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John Robertson (Glasgow, Anniesland): I am confused about what the hon. Gentleman is trying to say. He started by saying that what my hon. Friend the Paymaster General was saying was apple pie and all things nice, but now he is claiming that the previous Conservative Government should take the credit for all the good things that we are doing. If he thought things were so good, what has my hon. Friend said that has really pleased him?
Mr. Flight: I will comment shortly on the aspects of the Bill that we like, but the structure of the Bill raises some problems that have not been addressed and that might prevent it from addressing the issue of real poverty in our community. The easy assumption that moving to a more tax-based system for delivering welfare will solve all the needs of our society is over-optimistic, for the reasons that I am giving.
The Bill raises two crucially important issues. One is the level of balance that needs to be struck in measures to price people into work. Subsidising wages can entail the danger of depressing pay, demotivating skills improvement and personal advancement and depressing productivity growth. Secondly, the crucial issue is whether to use the tax system increasingly for welfare delivery or to continue with a mixture and use the existing Department for Work and Pensions system, which may be more effective at addressing real need.
The Chancellor's pre-Budget report described the objectives of his proposed tax credits as helping to tackle inadequate work incentives and to tackle the unemployment poverty traps. However, the National Association of Citizens Advice Bureaux has pointed out that topping up low earnings is now often serving to entrench low pay.
Caroline Flint: The difference between this Government and previous Governments is that when we had the old family credit system there was no national minimum wage to put a floor under poverty pay. The Government have provided a basis on which pay cannot go below a certain level, and can then be supplemented by in-work benefits.
Mr. Flight: I do not agree in principle, but a minimum wage is just a universal minimum for everyone and is not relevant to whether people receive the right rewards for different skill levels. It is merely a floor and we could spend hours debating whether it is sufficient.
The Government's recent report on skill levels has admitted that Britain's skill base lags far behind that of other developed economies. The Government predict that thousands of jobs could be left vacant because of the lack of skills. The report points out that the growth in the proportion of the work force with intermediate vocational skills has been slower than in the rest of the OECD. Many who participate in skills councils have expressed concerns that, increasingly, the right reward signals for the enhancement of skills are not clear. Under the Bill, take-home pay for many will bear little relationship to the market remuneration for their skills. The Chancellor's
economic objective is to increase Britain's declining rate of productivity growth under the Labour Government. Has he understood the contradictions between the very worthy social objectives and the very necessary economic ones?
Kali Mountford: Does the hon. Gentleman accept that one of the biggest barriers to attaining skills is an extended period of worklessness? Is it not good to incentivise going to work, so that people are back in the labour market and increasing the skills base?
Mr. Flight: That is why I said a few moments ago that it was the Conservatives who started the principle of pricing people into work. This is an important issue. A delicate balance needs to be struck between pricing people into work and having a system of pay-packet remuneration with signals in terms of people's rewards for enhancing their skills. Getting that balance right is difficult, but crucial. We do not know whether the Bill will get the balance right because we have not been told what the level of credits will be. The House should focus—as should the Chancellor if he wishes productivity growth in this country to recover—on the fact that this is a crucial area to get right.
According to the Government, for many, the working families tax credit should increase the incentives to get a job. However, as Donald Hirsch pointed out in the New Statesman, some people—not all—will, as they earn more, lose more than 90 per cent. of the extra income through tax and withdrawal of housing benefits. He said that while Ministers preached about improving individual opportunities and productivity, they risked sending signals that encouraged individuals and companies to go for low-grade, low-paid jobs.
The second major issue of principle is whether it is right to move increasingly towards using the Inland Revenue, as opposed to the Department for Work and Pensions, as the administrator and the payer of such benefits. While there are attractions in using the Inland Revenue—it has people's PAYE records—it being the administrator of welfare benefits runs the risk of leading to even greater bureaucracy and complexity in our tax system and of it failing to be able to deliver to the needy when they are particularly in need of support.
Much additional information beyond PAYE is required to administer benefits appropriately relating to family circumstances, receipt of housing benefit, disability and—for the Bill's particular purposes—average hours worked and child care costs. At the heart of the concerns of the Institute for Fiscal Studies is the need for claimants to monitor annual income, average hours of work and child care costs, which it believes will lead to the risk of considerably greater non-compliance. Pressure may also develop for those and other relevant items of information to be required to be included in citizens' tax returns, increasing the bureaucratic burden on everybody.
The proposals to simplify the administration system for paying tax credits by moving to an annual system based around the tax year—essentially to save administrative costs—runs the risk of the system being unable to respond quickly and specifically enough to people's changed working circumstances. The Paymaster General expressed the view that the Bill would bring about great improvements in that area, but she did not describe
precisely how that was to be achieved within the simplified administration. That is one of the areas that awaits the further regulations.In addition, there is the risk of increasing fraud. The right hon. Member for Birkenhead has pointed out that the less precise administrative arrangements for benefits proposed by the Bill run the risk of resulting in spiralling costs as people learn to play the system. The new arrangements also run the risk of offering large bonuses for dishonesty, inviting employers to connive with employees to the benefit of both parties and pulling employers into a spider's web of potential dishonesty. The right hon. Gentleman points out that as well as rewarding employers to pay low wages, the arrangements also take the pressure off improving productivity.
The former Select Committee on Social Security expressed concerns that the potential for fraud could increase if priority is placed on prompt payment at the expense of rigorous checking of eligibility, but when families face hardship, welfare payments need to be made promptly.
Similar systems overseas have experienced widespread abuse. Fraud became such a major problem with the Canadian working income supplement that Canada has moved back to a benefit system. In America, the earned-income tax credit has met with similar problems.
Under the Bill, in line with the move to encourage electronic application, claimants for the new tax credits, unlike even those claiming the existing working families tax credit and disabled person's tax credit, will not be asked to provide documentary proof of income with their application. Also, despite the known efficiency of the Inland Revenue in tax matters, it is not, in administering the new tax credits, subject to the powers of the new Social Security Fraud Act 2001.
The accounts that are required under the Bill and should be available for full parliamentary scrutiny do not include statistics relating to the number of payments and the location of employers affected, yet those are needed to make a proper assessment of where the greatest impact of the legislation on the community is felt.
In increasing the extent of benefits paid through the pay packet by employers, beneficiaries are also taking on an increased credit risk. An employer could receive funds from the Revenue and become insolvent before those funds had been paid on to the employees. It may sound like a remote risk, but it is very real, particularly for smaller companies in an uncertain economic environment.
The crucial issue is whether the new arrangements will tackle the problems of poverty in our community. The Chancellor has made much of his boast that the Government's measures to date have achieved a major success in reducing child poverty and have taken 1.2 million children out of poverty. However, according to the Department for Work and Pensions statistics, the increased spending on the working families tax credit has not yet reached those in the greatest need and at most risk of suffering the ill effects of low-income deprivation. This has been due in part to ever more complicated means-testing and in part to the fact that the focus overwhelmingly on work does not help families for whom work is not an option for health reasons, because the jobs are simply not there or because of problems with child care or transport.
Between 1994 and 1995, as the Paymaster General cited, and 1999 and 2000, there was little change in the proportion of children below the threshold's contemporary mean income. The Child Poverty Action Group report points out that the published figures for 1999-2000 showed that 34 per cent. of children were still living in income poverty and that one in six families fall into poverty as the result of the birth of a child.
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