Guardian’s Allowance Up-rating Order 2013

Lord Freud Excerpts

Monday 18th March 2013 Grand Committee

Moved by

[Lord Freud]

That the Grand Committee do report to the House that it has considered the Guardian’s Allowance Up-rating Order 2013.

Relevant document: 20th Report from the Joint Committee on Statutory Instruments.

[The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud)]

My Lords, I shall also introduce the Guardian’s Allowance (Northern Ireland) Up-rating Order 2013 and the Tax Credits Up-rating, etc. Regulations 2013. It is the Government’s view that the regulations and orders are compatible with the European Convention on Human Rights.

The regulations and orders before the Committee put into effect a number of reforms to tax credits and child benefit announced at the spending review 2010, the June Budget 2010 and the Autumn Statement 2012. In the spending review 2010, we announced that the basic and 30-hour elements of working tax credit would be frozen for three years from 2011-12. The regulations confirm that policy for 2013-14.

At the June Budget 2010, we announced that the rates of child benefit would be frozen for three years from 2011-12. We also announced that the income disregard, which is the amount by which a family can increase its income within a tax year without a recalculation of its tax credit award, would decrease from £10,000 to £5,000 in April 2013. At the Autumn Statement 2012, we announced that the child element of child tax credit, and the couple and lone-parent elements of working tax credit, would be uprated by 1% for three years from April 2013.

Benefits that help with the extra cost of disability have been protected. The regulations increase the disability elements of tax credits—that is, the disabled child and severely disabled child elements of child tax credit, and the disabled worker and severely disabled worker elements of working tax credit—in line with CPI. The rate of guardian’s allowance will also be uprated by CPI.

The Committee will be aware that the decisions on uprating contained in these regulations are part of a wider package of uprating measures. My noble friend Lady Stowell has already presented the Social Security Benefits Up-rating Order for 2013-14, which increases certain working-age social security benefits by 1%. The Welfare Benefits Up-rating Bill, which confirms the 1% uprating decision for 2014-15 and 2015-16, including for certain elements of tax credits and child benefit, is now entering its Report stage in the House.

I will start by saying that tax credits and child benefit provide valuable support to millions of families, so the decisions to freeze child benefit and tax credit rates or to increase them by less than CPI were difficult. They will mean that the rates will reduce in real terms. However, they are necessary decisions that should be considered in the context of the exceptional fiscal challenge that we inherited: namely, the largest deficit since the Second World War.

The Government are committed to reducing the deficit. Around four-fifths of the total consolidation in 2015-16 will be delivered by lower spending. This is consistent with OECD and IMF research that suggests that fiscal consolidation efforts that are focused on spending are more likely to be successful.

Tackling the unsustainable welfare budget is a key part of addressing our fiscal challenge. From 1997 to 2010, spending on welfare increased by some 60% in real terms, which is equivalent to an extra cost of £2,900 per household in Great Britain. It is an increase from 11% of GDP in 2007-08 to more than 13% today. Welfare now accounts for £1 in every £4 of public spending. Tax credits have significantly contributed to this increase. Under the previous Government, spend increased by an extraordinary 340% compared with the benefits it replaced. Tax credits will cost around £30 billion this year, and child benefit costs a further £12 billion. Together, they make up over 40% of working-age welfare spend.

Freezing the basic and 30-hour elements for three years will save almost £1 billion in 2013-14, while uprating the child, couple and lone parent elements by 1% saves £320 million, and decreasing the income disregard will save £125 million in 2013-14. The three-year child benefit freeze will save an additional £1.25 billion. If these savings were not delivered, this could clearly put additional pressure on spending on public services. While they are tough decisions, they are necessary and will be implemented through these regulations.

I assure noble Lords that while we are taking these tough and necessary decisions on welfare, we are also ensuring that high earners pay their share. The top 20% of households continue to make the greatest contribution towards reducing the deficit. This is true both in cash terms and as a percentage of their income and benefits in kind from public services. Overall, the richest will pay more tax in this Parliament than under the previous Government’s plans. As a result of this Government’s actions, a high earner pays an additional £10,000 on a £100,000 capital gain; pays an extra £60,000 on the purchase of a £3 million house, and an extra £300,000 if purchased via a corporate envelope; loses up to £4,500 a year in entitlement to tax reliefs on annual pension contributions, for an individual previously claiming the maximum annual tax-free pension allowance and paying the additional rate; can no longer benefit from tax relief on contributions to pension pots over £1.25 million in value; and will no longer be able to use income tax reliefs to reduce their tax bill excessively year after year.

These measures clearly affect benefits that are designed to support families with children. I am conscious that there has been much discussion, both in the House and through the media, about the impact that this might have on child poverty. The Government are committed to tackling child poverty and focusing on interventions that transform lives rather than push up benefit incomes to lift people just above a relative income line. We already know that focusing on the relative income line alone yields perverse results. In 2010, 300,000 fewer children were said to be in poverty because the recession had caused median incomes to drop. In other words, people were said to be pulled out of poverty not because anything changed in their lives but because the rest of society had got poorer.

The Government are consulting on a better measurement that includes income, which is of course an important part of tackling child poverty, but goes beyond income to tackle the root causes of poverty, including worklessness, educational failure and family breakdown. I re-emphasise that one of the most important things that we can do to support children is to tackle the nation’s debt and restore economic growth. In doing so, we can create a future of prosperity and opportunity. I simply disagree that what is best for children is to continue spending unaffordable amounts on welfare while building up debts to pay for it.

The Government are prioritising our resources into reforms that really help families with children. We have invested £2.5 billion in the pupil premium for disadvantaged pupils. We have put £1.2 billion into capital investment in schools. We are investing in making work pay through universal credit, sending out a clear signal that we believe that work is the best route out of poverty for parents and their children. As part of universal credit we are spending an extra £200 million to support families with childcare costs, and for the first time this support will be made available for families who work fewer than 16 hours per week. This will mean that 100,000 more working families will be helped with their childcare costs. Of course, we also provide significant support to families through the National Health Service and schools, which, even in these difficult economic times, we have protected the budgets for.

--- Later in debate ---

[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?

--- Later in debate ---

[Lord Freud]

My Lords, I shall come back to the noble Lord on the plans. I am reporting that HMRC has looked at the projection made at the time of the top rate being raised from 40p to 50p. The projected revenue was £2.5 billion. It is currently saying that the figure is less than £1 billion, with a warning that it could raise less than nothing when indirect effects are taken into account. As the noble Lord said, some of the effects take some time to be realised. I am not sure what the plans are for more reports. Rather than hurrying around to find an answer for what is a detailed point, I will write to him.

Clearly, the freezing and indexation of benefits is not an easy decision to take. Our rationale is that one of the most important things that we can do to support families and children is to bring down the deficit and secure the economic recovery. It is only fair that we tackle the deficit now so that future generations are not burdened with unsustainable debts, higher taxes and diminished public services. I commend the regulations and orders to the Grand Committee.

Motion agreed.