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Roger Casale (Wimbledon): I am interested to hear the hon. Gentleman repeat the argument that he made on Second Reading. Does he not accept that the world has changed enormously 25 years on? The argument for tax credits is valid today because we can no longer hope just to compensate people for being poor, on low wages or not having access to work. We have to achieve the dynamic effects that come from reconnecting people with the labour market, providing incentives to get back to work and, of course, providing proper child care and support for their children.

Mr. Flight: First, I made those points in Committee, not on Second Reading. Secondly, they are points of principle, not just points of practice. Given the expenditure and the difficulties associated with the Bill's approach to addressing the problems of those most in need, the arrangements are not particularly effective. The hon. Gentleman will note that these criticisms have been made by a number of organisations that focus on poverty. There are many good things in the proposals, to which I referred on Second Reading. However, our objections of principles remain valid and have not been adequately debated—[Interruption.]

Mr. Deputy Speaker (Sir Michael Lord): Order.

Mr. Flight: In view of the many issues that have not been addressed, I suggest that the Government agree to give the relevant Select Committee responsibility to scrutinise the substantial volume of regulations that will need to be introduced; otherwise, as the Law Society has warned, many important issues and principles will not be considered properly by Parliament.

I shall focus on difficult issues raised by the Bill, many of which are issues of principle that have not been resolved. There is the simple question of how generous and expensive the child tax credits will be. The lower the level of child tax credit, the less effect there will be on reducing child poverty, but the higher the level, the greater the risk of reducing work incentives, which the tax credits are intended to increase. More generous tax credits will reduce the financial disincentives to marriage or cohabitation for parents who are jobless, but the CTC and WTC proposals will continue some of the financial disincentives of the working families tax credit to marriage and cohabitation for parents. In Committee we touched on this issue, which is acknowledged by the study sponsored by the Rowntree Trust.

Working families tax credit and child tax credit have already brought back elements of joint assessment for both married and cohabiting couples. As a result of the Bill, one partner will be liable to repay the CTC or WTC if it is wrongly paid to the other partner. That could cause a nightmare situation when couples split up. Although working tax credit will increase incentives for people to get a job, it will reduce the incentives as they earn more, and some will lose more than 90 per cent. through tax and the withdrawal of benefits. The problem of squaring incentives to work is by no means fully addressed by the

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Bill. Under working tax credit, as with working families tax credit, parents remain the only people who are not eligible for child care subsidies.

As I said on Second Reading, I welcome the fact that the savings rules that applied to WFTC will not apply to child tax credit, but I do not recollect the Government ever setting forth the policy on savings for working tax credit.

Both credits are complex and present people in real life with complex decisions about whether to work more hours and whether to live together or apart. There is an issue of principle as to whether Government should use financial incentives to influence people's personal behaviour in those areas.

As in Australia and Canada, payments will be based on annual income figures, but unlike Australia and Canada, in the UK the Inland Revenue will not have the necessary data for many potential claimants unless the Government adopt the suggestion that all claimants should be required to produce annual returns for the Revenue.

Major problems will remain in defining and determining cohabitation. The Revenue said that it would check whether anyone was lodging a tax return from the same address as the claimant, but care will be needed by the Inland Revenue to avoid the risk of making a wrong cohabitation decision, such that under the law a couple is deemed to be cohabiting, because there will be consequent penalties and difficulties in recovering overpayments.

The arrangements depend on a great deal of information being transferred between Government Departments, especially from the Department for Work and Pensions to the Inland Revenue. We have not touched on the question whether this is potentially in breach of the data protection legislation, if not data protection principles.

The Bill fails to ensure that a national system of credits and benefits is maintained, and it risks the possibility of disputes similar to the current threat that the Whitehall moneys financing attendance allowance could be withdrawn in Scotland. The threat exists as a result of Scottish Ministers having chosen to provide free nursing care. It is in the interests of the country that there should be one system in all of Britain to avoid the possibility of conflicts, which the drafting of the Bill has not ruled out.

The Government have not resolved the difficulty of defining minimum hours to be worked to qualify for working tax credit, or how that will be checked, if at all. Will employers be required to provide information either regularly or on a spot-check basis? We have argued very strongly—this is the main point that has been made by the Institute for Fiscal Studies—that there is no work incentive argument for providing tax credits for singles and couples without children and thereby adding about 500,000 claimants a year.

Another issue that has arisen is the fact that the Government continue to propose in the Bill what I can only call Enron-style, off-balance-sheet accounting. Some £4 billion of existing expenditure is automatically being transferred to a tax net-off, and another £2.8 billion will probably be transferred as a result of the Bill. A total of £15 billion of welfare-related expenditure will then be accounted for in terms of netting off tax receipts, rather than being shown as expenditure. The Office for National Statistics, which adopts the accounting conventions set out in the 1995 European standard of accounting, keeps

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the national accounts on one basis, but there are now difficulties in reconciling the Red Book with national accounts. There is no logic to justify taking the proposed approach other than that of seeking to conceal the extent of such expenditure.

It has emerged from this debate that at the heart of the issue are our concerns about the complexities of the arrangements and our anxiety that the need for claimants to keep detailed records and monitor the number of hours worked, the amount of income earned and child care costs will lead to a much-increased risk of non-compliance. The right hon. Member for Birkenhead (Mr. Field) was more constrained today, but as he has warned previously, the arrangements in the Bill are likely to result in spiralling costs of the sort that were experienced in America as people learned to play the system and to offer excessive bonuses for dishonesty.

Above all—I suggest that hon. Members think about this point—the Bill will ensure that about 40 per cent. of all families will be on means-tested benefits. Some 30 per cent. of those will be of working age; and, on the Government's figures, about 80 per cent. will have children. Other tax credits will go to 56 per cent. of those in retirement. Stepping back, one can see that that means that well over half of the recipients will be paying for their benefits through direct and indirect tax. Is there any logic in a system that includes the costs, difficulties and administrative issues that are involved in taking money from people and then giving it back to them? That cannot be an ideal way of running our affairs. Indeed, the Prime Minister himself has warned of the major problems in having too much means-testing.

There are good objectives in the Bill and several aspects that we support, which I highlighted on Second Reading, but the House has not had the opportunity to consider many serious problems and a lot of the issues that I have sought to raise in this speech. I end where I started: it would surely be much more healthy for the Government who seek to introduce such legislation to bring to the House much more detailed proposals, rather than a framework in respect of which we do not know how many of the problems will be solved, when we do not know how much it will cost or whether 1.3 million people will be worse off as a result of its introduction. That is not the way to legislate, and I do not think that the Paymaster General made any convincing case for addressing this important territory with such a framework Bill, so we will abstain from voting. On the many areas that it does not address, there is scope to deal with hon. Members' queries through parliamentary questions, but it is to be hoped that many of the outstanding issues can be addressed in the other place.

6.39 pm

Jon Cruddas (Dagenham): Two elements dominated Government thinking on the social security/labour market interface in the last Parliament: first, helping families in poverty, especially those with children, by means of the children's tax credit; and secondly, pricing people into work through measures to alter the trade-off between work and non-work, through the working families tax credit.

The Bill proposes two new targeted tax credits: the child tax credit to tackle child poverty and target support for parents, and the working tax credit to tackle in-work

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poverty and remove barriers to work. These two new initiatives develop the strategy of confronting poverty and restructuring the supply of labour that was started in 1997. The strategy on the labour market has been to alter the derived utility of work for those not in employment. It makes work pay by altering the trade-off between work and non-work by building a minimum floor for wages—through the minimum wage—and by constructing a take-home premium above market wage rates for poorer labour market participants through the working families tax credit.

These measures work alongside the new deal and benefit-policing arrangements in terms of people's availability for work. If we add to that the record rises in child benefit and the 10p starting rate for income tax, the reform package begins to take shape. The Child Poverty Action Group has identified a substantial reduction in poverty—whatever measure we care to use. Separately, Piachet and Sutherland estimate that 1 million children have been lifted out of poverty since 1997.

Any labour market initiative such as the working tax credit should be judged against the nature of the labour market that it seeks to affect. New analysis of the labour force survey data by Professor Peter Nolan, the director of the future of work programme at the London school of economics, is helpful here. Let us consider the three general classifications in the labour force survey: white collar; traditional services; and manual, manufacturing and construction. Between 1992 and 2000, white-collar professionals accounted for 1.5 million of the 2.3 million increase in employment numbers. Yet traditional services—covering clerical and secretarial, personal and protective, sales, postal and cleaning services—together with manual, manufacturing and construction workers still account for nearly two out of three jobs.

Closer analysis suggests that the fastest-growing occupations have been: first, the four long-established services of sales assistants, data-input clerks, storekeepers and receptionists; secondly, state-dominated education and health service workers; and thirdly, the caring occupations such as those of care assistants, welfare and community workers, and nursery nurses. The fastest-growing occupation in the l990s has been hairdressing. The fastest-growing manual occupation since 1992 was housekeeping, with a rise of 368 per cent. In short, the key areas of growth in the demand for labour through the 1990s have been in traditional, low-paid, unskilled and routine employment. Much of that is carried out by women and much is part-time.

It is precisely because of these developments that the policy proposals before us are so important. The child tax credit will be the first single system of income-related support for families with children, irrespective of whether they are in or out of work. The working tax credit rationalises and extends the current provision of in-work support and, in so doing, increases the utility of work for more people.

The Bill establishes the machinery, prior to the Budget, for an extension of our attack on poverty in terms of the realities of labour market structure. There appears to be a problem, however, in terms of the operation of the working tax credit. This exists in areas with exceptional market conditions and strong disincentives to work. They are areas characterised by relatively high-wage economies, but with significant proportions of deprived families and, often, single parents. There are shortages of

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child care and early-years provision, together with exceptionally strong disincentives in the housing market in terms of labour market participation.

I am talking about London. Research by the Greater London Authority suggests that London has the lowest take-up rate of the working families tax credit in the UK—in London the rate is one in 10 families compared to one in six nationally, and one in five lone parents compared to one in three nationally. Part of this is accounted for by regional earnings differentials, yet even with a 70 per cent. write-off of child care costs, the higher-cost child care is a disincentive to participation, as are higher housing costs. Research suggests that people paying higher rents lose out. The gain through the tax credit is lost through housing benefit withdrawal.

In short, because of a combination of forces, the labour market participation strategy underscoring the policy is less effective in London, as there are greater financial disincentives to participation. Let us take my constituency as an example. It is one of the capital's more deprived constituencies, with a high number of one-parent families and housing benefit recipients. According to House of Commons statistics supplied to my hon. Friend the Member for Regent's Park and Kensington, North (Ms Buck), Dagenham remains 533rd out of 641 constituencies in the ranking relating to the proportion of families receiving the working families tax credit.

That implies serious imbalances between poor families' unemployment entitlement and take-up incentives. The issue should be investigated and there may be a need to introduce regional premiums to the regime to ensure that the policy works with maximum effect, consistently across the country.

Overall, I welcome the Bill, as it is specifically designed to confront the labour market that we have, but I am concerned that we are not yet maximising the strategy's potential in deprived parts of the capital such as my constituency.

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