Local Government Finance Bill

Baroness Donaghy Excerpts

Monday 22nd October 2012 Lords Chamber

[Baroness Sherlock]

My Lords, the amendment is designed to help the Government. To that extent, I hope that the Minister will embrace it enthusiastically. I spent some time as a special adviser at the Treasury. During work on my first Budget, I learnt one important fact: it is possible for things to be simultaneously very important and extremely dull. I am afraid that my speech may fulfil that theory completely, but I hope that the House will bear with me. In preparing for it, I was very grateful for advice from many quarters, including the National Policy Institute and the Children’s Society. I am also grateful to the Minister for allowing me access to her officials, to help me understand the implications of government policy.

At present, the taper rate for council tax benefit is 20%. In other words, for each additional £100 of income somebody has, they lose £20 in council tax benefit. That does not sound much, but it comes on top of a series of other tapers. If someone is on a low income but pays tax and national insurance and gets tax credits, after a certain point, for every £100 she earns, she will lose £32 in tax and national insurance, and another £41 in lost tax credits, leaving her with £27 out of the £100. The housing benefit taper is set at 65%, so she will be left with £17.60. The council tax benefit taper is set at 20%, so she will have about a fiver left out of the £100 extra that she has earned. That is what is called a maximum taper of 96%.

That may sound bad, but it could be about to get a lot worse. The National Policy Institute found that some councils were either proposing an increased taper or were consulting on increasing the taper from the current 20%. For example, I looked up the draft scheme proposed by Trafford Council. It includes a proposal to increase the taper from 20% to 30%. Interestingly, the text of the paper outlining the draft scheme states in paragraph 6.6:

“The draft scheme is designed to underpin the principle ‘Encouraging and supporting people back into work’ and the Government’s welfare reform principles below … People should get more overall income in work than out of work … People should get more overall income from working more and earning more”.

Is this what will happen? With a 30% taper on council tax, that person will face a combined taper of 99%. Of the extra £100, she will get to keep little more than £1.

Increasing the taper from 20% to 30% does not save very much, either. The report from the Institute for Fiscal Studies showed that it saved about 2% nationally across the council tax bill. However, as the IFS noted, because it reduces support at low levels of earnings, it reduces the incentive for some families to have someone in low-paid work. If the taper were to go over 35%, the worker would actually lose money. In other words, she would earn an extra £100 but would have less money in her pocket than before she earned it.

What is the solution? The Government explained that their solution to the problem of high marginal deduction rates was the introduction of universal credit. This was explained in another place in a Written Answer by the DWP Minister, the right honourable Chris Grayling, on 1 April last year. In response to a question from Liam Byrne, he said:

“Universal credit will improve the incentives to increase hours of work. At present some 0.7 million households in low paid work lose 80% or more of any increase in earnings. Under universal credit, virtually no households will have deduction rates above 76%”.—[Official Report, Commons, 1/4/11; col. 518W.]

Sadly, that was before taking into account the fact that council tax support would fall outside universal credit. Even on the current 20% taper, someone paying tax and national insurance could just nudge over the 80% combined taper. With a 25% taper on council tax support, the combined taper reaches 82%—and onwards and upwards. Therefore, we have a problem with the plan for universal credit to be the vehicle for stopping large numbers of people having high marginal deduction rates. It also means that the Government can no longer offer any assurance about people being better off in work, because the answer to the question, “Will I be better off in work or if I work more hours?”, will in future be simple. It will be, “It depends where you live”.

It is also worth remembering that the welfare to work programme is national. When the Government increase conditionality and tell a lone parent that she must take a low-paid job even if it means working in the school holidays when she would rather be with her children, they will not in future even be able to guarantee that she will be better off because they cannot necessarily guarantee how her local council will treat council tax support. Of course, by the time she has had to face other changes to tax and benefits and indeed possibly pay 7% of any maintenance in charges, she could be quite a bit worse off.

However, this is Third Reading and we cannot unpick the mess that is caused by keeping council tax support outside universal credit. But we can limit the damage. If the Minister cannot accept my marvellous amendment I hope that she will at least ensure that the guidance issued to local authorities makes clear the consequences of higher tapers. I fear that not all councils will necessarily understand the consequences of these decisions. I therefore hope that she will do that and recommend that the maximum taper be limited to that in the Government’s own default scheme.

I hope that the Minister will be able to accept this narrow amendment. All that it does is to insist that authorities cannot create schemes with means tests that are more aggressive than the Government's own default scheme. In so doing, it would ensure that the working poor could at least keep some of any increase in earnings. Surely we can all agree on that. I beg to move.

[Baroness Donaghy]

My Lords, Amendment 5 deals with the issue of work incentives. One of the central tenets of the coalition Government’s welfare announcements was that there should be no disincentive to work. “We will make work pay”, they said. However, there is no reference to work incentives in the Bill. The proposed schemes devised by councils to localise council tax benefits actually contain many disincentives to work. Since Committee, we have had the announcement of a transitional £100 million to assist councils in 2013-14. The government Statement referred to maintaining positive incentives to work and called for no sharp reductions in support for those entering work. But the changes will still have a massive impact on the working poor. Incidentally, the announcement also laid bare the myth of localism.

Let us remind ourselves that council tax benefits are in-work benefits. Nearly 750,000 people are non-passported recipients of council tax benefit and in work. It is the most comprehensively claimed benefit, despite the fact that a large number of eligible older people do not claim it. People who do claim it are in low-paid and often part-time work. In Committee, I outlined at least seven disincentives to work contained in local authority proposals to localise council tax benefits. I do not intend to go through them today in detail as they are already on the record, but they include: increasing tapers; the further exploitation of non-dependent deductions; removing working tax credit income disregards by varying amounts; making workers with income regarded as greater than need contribute more through increasing the rate of withdrawal; capping support at the level for band D, E or F; and, finally, everyone paying something—a return to the poll tax, but without anything included within income support, jobseeker’s allowance or ESA to counter it.

The £100 million transitional grant is supposed to reassure us that the Government are putting in place protections for the poorest and most vulnerable. That is not the case, as outlined by my noble friend Lady Lister. It is a temporary measure to help push through the new poor law. The irony is that the recently announced transitional grant will benefit councils that are relatively better off, which will find it easier to devise schemes that qualify for the grant. The Local Government Association has indicated that it is “questionable” how many of the 104 councils proposing a minimum payment of 20% stand to benefit.

The Minister’s Written Statement urges the development of well-designed council tax support schemes and to “avoid collecting small payments”. I believe that in practice local authorities are in an impossible position. The impact on those in work is completely sidestepped in that Statement. With 23 applications for every job vacancy, some working people are clinging on to their jobs by their fingernails. Comparatively small amounts being chipped away on council tax benefit, the bedroom tax, wage freezes and energy price increases will, when taken together, make the difference between just about holding things together and the whole pack of cards collapsing. Being presented with a council tax bill or an unexpected increase in that bill could be the pivotal point for some working families in deciding that work does not pay.

Where are the greatest number of working people who will be affected? County Durham has 5,810 working recipients of council tax benefit. There are more than 8,000 in Manchester, over 6,000 in Liverpool, 3,500 in Wigan and 3,500 in Salford. These are some of the poorest areas in the country, while South Bucks has only 420 and the City of London has 40. This redistribution of wealth is shameful and will have consequences for employment. The Government need to demonstrate that they are in favour of work incentives as opposed to benefit disincentives or this measure will be seen as an attack on the working poor. That is why I have tabled my amendment.