Taxation: Families

Lord Stoneham of Droxford Excerpts

Thursday 17th January 2013 Lords Chamber

[Lord Stoneham of Droxford]

My Lords, I join in the congratulations for the noble Baroness, Lady Hollis, not only on this debate but on the leadership that she provides the House on forensic analysis and social concern. I am sad that I cannot be completely alongside her today on the issue before us. I would like to follow by setting some sort of economic and social context, following in the footsteps of my noble friend Lord Bates.

Although government is never easy, it is always exceptionally difficult when the economy is bordering on recession and there is an overspending deficit to clear up at the same time. We will never really know, but I suspect that without the formation of the coalition and a deficit-reduction strategy we could well have had turmoil in the markets and the IMF knocking on our door. Interestingly, that was precisely the scenario that our opponents in the general election said would happen with a coalition—but it has not happened.

As we look at the impact of tax and benefits changes on families, we therefore need an economic context for all the decisions being made—and the economic context has been dire. There has been a huge adjustment in living standards, with a fall of more than 7% overall since 2009. In fact there has been no growth in real income for the median income earners for a decade. This was inevitable when economic growth has been subzero. Households have not only had to bear the burden of the national debt reduction; they have also had to reduce their own personal household debt, following a decade of economic growth built on the shaky foundations provided by unsustainable huge growth in personal credit and debt.

The European meltdown and rising commodity prices, particularly energy, have compounded the economic impact of the UK recession. This has undoubtedly led to an adjustment of the Government’s deficit strategy—not to plan B, but actually to one which closely follows the strategy set out by the Labour Chancellor Alistair Darling. We will be very keen today to hear the views of the noble Baroness, Lady Sherlock, telling us where she will make the savings to replace the cuts that they oppose.

Two other points need to be made about the economic context, the first of which is on mortgages. The confidence in the Government’s deficit reduction strategy has led to the continuation of low interest rates. This has been critical to those families who otherwise would have been embroiled in debt repayment problems, negative equity and very severe impacts on family budgets. That was the scenario in the last recession in the early 1990s and it could easily have happened again if interest rates had moved up to 5% or 7%. Those with mortgages—and they are not simply the well off—have benefitted from those low interest rates. That should not be forgotten, and low interest rates must remain an important objective.

The second issue is employment. Growing unemployment is always the great fear associated with recession. We can look at the impact of benefits on family incomes but this assumes a static situation. In reality, the situation is very fluid. People move in and out of the labour market. Unemployment figures used to be explained to me as being like a bath: unemployment figures rise like water in a bath when the flow into unemployment continues; but the flow out of unemployment is plugged because the vacancies disappear in weak economic conditions.

This recession has been marked by a much better performance on employment at a time when the working age population has increased by 350,000 a year, more than we could have ever anticipated. There is nothing worse for an individual’s psyche than losing their job. Self-respect and purpose go with being in work. There will be arguments about the type of jobs being created. However, the figures show that there are 1 million more jobs in the private sector and the possibility of these jobs—whether full or part-time, permanent or agency—is encouraging and vital for families up and down the country, north as well as south.

This growth reflects incredibly well on our flexible labour markets. It has allowed adjustments to be made to keep people in jobs. It has created many new opportunities which otherwise would have been denied to people on the fringes of the labour market. It also undermines the arguments that say that our labour market is not sufficiently flexible and that there should be more attempts to increase flexibility, thereby undermining basic protection rights.

This leads to another point—that recessions are always bad things. It is why boom and bust is so damaging to the poorest and most vulnerable. They are the ones who suffer when the flows into and out of the unemployment bath move adversely. The poorest and less skilled and those who are less mobile will always bear the heaviest burden. That is fundamentally why putting the national economy on a secure path of growth is so important, and important to them. That is why sustainable growth must now be the overriding priority for the coalition.

However, despite the difficulties and the economic constraints that the coalition Government are facing they are also confounding their sceptics by a massive programme of social reform that will benefit vulnerable families. We are being, and will be, criticised for the tough decisions that we have had to make on work-related benefits. However, this criticism ignores the relative rise of benefits compared to the position for those who are reliant on earnings over recent years when real incomes have been falling. At some stage an adjustment was going to be on the agenda.

This action, however, is matched by action that will assist families. As we have heard today, the rise in the basic tax allowance by 45% in three years is unprecedented. Anyone on the minimum wage has seen their tax bill halved. The Labour Government gave a high priority to families through the growth of family credits. The coalition has prioritised pensioners, who would otherwise have been very vulnerable to energy prices going up, and whose incomes have fallen behind income growth. The triple lock meant that, last year, pensions went up by 5.2%, and will go up in April by 2.5%. It would have been much less under the previous Labour regime.

Action on current pensions is being matched by fundamental reforms on the single-tier pension and, in due course, in seeking to resolve the social care issue for the elderly which was left hanging by the previous Government. It has been a major worry and concern for growing numbers of families with elderly relatives that these issues have not been resolved. The wholesale reform of the welfare system will follow with the reform of universal credit. Who would have thought that a coalition could take on this issue—which James Purnell failed to persuade Gordon Brown’s Government to tackle because there were thought to be too many more losers than winners in a reform needed to simplify, target resources on the poor and reduce disincentives to work?

The noble Baroness, Lady Jenkin, mentioned William Beveridge. Today is the birthday of Lloyd George. I think that they would be justly proud of the scale of the reform that the coalition Government are undertaking at this very difficult time. Reform and change are always difficult. It is made even more difficult when money is short and there are insufficient funds to help oil the wheels of change. However, no one can say that the coalition Government are not seeking to combine economic competence with a social concern for fairness which is aimed at improving the outlook, security and well-being of families up and down this land.