Fiona O'Donnell
Main Page: Fiona O'Donnell (Labour - East Lothian)Department Debates - View all Fiona O'Donnell's debates with the HM Treasury
(12 years, 4 months ago)
Commons ChamberIn constituencies such as mine, many pensioners live in rural communities without access to public transport, so we need to add into the mix the cost of running a car, which is essential to their quality of life.
I absolutely agree. In fact, that was one of the points that I wanted to make, because that subject has been eclipsed in the debate about the changes.
The Government have made great play of the recent increases to the state pension, and seem to suggest that they will somehow offset the changes to the tax allowances. As the hon. Member for Leeds West (Rachel Reeves) pointed out, however, we must remember that that is simply an inflationary rise. It will only keep pace with prices; it is not an increase. It is only a small step in the right direction towards restoring pensioners’ incomes to a level that most of us would recognise as providing a decent standard of living.
I have mentioned in the House before that the way in which pensioners experience inflation can differ markedly from the way in which the general population as a whole experiences it. One of the most obvious and significant examples of that relates to heating and domestic fuel costs. Retired people are more likely to have to heat their homes during the day, while the rest of us enjoy the benefit of our workplace heating systems. Many pensioners also find it harder to keep warm because of their age and the fact that they are not moving about so much. So any inflation in the cost of energy is felt disproportionately by pensioners, and nowhere more so than in those parts of these islands that experience consistently colder weather.
Last year, we saw sharp and dramatic increases in home energy costs, which played a big part in driving inflation up to over 5%. Energy prices have come down since that peak, but I heard on the news this morning that some economic commentators believe that inflation this year is going to be well above the Bank of England forecasts that the Government are using, and that we could experience inflation of over 3% this year as well. The welcome increases in the state pension have only kept it in line with inflation and might not keep it in line with inflation as it is experienced by people of pensionable age. That is why the Government’s argument that the changes to age-related tax allowances are compensated for by the increases in the state pension is somewhat spurious. In real terms, this tax grab squeezes the incomes of pensioners on modest incomes.
It is also all too easy to forget that pensioners have already paid a heavy price for the financial crisis. Those pensioners affected by these new changes to age-related allowances are in many cases the same people who saw the value of their savings and investments plummet in the wake of the financial crisis. Since then, they have had to contend with record low interest rates, coupled with high inflation. As the Treasury Committee reminded us earlier this week, quantitative easing, whatever its intended consequences, has had some very nasty side effects for those reaching retirement age and looking to buy an annuity in the last few years.
The hon. Lady, like me, has many pensioners in her constituency who are on modest incomes and thought they could afford to live out their retirement and be able to cope with running a car, higher food prices and all the other added costs of rural living. Does she agree that this change is going to wreck the plans of many of those pensioners?
I agree entirely. It is about not only rural and transport costs, but increases in VAT, cuts in fuel allowances and so forth. All these things have put a real squeeze on people living on fixed incomes, who have little opportunity to find money from any other source. These have not been easy financial times for those on fixed incomes, who have been the forgotten victims of the financial crisis. It is not fair to say that pensioners have got off lightly so far from the public spending squeeze—quite the reverse. In considering changes to age-related allowances, we need to understand that the granny tax will tighten the screw on people who have already had significantly to tighten their belts in recent times.
Those affected by this measure are all living on below-average incomes. Most will have paid tax throughout their working lives, and most thought they were doing the responsible thing by saving for their retirement. Crucially, they do not have the opportunity to find alternative sources of income. They are on fixed incomes and are living off savings.
I want to make some progress on the main subject of the debate, which is the freezing of tax allowances, but first let me make a couple of other points. Labour Members did not mention that the other thing that the Budget has rightly done is take many people out of tax altogether by increasing tax allowances. I believe that that has benefited up to 24 million.
All this must be seen in the context of deficit reduction. There have been exchanges across the Chamber about parties’ manifestos. I stood on a manifesto that was all about getting some sense back into the public finances and reducing the outrageous deficit that was bequeathed to the current Government. The Chancellor’s central strategy to deal with that deficit involves 80% of spending cuts and 20% of revenue raising. Given that the Opposition oppose virtually all the spending cuts, would reduce VAT, and are proposing not to freeze older people’s allowances, we can only conclude that they are not serious about reducing the deficit, and in that regard they are grossly out of step with public opinion.
Perhaps the hon. Lady will make the progress to which she referred and will begin to deal with the issue that represents the substance of today’s debate. May I ask her whether she made representations to the Chancellor before the Budget, asking him to freeze the age-related allowance?
I did not make representations to the Chancellor on a matter as technical as the one that we are discussing. Having dealt with that point, I will now proceed to discuss the freezing of older people’s allowances.
I consider the term “granny tax”, coined by the media and exploited by the Labour party, to be very pejorative. As was pointed out by my hon. Friend the Member for West Worcestershire (Harriett Baldwin), it is also very inaccurate, as 60% of those who will be subject to the freeze are men. Moreover, this is not a new tax, although some sections of the media presented it as such. I do not see how the freezing of an allowance can possibly constitute a new tax.
It is unrealistic to suppose that older people should be immune from the need to contribute to reducing the deficit. My hon. Friend the Member for Ipswich (Ben Gummer) made that point very eloquently. Let me add a statistic of my own: the number of people aged 65 and over is expected to rise by 65% in the next 25 years to 16.4 million. Some of the measures that were introduced so many decades ago to the benefit of older people simply cannot be sustained in the current period of rapid demographic change.
I thank the hon. Gentleman for that intervention, which gives me a chance to highlight the good news we had this week regarding the number of people in employment. In Great Yarmouth we saw not only an increase in employment this month, which is very welcome, but an increase in the number of young people in employment. That is a testament to the work the Government are doing, and also, I hope, a sign of the improvements that are coming. It is also a testament to the opportunities put in place through the previous Budget and the work of the Department for Work and Pensions, particularly on work experience and the Work programme, which is also having an impact.
In Great Yarmouth, we also have a particularly high number of part-time and seasonal workers due to the nature of the constituency and its tourism industry. The change in personal allowance is a huge help to that sector of the local work force. It puts extra money into the pockets of hard-working families across my constituency.
I am sure that the hon. Gentleman is going to talk about the age allowance at any moment. Has he considered its impact on his local economy? That money was not being spent on skiing trips or foreign holidays; it is money that would, in the main, be spent in the local economy.
The hon. Lady has just made a very good argument for cutting taxes and increasing the personal allowance, which is exactly what this Government are doing. The reason why I have chosen to talk about particular issues is that I agree with something my hon. Friend the Member for Stourbridge (Margot James) said a moment ago. Pensioners in my constituency are often concerned about the future for their family—their children and their grandchildren. The work this Government have done has put in place changes, enterprise zones and opportunities for people to increase jobs, as we have seen this month, so there is a real opportunity for people in future.
We must also take into account something else. In Great Yarmouth, a prediction listed by our local health teams in the past few years is that our pensioner group will increase by 35% in the next 15 years. That is a huge increase. I fully agree with my hon. Friend the Member for Ipswich (Ben Gummer) that we have to ensure that this country can provide for people in their pensionable years in future. As we face such an increase in the number of such people, the Government must take the decisions that mean we can provide a good and fair opportunity for the future of all pensioners. That is why I also appreciate the Government’s work to move towards a fair and straight flat-rate pension for pensioners in future, on which I congratulate them. The work done in the last two Budgets will make that possible. It will mean that our economy can move forward and that we can make fair and proper provision for people in various age groups.
As the personal allowance for all people, including under-65s who work hard, increases, there will be an impact on pensioners in future. The changes announced in the Budget that simplify the tax system make it clear that there will eventually be a flat, fair and generous rate of allowance for all people. As Opposition Members have admitted, that means that nobody has a cash loss at all. In fact, pensioners under this Government had the biggest increase in their basic state pension ever seen. More than 5 million of the poorest pensioners are unaffected thanks to the triple lock. All pensioners are therefore better off and will receive the biggest ever increase of £5.30 a week. In 2013, they will receive £130 more than they would have received under the previous Government’s plans. Pensioners will respect this Government for that and appreciate the Government’s credibility for putting together a solid economic base to allow it to happen.
That is why the measure should be looked at as a whole, particularly for an area such as Great Yarmouth, where we have a high proportion of pensioners. We must make sure that we can provide for them properly and fairly in the future, and also that the economy can create jobs for their families and increase our economic growth. Being in government is about making tough decisions. Those must be the right decisions, and that is what being in government is about. As we heard today from those on the Opposition Front Bench, opposition is often about opportunism, not about making right or proper decisions.
The great Bill Shankly once said that he was always surprised that people were surprised at surprises. In one sense it is surprising that Government Members seem to question the BBC and yet cannot intervene to tell me that it is wrong. As the BBC states, those affected will be
“a ‘middle-income’ range of…pensioners who will not get what they might have expected from the tax system.”
That is a very important point. Of course we are all concerned about the impact of the recession on the poorest, but there is another factor to consider. People on middle incomes, who might have had certain expectations about how they could live their life, are now being disappointed and do not know what is coming in the future.
People feel that one of the big problems with the Budget is that certain matters that were brushed over and not explained fully have subsequently come out as being pretty serious. The insecurity facing people at the moment, especially those in the middle of the income distribution, is really quite serious, not least because it is not very good for people’s quality of life if they are constantly worrying about what next year might bring financially. How they interact in the economy and their actions as consumers are also deeply affected by that insecurity.
One of the biggest challenges for Treasury Ministers to address is how communities such as I have mentioned in the Wirral and other parts of the country, where time after time Government announcements have chipped away at the money in the local economy, can deal with the insecurity facing people. The Budget will have a significant impact on people’s quality of life.
My hon. Friend is making an excellent contribution. Does she agree that when we meet older people in our constituencies, it is inspiring to hear how concerned they are about young people’s future? However, what they see in the Government’s taking money from 40% of pensioners is not an effort to invest in creating jobs for young people. What really hurts is the fact that that money is being used to give a tax break to millionaires.
My hon. Friend is right. Of course, older people are worried about the next generation’s future, and they do not believe that the Government are making the right move, not least for the reasons that she gave.
I hope that Treasury Ministers will reconsider the proposal and their approach to local economic development. Economies are geographically centred, and businesses currently face, as I have said time and again, a chipping away of resources in their area. That makes growth extremely hard and I hope that Ministers will consider that.
I entirely agree about a simplified tax system, and if we could have found a way of merging income tax and national insurance, taking away one complexity, that would have been a great step forward. The tax regime for pensioners—people in retirement—is far too complicated and we need to find a way of simplifying it.
Not at the moment. I am sure that all hon. Members have seen pensioners in their surgeries who have suddenly been landed with a huge tax bill that they were not expecting because PAYE had not been deducted from a private pension or because they had different income levels from those they were expecting. All of a sudden these people are facing a bill of a £1,000 or more that they literally cannot afford, and through no fault of their own. So the whole spirit of trying to simplify the tax position for pensioners is exactly the right way forward. This measure is not the end of that; it will be the start of trying to get to a place where everyone can understand what their correct tax position will be and will not have to fill in myriad tax returns. People have to claim this age-related allowance, and that is slightly unusual. Normally, people expect their personal allowance to be an automatic thing, but people have to write to claim this, and that has always struck me as a strange anomaly.
The direction we are trying to take is clearly the right one. This measure is not something that any of us would have wanted to do, and I feel sympathy for all those pensioners, including my parents, who will lose money as a result of it. This is one of the many issues about which we do not just get grief from our constituents; we get grief about it from our own families every time we see them. I have to try to explain to my family why they have to put up with this pain. When we have got the personal allowance up to £10,000, the actual value of these increased allowances over that level will have been greatly reduced compared with the £3,000 difference that I believe the figure was at the start of this Parliament.
I do not think that anyone in this House is saying that as the basic personal allowance is rightly hiked up to £10,000, there is any way we can afford to hike the pension one up by the same amount—all anyone was ever expecting was for it to go up by some measure of inflation. As that benefit was to be so reduced by the end of this Parliament, we have to wonder whether or not the actual benefit to people would have been worth all the complexity, and all the hassle of maintaining these things and the delivery cost.
So I say to the Government that simplifying tax is right. This measure is one of those in the box marked, “Necessary, but unpleasant and not what we wanted to do”. We would all much rather find ways of giving our pensioners more income, but I am convinced that this is one of those things that we just have to do to take our tax system in the right direction and try to fix the deficit. However, I encourage the Government to examine all the other things in the Office of Tax Simplification’s report on tax and pensions and try to introduce some of them too, so that we get a fully developed and balanced reform, rather than just this start.
Perhaps I can make a helpful point to the Minister. Does he think it simplifies the tax system for 30,000 Scottish families to have to fill in a tax return to be entitled to child benefit?
I will deal with that in my remarks on child benefit, which we will debate shortly. The idea of people having the same personal allowance whether they are 64, 65 or 75 seems to me perfectly sensible.
The changes made by the clause will help ensure that people get the allowances to which they are entitled, pay the right amount of tax and make it more straightforward for Government to administer, thereby minimising costs to the taxpayer. A 2009 report from the Public Accounts Committee commented that the age-related allowances were
“complex and hard for older people to understand and place too much emphasis on older people having to prove their eligibility, resulting in errors in claims and potential overpayments of tax”.
In March this year, the Office of Tax Simplification published its interim report, “Review of Pensioner Taxation”, which highlighted no less than nine complexities in relation to the age-related personal allowance. One of the main sources of complication is the taper, which we have heard about in the debate this afternoon. The taper removes an individual’s personal allowance where their income exceeds £24,000 at a rate of £1 for every £2 over this limit, up to the point at which their personal allowance is the same as that for an individual born after 6 April 1948. This creates a 30% effective marginal rate of tax for individuals on relatively modest incomes and brings people into the self-assessment system when, in most cases, they would otherwise have no need to complete a tax return.
For some, in particular people whose tax affairs have previously been entirely dealt with under the PAYE system through their working lives, and who have therefore had nothing to do with HMRC, this can be a challenge. They now find themselves having to complete forms and tax returns for HMRC because they may be affected by the taper when they reach the age of 65. The changes made by the clause, alongside the increases that we have made to the personal allowance, mean that we can now simplify the system of personal allowances. This will remove complexity and confusion for some taxpayers. But nobody will lose out in cash terms as a result of these changes.
Let me emphasise that point. As a result of these changes, nobody will lose out in cash terms. In fact, half the people over 65 in 2013-14 will pay no income tax at all and are unaffected by these changes. Those who are affected by the withdrawal of age- related allowances will benefit from a £1,100 increase in the personal allowance.
My hon. Friend makes a very good point. As I have outlined, the problems could be similar if both partners had an income in excess of £50,000. The charge would then apply to the partner with the higher income, and to avoid it being applied twice the partners would presumably have to share information with each other on their incomes and co-ordinate responses in their respective self-assessment forms or HMRC would have to implement some mechanism to link together individuals’ tax records to decide which partner was liable for the charge.
As was mentioned earlier, there would potentially be further difficulties if somebody who did not expect to come within the income bracket for the child benefit charge discovered at the end of the tax year that their income exceeded the limit. It can be quite common for self-employed people to find on preparing their accounts that their income was greater than expected. HMRC would then apply the charge retrospectively, but in order to do so it would need full details of the person’s cohabitation history for the year end. I gently tell the Minister that the potential for disputes is fairly obvious. The living together as husband and wife test is an established feature of the social security system, but we all know from the people who come to our constituency surgeries the problems that emerge. Its extension to the tax system raises a huge range of other issues. Whether a partnership exists will have to be determined on an ongoing basis throughout the year, rather than just at a single point of time, and individuals might not be aware of the need to report changes in their personal circumstances to the tax authorities.
We have already heard that there is a danger that the plan will encourage people to deny the status of their relationship to avoid the child benefit change, which will effectively introduce a couple penalty. That could be a disincentive for a lone parent considering moving in with a higher income person and could create an incentive for couples to split up when one partner has a high income. For people with several children, partnering decisions could have significant financial implications.
Has my hon. Friend, unlike the Government, considered the fact that in families where one parent chooses to stay at home and raise their family, that parent will now be forced into seeking employment? In this market, that will not be feasible.
My hon. Friend makes a significant point and that is part of the fairness test, which I do not think has been met. The Centre for Social Justice has been very critical of this aspect of the Government’s plans, which it argues could
“threaten a new wave of family instability and breakdown…which flies in the face of their commitment to ‘shared parenting’.”
For those who are in the tax credit system, we currently make an assessment of household income. If a person is not in the tax credit system, we do not make an assessment of household income and so have information only on individual income. Were we to try to do this on the basis of household income—I understand the argument made by hon. Members that that is the right thing to do—we would have to accept that that would involve putting everybody claiming child benefit, all 8 million, into the tax credit system which would be a substantial administrative burden on the state and on those individuals.
A number of points have been made in the course of the debate. Let me see whether I can pick up on those, rather than addressing every amendment. My hon. Friend the Member for Christchurch (Mr Chope) argued that the provision should apply only to a household income of £100,000 or more. Not only would that result in the administrative challenge I have set out, but it would cost an additional £900 million, which would be unaffordable as well as impractical.
The hon. Member for Kilmarnock and Loudoun (Cathy Jamieson) asked about providing information at constituency level. We can release the information by region, but the survey data are simply not good enough at constituency level. I can say that 63,000 people in Scotland will gain as a result of the changes we announced in the Budget, compared with the previously announced policy. She asked what the £5 million for customer information will pay for. It includes provision for an online calculator and guidance for customers, and a letter that will go out in the autumn to all individuals above the higher rate threshold. We will also be updating existing guidance and testing it with customers, and there will be marketing spend to highlight the policy.
My hon. Friend the Member for Christchurch asked why the legislation refers to “high” rather than “higher”. He is right that “higher” is mentioned in some of the other documentation, but the point, which parliamentary counsel considered, is that “higher” begs the question, “higher than what?”, so we used “high”.
I have only one minute remaining and want to address the concerns raised during the debate, so I will not give way.
The question was raised of classification and whether or not this was a tax. As my hon. Friend the Member for Christchurch said, that will depend on the Office for National Statistics assessment. Let me deal with the question the hon. Member for Kilmarnock and Loudoun asked. Independent taxation will still apply, each partner will still have their own personal allowance and tax rate bands, and the amount of child benefit, even if it is received by the taxpayer’s partner, will not increase the amount of income liable to tax. Where there are two high earners in a household and they do not want to tell each other their incomes, there will be a mechanism whereby they can find out whether they have a higher or lower income but without the full details.
Mr Hoyle, my time is up. As I have said, the Government have had to make difficult decisions. In order to continue to provide child benefit, we must do so in a sustainable manner. At the current cost that is not the case. We have increased the threshold to £50,000 and put in a taper. This all mitigates some of the concerns that hon. Members have raised, but the budget deficit left by the previous Administration is the challenge we must overcome if we are to avoid a far worse predicament.