Impact of Government Policies on Family Budgets

Lord Knight of Weymouth Excerpts

Thursday 27th October 2011 Lords Chamber

Moved By

[Lord Knight of Weymouth]

To call attention to the impact of Government policies on family budgets; and to move for papers.

[Lord Knight of Weymouth]

My Lords, I am pleased to introduce this debate on the impact of government policy on family budgets. Before I come to the substance of my contribution, I want to say something about the choice of the word “family” in this debate. Yesterday I asked, through Twitter and Facebook, for examples of how people have been affected by government policy in the past 18 months. I quickly had a response from someone called Ma on Twitter. She—I think she may be a she—said:

“Every single politician who talks about families is talking about those with kids. That has never changed. For my entire life in this country, I’ve been an irrelevance. Why? Talk about being ‘excluded’”.

I apologise to her if she felt excluded by the use of the word “family”. Over a series of tweets she had important things to say for us in this debate. I quote:

“I’m visibly older. What happens when I need to find a new job and can’t? This government will have me out in the street. I’m way past old enough to be a grannie now. Am I supposed to live in a student flat or crummy bedsit now? One wage coming into my home to pay for fuel. How does that work, exactly? One wage to pay for housing? All very well to care about kids. I didn’t have them in part because I couldn’t afford them. So I’ll freeze now? Nae good”.

She may have been Scottish. Clearly single people are suffering under this Government as well as more traditional definitions of family and I am happy to speak for them too as best I can. The other most striking response was on Facebook from Caroline O’Brien. She wrote:

“One thing that I haven’t seen mentioned is the effect of cuts in local services on family budgets. Particularly on families with special needs children. Very often as services are withdrawn families are forced to try to make up the shortfall or see their children suffer. Whether that is getting independent assessments of educational need, private speech therapy, funding activities previously coming from youth services or providing transport. The withdrawal of EMA is going to hit us too, as my daughter starts A levels next year and as for thoughts of university, the debt levels are terrifying. I am also noticing that charities are being hit hard, so far less help is now available from them. Many of these things are just starting to have an effect but from where I am standing the future seems bleak for so many families. I know I am lucky. We can afford to buy the food we need, heat our house and pay the mortgage but is equality of opportunity for my kids really something that should be cut? After all it is the tax payer who will have to pay if my kids are unable to participate in society in the future”.

[Lord Campbell of Alloway]

Would the noble Lord forgive me for asking whether his interesting speech is within the remit of the problems of this particular Statement?

[Lord Knight of Weymouth]

I am speaking to the Motion in my name around the impact of government policies on family budgets and I believe I am speaking directly to that, but I welcome the interest from the noble Lord.

Those two responses are the authentic voice of people in this country—not the poorest perhaps but certainly what has been described as the “squeezed middle”—and it is appropriate that we heard from them first in this debate.

In the remainder of my time I want to make three broad points. First, the lack of growth in the economy is hitting family budgets hard and the country desperately needs a credible and urgent plan to return to growth. Secondly, tackling two of the big inflationary items in budgets, food and energy prices, means taking on vested interests and pushing them to act in the long-term interest rather than for short-term gain. Finally, this Tory Government are failing because they are out of touch with the problems of ordinary families in this country.

I start with the last of those first. It was, I think, in George Osborne’s 2009 party conference speech that we first heard his soundbite: “We are all in this together”. The Government want us to believe that the pain is shared fairly. Does the Minister still believe that to be true? The evidence that he is hitting the poorest hardest is stark. I quote from Peter Wilby’s excellent piece in the 17 October edition of the New Statesman, where he said:

“One of Labour's most outstanding achievements in office was to reduce child poverty during an economic boom. This sounds nonsensical, but isn't. Poverty is defined relatively; children living in families that receive below 60 per cent of median income count as poor. As the median nearly always rises during a boom, more children automatically become poor unless employers increase their parents' wages or ministers increase their benefits. The Tories are about to pull off the opposite trick. In recessions, the median falls and so, unless poor families' wages and benefits are hit harder than average, child poverty automatically falls. In 2009-2010, that was exactly what happened, with 300,000 children coming out of poverty. But that was before the Tories got to work. Now, the Institute for Fiscal Studies reports, we can expect the same number (though not necessarily the same children) to go back into poverty over the next two years, despite the likelihood that median incomes will remain, at best, stagnant. You couldn't have a clearer illustration of the difference between Tory and Labour governments”.

On the income side of family budgets, we know that wage increases are not keeping up with inflation and that families are therefore suffering real-terms cuts. The Government are adding to that by their own attacks on pay in the agricultural sector by abolishing the Agricultural Wages Board, on the pay and conditions of school support staff by abolishing their negotiating body, and on public sector workers generally by imposing an effective extra tax on them through increased pension contributions beyond those being recommended by the noble Lord, Lord Hutton.

At the same time, the Government are of course cutting the benefits bill. Their cuts to housing benefits, to tax credits, to child benefit, to childcare, to educational maintenance allowance, to baby tax credits, to the maternity and health in pregnancy grants, to concessionary transport and to disability living allowance amount to a list that is long and painful. These cuts are hitting the poorest hardest, because it is the poorest who claim the most benefits, both in and out of work. Worst of all, for some families, unemployment is rising once more, with too many families now going through the trauma of a sudden collapse in their income. It is clear that “We are all in this together” rings hollow. If Ministers want to continue to claim that their choices on spending have been spread fairly, they are even more out of touch than I thought.

I turn to spending. The biggest hit on family spending overall was the Government’s decision prematurely to raise VAT to 20 per cent. As former Monetary Policy Committee member Professor Blanchflower wrote recently:

“It certainly appears that increasing VAT from 17.5 per cent to 20 per cent was a big mistake—it increased … Consumer Prices Index inflation by 1.5 percentage points and hit ordinary working people's living standards”.

His call to reverse that increase was repeated by last year’s winner of the Nobel Prize in economics, Christopher Pissarides, who said this month:

“Cutting VAT back to 17.5 per cent … will revive job creation and reduce unemployment. Deficit reduction is best done with spending cuts when the economy is recovering, not with higher taxes in a downturn”.

Last week’s inflation figures made grim reading. CPI, the Government's preferred measure, has never been higher at 5.2 per cent, and RPI, at 5.6 per cent, is the highest since June 1991. It is little wonder that the Markit Household Finance Index published this week showed 37 per cent of UK households expecting their financial situation to worsen this month, against only 7 per cent expecting an improvement, or that the Family Lives survey of December last year found that 53.3 per cent of families said that their finances were in a worse state now than last year.

If we look at the detail of the inflation figures, we see the reality for families. Bills for gas and electricity have risen by 9.9 per cent in the past month and are up 18.3 per cent since last year. Transport has risen 12.8 per cent in the past year and food is 6 per cent higher than 12 months ago. I expect that my noble friend Lady Smith of Basildon will talk about energy prices in her speech, but we know that the poorer you are, the higher the proportion of income is used in food and heating. I fear that this winter many more will have to choose between the two as the decision to cut winter fuel payments to £200 for over-60s and £300 for over-80s adds to the misery.

With regard to fuels costs, I have to press the Government on why they are not giving teeth to the groceries code adjudicator. This new body will be funded by the supermarkets. The responsible Minister, Ed Davey, has said it will “safeguard the consumer interest”, and it will lead, in the words of the National Farmers Union to,

“fewer instances of flagrant bully-boy tactics … by the supermarkets”.

Yet the Government have rejected two Select Committee reports calling on them to implement the regulatory body quickly. It was ready to go last summer. The Government rejected proposals to allow it to fine without a resolution in both Houses of Parliament and to allow it to act on anonymous complaints. On the three big tests, the Government have shown that they are unable to resist the power of the vested interests of the supermarkets and unwilling to set up an effective regulator—the effective regulator that consumers and producers of food want and need.

Since the Minister is so well briefed on Europe now, and given the warm relationship that the Prime Minister has developed in Europe with the likes of President Sarkozy, perhaps the Minister can tell us how we will get heard on more radical reform of the common agricultural policy, which his friends in the TaxPayers’ Alliance claim costs every household in this country £398 per year in higher food prices. If the Government are serious about helping family budgets, they must be willing to take on the short-termism and vested interests that are raising food and energy prices. That is the new bargain with business that Ed Miliband talked about last month in Liverpool and it is sorely needed.

Finally, what families in this country need more than anything is growth in the economy. Growth brings jobs, job security and consumer confidence. We are in a vicious circle that needs reversing. Today’s British Retail Consortium figures show 23,000 fewer workers in high-street stores than a year ago because of the collapse in consumer demand. How are the Government going to reverse it? To get the economy moving, we need spending to increase. As we have seen, that certainly will not come from consumers. Despite the welcome deal overnight in the eurozone, the best prospect of an export-led recovery is if China starts to import more, and we cannot see any signs of that. The lack of delivery by Project Merlin means that the prospects of businesses accessing the finance that they need are poor, so they are unlikely to start spending either.

That leaves the Government. In this downward spiral, we need a kick-start from the Government. That is the consistent lesson from history. We need a plan for growth. Call it plan A plus, call it plan B, call it whatever you like, but give us a plan for growth that will work. The Shadow Chancellor, Ed Balls, has offered his plan: reverse the VAT increase until growth is sustained; cut VAT to 5 per cent for home improvements; bring forward investment in schools and hospitals; repeat the bankers’ bonus tax to invest in building new homes and thereby create work for 100,000 more young people; and offer small business a national insurance incentive to take on new staff.

The Minister may say we cannot afford to do it; we say we cannot afford not to. Where else is growth going to come from? Families in this country are up against it. The conversations around the kitchen table are very bleak. Too many cannot tighten their belts much more, and the real impact of many of the cuts is still to come. The poorest are hit the hardest. It is not fair. Without a change of heart from this Government and without serious progressive measures, I fear massive social problems, a sustained recession and a blight on families’ chances for a generation. The families of this country need action now.

--- Later in debate ---

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, I am grateful to the noble Lord, Lord Knight of Weymouth, for initiating this debate on an important topic and for all the contributions that have been made.

As your Lordships are aware, and as we have been reminded, we are living through a period of real international uncertainty and instability. The eurozone, as we heard earlier, has been and is at the epicentre of this crisis, but the volatility has reached right around the world—to the US and China, and of course here in the UK. We are not immune from what is going on in our largest export markets. That instability acts as a powerful drag on what was already a difficult recovery from the deepest debt-fuelled recession in living memory.

It is right when we face such difficulties to ask ourselves: are we doing enough to support families; are we doing enough to protect the budgets of the poorest families; are we doing enough to provide opportunities for the youngest in our society; are we doing enough to support working parents; and, most importantly, are we doing enough to put the economy back on track to provide the opportunities, jobs and growth that we all need? When we came into government we inherited the deepest recession since the war and the largest budget deficit in our modern history. The adjective that the noble Baroness, Lady Pitkeathley, used was “dire”. I agree. It was absolutely vital that we tackled that deficit. High deficits lead merely to higher inflation, taxes and interest rates. Cutting the deficit is a vital precondition to growth and prosperity. I am grateful to my noble friend Lord Stoneham of Droxford for underlining this point.

As we have seen over the past year, UK gilt yields and interest rates generally have fallen dramatically in response to the tough choices that we made in our spending review. Low interest rates help businesses to refinance debt and help families to stay in their homes. Of course the noble Lord, Lord Stevenson of Balmacara, was quite right to remind us that even in this time of low interest rates, debt is a very real problem for many in our society. Even a 1 per cent increase in interest rates would take £10 billion out of the pockets of families through higher mortgage payments. I therefore applaud the debt advice provided by a wide range of private and not-for-profit organisations. It is important that consumers know that many free and high-quality sources of help and advice are available from publicly supported projects and the voluntary sector.

Perhaps I may add a comment on one aspect to which the noble Lord, Lord Stevenson, drew attention—graduate debt—because I do not entirely share his analysis. Under the new system, all graduates will pay less per month than under the old system and they will have a longer repayment term of up to 30 years compared to the current 25 years. It is important to remember that.

Generally, on the deficit and interests rates, it is by getting ahead of the curve, by consolidating on our own terms, that we have avoided the uncertainty and the instability that have cut through other countries and plunged families in other parts of Europe into even more austerity and difficulty. More than that, in our spending review, we took the decisions to tackle the deficit in a proportionate, responsible, but also a fair, way. Therefore, I completely reject the charges coming from the noble Lord, Lord Knight of Weymouth, and the noble Baroness, Lady Smith of Basildon. Indeed, we are all in this together and it is critical that those who can, pay most. That is why we have tackled the deficit in the way we have.

The first transparent analysis of the distributional effects of our budget and spending measures—something never produced by previous Governments—shows that after combining the impact of tax, tax credit and benefit, and public service spending changes announced by this Government, the top 20 per cent of households will make the greatest contribution towards reducing the deficit as a percentage of their income and benefits in kind from public services. We take those distributional effects very seriously.

We are also taking more from the banks in our ongoing taxation of them than the previous Government did through their one-off tax on bonuses. In relation to VAT, I share the analysis of my noble friend Lord Stoneham of Droxford. I believe that what we did to reverse the previous Government’s national insurance tax—a tax on jobs—is what really mattered in making the difficult choices about where to prioritise tax measures so as to get our economy going again. These are painful choices, but it was our partial reversal of that tax on jobs, which noble Lords opposite did not mention, that was key to getting the economy going again. We took particular care to reduce the impacts on family budgets.

In relation to fuel poverty and rising fuel prices—a very important subject raised by the noble Baroness, Lady Smith of Basildon, my noble friend Lord Stoneham and the noble Baroness, Lady Pitkeathley—we have to acknowledge first of all the reality of rising world oil prices. We cannot be insulated from that. But what has this Government’s response been? We cancelled the previous Government’s fuel duty escalator and cut fuel prices. We have taken action on fuel duty, which has resulted in average pump prices being about six pence a litre lower than if we had continued with the previous Government’s fuel duty plans. A typical Ford Focus driver will be paying about £56 less this year than he or she otherwise would have been doing. We have introduced the fair fuel stabiliser so that when oil prices are high, and oil profits are higher, fuel duty will increase by inflation only. This will ensure that the burden of high oil prices is better shared between oil companies and motorists. I say again that energy price increases are never welcome for consumers and we recognise that. It is important that these are limited to the costs and risks borne and are not about energy companies making excessive profits.

That is why we strongly support Ofgem’s work in ensuring competition in the energy industry, including the recent proposals stemming from the retail market review launched in November last year. That is why we are taking a range of other actions to increase people’s control over—and help them reduce—their energy bills. We are setting up the Green Deal for energy efficiency and the supporting energy company obligations. We are rolling out smart meters that will enable consumers to manage their energy use better and introducing the warm house discount to provide cash rebates for around 2 million vulnerable households by 2014-15. So, yes, we share the concern but I reject the charge that we are not going about it in a sensitive and proportionate way.

Taking some of our other measures to help families, we have made significant above-indexation increases in the child tax credit for the next two years, increasing it by £255 and benefiting 2.4 million low to middle-income families. This will also ensure that modelled tax and welfare policy introduced by this Government will have no adverse impact on child poverty for the next two years. I say that directly to the noble Lord, Lord Knight of Weymouth. He shakes his head but, again, we now have the benefit of the introduction by this Government of the independent Office for Budget Responsibility so that we can no longer make up such claims; all these things have to be independently assessed.

We made changes to the personal allowances to provide support for hard-working families on low and middle incomes, and increased the rewards for work. The increases in the personal allowances announced at the 2010 and 2011 Budgets will benefit 25 million individuals in 2012-13 and take 1.1 million of the lowest-income tax payers out of tax altogether. Our aim is to ensure that no one earning less than £10,000 will be caught in the income tax net. My noble friend was completely right to draw attention to this policy.

[Lord Knight of Weymouth]

I am grateful to the noble Lord for giving way. I would not normally intervene but he mentioned the Office for Budget Responsibility. Would he support the OBR having to report on relative child poverty as part of its reporting?

[Lord Sassoon]

The OBR has a very clear and extremely wide remit. The previous Government had absolutely no check on any of their numbers. They could rewrite cycles or determine what path of growth they wanted to show. So I think we are now in a completely different world. Perhaps I may press on, because time is short.

We have reformed child benefit so that families with a higher-rate taxpayer are no longer eligible. Low and middle-income families are no longer being taxed to pay for child benefit for the rich. That, again, is another aspect of fairness. Of course, noble Lords have mentioned the important triple lock on pensions that we have introduced.

Finally in this area, this month my right honourable friend the Chancellor announced a freeze on council tax bills. Therefore, there will be a council tax freeze for a second year and that will provide real help for households in difficult times. Of course, in the spending review there were still difficult decisions to make on what to cut, but the previous Government’s welfare spending was both unsustainable and unsuccessful.

Tackling poverty is not about moving families and children above some arbitrary line. It is not reduced by throwing good money after bad. This Government are taking a long-term strategic view to tackling poverty, which is about more than just welfare transfers; it is a strategy focused on transforming people’s lives and the lives of future generations. I am grateful to the noble Baroness, Lady Pitkeathley, for reducing these almost abstract concepts to some really vivid case studies. I say to noble Lords that it is to that end, and it is in recognition of these very difficult situations, that we are increasing expenditure on public services where they can tackle the root causes of disadvantage. That is why we will introduce the fairness premium, refocus Sure Start and improve education. That will help to break cycles of disadvantage. The new fairness premium is worth £7.2 billion over the spending review period and will provide support to the poorest families in the UK. It will extend 15 hours a week of early years education and care from 2012-13 to all disadvantaged two year-olds; it will maintain Sure Start in cash terms, including new investment in Sure Start health visitors; it will introduce a substantial schools premium, rising to £2.5 billion by 2014-15, to support the educational development of disadvantaged pupils; and it will protect those on the lowest incomes in higher education through a scholarship fund of £150 million by 2014-15.

We are also reforming welfare to ensure that welfare payments are targeted at those who need them most and we are reforming tax credits to focus them on those who need them most. That means reducing the rate at which tax credits are withdrawn, while reducing the threshold at which they are paid. Importantly, we want to ensure that those who can move into work have a real incentive to do so. Currently some 800,000 individuals, including around a quarter of a million children, live in households where no one has ever worked. That has to be changed and it will be changed through the new universal credit being introduced over two Parliaments. To support working parents, the Government have agreed the extension of support with childcare costs to those working less than 16 hours, as part of the new universal credit, which will enable the transition of second earners, typically women, into the labour market.

In conclusion, this Government fully understand the difficulties that families face in the current economic environment. The biggest thing that we can do as a Government to help families is to return the economy to sustainable growth: private sector growth through innovation, enterprise and export—sustainable, not debt-fuelled growth—that delivers the stability and jobs that we need across the country. That is our overriding priority. Tackling the deficit is the precondition to realising that ambition. The recovery will be difficult, but we will not let the poor and vulnerable bear the brunt of these difficult times. We are committed to helping families, young people and jobseekers realise their ambitions and fulfil their proposals. I am grateful to the noble Lord for introducing this debate.

[Lord Knight of Weymouth]

That is all right, then. The view from the Treasury is that everything is just fine. To too many families up and down the country, who are really struggling with their budgets, I am afraid that that will sound complacent and out of touch because, quite simply, the Government’s economic policy is not working for them.

We have had a really interesting debate and I am sure that we shall return to this subject. I am grateful to the noble Lord, Lord Stoneham of Droxford, not only for his kind comments about me, but also for being confident and brave enough to take on responsibility for the economic policy on his party’s behalf, the Liberal Democrats, as well as the Conservatives. I am grateful to my noble friends Lord Stevenson of Balmacara and Lady Pitkeathley for making very important speeches. What my noble friend Lord Stevenson said about the legacy of personal debt is something that we should keep in mind when we return to this subject. My noble friend Lady Pitkeathley’s two poignant stories told the stories of so many more people who are now struggling to cope. I am obviously grateful to my noble friend Lady Smith of Basildon for the detail that she gave us about the impact of the high cost of energy now.

The Minister started off his comments by saying that it is difficult but that external forces are responsible for making the recession more drawn out and more painful. If he is going to pray in aid external forces now for why his Government’s economic policies are not working, he cannot talk any more about the legacy that they inherited and the economic mess because that was down to the external forces of the global financial crisis. I shall come to a truce with him: I will not bang on at him about how he has got it all wrong, how everything that is going on with the economy of this country is all the Government’s fault and I will admit that there are some external forces if he, too, will stop going on about how it is all the horrible inheritance from the Labour Government because that was all down to the global financial crisis. Before that hit, our level of debt in this country was the second lowest of any of the leading industrialised nations in the world.

We shall return to this subject, but it has been a good debate. I beg leave to withdraw my Motion.

Motion withdrawn.