Select Committee on Work and Pensions Second Report

6 Household finances: debts and the Social Fund

103. One effect of living in poverty is a high proportion of household debt. The evidence received during the inquiry showed that debt repayments, including Social Fund repayments, frequently result in families living well below Income Support levels.[102] Research on children in severe and persistent poverty found that nearly nine in ten (87%) of children who were in severe poverty were in households that were in receipt of Income Support (IS) or Jobseeker's Allowance (JSA). Yet the average household income of children in severe poverty was found to be well below IS and JSA levels.[103] This was explained by issues such as deductions from benefits to repay debts, including Social Fund loans; non take-up and under-claiming of benefits; benefit sanctions; and inadequate benefit levels. This section will address some of these issues.

Household debt

104. The Families and Children Study (FACS) showed that a sixth of families (17%) were behind in paying bills, such as utility bills, council tax, credit cards and rent and mortgage repayments. One quarter of lone parents who were not working (or were working less than 16 hours) and 14% of lone parents who were working more than 16 hours per week had two or more debts. For couples, 23% where both partners were not working (or were working less than 16 hours) had two or more debts, compared with 7% for couples with one partner working and 2% where both partners worked.[104]

105. Citizens Advice have considerable expertise in the area of debt advice and informed the Committee that of the more than one million debt inquiries that they receive every year, 43% are from people on means-tested benefits or tax credits.[105] According to research conducted by Citizen's Advice, the most common reasons for falling into debt were living long-term, on a low income, over-committing financial resources and job loss. Consumer credit was shown to be forming a larger proportion of household debt than in previous years, with a disproportionate number of people having catalogue debt and doorstep-collect credit. This poses problems as this type of debt has very high interest rates. [106]

106. Citizens Advice concluded:

    "It is difficult to address the issue of child poverty without addressing the issue of debt…initiatives must tackle irresponsible lending and borrowing, lack of access to affordable credit and access to advice…"[107]

107. A crucial part of this is increasing access to financial advice and to financial education so that people can make considered judgements over which type of credit is best for them.

Social Fund

108. For families who have been on means-tested benefits for at least six months, the Social Fund provides interest free 'budgeting' and 'crisis' loans to those who lack immediate funds and are threatened with serious damage or risk to their health and safety. Community Care Grants (CCGs) are also payable to those who meet specified criteria such as needing to move because of disability, disaster or personal safety.

109. The Social Fund was raised by many giving both written and oral evidence as contributing to the low-income of families with children.[108] A range of problems was identified with CCGs, such as a restricted budget; applications being refused as they are deemed not to be high priority; and grants that are too low to meet the needs of families. Budgeting Loans are also criticised for the inadequate budget and for the restricted availability to those on IS and income-related JSA for more than 26 weeks. Other issues include people with outstanding loans being turned down, even if they are in real need, and repayment rates which are too high.

110. Our predecessor Committee conducted an inquiry into the Social Fund and produced a Report in March 2001[109] in which they urged the Government:

    "To take a radical look at the Social Fund. So that it may work to enhance the strategy to reduce child poverty, rather than work against it…We have concluded that the scheme in its present form needs urgent overhaul and an injection of funds. Without such action, there is a strong possibility that the wider social policy objectives of the Government will be endangered."

111. Three years after the Committee's Report, some further funds have been added to the Social Fund budget - an additional £90 million in the three years to 2005-06. However, a radical review has not so far occurred. In oral evidence the Secretary of State said, "We continue to examine how it can be improved, and the case for resourcing it better as well."[110] He went on to say, "I do not think it is perfect but I do not think it is so imperfect that we should abandon it."[111]

112. Strategies for improving the Social Fund were raised by some. Citizens Advice argued that eligibility should be extended to those receiving maximum Child Tax Credit, Working Tax Credit and those whose sole income is Incapacity Benefit or contribution-based JSA.[112] CPAG put forward several recommendations on reform of the Social Fund, based on their work with One Parent Families and the Family Welfare Association, to ensure that it meets the child poverty objectives. These include Child Development Grants, payable at key stages of a child's life; Child Health and Safety Grants, for items to maintain the health and safety of children; Secure Homes Grants, for families who separate or are homeless; and an Opportunity Grant, to help parents make the transition from benefit to paid work.[113] The costs of such proposals vary. For example, proposals to fund so-called 'lumpy' items through a Child Development Grant could cost between £136.5 million and £140 million and grants for child health and safety - this covers the replacement of essential items such as washing machines, beds, cookers etc - would cost between £71.8 million and £83.1 million.

113. The Secretary of State was asked his views on these proposals. He commented that he had reservations about providing grants for specific items as it would lead to a "rule-governed approach" that could prove to be very rigid and would lead to "considerable extra cost".[114]

114. The Committee reiterates the recommendation from our predecessor's Report on the Social Fund and urges the Department to overhaul the Fund. The Committee recommends that the national strategy expands the role of the Social Fund to help tackle severe and persistent child poverty and considers paying child development grants at key stages during the lives of those children in severe and persistent poverty.

Benefits and tax credits administration

115. Ensuring that low-income families receive the benefits to which they are entitled is crucial in maximising the family income. Take-up of benefits and tax credits varies considerably by benefit type and by claimant type. For example, take-up of Income Support is relatively high with between 86% and 95% of eligible people taking up their entitlement, whereas take-up of Council Tax Benefit is only in the range of 66% to 72%. Take-up for both of these means-tested benefits is highest for lone parents.[115] Take-up is probably lowest for Disability Living Allowance which is in the region of 40% to 60%.[116]

116. Maximising take-up of the new tax credits is crucial to their success and to the child poverty target.[117] CPAG pointed out that although statements from the Inland Revenue and Treasury claim high take-up figures of around 95%, this may not be entirely accurate as it is based on the expected number of those claiming rather than the actual number of families entitled.[118] This was reflected in the statements of Treasury officials in oral evidence who told us that they had expected 6 million families to claim the new tax credits and that 5.9 million had done so thus far.[119] Although it should be noted that before implementation, the Treasury expected 90% of families to be eligible for the new tax credits. This would suggest that more than 6 million families are eligible.

117. The introduction of the new tax credits has been marred by administrative failure resulting in families receiving incorrect payments and causing confusion, inconvenience and, in many cases, significant hardship for some of the families involved. This was particularly highlighted by Citizens Advice who told us of the many cases that they had encountered.[120] One of the biggest potential problems with tax credits administration has been overpayments. HM Treasury estimated that 750,000 families a year (12.5% of tax credit claimants) would experience increases in income leading to a decreased award.[121] However, to date, the Inland Revenue have been unable to put a figure on how many people have reported such changes or have been affected by maladministration generally.[122]

118. A Code of Practice on tax credits overpayments was published by the Inland Revenue in November 2003 - seven months after the introduction of the new tax credits.[123] The guidance states that where a change of circumstance is reported within the year, the payment will normally be reduced so that the right amount is paid over the year or payments may cease completely if the full entitlement has already been paid. Additional 'top-up' payments may be requested to avoid hardship, although this will result in an overpayment remaining at the year end. At the end of the year, overpayments will be recovered from the following year's award with limits set on the maximum recovery rate so that those receiving the maximum Child Tax Credit will have no more than 10% deducted. The guidance states that overpayments will not be recovered if it was due to official error and it was reasonable for the claimant to think the award was right; and that some or all of the overpayment may not be recovered if this would cause hardship.

119. The Committee remains concerned that we do not know how many people have reported changes in circumstances within the year. This means that we do not know how many families are likely to find they have been overpaid at the end of the tax year.

120. 2004-05 will see new challenges. Many Income Support and income-based Jobseekers Allowance claimants are to be transferred to CTC for the first time from October 2004.[124] 'End-of-year reconciliations' are to be conducted to determine whether the correct award was made for 2003-04. The scale of any potential problem resulting from overpayment will not, therefore, be clear for some months. The Committee welcomes the undertaking given by the Secretary of State to clearly examine the situation when the data was available so that people are not landed in severe hardship.[125]

121. It is vital that procedures for conducting end-of-year reconciliation and transferring new claimants to CTC run efficiently; that award letters explain clearly how the tax credit or credits in question have been calculated; that families are protected from hardship; and are able to get reliable information and advice from the Tax Credit Helpline. At the very least, robust procedures must be in place to ensure that overpayments which occurred as a result of official error are not recovered inappropriately. Overpayments should not be recovered where to do so would cause hardship or damage work incentives. The Inland Revenue should also evaluate whether additional 'top up' payments are an adequate mechanism for avoiding hardship when awards are adjusted within year. There should also be a right to an appeal against decisions to recover overpayments, and a proper appeals mechanism to consider such appeals. The Committee recommends that the Government ensures that tax credits administration and policies and procedures on overpayments support the objectives of tackling child poverty and making work pay.

Child Trust Fund

122. The Child Trust Fund is a new development in the 'asset-based welfare' strand of policy. All children born after September 2002 will receive an endowment which will be invested and which the child can access at the age of 18. Possible further endowments will be paid at certain ages and children in low-income families will receive higher payments. The Child Trust Fund is sometimes mentioned as part of the anti-poverty strategy, in spite of the long-term nature of the initiative yet, as NCH states, "…it is worth noting that the benefits will not come to fruition until around the Government's target date to eradicate child poverty."[126] CPAG argues that the introduction of the Child Trust Fund is less of a priority than, for example, reform of the Social Fund. The Committee recommends that the Government attaches a greater degree of priority to developing the role of the Social Fund than it does to the Child Trust Fund between now and 2010.

102   Ev 17, 49, 194 Back

103   Ev 59 Back

104   Barnes M et al (2004) Families and Children in Britain: Findings from the 2002 Families and Children Study (FACS) Back

105   Ev 199 Back

106   Ev 200, Qq 60-64 Back

107   Ev 200 Back

108   Ev 46, 59, 87, 191, 197, 214, 240 Back

109   Social Security Select Committee, 'Third Report: The Social Fund', 27 March 2001, HC 232 Back

110   Q 522 Back

111   Q 524 Back

112   Ev 197 Back

113   Ev 197, Q 74 Back

114   Q 523 Back

115   DWP (2004) Income Related Benefits Estimates of Take Up in 2001/02, DWP Back

116   Ev 122 Back

117   Ev 190-191, 212 Back

118   Ev 190-191 Back

119   Q 306 Back

120   Ev 190, 196, Qq 47-52 Back

121   HM Treasury and Inland Revenue (2002), The Child and Working Tax Credits. The Modernisation of Britain's Tax and Benefit System. Number Ten.  Back

122   Qq 306-310 Back

123   Inland Revenue, Code of Practice COP26, What happens if we have paid you too much tax credit? Back

124   Official Report, 11 March 2004, col 1645W Back

125   Q 467 Back

126   Ev 77 Back

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2004
Prepared 23 April 2004