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Mr. Clifton-Brown : The hon. Gentleman has done the House a service this afternoon by trying to seek clarification from the Government of whether they intend to claw back the overpayments, at least until the Government have decided in principle whether they will abide by the code of practice. The people involved are obviously of meagre financial means and we have all had difficult, harrowing constituency cases with people not knowing whether the overpayments will be clawed back by the Government. The Government owe those people a quick decision, and I hope that the Paymaster General will be able to give a clear and unequivocal statement on the matter when she winds up.

Mr. Laws: I agree with those comments: it is high time that the Minister responded clearly to the ombudsman's report. After all, the contents of that report were no great surprise to anybody who had been closely involved in the tax credit system over the past year. Assuming that the Paymaster General has been taking a close interest in that vital issue, I cannot believe that a single recommendation by the ombudsman will have come as a great surprise to her.

Several hon. Members have already put on record some of the problems with the tax credit system.

John Thurso (Caithness, Sutherland and Easter Ross) (LD): My hon. Friend will know that I raised the issue of tax credits in a Westminster Hall debate on 6 April when many of exactly the same points were raised. Specifically, the point was made that Citizens Advice Scotland believes that the debt that people are getting into as a result of the overpayments is in direct contravention of the policy of the Scottish Executive—
 
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so much so that Citizens Advice Scotland has had to issue a leaflet on the subject. Real hardship has been caused, and that is what we wish to address.

Mr. Laws: I entirely agree with my hon. Friend's comments. It is precisely because this issue is causing so much hardship among those people who most depend on the tax credit system that the Government should take it seriously.

It is worth recapping the problems with the tax credit system, because some Labour Members have sought to draw attention only to the aspects of the system that they think have worked, and are unaware of, or unwilling to acknowledge, the problems experienced. As the shadow Chancellor said, we are talking about almost 1.9 million overpayments and 700,000 underpayments, out of 5.7 million awards. That is an enormous problem rate, especially when it comes to clawing back overpayments and paying out on underpayments. The problem must be endemic to the system, if one third of awards are overpaid.

Some £1.9 billion of taxpayers' money has been overpaid, unintentionally. A further £800 million will automatically not be recovered as a consequence of the £2,500 disregard when incomes rise. The Chief Secretary said that he saw the disregard as the equivalent of the personal income tax allowance, but I profoundly disagree with that statement. The personal income tax allowance is the amount that the Government set so that people do not pay tax on the initial amount of their income. The £2,500 disregard is designed purely to reduce the extent of the problem of endemic overpayment in such systems, which was seen in Australia years before the UK system was introduced. Of course it would be possible to get rid of most of the overpayments by having a much bigger disregard, of £5,000, £7,500 or £10,000. The Government would be able to say that all the overpayment problems had disappeared, but all that would do is shift the problem from overpayments to the disregard.

Mr. Frank Field: The hon. Gentleman mentioned the Australian experience. The Australians not only had a disregard system, but realised that once they were in a hole it was best to stop digging, so they wrote off the overpayments up to 1,000 Australian dollars.

Mr. Laws: The right hon. Gentleman is exactly right and has for many years taken a very close interest in the development of tax credits. He draws attention to the problems in Australia that led to an ombudsman's report there two years ago in which the ombudsman criticised the Australian tax credits system, saying that the system inherently led to a large number of debts, that the debts arising from the scheme were affecting lower-income families, that the debts could be unavoidable and that they seemed to have an unfair retrospective effect. He was also concerned about the manner in which the debts were being recovered. We now find that all those issues are confronting us in the United Kingdom. The Government must have been aware of all those issues when they devised their policy, but they have failed to address all of them with the relatively minor changes to their own policy, such as the disregard.
 
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We have talked about the complications of the system and people's bafflement at trying to understand their awards and entitlements. Thanks to the parliamentary questions that the Treasury has answered—which is unusual on the subject of tax credits—we now know that 65.5 million award notices have been sent out in just two and a quarter years, including 34 million award notices last year alone. All hon. Members will be familiar with the experience of constituents coming to advice centres to describe their problems and reaching into their bags to bring out sheaves of tax credit payment papers. On Saturday, I saw a constituent who had nine separate award notices that had been issued in seven weeks, all with entirely different amounts. That is part of the problem with the system, and it has helped to cause the confusion among individuals who must then anticipate whether or not their award is correct.

As the shadow Chancellor indicated, there has been a big rise in administrative costs. Four hundred staff have been allocated to handle complaints, and 3,200 staff are dealing with the dedicated helplines. There have been 21,600 compensation payments for bad service in the past year alone. The error rate in the system is 21.4 per cent. for the first year that we know of, as against a target of 10 per cent. and an error rate of 10 to 14 per cent. under the old system. Sir Nicholas Montagu, the then head of the Inland Revenue, told the Public Accounts Committee that he was confident that the error rate would be halved from that under the old system. What has happened instead is that it has doubled.

While the Paymaster General seeks to sort out the problems with overpayments, 271,000 people have requested write-offs of overpayments—217,000 in 2004–05—and there have been 54,000 appeals in the first two months of this year alone. It is no wonder the tax credit administrators are struggling given that they must now make 271,000 separate judgments without any proper, statutory system of independent appeal. Although the Government's line on this seems to change from day to day, we have also been told that, so far, only £37 million of the £1.9 billion in overpayments has been written off, but the Treasury cannot tell us how much of the total overpayment has been recovered.

Ed Balls: The hon. Gentleman refers to the difference between the old and new systems in comparing staff numbers, complaints and whatever, but he does not make the point that the take-up rate under the old family credit system was slightly below 60 per cent. and that the take-up rate under the new tax credit system is about 80 per cent. and has exceeded expectations. Does he not agree that, although it is right that we focus on these issues and sort them out, the fact that the take-up rate exceeds expectations shows that the system is working better than the old one and that it is worth sorting out those problems so that it can work better in the future? Unlike the shadow Chancellor, will he tell us whether he supports the continuation of the tax credit system as a way to reduce child poverty?

Mr. Deputy Speaker: Order. The hon. Gentleman must learn to hone his interventions.

Mr. Laws: I will take the first of those questions, Mr.    Deputy Speaker. I am afraid that the hon. Gentleman, for whom I have a great deal of respect, still
 
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seems to be in denial about the system. Perhaps he has got too close to it. The Liberal Democrats are not trying to suggest that the tax credit system has made no important contributions, both in providing work incentives and in reducing poverty, but this debate is about the hundreds of thousands of people in real poverty whose situation is being massively exacerbated by a systemic failure that the Government must address. I shall come later to how the systemic problem, as well as the short-term administrative problem, may be dealt with.

The situation has brought us to a state of affairs that affects even individuals who have been previously been cheerleaders for the tax credits system. I am thinking of an author who trumpeted tax credits in The Independent on Sunday this week and said that they had been a great success of the Government. However, even that individual, Mr. Prosser, says that the system is now a "bureaucratic mess" and that tax credits do not work well for families on low and middle incomes.

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