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7.1 pm

Ms Ruth Kelly (Bolton, West): I am grateful for the opportunity to speak in this important debate. A Liberal Democrat Member described the Budget as timid. I disagree. On Tuesday, we witnessed one of the most radical shake-ups of the welfare state, not just in a generation, but perhaps since the war. Just 50 years ago, Beveridge set out to conquer the five evils afflicting our society: want, disease, ignorance, idleness and squalor. Looking back in 50 years' time, we may say that the past 12 months have seen the first real attempt to rebuild the edifices of the welfare state which had gradually been eroded by 18 years of Tory rule.

In May 1997, we inherited an economy in which one in five families of working age had no one in work, one in three children lived in poverty and inequality was as great as it had been a century earlier. When my right hon. Friend the Prime Minister assumed the mantle of government, he said that the new Labour Government should be judged on its success in narrowing inequality, alleviating poverty and creating a more just society. This Budget is an important step towards doing just that.

Last July, my right hon. Friend the Chancellor introduced the first pillar of reform--the new deal for the unemployed, a £3.5 billion programme to put young and long-term unemployed people back into work. The Budget represents the second pillar of reform to attain

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those aims--the establishment of the principle that work should pay and the introduction of the new working families tax credit, which is an assault on in-work poverty and a measure for families with children.

I want to consider the detail of the new working families tax credit, a measure which will ensure that lower and middle-income working families with children keep more of what they earn. It will ensure that no family earning less than £220 a week will pay any tax at all and any family with a full-time worker will be guaranteed a minimum income of £180 a week. It represents a radical change and ensures that the Budget genuinely helps the poor and those with children.

Not everyone agrees, however. Opponents of the tax credit argued before it was introduced that it would do nothing for the poor. Indeed, only a week ago the right hon. Member for Hitchin and Harpenden (Mr. Lilley), the shadow Chancellor, issued a press release saying,

That has definitively been shown to be untrue. The Institute of Fiscal Studies argued that it was

    "a Budget for lower-income families with children . . . It has been a long time coming, but this is a genuinely redistributive Budget."

I am delighted to be able to tell my constituents in Bolton, West that a couple earning £200 a week--a typical starter wage for someone moving off unemployment and into work--will be £23 a week better off as a result of the Budget and that, on average, families with children will gain about £250 a year.

Let me also consider some of the arguments raised by the hon. Member for Chingford and Woodford Green (Mr. Duncan Smith). His main point was that the working families tax credit would tend to take money out of the purse and put it into the wallet, and that a tax credit would mean that the money would be paid to the working man, whereas a benefit paid to the mother would be more likely to help children. I disagree. I was pleased to note that the Budget did not shift the balance significantly away from the woman, as the shadow Chancellor recently suggested. Indeed, under the new system, families will be able to elect to whom the payment is made--and, of course, it will be more generous.

The shadow Chancellor argued that a new tax credit could put additional burdens on business. Again, that is not true. Under the new system, the Inland Revenue will merely issue a different tax code to the employee based on family income. That will involve no hassle, no intrusion into privacy and no stigma.

The hon. Member for Chingford and Woodford Green mentioned the experience in the United States and Canada. I am pleased to be able to respond to some of the points that he raised. The experience in Canada, which was discussed in the recent Joseph Rowntree Foundation report, is very different from the experience that we shall have in Britain as a result of the working families tax credit. The report argues that such a scheme was not successful in Canada because the culture there did not value work above unemployment and society did not want to use the system to discriminate in favour of people who wanted to work their way out of poverty and into better career opportunities.

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In respect of the United States, only yesterday, Jeffrey Liebman, a respected United States public policy expert, wrote in the Financial Times:

The United States has had 23 years of experiencewith tax-based work credits which shows that such programmes can have important benefits. Recent research there indicates that the earned income tax credit offset almost one third of the rise in inequality that occurred in the United States in the past 20 years. Moreover, the proportion of lone parents who work increased from 73.7 to 82.1 per cent. since 1993, when President Clinton included a large increase in the earned income tax credit in his first Budget.

I also do not agree that paying money through the tax system will fail to reduce the stigma associated with family credit. The working families tax credit is likely to have important psychological benefits, being resented less by taxpayers and by the recipients, who prefer to have a smaller amount withdrawn from their pay packet than to claim benefit. By reducing the associated feelings of dependency and cynicism, the measure is likely to increase take-up, further alleviating in-work poverty.

Another drawback of the old family credit system is that it runs together with other means-tested benefits such as housing benefit and council tax benefit, which taper off quickly as incomes rise, as the right hon. Member for South Norfolk (Mr. MacGregor) pointed out. As a result, some families are trapped in poverty. Some find themselves in the scandalous situation of losing more than a pound in benefit for every extra pound that they earn. The poverty trap is aggravated by the low starting rate of tax, with 45 per cent. of people on family credit paying tax as well.

In addition to being more generous than the old family credit system, the new working families tax credit means that families will keep more of the money that they earn. People can now earn up to £90 before losing benefit, and then they lose it at a slower rate. The amount of benefit withdrawn from working families as income increases will reduce from 70 per cent. with family credit to 55 per cent. under the new system. Even taking the interaction of the new tax credit with other means-tested benefits into account, once it is in place only 250,000 families will lose more than 70p in the pound for every extra hour worked, compared with almost 750,000 at the moment. That is good for work incentives, encouraging people to work longer or to get better-paid jobs. The working families tax credit will particularly help women, creating opportunities for those who had previously been barred from taking them by the lack of high-quality available child care. The child care tax credit will meet up to 70 per cent. of child care costs, up to a limit of £100 for one child or £150 for two or more.

Conservative Members have said that this is a political Budget because we are helping single parents and those in poverty. I agree. There is a political motive. We have to attack in-work poverty. We have to get people back into jobs and we have to open up opportunities--

Mr. Deputy Speaker: Order. The hon. Lady has used up her time.

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7.11 pm

Mr. John Swinney (North Tayside): I am grateful for the opportunity to speak in this debate. Welfare has dominated the debate so far. I welcome the Chancellor's attempts to attack the poverty and benefit trap that has affected the lives and circumstances of many people. There are many details in the proposals. As some positive action is taken, further anomalies will be created. It is important to watch the detail of how the proposals are formulated to ensure that progress is made on the Chancellor's aims.

The consequences of raising the entry point for employers' national insurance contributions have been mentioned. I am concerned that the changes could lead to an increase in part-time employment, particularly after the introduction of the national minimum wage. I welcome the increase in child benefit. We await the publication of the Green Paper to find out how the measures announced on Tuesday fit in with the Government's other proposals on welfare.

I should like to reflect on the effects of the Budget on Scotland and on the people of my large rural constituency. It did not properly address the economic circumstances in Scotland and contained specific measures that will be particularly damaging to our economy. I was disappointed by the continued fixation with the spending plans and targets of the previous Government, despite a dramatically improved revenue position.

The Government have boxed themselves in through their economic policy since the election. The clear result is a macro-economic approach that damages Scotland's economy. Micro-economic tinkering has been insufficient to remedy the mistakes of 18 years of Conservative Government and one year of new Labour Government.

The Chancellor should not need me to tell him about the nature of the Scottish economy. However, even with a Scottish Member in the hot seat at the Treasury, policy appears still to be dominated by the prevailing economic conditions in the south-east of England.

Does the Chancellor not recognise the export-oriented nature of much of Scotland's industry, or the importance of rural industries in the manufacturing sector, both of which have been hit by the dual policy of high interest rates and the strong pound? The Chancellor has awarded control over interest rate policy to a committee--with no Scottish voice or membership--that has increased interest rates five times since the election.

High interest rates may be necessary to address the overheating of the south-east of England, but they are disastrous for the Scottish economy. Time will tell whether the Chancellor has done enough in the Budget to prevent the Monetary Policy Committee from increasing interest rates further. When the Scottish economy is growing more slowly than the economy of the rest of the United Kingdom, the Chancellor has taken a great risk.

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