Tax Credits

Debate between Caroline Flint and Karen Buck

Thursday 29th October 2015 Commons Chamber

[Caroline Flint (Don Valley) (Lab)]

It is a pleasure to follow the hon. Member for Aberconwy (Guto Bebb). He makes a very important point about how little people keep for every £1 extra they earn. I seem to recall that the Prime Minister once took Gordon Brown to task on that very issue. It is on film and it can be seen on YouTube. In making work pay, it is very important for people to feel that for every extra hour they work they are making a difference to their progression in their working lives.

The starting point for this debate is the Chancellor’s ill-formed proposals to reform working tax credits. The truth is that the distribution aspect to the tax credit cuts is severely regressive. The Institute for Fiscal Studies has shown that the national living wage, touted by the Government as a solution for that, at best undoes 27% of the damage.

Today, I would like to start with how the story really began. In 1997, when Labour came to power, the only help for families was child benefit, married person’s tax allowance and a child personal allowance as part of income support and income-based jobseeker’s allowance. A small number of people with disabilities also received a disability working allowance. The then Government found high rates of poverty among families with children. Tax credits were thought to be a new mechanism to support those families into work, which was the best route out of poverty. The evidence is strong that the more far-reaching tax credits and the introduction of help with childcare costs transformed prospects for millions of families. One outcome was that the lone parent employment rate rose. In 2014, it was at the highest rate on record: 65.7%. That is amazing. Of course, the vast majority of lone parents are women. Another outcome was that tax credits reduced child poverty. The Department for Work and Pensions confirmed that in the first decade of tax credits, up to 2010, child poverty fell dramatically as 1.1 million children were lifted out of poverty.

Tax credits give a benefit to employees. They are not simply a state handout to bad employers. When most employers set wages, they are blind to the private tax credit details of their employees. What is more, they cannot pay one worker one wage and the next person on the production line a different rate just because they claim tax credits. In most cases, the employer does not know. As the Resolution Foundation reported this week in evidence to the Work and Pensions Committee, if the Government remove tax credits the employer will not immediately step in to fill the void, regardless of the rises in the national minimum or living wage. The Government must know that, and it is wrong to suggest that the only beneficiaries of tax credits are bad employers.

We must challenge and address the Chancellor’s claim that the cost of tax credits has risen from £1 billion to £30 billion today. This summer, the Chancellor stated:

“The original tax credit system…cost £1.1 billion in its first year. This year, that cost has reached £30 billion.”—[Official Report, 8 July 2015; Vol. 598, c. 334.]

That claim is simply bogus. Articles by Declan Gaffney and Tim Blackwell in the New Statesman and by many others show that the £1.1 billion figure relates to the first reforms, which began only in October 1999, halfway through the tax year and covering only three months of tax credit payments for a typical claimant. Indeed, in its first full year, 2000 to 2001, the cost was more like £10.5 billion, not £1.1 billion.

That brings me to the question of why the tax credits bill increased. First, tax credits wrapped up within them a number of previously separate benefits. They were more generous—I acknowledge that. The tax credits we refer to today, however, include the childcare costs introduced in 2003, which no previous Government had ever met. Yes, tax credits were about challenging poverty pay. However, as my hon. Friend the Member for Darlington (Jenny Chapman) mentioned, they also aimed to address the issue facing many families, particularly lone parent women: even if they were on a reasonable wage—whatever “reasonable” is—they still could not afford to work, because of the amount of their wages that would have been spent on exorbitant childcare costs.

[Ms Karen Buck (Westminster North) (Lab)]

My right hon. Friend is making a very powerful case. Does she agree that the important element of tax credits was that they were a means of getting lone parents in particular into work? Gingerbread, among others, has calculated that a 5% rise in employment among lone parents saves the Treasury £436 million. Getting lone parents in particular into the workplace therefore benefits the wider economy.

[Caroline Flint]

I absolutely agree with my hon. Friend. Missing from the debate is a consideration of the impact of the changes on other sectors of the economy, and the wellbeing and economic opportunities they provide to people by being in work. As I said, the employment rate for lone parents went up to 65.7% in 2014, which is brilliant. The worry is whether it will go back down, rather than improving further.

The total tax credits that families receive relate to their income. The 2008-09 recession had a dramatic effect on wages. As wages fell, many families either qualified for tax credits or saw their tax credits rise. It is notable that during the John Major recession unemployment rose to a peak of 10.7% by 1993, whereas in the recession of 2008-09, many employers reduced hours or did not increase pay to keep staff in work. I understand why they did that. In the House, we had debates in which we said that we appreciated that employers were trying to deal with a difficult situation and were trying to hold on to people in work. As a result, however, more people either claimed tax credits or received a higher amount.

As I said, unemployment during the John Major recession rose to a peak of 10.7%. In the 2008-09 recession, as a result of a number of factors, including employers keeping people in work, unemployment rose to only 8.5%. Recent figures show that the number of employees earning less than the living wage has risen by 45% since 2009. Combining the two, it is clear that people remained in work but needed more support through tax credits. That is not a conspiracy; this is the reality of an economy adjusting to finding itself in difficult situations, and families finding themselves in difficult situations and the state being there as a safety net to help them. Without tax credits, the rise in unemployment in that most serious recession, which we all experienced, could have been much worse. I think that that goes a long way to explain the cost of tax credits today.

This week, given the vote in another place, the Chancellor says he is in listening mode. We must address how we support people into work and to stay in work, so that they can make progress on improving their living standards and the life chances of their children. I agree with everything my right hon. Friend the Member for Birkenhead (Frank Field) and other colleagues from across the Chamber have said. I will not repeat that, but let me add a final few points.

To move forward, a number of things have to happen. First, the Government must be straight about the figures relating to tax credits. Only then can we have a sensible conversation. Secondly, the Chancellor needs to provide a proper assessment of the impact of any new proposals on incentives or disincentives to work for those who receive tax credits. I asked the Chancellor on Tuesday why, if he stood up for working people, a proper assessment had not been not published with his last proposal. He did not answer. I am afraid that I feel that that was because he is afraid to face the facts. Thirdly, the Chancellor needs to ask what impact the new proposals will have on child poverty. Fourthly, we need to look more widely across Departments at what support actually helps people to get into work, stay in work and make progress in work. I founded the first all-party group on childcare 18 years ago, when I came into this place. The childcare offer has improved, but it is still not good enough for many working families. Those are the questions I need answers to for the 5,300 Don Valley families who are really worried about the future of their tax credits and their ability to hold their head up high and say, “I am in work. Help me to support my children.”