Tax Credits Up-rating Regulations 2011

Lord Newby Excerpts

Wednesday 23rd March 2011 Grand Committee

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, I shall also speak to the draft Guardian’s Allowance Up-rating Order 2011, and the draft Guardian’s Allowance (Northern Ireland) Up-rating Order 2011. In my view, the regulations and orders are compatible with the European Convention on Human Rights.

The Government inherited an exceptional fiscal challenge. It is important to sketch out the background to these important statutory instruments and to put them into proper context. The state is borrowing one pound in every four that it spends, and just paying the interest on the nation’s debt costs £43 billion—around £120 million a day. The unprecedented scale of the deficit has meant that the Government had to make tough choices in the June 2010 Budget and in the spending review about how taxpayers’ money is allocated.

We believe that fairness starts by taking the right decisions to tackle the deficit so that future generations are not burdened with unsustainable debts, meaning higher taxes and diminished public services. Tackling the deficit in a fair and responsible way means that those that can contribute do and those who are less able to do so are supported. Analysis shows that after combining the impact of tax, tax credit and benefit and public service spending changes announced by this Government, the top 20 per cent of households will make the greatest contribution towards reducing the deficit as a percentage of their income and benefits in kind from public services. That is a statement that was true after the Budget and spending round as of last year, which encompassed the measures we are talking about, but of course it remains true and confirmed in the numbers that came out with the Budget today.

The regulations and orders before the Committee put into effect a number of reforms to tax credits, announced in the June 2010 Budget and the spending review. These changes will ensure that we tackle the deficit in a way that is fair and ensures that tax credits are targeted at those who need them most. Tax credit elements which were previously uprated by the retail prices index will be uprated this year by the consumer prices index, apart from the basic and 30-hour elements of working tax credit, which will be frozen. The rate of guardian’s allowance will also be uprated by CPI. However, significant above-indexation increases to the child tax credit will help those households with children.

Under the current system, tax credits are available to families earning up to £58,000. If households have an increase in income up to £25,000 in a year, they can earn up to £83,000 and still benefit from tax credits. This means that people in the top income decile are eligible, which is unjustifiable within the current economic climate. Reforms to tax credits included within these regulations and orders mean that support for higher income households will be reduced by increasing the rate at which tax credits are withdrawn, while reducing the threshold at which tax credits are paid. Households will also no longer experience an increase in household income of up to £25,000 without their tax credit eligibility changing. Under the current system, around nine out of 10 families with children are eligible for tax credits. Once the tax credit changes have been introduced in April this year, seven out of 10 families will still be eligible for tax credits.

Spending on tax credits has increased from £18 billion in 2003-04 to an estimated £30 billion in 2010-11. The system of tax credits under the previous Government was not only unsustainable in fiscal terms; it was also unrealistic in terms of meeting its stated policy objectives. From 2004, progress on relative poverty stalled. However, the previous Government continued to pump money into the tax credit system. They spent more than £150 billion on tax credits since 2003.

Although a large proportion of tax credit spending was directed at children, the Institute for Fiscal Studies has estimated that meeting the 2020 child poverty target would require an extra £19 billion of welfare transfers. The previous Government had a static view of poverty, believing that it could be reduced, or even eradicated, by directing money at it. The way that child poverty is currently measured means that, perversely, reducing the income tax paid by millions of lower earners, or providing additional support to low-income pensioners, could push up the poverty line. This would increase the number of children calculated as being in poverty. We want to take a long-term, strategic view to tackling poverty, which is about more than just welfare transfers. This is not about moving families and children above an arbitrary line—where one day they are in poverty and the next they are not—but is about transforming their life chances.

The Prime Minister asked Frank Field and Graham Allen to undertake reviews on poverty and life chances. Findings from both reviews have fed into the child poverty strategy, which will be published shortly. While awaiting the conclusions of these reviews, the Government have used some of the savings from withdrawing child benefit from families with a higher rate taxpayer to fund significant above-indexation increases in the child tax credit over the next two years. This means that the child tax credit will increase by £255 in 2011, benefiting 2.4 million of the poorest families. This increase is better targeted at low-income families and will ensure that the spending review will have no measurable impact on child poverty in the next two years.

As well as targeting financial support at low-income households, the spending review introduced a new fairness premium, which will fundamentally change the prospects of the poorest children by offering real opportunities to raise them out of poverty for the long term. The fairness premium is worth over £7.2 billion over the spending review period and will include a £2.5 billion premium to support the educational development of the poorest pupils. It also protects cash funding for Sure Start to support the poorest in early years and at every stage of their education.

Despite the last Government’s spending on tax credits, working-age poverty actually increased under Labour, as there are now more working-age adults in poverty than there were in 1997. The current welfare state too often traps people in dependency. Almost 2 million children are living in workless households. The spending review announced radical plans to reform the welfare state. The new universal credit, which will be introduced over two Parliaments, will replace the current complex system of means-tested working-age benefits with a single, streamlined payment. The universal credit, which will cut through the complexity of the existing benefits system, will ensure that work pays.

In that context, I commend these regulations and orders to the Committee.

[Lord Newby]

My Lords, in the context of the overall fiscal position in which we find ourselves, it is not surprising that we are having to make some pretty unpalatable changes to some tax credits. As the Minister has said, expenditure on tax credits rose in cash terms by two-thirds over the seven years from 2003. In the current environment, that is simply unsustainable.

Although there are some aspects of the changes that we find quite difficult—for example, reducing the proportion of reclaimable childcare is not something that we would have done willingly—other elements are long overdue. It is crazy that people earning £50,000 or £60,000 or even £70,000 have been able to claim an element of child tax credit. Of course, the concept that parents find themselves in financial stress when they have young children is not new; it is dealt with at great length in Malthus’s great essay on population, where he talks about how poverty comes to young families at the point when they have children. However, that was talking about an era in which most people were poor for the whole of their lives. That simply does not exist today. A circumstance in which nine out of 10 families were eligible for tax credit does not really have any sense. Even with the changes, some seven families out of 10 will continue to get tax credits. That certainly encompasses all those who could even vaguely be said to be in need.

The situation we now find ourselves in at this end of the income scale was exemplified to me by a colleague in another place yesterday, who was telling me that she had had a letter from a constituent grumbling that the changes to tax credits and child benefit meant that she and her family would no longer be able to have their second foreign holiday that year, and asking what the MP was going to do about it. I suspect she got a fairly shirty response, but many people at upper income levels have been regarding tax credits and child benefit as not necessary for the ordinary running of the family but for luxuries, so to see that curtailed in the overall scheme is very welcome.

Slightly down the track comes the really welcome introduction of the universal credit. Just as, at the top end, people are getting some benefits who, frankly, do not need them for the good functioning of their families, at the bottom end there are still huge disincentives around work and huge anger among people who are trying to make a living and do the right thing.

At the recent Lib Dem conference in Sheffield I went to get my papers from a kiosk in the shopping centre in the centre of Sheffield, and the young woman behind the kiosk asked rather aggressively what I was doing there. I said very timorously that I was at the Lib Dem conference. She said she was a Labour voter. I was prepared for a tirade about how flinty hearted we were and I got a tirade, but the tirade I got related to the fact that because she was a single mum with two young children she could only work part-time and earn only £6,000 a year and her sister, who was 28 and had never done a day’s work in her life, was getting more from the state. At this point her colleague in the kiosk joined in. They were so intent on telling me about this injustice in the system that everybody else who was trying just to buy a paper had to come up in a very shamefaced way so as not to interrupt this flow of invective, which was being directed at politicians generally. I was able to tell her that the universal benefit was on its way and thereafter life would look somewhat fairer from her perspective.

I have two questions for the Minister around these proposals today. The first relates to what he said about Sure Start. There has been an awful lot of noise about Sure Start. He said that the Government are protecting the cash funding for Sure Start. I know that every Liberal Democrat council is able to maintain Sure Start and I know some councils cannot. Can the Minister tell me why, if the Government are protecting the cash funding for Sure Start, some councils might be choosing to cut it?

Secondly, the whole area of child poverty is to be the subject, I believe, of a child poverty strategy document due for publication shortly. Under the terms of the Child Poverty Act it is due to be produced by the end of March. It is now almost the end of March and I would like the Minister’s assurance that that document will, indeed, be winging its way to us over the next few days.