Welfare Benefits Up-rating Bill

Lord Newby Excerpts

Monday 11th February 2013 Lords Chamber

[Lord Newby]

My Lords, I thank all noble Lords who have taken part in today’s debate. It is an issue about which all participants feel passionately and I can well understand why. I will try to respond to as many questions as possible, but let me begin by reminding the House of the purpose of the Bill. As my noble friend Lady Stowell pointed out in her opening speech, this Government inherited an exceptional fiscal challenge. The financial crisis of 2008-09 resulted in the largest deficit since the Second World War and the UK experienced one of the deepest recessions of any major economy. Even before the recession began, the UK had the highest structural deficit of any country in the G7. This level of public spending was simply not sustainable. There are still tough choices to make. The savings from this Bill provide a significant contribution towards delivering the savings needed to ensure that spending is on a sustainable path. It is, of course, never an easy decision to take action on welfare spending and I understand only too well that the welfare system provides vital support to millions of people. I also understand that while benefit rates will rise in cash terms, they will be fall in real terms.

In these tough economic times, people have seen significant restraints in their pay across the public and private sectors. With welfare expenditure accounting for £1 in every £4 spent, it is simply unrealistic to think we can achieve the savings we need without taking further action on welfare. We have already had to take tough decisions on welfare spending in this Parliament, yet despite these, more than £200 billion was spent on welfare last year. Under the previous Government, spending for working-age people and children increased by around 60%—equivalent to an extra £1,400 cost per household in Great Britain. This is the context against which this Bill must be judged.

However, in making what we believe are necessary limits in welfare spending, I cannot stress enough that our motivation is not, to quote various noble Lords today, to “demonise”, to “stigmatise”, to brand the poor as undeserving, to impose a harsh ideology on them or to divide and rule. It is simply to help—albeit painfully—provide a sustainable platform for the public finances and the economy going forward. This is something that every citizen of the UK will benefit from in the longer term.

The right reverend Prelate, the Bishop of Ripon and Leeds, asked me for an assurance or statement that the vast majority of benefits claimants were not skivers. I am extremely happy to give such an assurance. Nobody in your Lordships’ House believes that to be the case; all of us know only too many people who are working extremely hard to make ends meet. I particularly acknowledge the point made by the noble Baroness, Lady Donaghy, about people on low incomes often having several jobs and still struggling to make ends meet. I acknowledge that that is the reality for many people in Britain today.

We have to return to the main point. If the savings from this Bill were not delivered here, they would have to be found somewhere else. That would mean additional pressure on other public services. To put this figure into context: £1.9 billion is equivalent to the salaries of about 45,000 nurses or around 40,000 teachers. To put it another way: it is equivalent to 500,000 primary school places. Anybody opposing the Bill needs to explain where the money is coming from.

[Baroness Hollis of Heigham]

My Lords, did the Minister and his colleagues make the same consideration when they decided to take £3 billion in tax relief and give it back to millionaires? Will that money not also have to be found for the 40,000 nurses and so on? Is he about to tell us?

[Lord Newby]

Do not worry, my Lords, I am coming to that. The implications of some of the speeches we have heard today are that we should not be making cuts at all, that no civilised society would, even in today’s circumstances, reduce public expenditure. For those who take that view, all I can say is that we simply cannot possibly agree. For those who accept that we should be reducing the deficit but disagree with these changes, my challenge is and remains this: what would they cut instead? The noble Baroness, Lady Hollis, was clear that she would reduce payments to pensioners—

[Baroness Hollis of Heigham]

My Lords, what I said was that I would scrutinise the tax relief available for the building up of pensions which costs £32 billion, of which at least £8 billion comes from the fact that people on higher rate incomes get higher rate tax relief. That is what I said I would scrutinise: not money from pensioners, but from the way that pension savings are artificially supported by tax relief, two-thirds of which goes to the better off.

[Lord Newby]

My Lords, I am extremely grateful to the noble Baroness for correcting me. In that case, and in view of her earlier intervention, I think that what she and the noble Baroness, Lady Sherlock, are saying is that the money will be raised from the millionaires who, in their view, are getting a windfall benefit of £3 billion. I believe that that is what both noble Baronesses have said. But it is clear that either they have not read or they do not believe the report from the Office for Budget Responsibility which suggests that the impact of reducing the higher rate of tax from 50% to 40% is probably £100 million and may be negative. The Government therefore simply do not accept the figures which have been quoted against us. The figure of £1 billion a year to which I think the noble Baronesses have referred was based on an HMRC static comparison. What we know only too well is that given the chance of paying 40% or 50%, the rich—surprise, surprise—change the way in which they order their affairs. There is no pot of gold through a 50% tax rate. My view is that, frankly, the Opposition are all confusion about this.

In the Second Reading debate on the Bill in another place, the right honourable David Miliband was widely praised for saying:

“The Government have projected the cost of all benefits, all tax credits and all tax relief for the next few years, and I am happy to debate priorities within that envelope. I will take the envelope that they have set, but let us have a proper debate about choices, not the total sum—a priorities debate, not an affordability debate”.—[Official Report, Commons, 8/1/13; col. 217.]

The Government have set out their priorities, but frankly, Labour has not begun to set its out. I do not know whether the Opposition agree with David Miliband. I certainly do not know, within the context of overall expenditure cuts, what their priorities will be. We have decided to protect pensioners as a top priority; does Labour agree? We have decided to take millions of people out of income tax as an incentive to work; does Labour agree? We have decided that people on high earnings should no longer get child benefit; does Labour agree? If it does not—and on some of those points, I simply do not know whether it does or not—what other cuts is it proposing in order to keep within the Government’s spending envelope, or within the terms of its own Fiscal Responsibility Act 2010 which committed the Government to halving government borrowing by the 2013-14 financial year. We look forward to hearing the answers, but it is clear that we are not going to hear them today.

--- Later in debate ---

[Lord Newby]

My Lords, we think it is a basic principle that people on very low incomes should not be paying income tax. It may be a difference of view between this side of the House and the other side, but this is the view that we have taken. This is the policy that we are introducing and we will continue with it.

A number of noble Lords asked why we are proceeding via a legislative route. We believe it is only right that we set out our plans in advance and give as much certainty as possible. The Bill gives certainty on further savings, making a crucial contribution to our plans and helping us to maintain credibility, not least in the markets. We have to keep reminding ourselves that even a one percentage point rise in effective mortgage rates would add £12 billion a year to households’ mortgage interest payments, costing the average household with a mortgage around £1,000 a year. Given the current level of the deficit, such an interest rate rise, in the absence of a credible fiscal policy, is perfectly plausible. The IMF made this element clear when it said in October:

“To anchor market expectations, policymakers need to specify adequately detailed medium-term plans for lowering debt ratios, which must be backed by binding legislation or fiscal frameworks”.

This Bill takes us in that direction.

A number of noble Lords asked what will happen if inflation soars. First, the independent MPC remains committed to maintaining price stability, which is defined by the Government as an inflation target of 2%, as measured by the 12-month increase in the CPI. Although inflation is forecast by the MPC and the Office for Budget Responsibility to be above the 2% target in the near term, it is then forecast to fall back towards the target in the medium term. It is right that the Government make plans based on the best available forecast. However, we know that these are forecasts and targets and we are aware that external factors and unforeseen events can produce a different outcome.

We always monitor the rate of inflation and the impact that it has on households and the wider economy. That is why, in the Autumn Statement, we took action to help households with the cost of living, including cancelling the January fuel duty rise, providing funding for local authorities to freeze council tax and announcing a further increase in the personal allowance. We will continue to monitor the rate of inflation closely, based on monthly data on consumer price inflation published by the Office for National Statistics, and the impact that it has on the cost of living for families. This will continue to be a key consideration for this Government’s policies in the future.

Many noble Lords raised concerns over the impact of this Bill on poverty, particularly child poverty. I will start by saying that any two-dimensional measure for poverty, which looks at relative income only, is not an adequate way to measure progress on poverty. The most recent decrease in child poverty—a fall of 300,000 in the number of children in relative poverty in 2010—was due to the recession causing a fall in median income and pushing the poverty line down. That is clearly absurd, which is why we are consulting on a better measure of child poverty, one that includes income but goes beyond it to tackle root causes; for example educational failure, problem debt or worklessness.

In terms of how we tackle this issue, it is worth while looking at the success of the previous Government in dealing with child poverty. In the period 2003-04 to 2010, £170 billion was spent on tax credits but there was little or no progress in reducing the levels of child poverty. We in this Government want to look at some of these basic issues around educational failure, problem debt and worklessness. We recognise, as I am sure all noble Lords do, that education is one of the key factors in getting poor children out of poverty. That is why this Government are committed to providing additional funding for disadvantaged pupils through the pupil premium, which will rise by £2.5 billion a year by 2014-15. We are also spending £200 million extra in universal credit to support families with childcare costs. For the first time, this support will be made available to families who work fewer than 16 hours per week, which will mean that 100,000 more working families will be helped with their childcare costs. All two year-olds from low-income households will be able to access 15 hours per week of early education, starting with the poorest 20% in 2013 and extending it to 40% in 2014.

Debt is also a major problem for poor families, who not only take out debt but often take it out at extortionate rates of interest. That is why we are putting in place stronger, more responsive regulation of unsecured lending and other forms of consumer credit to ensure that borrowers are protected and can be confident of getting a fair deal, and why we have given the Financial Conduct Authority power to regulate loan sharks and cap interest from payday lenders for the first time.

However, work is the best route out of poverty. As my noble friend Lady Stowell set out at the start of this debate, the Government are reforming the welfare system to improve incentives for individuals to enter work. Universal credit will not only improve the financial incentives offered for people who want to work but will simplify the benefits system. Replacing the main benefits with one single payment and removing the complex system of hours rules and different tapers that currently exist means that claimants will understand that they are better off getting a job and increasing their hours. Under universal credit, 3.1 million households will benefit by an average of £39 a week and up to 250,000 children will be taken out of poverty. Any household whose migration to universal credit is initiated by the DWP will receive transitional protection, and there will be no cash losers from the policy.

A number of noble Lords have spoken eloquently about issues facing the disabled. I repeat that we have protected those benefits designed to reflect the additional costs that disabled people face as a result of their disability. Of course, as we have heard, this does not mean that no disabled people will be affected. In common with other working-age recipients, many disabled people will also be claiming benefits that include help towards everyday living expenses or housing costs, but those benefits for the extra costs of disability are protected. I am afraid that I cannot give the noble Lord, Lord Macdonald of Tradeston, the assurance that he is seeking in respect of ESA, but I suspect he is not too surprised about that.

Government policy towards disability is not limited to benefit levels. We will shortly be publishing the most comprehensive analysis of available data about disability since 2005, entitled Fulfilling Potential: Building a Deeper Understanding of Disability in the UK Today. This will help inform the next stage of our disability strategy: the development of actions, outcomes and indicators. It will help increase public understanding, change attitudes and enhance the commitment to improving the lives of disabled people. We are setting up a new disability action alliance, bringing together organisations of disabled people and organisations from across government and the public, private, voluntary and community sectors. This will take forward practical actions at both the national and local level, making a real difference to the lives of disabled people. We will publish a further strategic document and action plan to include the alliance actions as well as actions across government in the spring.

There have been a number of questions about the cumulative impact of the various changes that have been made in recent years and why the Government have not produced an analysis of these to the extent that people would like. Looking at the cumulative impact of tax, tax credit and benefit reforms since the June 2010 Budget, the top 20% of households continue to make the greatest contribution towards reducing the deficit as a percentage of their income and benefits in kind from public services. So far, HMT’s analysis has not included universal credit. Separate analysis shows that three-quarters of the gainers from UC are in the bottom 40% of the income distribution.

As noble Lords know, the analysis in this area is extremely complicated, and breaking down the results in detail is extraordinary difficult to do accurately, if not impossible. Similarly, not all policy changes can be modelled robustly, and the IFS has acknowledged that the effects of dynamic reforms such as those to disability living allowance and housing benefit cannot be precisely modelled. In these circumstances, it would be simply irresponsible for the Government to do so.

I shall try to respond to a number of specific questions as quickly as I might. The noble Lord, Lord German, asked me to commit the Government to no further welfare cuts in this Parliament. I remind him that at the Autumn Statement 2012, the Government said that detailed spending plans for 2015 and 2016 would be set in the first half of this year. We cannot prejudge the outcome. By “first half of this year”, we mean the back half of the first half of this year.

The noble Lord, Lord Bates, referred to the living wage. The Government support the idea of the living wage. Civil servants are paid the living wage; and contractors, for example at the DWP, are paid the living wage. My guess is that the living wage will increasingly become the norm, particularly in London.

The right reverend Prelate the Bishop of Ripon and Leeds asked about asylum seekers. Asylum-seeker benefit rates are a matter for the Home Office and are not within the scope of the Bill. I will draw his remarks to the attention of my colleagues in the Home Office, because I know that the right reverend Prelate feels strongly about that matter.

The noble Lords, Lord Kirkwood, Lord Whitty and Lord Best, and the noble Baronesses, Lady Donaghy and Lady Lister, in various ways talked about how the growing disparity between benefits and earnings impacts among other things on the housing market. There are very long-term, secular changes in the relationship between benefits and earnings and, as the noble Lord, Lord Whitty, said, there are long-term failings in the operation of the housing market. We will have many opportunities to discuss these, no doubt in Committee but more generally in your Lordships’ House. I am sorry that I have not been able to deal with them tonight. There are quite a number of issues that noble Lords have raised this evening that I have been unable to cover, and I look forward to debating them in Committee.

Welfare spending accounts for more than a quarter of all public spending. In these touch economic times, when people across the public and private sectors have seen significant restraint in their pay, this Bill finds the right balance between finding savings from welfare while ensuring that benefits and tax credits continue to be increased in cash terms. I commend the Bill to the House.

Bill read a second time and committed to a Committee of the Whole House.