerity cuts were not needed to cut the deficit but to pay for tax cuts for the richer.
There we have it. This policy hits the poorest who had no spare cash anyway. It hits low paid workers as well as those who cannot work. It hits children hardest. It will increase poverty and inequality, especially for children. Its impacts will be felt well into the future as these new, lower levels form the basis for any future increases. Every increase in inflation represents a windfall for the Exchequer at the expense of the poorest families in our society. This is unjustifiable. The Government should abandon it now.
Lord Young of Cookham (Con)
I begin by thanking the right reverend Prelate the Lord Bishop of St Albans for securing this debate—his second debate this week, each focusing rightly on the least well-off in society. I am grateful for the way he set out his case and for what he said about families, much of which was endorsed by my noble friend Lord Elton. The other speakers in this debate are all veterans of previous debates on universal credit—an important qualification which I hope has reassured the noble Baroness.
The noble Baroness wanted to look at history. If I may, I shall do exactly the same, going back a little further than she did. This debate is very different from one that might have taken place when I first entered government in 1979 as a Minister at the Department of Health and Social Security, a precursor to today’s DWP. Welfare spending on people in work barely existed at that time, often leading to a sharp drop in income as people moved off supplementary benefit into work, with all the disincentives that went with it.
In the decades that have followed, we have seen in-work support evolve from its inception through family credit and housing benefit to the introduction of statutory sick and maternity pay in the 1980s and then on to tax credits, which started in the late 1990s and have grown in importance ever since. The more than £25 billion that the Government now spend on in-work benefits and tax credits sits at the heart of a welfare system dedicated to supporting people, first, to seek and find work, and then to stay in work and take home more of what they earn. This has been a dramatic change in priorities over my political lifetime.
I hope it does not sound hard-hearted to say that work is the best route for families to get out of poverty and become self-reliant. I genuinely believe that to be the case. Earnings provide people with the best opportunity to grow their income and become financially secure. Across the UK, the unemployment rate is at its lowest level in over 40 years and there are fewer households where no one is in employment than at any time since comparable records began. That is why we are committed to incentivising work for those who can. This debate, however, is about the next step.
What happens to living standards when people have found a job? Here, the Government have taken a number of steps, not all of which have been mentioned in the debate. They have cut income tax for over 30 million people and taken 4 million low earners out of income tax altogether. As of April this year, a typical basic rate taxpayer will pay over £1,000 less income tax, compared to 2010-11. Our plan, as the noble Lord, Lord Kirkwood, mentioned, is to increase the tax-free personal allowance further to £12,500 by the end of this Parliament.
Other measures, such as freezing fuel duty and reducing social rents to 2020, will mean more money in the pockets of those social tenants paying their own rent and a lower housing benefit bill. If one puts it all together and takes into account the national minimum wage, in 2010 a single person on the national minimum wage working 35 hours per week would have taken home £9,200 after tax and national insurance. Following the national living wage and changes to the personal allowance, they would take home £12,500, an increase of £3,300.
The national living wage has had a big impact. It has given the UK’s lowest earners their fastest pay rise in 20 years. In 2016 their full-time earnings increased by 6.2%—well above median growth of 2.2%. Since 2010 the annual average income of the poorest fifth of households has risen in real terms by more than £300, while the incomes of the richest fifth have fallen. Our aim is for the national living wage to reach 60% of median earnings in 2020. Since 2010, we have 600,000 fewer people living in absolute low income on a before-housing-costs basis, and 1.2 million fewer people on out-of-work benefits, so income inequality is down.
My noble friend Lord Elton and others mentioned working families on low income. Here we have made the childcare element of universal credit more generous. Parents on universal credit can now claim back up to 85% of eligible childcare costs, compared with 70% in working tax credit, a change that is benefiting 500,000 working families. Working families in England with children aged three and four can now get up to 30 hours of free childcare a week in England, worth up to £5,000 per child. This amounts to a record investment by the Government in childcare. By 2019-20 we will be spending over £6 billion per year to support working families in this way. Helping the younger unemployed, we have seen more than 3 million apprenticeships start since 2010, with a commitment to 1.9 million more apprenticeships by 2020, helping young people into better-paid employment. Youth unemployment has fallen by over 40% since 2010, and the proportion of young people who are unemployed and not in full-time education remains below 5%
While the debate has focused on the specific impact of the benefit freeze, we should put on the other side of the scales the many measures that I have just mentioned. If we do that, we get a fuller and more balanced picture.
At the time of the 2015 summer Budget, we estimated that the benefit freeze would save £3.5 billion in 2019-20, equating to an average notional loss of £6 per week in 2019-20. Some of the other measures I have just referred to should be taken into account before one comes to an overall judgment.
The noble Baroness, Lady Sherlock, and others, contrasted the freeze in working-age benefits with a more generous regime for the state retirement pension. There is a key difference that justifies this. Once you reach state retirement age, there is no turning back. For most, there is no opportunity to increase their income through paid work, whereas those of working age and who are fit have this opportunity. Between August and October of this year there were 780,000 job vacancies. Just to make the point, around 80% of people leave JSA within six months of making a claim, indicating that this is a stream rather than a pool.
A number of noble Lords raised statistics about poverty. We can trade statistics about relative or absolute poverty, before or after housing. Since 2010, on a before-housing-cost basis, there are 600,000 fewer people on absolute low income—a record low—including 200,000 fewer children, 100,000 fewer pensioners and 300,000 working-age adults.
In his opening remarks, the right reverend Prelate said that one of the three criteria should be fairness. I agree. The Treasury published a cumulative distributional analysis alongside the Autumn Statement in November last year, showing the impacts on household income of tax, welfare and public expenditure changes implemented—or planned to be implemented—since the 2010 general election. This is the most comprehensive analysis available, covering the effects of not only direct cash transfers between households and government but of front-line public service provision. This analysis shows that the state is highly redistributive. On average, the 10% of households with the lowest incomes receive over four times as much support in spending as they contribute in tax, while the 10% of households with the highest incomes contribute over five times as much in tax as they receive in spending. The Government’s policies have repeatedly increased the tax contribution of the wealthy through measures such as the reform of dividend taxation and the increase in stamp duty. Income inequality is now lower than it was in 2010.
My noble friend Lord Elton mentioned children and families. We are committed to supporting families and tackling the root causes of child poverty and disadvantage. We know that children do worse in households where no one is in work. A child growing up in such a family is almost twice as likely to fail at all stages of their education as a child living in a working family. Children in households without a working member are five times more likely to be in poverty than those in households where all the adults work. Hence the emphasis in our policy on getting people into work wherever possible.
I shall touch briefly on some of the points raised in the debate. I join the noble Lord, Lord Beecham, in paying tribute to the voluntary sector and the work it does in helping some of the families we have been talking about. On the spare room subsidy—rather than the bedroom tax—he will know that discretionary housing grants are available to help those in need as a result of the change. My noble friend Lady Buscombe addressed the two-child policy in the debate that has just concluded. I should like to write to the noble Lord if I do not touch on all the points he raised.
On the benefit cap, there is a basic issue of fairness which, I think, resonates with the public as a whole. It is absolutely right that you cannot get more from a life on benefits than from work. This is the principle behind the cap.
I am grateful to the noble Lord, Lord Kirkwood, for curtailing his speech on the earlier debate. I will pass on to the Chancellor his suggestion of switching the resources from cutting the personal tax allowance to putting more into universal credit. He asked why we used primary legislation to freeze the benefits and tax credits. Legislating for four years brought certainty on levels of welfare spending to benefit recipients, the taxpayer and the Exchequer. The annual uprating includes benefits for carers and disability premiums. My understanding is that, once we come to the end of the freeze, we revert to the default position of uprating on the normal basis.
The noble Lord asked about the SSAC. The annual uprating order that provides for increases in benefits and pension rates is not subject to SSAC scrutiny. The order is fiscal policy and that is why the four-year benefit freeze was provided for in primary legislation and not as part of the annual review.
This is a Government who support families. We support people below state pension age with over £90 billion a year in payments, providing a robust welfare safety net. We support families who face additional obstacles and costs as a result of disability or illness by maintaining the value of the payments they receive. We support parents to get into work and out of poverty, to earn more, to gain financial security for their families and to give their children the best prospects for the future.