Welfare Benefits Up-rating Bill

Lord McKenzie of Luton Excerpts

Monday 25th February 2013 Lords Chamber

[Lord Low of Dalston]

My Lords, somewhat to my surprise, I find my name on this amendment, so perhaps I should say a few words. I do not want to repeat all the arguments that were advanced at Second Reading and I do not have a lot to add to the very eloquent speech that we have just heard from the noble Baroness, Lady Meacher, but there are a couple of points I would like to make.

The first is the economic argument. I said at Second Reading that it did not really make any sense, at a time when the economy was flat-lining, to withdraw additional purchasing power from a section of the community that was most likely to spend it: those on welfare benefits. With every day that goes by and the economic news piles up about the dire condition of the British economy, the stronger this argument gets. The Minister did not respond adequately to that argument at Second Reading. I would be grateful if the Government gave further serious consideration to the force of that argument, which is genuine and considerable.

The Bill will cause real hardship for disabled people, carers and children. Disabled people are said to be protected but, as we showed at Second Reading, the protection accorded disabled people is partial. There is some protection for those in the support group receiving employment and support allowance, and disability living allowance is exempted from the 1% cap, but those receiving employment and support allowance in the work-related activity group and other disabled people receiving other benefits do not receive protection from the 1% cap. It cannot therefore be said that disabled people are fully protected, nor are carers.

Above all, children are not protected. Disabled children in this country are already disproportionately likely to live in poverty. Approximately 40% of all disabled children—about 320,000—live in poverty, compared with a poverty rate of 30% across all children. Nearly a third live in severe poverty—where a family’s income is less than 40% of the national average. Under universal credit, which will begin to come into effect later this year, parents of disabled children can receive a benefit called the disabled child addition. This will replace the current disabled child tax credit, but, under universal credit, the support available for disabled children who do not receive the high rate of DLA care component will be cut by half, from £57 a week under the disabled child tax credit to £28.52. The Bill will mean that the value of this benefit will increase at a significantly slower rate, by just 1% as opposed to in line with the CPI, which is currently running at 2.7%. As a result of the Bill, parents of disabled children receiving the lower disabled child addition of universal credit will lose £25.21 a year, or £75.63 over the three years during which the 1% cap is intended to operate. I would be grateful if the Minister could reflect further on the hardship that will be caused to all these groups and have second thoughts about the universal application of the 1% cap.

[Lord McKenzie of Luton]

My Lords, I shall speak to Amendment 1 in this group and to the other amendments that we have in it: Amendments 6A, 9 and 10A. I am grateful to my noble friend Lady Hayter for moving the amendment in my absence and apologise to the noble Baroness, Lady Meacher, for missing the very start of what was a powerful presentation.

Amendments 1 and 9 would remove the reference to 1% in Clauses 1 and 2 and hence remove the 1% cap on the uprating of relevant sums and amounts. Amendments 6A and 10A would delete the prohibition on uprating such sums and amounts under the annual uprating of benefits and tax credits. We fully intend these amendments to undermine and negate the purpose of the Bill, which we consider to be unnecessary, misdirected and contributing to the continuing economic failure of this Government, a failure all too evident from last week’s downgrading of our AAA credit rating by Moody’s.

Let me be clear from the outset on Labour’s position: we will make no commitment now on spending or tax for the next Parliament and will set out our spending plans at the time of the next election. However, right now we would uprate in line with inflation—I shall come on in a moment to how the Government can plug the hole in their increasingly fragile finances.

This Bill is unnecessary because if this Government misguidedly wish to plough on with this capping on uprating, they could simply use the annual uprating process. The Bill provides no certainty for taxpayers because there is no certainty on claimant numbers, except perhaps the prospect of them increasing, given the Government’s economic failure. As for the markets, it is frankly untenable to suggest that by locking those amounts, which account for less than 0.1% of government spending, into legislation they will be assured and comforted. It does not seem to have cut any ice with the rating agencies. The certainty of a real terms cut in support cannot be welcomed by claimants, especially when they have no certainty about the level of the real cut.

We all know why the Bill was brought forward. We made our position clear at Second Reading and I do not propose to revisit the issue in Committee. The Bill is misdirected on several counts. It does nothing for jobs. Indeed, by withdrawing real resources from low-income families, which of necessity have the highest marginal consumption rates, it is damaging demand. It ignores the IMF warning that the fiscal stabilisers should be allowed to operate. Its justification is supposed to be that there needs to be some correction for the fact that benefits have been uprated at a faster rate than earnings over the past five years—essentially, that those out of work have done better than those in work. It is perverse, therefore, that two-thirds of those hurt by the Bill are in work, taxing the very strivers whom the Government claim to be supporting. Indeed, specifically included in the cuts is in-work support, such as working tax credit, SSP, SMP and paternity pay, as well as in and out of work benefits such as housing benefit, the very support that enables individuals to sustain employment and manage work and family responsibilities.

It is not only those in work who are having their living standards cut. The Government are failing to honour their pledge to protect the most severely disabled. If they still hold to their obligations under the Child Poverty Act, they are drifting further away by pushing a further 200,000 children into poverty. Worst of all, at a time when the Bill will reduce the living standards of the very poorest, they are rewarding those with the highest incomes, including 8,000 millionaires, with a generous tax cut. The contrast could not be greater: a £2,000 a week tax cut for some, 71p a week if you claim JSA.

By leaving the inflation risk with claimants, the Bill creates greater risk for the poor and uncertainty about their real incomes. The 2012 Autumn Statement cites energy and fuel prices as remaining a potential source of risk over the coming years. It estimates that inflation will be higher in 2013 and 2014 than originally announced due to rises in domestic energy prices and food commodity prices—the very costs that hit the poorest hardest. We see today the reaction of the currency markets to our credit rating downgrade: a weakened sterling, which will put further pressure on prices.

Uncertainty is compounded by there still being no cumulative impact assessment for the raft of benefit and tax credit changes that have been introduced so far by the Government. The IFS, in its 2013 green budget, analysed the effect of the 2013-14 tax and benefit changes. It concludes:

“This broad pattern of tax giveaways and welfare takeaways”—

its own terminology—

“means that the changes, on average, reduce net incomes towards the bottom of the income distribution and increase net incomes in the middle and upper parts of the distribution”.

It states that the below-inflation uprating is the predominant cause of losses in the bottom half of the income distribution and that the reduction of the top rate of tax from 50% to 45% produces the gain for the richest.

That juxtaposition speaks volumes about the priorities of this Government: the rich need more to motivate them; the poor need to feel the lash of cuts to inspire them. This pattern is not new. Looking at the overall position since 2010, apart from the richest decile it is a fact that the poorest have lost the greatest percentage share of their income in the cause of fiscal consolidation. This analysis is consistent with the detailed briefings that we have all received from a range of authoritative sources. They tell us that 68% of those affected by the Bill are actually in work, 30% of all households that will be hit will lose on average £156 a year, two-thirds of those households are families with children, 71% of households affected are at or below average income, and two-thirds of those affected are women.

--- Later in debate ---

[Lord Bates]

I, too, was not intending to speak on this amendment, but I was spurred to by my noble friend Lord Forsyth of Drumlean. I rise to add to some of the points and to reinforce some of the questions that he has about this. I followed this debate quite closely at Second Reading, and I thought that the position then argued by the noble Lord, Lord McKenzie of Luton, was that the Opposition opposed the 2013-14 and 2014-15 limits but had not yet reached a position on 2015-16. Presumably by supporting this amendment, they are now making the position that they do not agree and would therefore reverse the policy as it affects 2015-16, which is £1.9 billion. I may have got that wrong, and I am very happy to sit down if the noble Lord wants to intervene to correct me.

[Lord McKenzie of Luton]

I shall clarify for the noble Lord that we made our position clear in respect of 2013-14, which is not in the Bill but is dealt with by regulations in the normal way. We made it clear that we will make no tax or spending commitments in respect of the next Parliament, which would include the latter part of 2015-16. As for 2014-15, we think that removing this cap would enable the normal process to take place so that there can be an assessment in the normal course about what is happening to inflation and the state of the economy in that year. I hope that has clarified the position. That has not changed since we debated this at Second Reading.

[Lord Bates]

The noble Lord is saying that the Official Opposition do not intend to make any pledges, which is interesting because I thought I heard last week that there was a proposal for a mansion tax and that that would be funded by other means. I thought that was a specific spending commitment beyond 2015-16.

My second point picks up on one from the noble Baroness, Lady Meacher, who made a thoughtful contribution. We overwhelmingly agree that the most effective way to alleviate poverty and raise standards is to create jobs. I would have thought that there would be some recognition that the Government’s record on that has been quite reasonable. We would of course like it to be very much better, but contrary to some other countries that are wrestling with the same problems our unemployment rate continues to fall. We now have the highest level of private sector employment in our history and a million new private sector jobs since the last election. That suggests that moves to reform taxation and stimulate the economy are beginning to have some effect, and that they are the best way of tackling this.

We have an Urgent Question coming up on the rating agency decision: the noble Lord, Lord McKenzie, and the noble Baroness, Lady Meacher, referred to this. I was reading through the decision and thinking of making a contribution to the Urgent Question, which I will not now do having secured the Floor in this debate. Moody’s statement,

“explains that the UK’s creditworthiness remains extremely high … because of the country’s significant credit strengths”,

chief among which are,

“a strong track record of fiscal consolidation and a robust institutional structure”.

That is quite interesting. In fact, going beyond that, we are again warned about what could happen to the country’s inflation and the cost of borrowing if the country were to be downgraded again.

Further down, on what could move the rating up or down, Moody’s statement says that,

“downward pressure on the rating could arise if government policies were unable to stabilise and begin to ease the UK’s debt burden during the multi-year fiscal consolidation programme”.

So there is a case for fiscal consolidation. There needs to be a recognition that the Government’s policies of raising tax thresholds and increasing employment are beginning to have some effect.

Notwithstanding that, I come to a point of agreement, which I made at Second Reading: no one on any side of the House is cheering on this measure. It is an economic necessity. It is certainly not something that anyone takes pleasure in.

--- Later in debate ---

[Lord Newby]

I am extremely sorry if I misunderstood the noble Lord.

In conclusion, I repeat that the amendments in this group would mean that the Bill would not deliver on its purpose of enabling the Government to set out clear and certain plans to control welfare spending and help secure the economic recovery. That is why they should be resisted.

[Lord McKenzie of Luton]

My Lords, perhaps I may wind up on behalf of my noble friend, who moved Amendment 1 on my behalf. I thank the Minister for his range of responses. I emphasise that, yes, we believe the amendment would negate the Bill, but it would not prevent the Government doing what they wanted to, given a chance, over a three-year period. However, we believe that it is wrong to lock in a real-terms cut for three years. Effectively, it is for two years, given that the first year is by way of regulation.

On issues of tax, the Minister, in response to the Second Reading debate, said that a 50% tax rate would not garner the revenue we believed because people would order their affairs. Ordering their affairs, as set out in some detail in the HMRC publication that looked at this issue, would involve switching income from one year to another. It is quite possible that, as we speak and draw to the end of the current tax year and move towards, possibly, a 45% tax year, a great deal of income will shift from this year into next year. Will the Minister say whether he thinks this is okay and acquiesces with it, or whether it is a matter that the Government should address in some form? If you simply sit back, clever and well resourced people will reduce their tax liabilities as fully as they can. However, it does not inevitably have to be that way, particularly when the people who will pick up the burden of that avoidance are at the very low end of the income scale.

[Lord Bates]

I take the argument that the noble Lord is making about 50p down to 45p. I am puzzled therefore as to why, during the entire period of the previous Government, who were in power from May 1997 until April 2010, the top rate was 50p. It reduced to 45p only on 6 April 2010. If it was an overriding cause of concern and a belief of the Government of that time, in which he served as a distinguished Minister, surely they would have kept the rate at that level and not proposed reducing it.

[Lord McKenzie of Luton]

We are addressing the policies of this Government. We can spend all our time debating what previous Governments have done but we are addressing this Government’s determination to raise the revenue that they can from a 50% rate, rather than give what is a huge tax cut to a minority of people in our country at a time when people at the other end of the income scale are being asked to bear a real additional burden. That is what we are complaining about and we believe that the Government can and should do something about it.

There have been a range of powerful contributions to this debate. I agree entirely with my noble friends Lord Bach and Lady Hollis about this collection of things that are going on, particularly at the moment. New benefits, new structures and new payment details are being introduced in circumstances in which it is difficult for people to access good advice, to get justice when they wish to challenge, or even to understand the system with which they are faced.

The noble Lord, Lord Bates, referred to fiscal consolidation. Yes, we all agree about fiscal consolidation: the issue is how you go about it. We all agree about the importance of work and getting people into work, but it is how you go about it. The problem is that the Government have not produced the goods. Every time George Osborne presents a Budget or an Autumn Statement, the OBR revises growth downwards. Indeed, the latest GDP figures show that there has been no growth this year. The issue is not about whether we believe growth is the right way forward; it is about how you get it—and this Government have not delivered on that.

As to their impact on benefit spending, the Government’s failure to get Britain back to work is sending the social security bill up by something like £13.6 billion more than expected. Long-term unemployment is up by 55.7% this year. That is a manifestation of government failure in getting people into work and on growth in the economy. Borrowing has risen by 10% so far this year and it looks as though the Chancellor will miss his target to get the national debt falling by 2015.

On our record on benefits, I would say to the noble Lord, Lord Forsyth, that real-terms expenditure on out-of-work benefits fell by £7.45 billion under the previous Labour Government between 1996-97 and 2009-10, while real spending on out-of-work benefits in 2006, at something like £38 billion, was at its lowest point in 15 years. You do not have to take my word for Labour’s record on benefits. An analysis was made of the Labour Government’s record on welfare reform and it was found that they had made “strong progress” in their welfare-to-work agenda. Policies such as Welfare to Work, the New Deal and Jobcentre Plus were all a success. It was the noble Lord, Lord Freud, who came to that judgment.

[Lord Forsyth of Drumlean]

I am most grateful to the noble Lord. I am a bit puzzled because he said in answer to my noble friend Lord Bates that we were discussing the policies of this Government, not the last one. He is a little selective. However, given what he has described—an economy which is not growing at all—how on earth does he expect to fund the increase in benefits that he says he is in favour of? That is the crux of the matter. It is not about where we would like to be or how the world might be different, the fact is that the economy is not growing. If the economy is not growing, how is it possible to expand the welfare budget?

[Lord McKenzie of Luton]

I was talking about the last Labour Government in response to points that the noble Lord himself made earlier on. On growth, I would outline that there is one particular proposal that we in the Labour Party have been working on—the long-term jobs guarantee, and we have explained how it could be funded by, yes, restricting tax relief for the wealthiest in terms of pension contributions. It would get people into work, get them spending, and take them off benefits and welfare support. That is the way to do it. Perhaps I can turn this back to the noble Lord. The approach the Government have undertaken has simply failed to deliver growth; it is not happening. Everyone knows that and it does not need me to expound on it. The Government have failed to deliver.

It is because of that that we are challenging this burden of a real-terms cut. The noble Lord said that it is not a cut, but of course it is a cut in real terms because it is a cut in people’s living standards. It is also a cut that we do not know the magnitude of over the life of this Bill, which is why we object to it so strongly. We do not know what the rate of inflation is going to be in two years’ time. We can speculate on the impact of the downgrading of our credit rating, but getting growth in the economy and thus providing more employment is certainly more likely to impact in a positive way. That is what we would argue for and plan for. It is making the people at the bottom end of the income scale pay for the failure of this Government that we object to. This Bill is the wrong way to deal with benefits uprating. There is a tried and tested way that has operated for many years which is open to the Government rather than locking it down and forcing people into a real-terms cut in their living standards.

I suspect that we will have another round of this argument on Report because it is the fundamental part of our objection to the Bill, but in the mean time, I beg leave to withdraw the amendment.

Amendment 1 withdrawn.