Impact of Government Policies on Family Budgets

Lord Sassoon Excerpts

Thursday 27th October 2011 Lords Chamber

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

My Lords, I am grateful to the noble Lord, Lord Knight of Weymouth, for initiating this debate on an important topic and for all the contributions that have been made.

As your Lordships are aware, and as we have been reminded, we are living through a period of real international uncertainty and instability. The eurozone, as we heard earlier, has been and is at the epicentre of this crisis, but the volatility has reached right around the world—to the US and China, and of course here in the UK. We are not immune from what is going on in our largest export markets. That instability acts as a powerful drag on what was already a difficult recovery from the deepest debt-fuelled recession in living memory.

It is right when we face such difficulties to ask ourselves: are we doing enough to support families; are we doing enough to protect the budgets of the poorest families; are we doing enough to provide opportunities for the youngest in our society; are we doing enough to support working parents; and, most importantly, are we doing enough to put the economy back on track to provide the opportunities, jobs and growth that we all need? When we came into government we inherited the deepest recession since the war and the largest budget deficit in our modern history. The adjective that the noble Baroness, Lady Pitkeathley, used was “dire”. I agree. It was absolutely vital that we tackled that deficit. High deficits lead merely to higher inflation, taxes and interest rates. Cutting the deficit is a vital precondition to growth and prosperity. I am grateful to my noble friend Lord Stoneham of Droxford for underlining this point.

As we have seen over the past year, UK gilt yields and interest rates generally have fallen dramatically in response to the tough choices that we made in our spending review. Low interest rates help businesses to refinance debt and help families to stay in their homes. Of course the noble Lord, Lord Stevenson of Balmacara, was quite right to remind us that even in this time of low interest rates, debt is a very real problem for many in our society. Even a 1 per cent increase in interest rates would take £10 billion out of the pockets of families through higher mortgage payments. I therefore applaud the debt advice provided by a wide range of private and not-for-profit organisations. It is important that consumers know that many free and high-quality sources of help and advice are available from publicly supported projects and the voluntary sector.

Perhaps I may add a comment on one aspect to which the noble Lord, Lord Stevenson, drew attention—graduate debt—because I do not entirely share his analysis. Under the new system, all graduates will pay less per month than under the old system and they will have a longer repayment term of up to 30 years compared to the current 25 years. It is important to remember that.

Generally, on the deficit and interests rates, it is by getting ahead of the curve, by consolidating on our own terms, that we have avoided the uncertainty and the instability that have cut through other countries and plunged families in other parts of Europe into even more austerity and difficulty. More than that, in our spending review, we took the decisions to tackle the deficit in a proportionate, responsible, but also a fair, way. Therefore, I completely reject the charges coming from the noble Lord, Lord Knight of Weymouth, and the noble Baroness, Lady Smith of Basildon. Indeed, we are all in this together and it is critical that those who can, pay most. That is why we have tackled the deficit in the way we have.

The first transparent analysis of the distributional effects of our budget and spending measures—something never produced by previous Governments—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. We take those distributional effects very seriously.

We are also taking more from the banks in our ongoing taxation of them than the previous Government did through their one-off tax on bonuses. In relation to VAT, I share the analysis of my noble friend Lord Stoneham of Droxford. I believe that what we did to reverse the previous Government’s national insurance tax—a tax on jobs—is what really mattered in making the difficult choices about where to prioritise tax measures so as to get our economy going again. These are painful choices, but it was our partial reversal of that tax on jobs, which noble Lords opposite did not mention, that was key to getting the economy going again. We took particular care to reduce the impacts on family budgets.

In relation to fuel poverty and rising fuel prices—a very important subject raised by the noble Baroness, Lady Smith of Basildon, my noble friend Lord Stoneham and the noble Baroness, Lady Pitkeathley—we have to acknowledge first of all the reality of rising world oil prices. We cannot be insulated from that. But what has this Government’s response been? We cancelled the previous Government’s fuel duty escalator and cut fuel prices. We have taken action on fuel duty, which has resulted in average pump prices being about six pence a litre lower than if we had continued with the previous Government’s fuel duty plans. A typical Ford Focus driver will be paying about £56 less this year than he or she otherwise would have been doing. We have introduced the fair fuel stabiliser so that when oil prices are high, and oil profits are higher, fuel duty will increase by inflation only. This will ensure that the burden of high oil prices is better shared between oil companies and motorists. I say again that energy price increases are never welcome for consumers and we recognise that. It is important that these are limited to the costs and risks borne and are not about energy companies making excessive profits.

That is why we strongly support Ofgem’s work in ensuring competition in the energy industry, including the recent proposals stemming from the retail market review launched in November last year. That is why we are taking a range of other actions to increase people’s control over—and help them reduce—their energy bills. We are setting up the Green Deal for energy efficiency and the supporting energy company obligations. We are rolling out smart meters that will enable consumers to manage their energy use better and introducing the warm house discount to provide cash rebates for around 2 million vulnerable households by 2014-15. So, yes, we share the concern but I reject the charge that we are not going about it in a sensitive and proportionate way.

Taking some of our other measures to help families, we have made significant above-indexation increases in the child tax credit for the next two years, increasing it by £255 and benefiting 2.4 million low to middle-income families. This will also ensure that modelled tax and welfare policy introduced by this Government will have no adverse impact on child poverty for the next two years. I say that directly to the noble Lord, Lord Knight of Weymouth. He shakes his head but, again, we now have the benefit of the introduction by this Government of the independent Office for Budget Responsibility so that we can no longer make up such claims; all these things have to be independently assessed.

We made changes to the personal allowances to provide support for hard-working families on low and middle incomes, and increased the rewards for work. The increases in the personal allowances announced at the 2010 and 2011 Budgets will benefit 25 million individuals in 2012-13 and take 1.1 million of the lowest-income tax payers out of tax altogether. Our aim is to ensure that no one earning less than £10,000 will be caught in the income tax net. My noble friend was completely right to draw attention to this policy.

[Lord Knight of Weymouth]

I am grateful to the noble Lord for giving way. I would not normally intervene but he mentioned the Office for Budget Responsibility. Would he support the OBR having to report on relative child poverty as part of its reporting?

[Lord Sassoon]

The OBR has a very clear and extremely wide remit. The previous Government had absolutely no check on any of their numbers. They could rewrite cycles or determine what path of growth they wanted to show. So I think we are now in a completely different world. Perhaps I may press on, because time is short.

We have reformed child benefit so that families with a higher-rate taxpayer are no longer eligible. Low and middle-income families are no longer being taxed to pay for child benefit for the rich. That, again, is another aspect of fairness. Of course, noble Lords have mentioned the important triple lock on pensions that we have introduced.

Finally in this area, this month my right honourable friend the Chancellor announced a freeze on council tax bills. Therefore, there will be a council tax freeze for a second year and that will provide real help for households in difficult times. Of course, in the spending review there were still difficult decisions to make on what to cut, but the previous Government’s welfare spending was both unsustainable and unsuccessful.

Tackling poverty is not about moving families and children above some arbitrary line. It is not reduced by throwing good money after bad. This Government are taking a long-term strategic view to tackling poverty, which is about more than just welfare transfers; it is a strategy focused on transforming people’s lives and the lives of future generations. I am grateful to the noble Baroness, Lady Pitkeathley, for reducing these almost abstract concepts to some really vivid case studies. I say to noble Lords that it is to that end, and it is in recognition of these very difficult situations, that we are increasing expenditure on public services where they can tackle the root causes of disadvantage. That is why we will introduce the fairness premium, refocus Sure Start and improve education. That will help to break cycles of disadvantage. The new fairness premium is worth £7.2 billion over the spending review period and will provide support to the poorest families in the UK. It will extend 15 hours a week of early years education and care from 2012-13 to all disadvantaged two year-olds; it will maintain Sure Start in cash terms, including new investment in Sure Start health visitors; it will introduce a substantial schools premium, rising to £2.5 billion by 2014-15, to support the educational development of disadvantaged pupils; and it will protect those on the lowest incomes in higher education through a scholarship fund of £150 million by 2014-15.

We are also reforming welfare to ensure that welfare payments are targeted at those who need them most and we are reforming tax credits to focus them on those who need them most. That means reducing the rate at which tax credits are withdrawn, while reducing the threshold at which they are paid. Importantly, we want to ensure that those who can move into work have a real incentive to do so. Currently some 800,000 individuals, including around a quarter of a million children, live in households where no one has ever worked. That has to be changed and it will be changed through the new universal credit being introduced over two Parliaments. To support working parents, the Government have agreed the extension of support with childcare costs to those working less than 16 hours, as part of the new universal credit, which will enable the transition of second earners, typically women, into the labour market.

In conclusion, this Government fully understand the difficulties that families face in the current economic environment. The biggest thing that we can do as a Government to help families is to return the economy to sustainable growth: private sector growth through innovation, enterprise and export—sustainable, not debt-fuelled growth—that delivers the stability and jobs that we need across the country. That is our overriding priority. Tackling the deficit is the precondition to realising that ambition. The recovery will be difficult, but we will not let the poor and vulnerable bear the brunt of these difficult times. We are committed to helping families, young people and jobseekers realise their ambitions and fulfil their proposals. I am grateful to the noble Lord for introducing this debate.