Low-income and Vulnerable Consumers

Lord Haskel Excerpts

Thursday 6th November 2014 Lords Chamber

[Lord Haskel (Lab)]

My Lords, I do not know if the Minister goes to the World Economic Forum at Davos. In 2009, a speaker said:

“There is a disconnect between capitalism and people’s lives”.

That speaker was David Cameron, a year before he became Prime Minister. My noble friend’s debate today is a good opportunity to see whether the Government’s policies of the last four years have put this right. The disconnect to which the Prime Minister referred was rising social inequality and inequality of opportunity; and how the lives of some people, even those at work, were becoming more precarious and threadbare, while others benefited from economic progress, as my noble friend explained.

Have the Government’s policies made this better or worse for consumers? I will not burden your Lordships with more numbers, but various reports recently from well respected organisations tell us that, as the economy improves, so the number of people on low pay rises. Both in the public and private sector, for many pay has not even kept pace with inflation. The Populus survey reported in today’s Financial Times found that only one in seven feel the benefit of any recovery.

Part of this disconnect is that the Government encourage low pay by subsidising it through the welfare system. Why should the taxpayer subsidise firms that cannot pay their people enough to live on or cannot raise productivity so that consumers can earn more? As the Prime Minister said, there is a disconnect here.

When I first became interested in housing, 80% of the money went into construction and 20% into helping with rent. Under this Government, this has been reversed, as my noble friend described. In our current budget the opposite is true: 80% goes on rent and 20% on encouraging construction. Housing has become the low-pay subsidy for low productivity. By creating more and more low-paid consumers, not only are we making their lives more difficult, but the Government are creating difficulties for themselves—difficulties caused by the low tax revenue that they announced earlier this month.

The cumulative outcome for the consumer is the worst of both worlds: low productivity, which means low pay, and a housing shortage, which means high rents, with rises of up to 61%, as my noble friend Lord Whitty just told us. But at least business is starting to recognise this insanity, with 1,000 companies now paying the living wage.

The Government say that they are helping these consumers by taking low earners out of income tax, reducing the burden on hard-working families. However, before the income tax threshold is reached, national insurance becomes payable—the Minister knows this—so national insurance is the first burden on the low paid, and it is mainly the middle and upper-middle earners who benefit from raising the income tax threshold. Raising the national insurance threshold would have been of more benefit to the low paid, especially as national insurance rates rise with inflation. However, this Government consider it more politically expedient to do it the wrong way round, so it is the low paid who suffer.

The same mismanagement affects business. Let us take the annual investment allowance. The noble Baroness, Lady Noakes, knows all about this. During the last years of the previous Administration, it was set at £50,000. The new Government soon increased it to £100,000. In 2012, it was cut to £25,000, but the following year it was increased to £250,000. Last year’s Budget raised it to £500,000, and the current plan is that it will return to £25,000 in 2016. Yes, there is more confusion. At the same time, the annual investment allowance has become restricted to investment in plant and machinery, and the allowance for industrial buildings was scrapped altogether.

Does the Minister agree with the conclusion of the Institute for Fiscal Studies in its paper Tax Without Design, published two months ago, that the cumulative effect of all this creates costs and uncertainty and that it distorts behaviour? At this time of great business difficulty, it may be one reason why we are seeing a reluctance to invest—which of course is perhaps the major contributor to low pay.

Another area of cumulative failure is what I would call putting out one fire but not preventing the next. A good example is the Government’s policy towards private companies providing public services. It is obvious that the business model is wrong. Tenders are often won by large companies that overpromise on quality and bid low on price. This effectively rules out smaller providers, so there is little competition. Two of the major providers have been shown to be dishonest and other inquiries are under way. We know that when things go wrong there is little redress and revoking contracts can be very costly.

To the consumer of a public service, public service ethos is essential, especially in sensitive areas such as probation work. Indeed, some services have such social pressures that you cannot leave them to the market. Consumers want to know how these companies make their profits, who their suppliers are and where the dividends go, but most of this is hidden from them. What is obvious is that the Government’s ability to manage outsourcing is weak. They have failed to make this market work both to the benefit of the contractors and to the benefit of the consumers of the services. This weakness is also apparent in the railway franchise system.

The Government’s continued dogmatic refusal to correct the business model means that we are now facing a crisis of public confidence in these services. Refusal to encourage public sector bids and reluctance to accept locally administered solutions mean that these services are not as good as they should be—and it is the vulnerable and those on low income who suffer most from this. The real truth is that we are all victims of these avoidable and unnecessary difficulties, brought about by the Government. Are we going to see any change?