Guardian’s Allowance Up-rating Order 2013

Lord Eatwell Excerpts

Monday 18th March 2013 Grand Committee

This Government are committed to restoring the country to sustainable growth and prosperity. The savings enabled by these regulations are a crucial part of delivering on that commitment. However, the Government are committed to doing this in a way that will protect those who need protection and ensure that the highest earners pay their share. This Government are taking action that will really benefit those in work and families with children, not just pumping more money into the benefit system. We have not shirked our responsibility to take the tough decisions to return the UK to economic stability. I commend these regulations and orders to the Committee.

[Lord Eatwell]

My Lords, I am grateful to the Minister for introducing these statutory instruments. He concentrated, as indeed I will, on the uprating of tax credits. He said little about the guardian allowance uprating, which is the only issue that gives rise to the traditional debate between RPI and CPI, which I shall certainly leave aside. Enough has been said about that to expose the Government’s use of that device to extract money from the welfare system.

The noble Lord pointed out in his introductory remarks that the measures that he described were withdrawing a total of £2.7 billion, I think it was, from the pockets of the poorest in this country. These contemptible measures represent a fundamental economic failure and a fundamental misunderstanding of the role of tax credits and of the security system in our economy. He referred extensively to the idea that this was somehow fair. In particular, when addressing the issue of working tax credits he justified what is being done by referring to the personal allowance change, from which the noble Lord himself benefits; from the fuel duty change, from which the noble Lord himself benefits; and from the freezing of council tax, from which the noble Lord himself benefits.

My point relates not to the motivations of the noble Lord but to the fact that these benefits benefit everybody in the economy. The changed personal allowance benefits 24 million people, which is just about every taxpayer, including the noble Lord and me. These measures are no justification whatever for withdrawing support from those who are on the lowest incomes and who need support the most.

I was struck by the table of the decline in benefits that was attached to the Explanatory Memorandum for these measures. The basic element of tax credits is down by £45 in real terms. The second adult element is down by £25 in real terms. The lone parent element is down by £25 in real terms. For child tax credits, the family element is down by £15, the child element is down by £30 and the disabled child element is down by £30. These may seem trivial sums, but for families who are absolutely on the edge of survival they are absolutely fundamental. The £2.7 billion that the Government are extracting from this part of our community in order to attempt to reduce the deficit is a direct attack on targeted benefits that were actually associated with the poorest in our community.

The Government have also, perhaps unintentionally, weakened a fundamental aspect of the Chancellor’s economic policy. The Chancellor has referred on several occasions to the fact that his measures are designed to attack the structural deficit and not the deficit as it occurs from year to year, as it may be affected by fluctuations in economic activity. There, the Chancellor has pointed out, the effects of any decline in activity are mitigated by what are called the automatic stabilisers: the fact that benefits rise automatically as people become more impoverished and are reduced automatically as the economy grows, although the Chancellor has of course not experienced that. Now we are weakening the automatic stabilisers.

Have the Government calculated the effect on the overall multiplier consequences on government expenditure of the weakening of social security payments that we have before us? Can the noble Lord tell us what the overall impact will be of this reduction in spending for the poor on the level of activity in the economy, now that we know, by virtue of the IMF, that the multiplier consequences of reducing government expenditure are much higher than was contained in either the Treasury’s or the OBR’s calculations? Can he tell us the impact of this on the overall level of activity and the consequential impact on the increase in the deficit that these spending changes will bring about? It is a trivial economic error to look at first-round effects and not to look at subsequent consequences on levels of activity and revenue.

We have before us the first step in a steady attack on the welfare system, which is to be progressed year after year over the next three or four years. I find it a dispiriting image of our country that we are prepared to do this in the most dire economic circumstances, attacking those who are the weakest while simultaneously, from this April, reducing the top rate of tax for those with the highest levels of income, over £150,000, from 50% to 45%. The noble Lord referred to this group, telling us that the top 20% are contributing a major share of tax revenue to the reduction in the deficit. Does he not realise that, arithmetically, that arises because they are so darn rich compared with everybody else?

The distribution of income in this country has deteriorated and become so skewed that the higher tax revenues contributed by those on higher incomes are a direct function of the extraordinarily high pre-tax incomes observed in the top portions of our society. The Minister’s references to the proportion of revenues now being derived from the purchase of £3 million houses, or from the impact on £1.25 million pension pots, will seem like a Hollywood fantasy to the people with whom we are dealing in these measures.

Will the Minister also confirm that the reduction in real incomes of the lowest two deciles in the economy is greater in proportion than that of the top decile, once one takes out the tax increase introduced by Alistair Darling, which the Government always put into their calculations in order to produce the spurious argument that the top decile has contributed most? Once one strips out the measures taken by the previous Labour Government in the March 2010 Budget, the proportionately larger contribution of the top decile disappears.

These measures directly attack the weakest members of our society and reduce the overall welfare budget at a time when it is needed more than anything else. It is not only inequitable but economically illiterate, because it reduces the transfer of funds to that section of society that provides the overwhelming economic benefit of spending every penny it gets, thereby helping to sustain activity in the overall economy. These are vicious measures from an economically illiterate Government.

[Lord German]

My Lords, I had hoped that we would not have a second round of our debate in the Chamber about the welfare uprating Bill, but clearly we have just had it. It slightly disappoints me because we will be re-rehearsing similar arguments. However, I must say to the noble Lord, Lord Eatwell, that I support interventions that help people in their lives. I support very much the pupil premium, and investing heavily in helping young people, particularly young children, to find a better way of life. I also support the uprating and raising of tax thresholds, because we can raise the bottom tax threshold and adjust other tax thresholds in a different direction.

I note also, by way of a second round in this debate, that I heard no answer to the question about savings, except the £100 million according to the OBR, which was the only example that we heard of another way of saving money. In order to get this concretely in my mind, I would be grateful if my noble friend would say, for the year 2013-14, what the savings will be from the freezing of tax credits and from the elements that are before us in these regulations when they are added together. We can then compare them with the £100 million offer that we have just heard.

I have two further small questions. First, the Government are obliged under the Tax Credits Act 2002 to review the level of tax credit payments. They have done so for 2013-14, but while the review may have been made public it is not very easy to find. Perhaps my noble friend would either point me in the direction of the report or send me a link so that I can have a close look at it. I should add something in response to the noble Lord, Lord Eatwell, who talked just now about the freezing of council tax benefits. I live in a Labour-run authority and my council tax has gone up. It does not benefit me at all. It is also managed by a Labour-run administration.

The second part of my question relates to the guardian’s allowance. I can understand why it has been excluded, given that the majority of people who are guardians will tend to be of an older age. I wonder whether that is the only logic or whether there is another logic behind uprating fully by CPI. I welcome the move, but I just want to understand why it has been taken.

[Lord Freud]

It is worth just reminding noble Lords that we have to take pretty urgent action to tackle the situation left by the previous Government, which was an unsustainable welfare bill that has been rising and that continues to rise, as I said, from 11% in 2007-08 to more than 13% today.

[Lord Eatwell]

That is a good point, which I forgot to bring up. Could the noble Lord tell us whether that rise is due to the change in the rate of benefits or to the recession?

[Lord Freud]

That is a complicated and rather interesting question, so if the noble Lord will accept this I would like to reflect upon it and write to him. One thing is that in the past couple of years we have in effect held level the number of people on out-of-work benefits. It is really quite a complicated question, and I shall go away and try to come back to him with a proper answer.

My noble friend Lord German asked about the 2013-14 savings. The three-year freeze of the basic rate and the 30-hour element of working tax credit have saved £975 million from 2011-12. The three-year freeze of child benefit saves £1.25 billion from 2011-12, and uprating certain elements of tax credits by 1% saves £320 million for the same period.

On the automatic stabilisers, the multiplier that we use is decided by the OBR, which is using a rate of 0.6 for welfare spending. That compares with a fiscal multiplier for capital expenditure of one. Clearly, one of the attractions of moving an extra £5.5 billion into infrastructure over the next two years is that it has that larger multiplier effect. The investments for the next two years are in new roads, science infrastructure, free schools, cutting the rate of corporation tax and increasing the annual investment allowance to £250,000. The OBR has said that it expects the level of GDP to be higher as a result of Autumn Statement policies.

My noble friend asked about the location of the reports on tax credits. I shall send the link to the relevant website. I apologise that it is difficult to find.

On the point raised by the noble Lord, Lord Eatwell, about who pays and about the rich, there are very good reasons for changing the top rate of tax, not least that the analysis of the rise from 40p to 50p, which was meant to have raised £2.5 billion, found that it raised considerably less. HMRC has found that it would raise at most £1 billion, and even less than nothing when indirect effects are taken into account. Clearly, that analysis is of the rising effect; one could look at the argument the other way when one starts to reduce it.

[Lord Eatwell]

My Lords, can the Minister elaborate on that point? In the Treasury’s initial assessments, and despite what seemed to be the obvious impact of the cut in top-take tax from 50% to 45%, its estimates were far lower than £1 billion. It has therefore significantly increased its estimate of the take; I refer to the estimates published at the time of the announcement of that measure. Will the Treasury publish a full assessment of the impact of the change in tax rates? Will it do so on a rolling basis, because we will know much more in four years about what has really happened during the past year than we know now?