Taxation: Families

Lord German Excerpts

Thursday 17th January 2013 Lords Chamber

[Lord German]

My Lords, I pay tribute to the noble Baroness, Lady Hollis, for securing this debate today. I do not think anyone in your Lordships’ House does not understand her dedication to these issues. Without wanting to trade figures with her—which is obviously a dangerous trade and I will not upset some of the interpretations she places on those figures—it is, of course, important that your Lordships hear the sort of scrutiny that she brings to these issues. The noble Baroness has secured a full debate on a very important matter for the House to consider.

I am pleased to have this debate, especially as it ranges over the benefits and tax systems together. They are inseparable in any discussion of welfare issues in our country. This Government’s actions in this area have been a mix of major policy changes—some on a very large scale—coupled with the need to reduce the budget. That is a difficult balancing act, but the Government have done well to shift the policy agenda at the same time as having to make sharp reductions in public expenditure. It is worth remembering that if you take the relevant tax and benefits expenditure together, the total welfare bill of this country represents nearly £1 in every £3 of public expenditure. That is more than the total expenditure on health, education and defence added together across the whole of our country. Therefore, it is impossible to escape the need for cost reduction in the welfare bill in our deficit-burdened country.

I wish there was greater political honesty around this matter. It was certainly not helpful when, a couple of weeks ago, the Labour Front Bench in the House of Commons outlined a new idea to divert funds from pension tax relief to a jobs guarantee. In an earlier announcement, Labour had already allocated that same money to reversing changes to tax credits. This does no credit to politicians in general or to debates on these issues. The fiscal burden is a reality that cannot be escaped.

Nevertheless, it is pleasing to note that in the Autumn Statement we were able to reduce the hit on the overall welfare bill. There was much talk of the need to make a reduction of £10 billion; indeed, it was frequently talked about in debates in your Lordships’ House. The eventual reduction figure announced was much less: £3.8 billion. Even so, it still requires tough and difficult decisions. Any reductions in the welfare bill have to be fair and proportionate. When money is tight, spreading the impact over a large number of people who lose a small amount of money is fairer than targeting specific groups for larger cuts. The average loss from the changes made in the Autumn Statement will be in the region of £3 a week.

I am pleased that the Government have reduced the hit on the bill and, in particular, avoided some of the more unpleasant proposals put forward in the lead-up to the Autumn Statement. Those aged under 25 will still be eligible for housing benefit, benefits will not be frozen and families will not have their child benefit capped if they have more than two children. It is also clear that the 1% cap is a temporary measure. However, the most beneficial change, which comes in from April this year, is the increase in the personal tax allowance. The amount earned before paying tax increases from £8,105 to £9,440. That is the largest real-terms increase in the personal allowance for 30 years. It will give the average worker an increase in their pay of nearly £600, and—of particular relevance to this debate—59% of the 2.2 million people taken out of tax altogether from April will be women. This is a much more effective and efficient way of putting money into people’s pockets than the hand-back system of tax credits.

The tax credits system is so complex that it led to more than £10 billion in fraud and error. From this April, the changes will benefit 23 million workers in our country but not the 1.8 million of our richest people who will pay more as a result of the changes. Someone working full-time on the minimum wage will see their income tax bill cut in half compared to what it was under the previous Government. It is getting fairer but I hope the Government’s ambition is that no one on the minimum wage should pay income tax at all. I very much hope that the Government will go further in this direction.

Our welfare system provides the safety net. Any decent society must do this but I believe that it should do more. It should help those people who are able to improve their lives and their life chances. Giving people a helping hand to do better is also a key role for a modern welfare system. That is why trapping people in a benefits culture is a bad idea. It offers no solutions and no way out for those who are able. The hand-back tax credit system has had the impact of increasing reliance on state support instead of providing an increase in personal confidence and self-reliance. Taking away tax first is the way that we should proceed, which is what this Government have been doing. People will not have to hand it back; they will see their money in their pocket.

The complex mix of benefits and tax credits created by the previous Government has meant that far too many people are not better off in work. Changing that aspiration and making sure that people are better off in work is the great hope that I am sure your Lordships’ House shares for universal credit. Working for just a few hours a week will mean that you are better off. I should be grateful if the Minister would give this House an update on progress towards implementation of universal credit so that we can see how all this will come into effect this year.

One of the tricky issues that universal credit brought forward was that of childcare under a universal credit system. Since universal credit will give an opportunity to bring more people into a system of balancing their tax and benefits together, it will obviously be received by more people. Spreading the same amount of money across more people could mean a reduction in the amount of childcare funding that would be provided. I was very pleased that the Government managed to find an extra £300 million in order to bridge some of that gap.

The difficulties that we face with funding mean that the levers within the future system should allow for more incentive to be provided within it. I know that the Minister shares the ambition that the taper rates should be such that people should be able to keep more in years to come. I hope that he might also comment on that when he responds to this debate.

I very much agree with the noble Baroness, Lady Hollis, about language. Care must be taken over the language that we use in all these issues. Stigmatising people by language and by the difference and distinction between those in work and those out of work does not aid encouragement and support for improvement in people’s quality of life. The fact is that the vast majority of people want to work and are working hard in order to do so. More than half the people who claim jobseeker’s allowance do so for six months or less. I am afraid that both sides of the political divide have been guilty of this sort of rhetoric. I hope today that your Lordships can agree that this distasteful practice must end.

In conclusion, I give two examples of how, if the universal credit system works as we all hope it will, it will lead to change for families in our country. A typical one-earner couple with two children who are renting will be £761 better off under universal credit if they come into the system this year. I wonder whether that is a sign that the change we bring will support families. A one-earner family with an income of £20,000 and two children will gain £223 from the personal allowance increase. They will obviously lose tax credits of £150 and child benefits of £39, but under universal credit they will still make a net gain of £34. When my noble friend sums up on the ambitions for universal credit, could he support these examples and show us that universal credit will make sure that work will always pay and families will always be better off?