Taxation: Families

Baroness Jenkin of Kennington Excerpts

Thursday 17th January 2013 Lords Chamber

[Baroness Jenkin of Kennington]

My Lords, rising to speak after the noble Baroness, Lady Hollis, who is so well known for her knowledge, expertise and experience in this area, I feel a bit like a young and very inexperienced First World War pilot up against the Red Baron, or perhaps the Red Baroness in this case. However, like other noble Lords, I am of course grateful to her for the opportunity to participate in this debate.

Let us take a moment to look at why the Government are having to take these steps. When the coalition came into office in 2010, the country’s tax and benefit system urgently needed reform precisely because it was failing families, especially families headed by couples, and let us remember that such families are still in the majority.

I will start by putting my remarks in context with that great reformer of the mid-20th century, the architect of the welfare state itself, William Beveridge. His blueprint for social reform anticipated the enormity of the post-war social challenges and showed a reforming Government how they could rise to them even in the hardest economic times—then, as now. It is worth remembering that his appeal to conservatives and other sceptics was to argue that welfare institutions would increase the competitiveness of British industry in the post-war period, not only by shifting labour costs like healthcare and pensions out of corporate ledgers and onto the public accounts, but also by producing healthier, wealthier and thus more motivated and productive workers who would also serve as a great source of demand for British goods.

Yet by the end of the first decade of the 21st century we had become a nation that was dependent on benefits to a degree that would have astonished and possibly horrified Beveridge, so concerned was he in his later life that the state might have replaced the welfare society where people anticipated, gave, and received mutual help. We had created a veritable tax credit culture that had been fostered by the party renowned for tax and spend. By 2011, nine out of 10 families were receiving some form of subsidy from government over and above child benefit. Families earning over £50,000 a year were able to apply for a top-up in the form of child tax credits, yet even the most numerate stock broker or accountant found themselves unable to work out exactly how they were calculated. For those families, that might have meant a degree of uncertainty about whether it was worth while for a second earner to pursue a part-time job which in turn might have meant the tax credits were all tapered away. But that is nothing in comparison to the abject fear in much lower-earning families that changes to earnings might lead to demands for massive repayments.

Our benefits system was at breaking point under the weight of the confusing complexity of 51 different benefits, withdrawn at different levels. At the end of many years of economic growth, prior to the recession, 5.4 million people were claiming out of work benefits. Many had done the sums and did not consider it worth their while to work as they would struggle to earn as much as they were entitled to on benefits. DWP figures from 2010 show that despite 2.4 million households receiving working tax credit, 35% of families stayed in poverty when a parent entered work.

A significant couple penalty was also a feature, making it much harder for single-earner couples, who might have several young children, to work their way above a somewhat arbitrary poverty line than a single parent. The level of fraud was such that lone-parent claimants exceeded actual numbers in the country by an estimated 200,000. Fathers facing a general slump in blue collar wages, a situation exacerbated by many employers understanding that the Government would top up the little they were willing to pay, often perceived that the mothers of their children would be better off living separately from them.

Researchers at the University of Essex found a spike in the divorce rate of a staggering 160% among families where working families tax credit made it distinctly financially advantageous for a woman to part company with a low-earning or non-earning husband. That is why universal credit has been designed to ensure that people will be better off in work, to make work pay, to simplify an eye-wateringly complex system and reward responsibility, with couples raising children together and sharing the daily load, fathers and mothers willing to work extra hours to improve their families’ lives, not expecting the taxpayer to do that for them. Let us face it, in most cases, they were and are the taxpayer.

Turning to the tax system, I strongly support my party’s pro-marriage credentials and the introduction of the transferable tax allowance for married couples. This would be a popular first step towards rebalancing our tax system so that it is fairer to single-earner families. The organisation Care found that the tax burden on one earner couples with two children is a staggering 42% higher than the OECD average. We are among a small minority of countries in Europe which do not recognise interdependence within families but instead tax on an individual basis.

The tax burden on couple families is why the respected Institute for Fiscal Studies found that increasing the personal tax allowance helps richer families most, where both parents are more likely to have jobs that enable them to take full advantage of tax-free earnings, while transferable tax particularly benefits families at the poorest 20% level. Enabling a low-earning or non-earning spouse to transfer some or all of their personal allowance to their other half sends the vital signal that this Government understand that it is not always desirous or in the best interests of families for both parents to be working. It is not only Conservatives who believe this. Towards the end of her time as Trade and Industry Secretary, Patricia Hewitt admitted in an interview to the Daily Telegraph that new Labour had done a disservice to families by assuming that having both parents in continuous work should be the goal. She said they had belatedly recognised that inadequate recognition had been given to what matters to people most—their families and relationships. She said:

“If I look back over the last six years I do think that we have given the impression that we think all mothers should be out to work, preferably full time as soon as their children are a few months old … We have got to move to a position where as a society and as a Government we recognise and we value the unpaid work that people do within their families. That’s mothers but also fathers and people looking after elderly relatives or people with disabilities”.

I do not suppose that my noble friend the Minister could have put it better himself.

In summing up, I must reiterate that while those who need it should of course continue to receive support, welfare reform is vital for this country so that we stay competitive and support and encourage people’s aspirations to work, setting the right example to their children by paying their own way and avoiding dependency. This Government have grasped the nettle, not despite economic hardship but because our financial circumstances highlighted how urgent was the need for reform.

Child benefit changes have not been carried out in a seamless and sensible way—there is no getting away from that charge—but again we have to face up to the realities. We are in an economic quagmire. Giving more than £1,000 to every family, however wealthy—and that is just for a first child—is unsupportable. However, it is also untenable that single-earner families on incomes a little over the threshold set by the Government quickly lose everything when they are already being hammered through the tax system.

If we really want to support families in need, we must prioritise the most vulnerable, particularly the disabled, as the Secretary of State and my noble friend the Minister have pledged to do. We should do absolutely everything possible to make work pay, recognising that, if wages are not rising, it cannot be right to keep pumping in government subsidy in a way that will let employers off the hook and make it even more difficult to imagine life without benefits.