Poverty

Lord Watson of Invergowrie Excerpts

Thursday 22nd July 2010 Lords Chamber

[Lord Watson of Invergowrie]

I congratulate my noble friends Lord Boateng and Lady Donaghy as well as the noble Lord, Lord Shipley, on excellent maiden speeches, and I look forward with eager anticipation to the speech by my noble friend Lord McFall of Alcluith—not least to find out where Alcluith is, which as a Scot I fear I should already know. The noble Lord, Lord McKenzie of Luton, has done the House a service in securing this debate because I firmly believe that the poorest in society should not bear the burden of rebalancing the current fiscal deficit. As a result of the Budget announced last month, that is precisely what will happen.

Today, 3.9 million children are living in poverty in the UK—that is, in a household with an income of less than 60 per cent of the median household income, which in 2008 was £404 a week. Households in poverty therefore have a net income equal to or below 60 per cent of that, which amounts to a weekly income of £244 or less. After housing costs, that figure falls to just £206 a week for a family. It should be stressed that more than half the children whose family income is less than £206 a week after housing costs live in households where at least one of the adults is in paid work, so this is not just a question of worklessness. In this context, the changes to tax credits and other in-work benefits for the low paid are particularly important.

A number of changes in the Budget will result in a reduction in the income of the poorest—for instance, changing the basis for calculating the uprating of benefits from the retail prices index to the consumer prices index. The main difference between them is that the CPI does not include housing costs. The effect of the change will be a 1 to 2 per cent reduction in the benefits paid to families. Housing benefit—a subject to which I shall return—will also be affected by the change in the basis for uprating. The increase in the rate of VAT to 20 per cent will have a disproportionately large impact on the poorest families, because the poorest 10 per cent spend 14 per cent of their disposable income on VAT compared to the most affluent 10 per cent, who spend just 5 per cent of their income on VAT.

The Budget did include measures aimed at helping low-income families. The increase in child tax credit is welcome, although if a family also receives housing benefit, that allocation will be cut in recognition of the increased family income from the child tax credit. This occurs because the child tax credit is taken into account when the household income is calculated. For the housing benefit to remain unchanged by the increase in child tax credit, the regulations would need to change so there was a disregard for child tax credit, and I will be interested if the Minister will give the House the benefit of his views on this point.

This Budget is deeply regressive. People in the bottom half of the population are heavy users of services and benefits and there are more children and elderly people in the bottom half of the population than the top half. Public service cuts therefore fall disproportionately on the bottom half. The problem is not just that cuts risk tipping us back into recession and will hit the worst-off hardest. It is that by taking demand out of the economy and undermining a fragile recovery in the process, the coalition could actually increase the size of the deficit as has happened in Greece and Ireland, as we know all too well. The extent of these measures amounts to a Budget of ideological choice, not of necessity. There was nothing unavoidable about adding £40 billion to the previous Government's already swingeing plans to halve the deficit in four years. The effect of this Budget will be to shrink the state below 40 per cent, which even the noble Baroness, Lady Thatcher, never attempted during her time as Prime Minister.

I say to those on the Liberal Democrat Benches that I wonder what those old Liberal heroes Beveridge and Keynes would make of such draconian deficit cutting or of £11 billion of welfare cuts. Most of that comes from slicing 2 per cent off every benefit by cutting inflation indexing. You simply cannot cut a quarter of social care for the old, children's services or child protection without doing dangerous harm to millions of vulnerable people. To take only 23 per cent from taxes with 77 per cent in cuts means that the pain will fall on the poorest people in the poorest regions most dependent on public spending.

The coalition has opted for cuts far beyond anything the markets expected or demanded and the reasoning can only be ideological. The Budget's key objective—reducing the deficit—is not premised on economic logic. You do not require a degree in economics to understand that cutting spending and raising taxes reduces demand—someone who has just been made redundant will not be spending much—and could choke off recovery before it has begun. Indeed, the Chancellor is ignoring the cautionary voice from his own recent creation, the Office for Budget Responsibility, which has revised down its growth forecast for the next year by 0.3 per cent—£5 billion—as a direct result of the Budget, so even his own experts believe that the Budget will have an immediate, negative effect on growth. Both Barclays Wealth and Ernst & Young—not organisations that I am normally given to quoting—have produced analyses suggesting that the Government are, in the latter's words,

“underestimating the impact of this significant fiscal tightening".

The International Monetary Fund is equally unimpressed, because it has cut its growth forecast for the UK both this year and next in the light of this austerity Budget. For all Mr Osborne's protestations that the measures in his Budget were “unavoidable”, there is every reason to believe that cutting fast and deep could, and indeed should, have been avoided.

Many charities have warned that drastic changes to the housing benefit system outlined in the Budget will lead to overcrowded homes and a surge in evictions. They fear the changes will make central London unaffordable to anyone on a low income, ghettoising the city by pushing the poor to the outer boroughs. I welcomed the contribution by the noble Lord, Lord Best, who spoke very knowledgably on this subject and in greater depth than I can. As he said, the changes will see housing benefit capped at £400 from next April. Thousands of people renting from private landlords in London and other high-rent cities will find that that will no longer cover their weekly rent, forcing them to move to a cheaper area. From April 2013, people who have been on jobseeker’s allowance for 12 months or more will also see a 10 per cent reduction in their housing benefit. The coalition has said that it wants to make sure that when you work you are better off. That is not unreasonable, but the suggestion that the system is being changed to encourage people to go into work is based on a popular misconception about those who claim housing benefit: only one in eight people receiving that benefit is unemployed. The changes will be very serious for London and other inner-city areas and could result in thousands of people becoming homeless. The policy would force people on low incomes out of central London. In fact, it could replicate what has become of Paris, where the well-off have annexed the city centre, while the poor form a ring around the outskirts.

As the noble Earl, Lord Clancarty, said, the situation in London is currently so grave that the Evening Standard has begun an appeal, which it has named the Dispossessed Fund, to help those who it has identified as being in distress. Yesterday's edition highlighted a cleaner working at the Treasury, who the newspaper claimed was paid so little that her children have to live on soup. The homelessness charity Shelter estimates that some people currently claiming housing benefit could lose up to 40 per cent of their total rent, which will force people out of their accommodation with nowhere for them to go. Shelter expects to see debt and evictions rise as a result of this change. Any savings to the Government would be more than offset by the cost of rehousing families unable to afford their rent. The coalition needs to answer the question: where are people on low incomes meant to live? Even the Mayor of London has forsaken party loyalty to condemn the proposed changes to housing benefit as draconian, and not all Lib Dem MPs are prepared to forsake their principles. Simon Hughes has urged the coalition to slow down changes to housing benefit, saying:

“We need a system that is flexible and ties in to areas of different need”.

Indeed we do, and that begs the question as to how long Liberal Democrats will adhere to the Tory agenda when the Budget has shown that it is the poor who will be hit hardest. During the general election, the Liberal Democrats actively campaigned against much of what is now being implemented. Even excluding the effect of wider spending and benefit cuts, the squeeze on the worst-off 10th of the population will, according to the Institute for Fiscal Studies, be five times the impact on the richest 10 per cent by 2015.

The Chancellor insisted that his Budget was progressive, fair and unavoidable. In fact, it was the precise opposite on all counts. Raising the regressive value added tax while cutting housing, disability and child benefits contrasts starkly with plans to cut corporation tax year after year and let banks off with a levy that is inconsequential when compared to the huge amounts they pay out in bonuses. Even the boost to child tax credit will be more than offset by the housing benefit squeeze and the ending of maternity and pregnancy grants, along with other benefits targeted at women and children.

Lib Dem voters backed a party which stood against early cutbacks, in support of a ratio of cuts to tax increases of 2.5:1 and fiercely opposed the threat of what it called a “Tory tax bombshell” of increased VAT. Now, sadly, I have to say that it has binned all three commitments in the name of coalition compromise and signed up to a Budget which must be alien to much of what it has hitherto stood for.

This unnecessary and dangerous Budget is very likely to push the economy back into recession, and the big worry is that it will lead to what the Nobel economist Paul Krugman has called the long depression: zero growth and high unemployment for years. There are no prizes for guessing who that will hit the hardest.