Taxation: Families

Lord Freud Excerpts

Thursday 17th January 2013 Lords Chamber

[The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud)]

My Lords, this has been an interesting and important debate, and I am grateful to all those who have contributed. The noble Baroness, Lady Sherlock, referred to the quality of the debate; there was something interesting in all the speeches, which is not always the case. I therefore thank the noble Baroness, Lady Hollis, for securing the debate.

I shall set some context for the debate before I try to deal with as many of the points raised as possible. The arguments for our programme of tax and welfare reform are well rehearsed. We have heard much discussion in the media, in Parliament and elsewhere on the welfare and tax policies that the Government have planned. However, I think that it is worth me touching on the rationale for our programme of reform.

We have already made significant progress in tackling the fiscal challenge that we faced when we came into office. We inherited the largest deficit in more than 60 years and, since then, welfare spending has risen from 11% of GDP in 2007-08 to more than 13% today, including pensions and working-age payments. In a constrained fiscal climate, this puts real pressure on key public services and is unsustainable. The deficit has now been reduced by a quarter, and we have created more than 1.2 million private sector jobs. Even if we play around with the small anomaly of those who are on skills training, there has been a huge increase in private sector jobs.

The noble Baroness, Lady Hollis, raised a question about cumulative impacts, and I was fascinated by her sums on this. However, I need to point out that this Government publish impacts of benefit and tax changes alongside each Budget and Autumn Statement. That is something that previous Governments did not do.

[Baroness Hollis of Heigham]

Is the Minister acknowledging that the Government have not published a cumulative analysis of the cuts, benefits and tax changes since 2010? If he is so doing, which I think is what he has said, it is still done slice by slice. Can we hope that he will do so—will he give a commitment to do so in future?

[Lord Freud]

My Lords, it is bluntly impossible to do a total cumulative assessment. I have looked at doing it, and you do not know what to put in and what to leave out. No one has done it in the past; it is not possible. Doing it year by year, as we do, is the best we can do—and it gives a fair view of what happens in a particular year.

I shall continue. While we are taking action to reduce the deficit, we have continued to support families by cutting tax for more than 24 million working people, lifting 2 million of the lowest-paid workers out of income tax altogether. Further freezes in council tax this year will help families with the cost of living by keeping the cost of council tax bills down. Here I pick up the point made by the noble Baroness, Lady Pitkeathley, about localising council tax support. That is being done because it is at the local level where the need for particular support is best understood, and we have announced additional funding of £100 million to support that process. More widely, we are investing heavily in low-income families by supporting the most disadvantaged through every stage of their education.

On the question raised by my noble friend Lady Jenkin, the right reverend Prelate the Bishop of Exeter, and my noble friend Lord Bates, the Government remain committed to recognising marriage in the tax and benefits system. That is as far as I can go today. On the point raised by the right reverend Prelate on child benefit, it will be completely removed only from families that include someone earning over £60,000, and 90% of families will continue to receive child benefit.

It is clear that decisive action is needed to control the damaged and hugely expensive welfare system that we inherited. Labour increased spending on benefits and tax credits by £75 billion and, in real terms, expenditure on all working-age benefits increased from £59 billion in 1997-98 to almost £95 billion in 2010-11, in today’s money. These increases are simply unsustainable. In tax credits, spending increased by £23 billion in real terms between the same two dates, which meant that nine out of 10 families with children became eligible for tax credits—a point made by my noble friend Lady Jenkin. In some cases, families could receive more than £70,000 in earnings and still be entitled. It is clear that, given this level of generosity, we could not protect child benefit and tax credits from the need to make welfare savings.

The Government have not shied away from acknowledging that tough decisions are needed, and we are committed to ensuring that savings measures are taken in the fairest possible way. That is why the 10% richest households will contribute most as a result of the tax and benefit changes that we are making. My noble friend Lord German inquired about that. Overall, as a result of recent changes, we may have reduced the marginal rate from 50% to 45%, but everyone in this House will be familiar with the impact of the Laffer curve. What really counts is how much total tax is taken from the richest; a quarter of all income tax is paid by the top 1% of earners, and the top 5% pay about £50,000. In practice, our changes mean that, overall, the richest will pay £1,000 a year each more in tax, not less, as has been claimed.

It is reasonable to expect the richest to pay their fair share, and it was equally important that we took action to ensure that people on benefits did not receive support that far outweighed the income received by many families who do not rely on benefits to get by. We have, for example, done away with the frighteningly high rates of housing benefit in the private rented sector, and from April this year we are applying an overall benefit cap so that households on out-of-work benefits no longer receive more in welfare payments than the average weekly wage for working households.

The year 2013 is pivotal for welfare reform. The introduction of universal credit and the personal independence payment in April will kick off the most fundamental reforms of working-age benefits for generations. I am pleased to tell my noble friend Lord German that we aim, still on time, to start universal credit on 29 April as a pilot, moving to a national basis in October. The universal credit system creates a seamless system of support to make work pay. People will be able to keep more of their income as they move into work, and it delivers a smoother and more transparent scheme that does away with the administrative difficulties created by switching between benefits and tax credits.

The noble Baroness, Lady Donaghy, made a particular point on universal credit and the self-employed. She made a point about the carry-forward, and I can tell her that I am aiming to introduce something for that to work efficiently; that will be in time for when the people who need it will be using it, so I hope that I can reassure her on that important point.

In the Autumn Statement, the Chancellor announced measures to tackle the rise in spending on benefits and tax credits by increasing the majority of working-age benefits by 1% for the next three years. The savings in that Statement amount to £2.8 billion in 2015-16. We are aiming here to strike the right balance between the support we provide and the need to tackle the spiralling cost of the welfare bill. Picking up the point made by the noble Lord, Lord Alton, on disabled people, we are protecting those elements of ESA support, the disability elements of tax credits and the main disability benefits—DLA, carer’s allowance, attendance allowance and incapacity benefit. While I am discussing the points made by the noble Lord, Lord Alton, about disability—picking up his query on PIP—I suspect we will have a chance to talk about that more next week. There is not a difference: the 50 metre to 20 metre change does not create any substantial difference in entitlement. I will be able to go into that in some more detail.

Although the Government are committed to supporting working families, it would be unrealistic to exclude that group entirely from our savings measures. Although some families will be affected by the tax credit and child benefit changes, we need to put this into context: working households will gain by an average of £125 in 2013-14. Households will, on average, gain—no matter where they sit in the income distribution.

A lot has been made of the suggestion that 81% of the £1 billion or so raised by the tax and benefit changes will come from women. However, the analysis underpinning the 81% figure misrepresents the true impact of welfare reforms on women. It assumes that because the payment of child benefit is to women, its restriction hits women; but the reality is that in many cases it goes into households. The real figure, if you do that analysis, moves from the 80% or so figure to the 60% or so figure. The Government continue to support women and their families through their tax; 80% of households with children will see their tax credits increase. The across-the-board freeze in council tax bills will help families with the cost of living.

Picking up the point made by the noble Baroness, Lady Pitkeathley, on PIP for carers, I remind her that we are committed to linking carers to receipt of either rate of the daily living component of PIP. That is the underlying reason why the impact assessment published in May 2012 showed that broadly the same number would be entitled to the carer’s allowance. Of course, continuing on her theme, where a carer lives in the same household as someone who is disabled, the benefit cap will not apply anyway, because that is one of the exclusions.

On childcare, we are spending an additional £200 million on universal credit and the focus of that is on families who work fewer than 16 hours a week. This investment will mean that 100,000 more families will be helped as they move into work. The Childcare Commission has been considering the cost of childcare in England and we expect its report to be published soon, so there will be further developments on that.

Turning to child poverty, by the relative income measure, the previous Government may have made some progress in moving children from out-of-work households out of poverty, but the effect on children from in-work families was considerably less. As my noble friend Lord Bates pointed out, work is the best route out of poverty. However, only 13% of the reduction in child poverty between 1998 and 2010, came from this fundamental route of families moving into work. That is where universal credit is so important: our estimates are that up to 300,000 more people will enter work as a result of the introduction of universal credit through improved financial incentives alone; 75% of the gainers from universal credit are in the bottom 40% of the income distribution.

Universal credit will make it easier for people to understand the level of benefit to which they are entitled—compared to the current complex system of benefits and tax credits—and significantly improve the take-up of unclaimed entitlements. That is a powerful tool in tackling poverty, because in 2009 it was estimated that 400,000 of the people living in relative income poverty were doing so because their families were not receiving all the benefits to which they were entitled.

I need to point out the importance of our White Paper on pensions, published earlier this week. The reforms will give a boost to the people who lost out on the additional state pension in the past, such as low earners and self-employed people. About 750,000 women who reach state pension age in the first 10 years after the single-tier pension is introduced will receive an average of £9 a week more in state pension because of the single-tier valuation. In response to the noble Baroness, Lady Hollis, this Government are committed to protecting pensioners—much though she may resent it. We have legislated to restore the link to earnings for the basic state pension, and are committed to the triple lock.

On the point raised by the noble Baroness, Lady Sherlock, about relative beneficiaries, the people in the middle have been squeezed quite savagely in recent years overall. I refer her to the interesting article in the Financial Times suggesting that those brackets were back at the levels of 2002-03, whereas the bottom 30% had increased their income in real terms by 3% or 4%.

Our fundamental welfare reforms will transform the welfare system by 2017. The replacement of many of the current suite of income-related benefits and tax credits with our flagship reform—universal credit—will provide a streamlined and transparent scheme that will mean that 3 million families will be better off, on average, by about £168 a month. In April this year, the largest ever increase to personal allowances will benefit 24 million people and lift 1.1 million people out of income tax altogether. Our tax measures, coupled with a modern benefit system, will demonstrate that supporting families remains an absolute priority for this Government.