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Mr. Vernon Coaker (Gedling): Has the hon. Gentleman agreed that policy with the shadow Chancellor? What is the estimated cost of the package?

Mr. Willetts: I am pleased to say that the package was agreed with the shadow Chancellor and the Leader of the Opposition before we launched it. The point is that it is tax neutral. No extra tax would be taken from pensioners, so no one would be worse off. That is what we announced on day one, and it remains our policy. The hon. Member for Gedling (Mr. Coaker) seems to be baffled by that. I should be happy to take a further intervention, but ours is a straightforward position, and I am grateful to him for giving me yet another opportunity to make it clear.

The real task is not only to tackle pensioner poverty now but to try to ensure that the next generation of pensioners is not in poverty. Above all, we must encourage more funded pension provision. Perhaps the most worrying economic statistic under this Government is the savings ratio--the percentage of income that pensioners are saving. I am pleased to see my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke) here because it gives me a chance to praise his record as Chancellor of the Exchequer. When he left office in the second quarter of 1997, households were saving 10.7 per cent. of their income. That figure has fallen to 3 per cent. That statistic is very worrying because it means that future generations of pensioners will retire with an income much lower than they expected. I support the Government's pension statements initiative. It is a useful measure to try to encourage people to understand what the value of their total pension package may be when they retire.

The evidence shows, however, that over the past few years there has been a significant decline in occupational pension provision. The average number of occupational pension schemes being set up each year has fallen from 9,000, when we were in office, to fewer than 5,000 since 1997. In 1999, only 3,000 schemes were set up. In addition, 14 per cent. of final salary schemes are closed to new members. The number of personal pensions being taken out is declining.

The combination of the extra tax that the Government have imposed on pensions, and planning blight as people wait for the arrival of stakeholder pensions, means that

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we face a significant decline in funded pensions. The danger is that although we in this country have been complacently patting ourselves on the back because our funded pension provision is way ahead of that on the continent, the boot may soon be on the other foot.

I will make a modest bet with the Secretary of State that if we carry on at this rate, within a few years the annual flow into funded pension savings in Germany will exceed that in Britain. The right hon. Gentleman, or any subsequent Secretary of State, will then be under understandable pressure to introduce yet more special schemes or other measures to increase state benefit income for pensioners, because they will not have enough pension savings of their own. That is the long-term problem that we face, and far from tackling it, the Government have, if anything, exacerbated it through regulatory complexity, planning blight and extra tax.

What is the Secretary of State's agenda? Whenever I refer to all the changes that are due in 2003, he looks rather baffled. I wonder how many Labour Members are fully aware of what is supposed to happen in 2003. It is frustrating that the only explanation the Government have given us of those proposed changes is Treasury working paper No. 5, from November 1999, "Supporting Children Through the Tax and Benefit System". There is a much consulted chart, which all the pundits love, on page 40, with graphs showing the current and new arrangements for financial support for children.

The Chairman of the Social Security Committee, the hon. Member for Roxburgh and Berwickshire (Mr. Kirkwood), is in his place, and I am pleased that the Committee is conducting a study of that important subject. We face turbulence in the benefits system because the Secretary of State hopes, within one year, not only to introduce a pensioner credit but to abolish the working families tax credit and introduce a new integrated child credit and an employment tax credit. There will be considerable confusion.

Those charts in the Treasury working paper show the point at which welfare reform disappears up its own rear because the second chart has exactly the same distributional effect as the first, but is achieved by a different means. The game of going through all those changes simply to deliver to every family exactly the same income as they get at the moment, but through a radically changed organisation, does not seem worth the candle. Coming up with a different way to deliver exactly the same distribution of benefits is a perverse and unnecessary exercise.

I presume that the Government are embarking on the exercise only because they want to change some of the ways in which people gain from taxation and benefits. I think that they will encounter a paradox. Their main additional proposal is the employment tax credit, which is received by people in work on low earnings, regardless of whether they have children. Therefore the main distributional impact of measures that are supposed to help children will be to extend a benefit to low earners without children.

The Secretary of State might disagree, but I think that he will find that the main impact of introducing the so-called family package in 2003 will be to help people without children--that is where the additional expenditure is likely to be made. I see him shake his head, but he intends to introduce an employment tax credit, and he will

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not be able to withhold it from people who do not have children, so they are likely to be the recipients of the extra expenditure in 2003.

Mr. Darling: I am listening to the hon. Gentleman's interesting lecture. Our strategy is quite clear. He asks about in-work measures. We want to make sure that work pays, but we inherited the problem that many people were better off on benefits than in work. That is the logic behind an earnings tax credit. We also want to do more for families, especially those on modest or low incomes, who have children, while working towards achieving our objective of reducing child poverty. That is the logic behind the child credit. Rather than engage in academic debate, the hon. Gentleman should face up to his own problem, which is that he cannot give more money to eradicate child poverty, nor allocate the funds necessary to make sure that work pays, because he is committed to making massive cuts in public spending.

Mr. Willetts: The Secretary of State might think that the debate is academic, but all I am trying to do is elicit from him a coherent statement. His Department has never issued anything to tell us what he thinks is the purpose behind all the changes that the Government hope to introduce in 2003. He talks as if no help has ever been given to families on low incomes, but it has--family credit, for example. All the changes that he plans to implement will do is deliver to the person in work the money that family credit would have delivered to the caring parent. It is doubtful that there is any purpose in changing the delivery system in that way.

I do not know whether the right hon. Gentleman knows the history of the Labour party in this respect. It is ironic that what he thinks he is doing by making these radical reforms--although perhaps the Chancellor is behind them--is exactly the same as what the Labour Government tried to do in 1964. Lord Houghton was going to be the man who integrated tax and benefits, and he worked on it for years. The Secretary of State should read Richard Crossman's explanations of what went wrong as the Labour Government wasted years trying to integrate tax and benefits. They even had a precursor to stakeholders, in the form of "superfunds", which were going to encourage more funded pensions among those who did not have funded pension schemes.

Labour Governments have been through all that before, and I tell the right hon. Gentleman that tax-benefits integration will not deliver what he thinks it will. He cannot sit on his hands and say that everything comes down to the Treasury, or that I am delivering a merely academic lecture. In 2003, he will implement massive changes in the British tax and benefits system for which no person in his Department has ever offered any coherent explanation or justification. The right hon. Gentleman cannot wash his hands of the matter; it will come back to haunt him.

Oddly enough, an alternative strategy rests on an insight from Beveridge himself: that targeting is not the same as means-testing. Means-testing, either in the traditional way through benefits or through the tax system, is not the only way in which to target assistance on families and other groups who need help. If the categories of recipient are defined carefully enough, categorical

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benefits can be distributed in a way that is quite well targeted. That is why, before I became a Member of Parliament, I argued that help should be focused on families with children younger than five. Families with younger children tend to be those on low incomes. We know also that poorer pensioners tend to be older pensioners. That is why the help in our package is especially focused on the over-75s. If those elementary age rules are used, we could achieve quite good targeting without means-testing.

Mr. Webb: The hon. Gentleman has had an influence on my thinking on this issue. That is partly why Liberal Democrats advocate serious pension rises for older pensioners. The only respect in which the hon. Gentleman's policy does more for the over-75s is the fact that he would replace in cash the benefit that they get in kind. It would not give a penny extra to the over-75s.

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