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“the number facing marginal tax rates of 60 per cent. or more has increased by nearly 1 million, largely as a consequence of the workings of the tax credit system.”
Mr. Adrian Bailey (West Bromwich, West) (Lab/Co-op): Will the hon. Gentleman give way?
Mr. Osborne: I am happy to give way. I do not know whether the hon. Gentleman agrees with the right hon. Member for Darlington.
Mr. Bailey: I do not, and my constituency is West Bromwich, West, if the hon. Gentleman wants to tell me how many overpayments there have been in my constituency. Something like 8,000 families in my constituency are benefiting from tax credits, but over the past three years, just 37 people have come to my surgery with tax credit problems. Will the hon. Gentleman tell us what comparable reforms he would introduce that would allow families with children on an average income to be £1,500 a year better off, with those who are poorest being £3,500 a year better off? That is the true nature of the issues about which he is talking.
Mr. Osborne: As the hon. Gentleman does not know what is going on in his constituency, I can tell him that 3,600 people there were overpaid. He will have to ask them why they did not feel that it was worth their time to go to his constituency surgery.
The right hon. Member for Darlington told us that the tax credit had left us with an
“80-20 society, in which 80 per cent. do OK but 20 per cent. are left behind”. —[ Official Report, 28 March 2006; Vol. 444, c. 710-11.]
[Interruption.] It is no good Members saying that he was wrong. Did the hon. Member for Dudley, North (Mr. Austin) say that?
Mr. Ian Austin (Dudley, North) (Lab) indicated assent.
Mr. Osborne: There we go. The hon. Gentleman is one of the Chancellor’s henchmen and a proponent of what was called the “Kill Mil” operation. No doubt he is getting to work on the Education Secretary as we speak.
The right hon. Member for Darlington is not the only person who has criticised the operation of tax credits. As my right hon. Friend the Leader of the Opposition pointed out during Prime Minister’s questions, the right hon. Member for Birkenhead has said:
“using tax credits as an anti-poverty weapon is like attempting keyhole surgery with a hacksaw”.
That is Labour’s verdict on Labour’s record.
At question is not the existence of tax credits—we support tax credits, but want tax credits that work—but the system that the Chancellor chose of annual awards, annual income assessments, annual overpayments and annual clawbacks. That system means that almost half of all families get the wrong tax credit payment.
Perhaps the Economic Secretary to the Treasury has not even read the parliamentary ombudsman’s report, but if he did, he would see that she says that there is
“the fundamental question as to whether, for people on modest incomes who have to budget and plan their finances carefully to manage their lives, such inbuilt instability or uncertainty really works.”
The Treasury Committee, in its first and perhaps most important recommendation, points to the new evidence that shows that the family incomes of many of the poorest have become more variable and unstable as a result of tax credits. That all-party Committee asks the Chancellor to consider fixing awards over shorter periods than a year, and I ask him again to do so. The time has come to give serious consideration to moving to a tax credit system that is based on shorter, more fixed payments, that brings greater certainty to family incomes and that avoids the hardship of overpayment.
Mr. Jim Devine (Livingston) (Lab): It is great to hear the hon. Gentleman giving advice, but in his interview in last month’s edition of Magill, the well-respected Irish magazine, he said:
“anyone who says that I haven’t known adversity hasn’t looked at my CV—I worked for John Major when we lost the 1997 election”.
He then said that he worked for the right hon. Member for Richmond, Yorks (Mr. Hague) when the Conservatives lost in 2001. He went on to say:
“That doesn’t say much for the quality of my advice”—
so why should we listen to him now?
Mr. Osborne: An absolutely devastating intervention. I should refer the hon. Gentleman to the figures on awards in Livingstone, which has pretty much the worst record on errors of anywhere in the country outside East Ham and West Ham. If he wants to toddle off and look at the figures, he can do so.
Examining the design of the tax credit system does not mean scrapping tax credits, but trying to make them work. In a rare admission of error, the Chancellor, too, opened up that possibility at the end of last year when he said that the Government might have to examine fixed payments. However, I doubt that he will do that considering that he designed the flawed system and has presided over its incompetent administration. Today’s tax credit system is his creation and no one else’s— [Interruption.]
Madam Deputy Speaker: Order. Could we have just one debate in the Chamber with one speaker?
Mr. Osborne: Thank you, Madam Deputy Speaker.
The Chancellor remains stuck in the past. He is refusing to listen and is the road block to reform. He is too proud to admit that he has got it wrong and too lacking in courage to defend the system in public. It will be up to the next Government to fix the broken tax credit system and give millions of lower-income people the social justice that they deserve.
2.9 pm
The Chief Secretary to the Treasury (Mr. Stephen Timms): Today’s debate gives us the welcome opportunity to reflect immediately on yesterday’s report from the Treasury Committee on the administration of tax credits. We will, of course, respond to the report in full in due course. In the mean time, I welcome it as a constructive contribution to the debate, and I hope that it offers the prospect of a new consensus throughout the House on the advantages of the tax credit system.
The hon. Member for Tatton (Mr. Osborne) said, in introducing the report, that tax credits are right in principle. I agree. The report rightly drew attention to the wide support among non-Government organisations, such as Citizens Advice, for the tax credit system. It underlined the importance of improving the quality of service provided to tax credit claimants. I agree about that as well.
It is a shame that the speech of the hon. Gentleman did not reflect very much of the now broad agreement on the gains from the tax credit system. He told us that he agreed that tax credits are right in principle, but he did not tell us very much about his agreement. It seemed that he was much more anxious to voice his criticism of the system than to explain why he now supports it.
I remind the House why there is broad agreement about the gains from the tax credit system. Let us consider the progress that we have made since 1997.
Mr. Andrew Mackay (Bracknell) (Con): Before the Minister goes any further, will he clarify exactly why the Chancellor of the Exchequer will not reply to the debate? At what point did he decide to go to the ECOFIN meeting? Why, according to the website earlier this week, was the Paymaster General attending?
Mr. Timms: The right hon. Gentleman will be pleased to know that my right hon. Friend is defending our national economic interests in Brussels today, as he has done extremely effectively over the past nine years. I think that the right hon. Gentleman will find that reassuring. As for the way in which we are handling the debate, it is precisely the way in which these debates have been handled in the past.
I remind the House of the changes that have occurred since 1997.
Mr. Shailesh Vara (North-West Cambridgeshire) (Con): Will the Minister give way?
Mr. Timms: No. I will make some progress and then I will gladly give way to those who want to intervene.
Since 1997, there are now over 2 million more people in work, thanks in large part to the tax credit system. In 1997, just 800,000 people received family credit. Today, 6 million people benefit from tax credits. Ninety three per cent. of families on incomes below £10,000 claim their entitlement to child tax credit compared to the initial family credit take-up of just 57 per cent. under the Tories. In 1997-98, fewer than 2.5 million families with children paid no net tax. Under today’s tax credit system, there are now 3 million families in that position.
Three enormous gains have been achieved from the introduction of the tax credit system, which is what it was designed to deliver, and which it is succeeding in delivering.
Mr. Charles Walker (Broxbourne) (Con): Undoubtedly the tax credit system has helped many people, but there are many families that suffer huge distress when they receive claims for large sums that they have no means of paying. How is the Minister proposing to reduce this distress on hard-working families who do not deserve to be treated in that way?
Mr. Timms:
I shall set out the progress that we are making on that, because I think that it will be acknowledged that it has led to considerable improvements. Before I do so, I am grateful for acknowledgement of the benefits of the system, which I shall set out. First, tax credits have significantly improved incentives to work. In the past, far too many people found that they were better off on benefits than in a job. Tax credits have put that right. That is one of the reasons why so many more people are now in work and why the historic high rate of employment that we have achieved has been maintained for so long. Secondly, the tax credit system has reduced the tax
burden on low to middle-income families. An OECD study, published in March, showed that, thanks to tax credits, net tax paid by a couple with one child living on the average manufacturing wage has fallen from more than 17 per cent. in 1997 to less than 10 per cent. now. That is a dramatic reduction in the tax burden for people who are benefiting greatly from the improvements that have been introduced.
Mr. Philip Hollobone (Kettering) (Con): I shall read briefly the comments recently of one of my constituents in response to a letter from the Tax Credit Office. My constituent writes:
“I should like to point out that although initially the tax credit payments proved very useful, the situation created by your overpayment has caused me substantial hardship and increased stress. In fact, I wish that I had never applied in the first instance. I feel very let down by the system.”
Mr. Timms: I shall describe to the House the improvements that we have made. It is particularly interesting to note that take-up of tax credits has continued to rise.
The most recent figures and data have confirmed that the third big gain has been that tax credits have helped to achieve a big reduction in child poverty—since 1997, the number of children growing up in poverty has fallen by 700,000. That is consistent with our aim of halving child poverty by 2010 and abolishing it by 2020. Tax credits have made a big contribution to that success.
Of course, there have been problems with administration and with IT. It is right that the House should press for those problems to be fixed, and I want to report progress on that. I hope that the debate will reflect a new agreement across the House that tax credits are right in principle and that the focus now needs to be on how we can make the system more effective still. Conservative Members now say that they agree with that, and that is progress, but that is not reflected in the detail of their contributions to the debate. Tax credits are playing a key role in moving people into work, helping people move up the employment ladder while in work and ensuring that it pays to be in a job.
Mr. Jim Cunningham (Coventry, South) (Lab): I am sure that my right hon. Friend recalls that when the Opposition were in Government they opposed tax credits. They opposed the proposal all the way down the line. Does my hon. Friend recall also who it was who introduced the Horizon project that cost billions and cost nearly £50 million to put right? The shadow Chancellor of the Exchequer did not talk about that. I wonder whether he had a hand in that when he was an adviser in John Major’s Government.
Mr. Timms: The Conservative party was responsible for that. My hon. Friend is absolutely right that the Conservative party consistently opposed tax credits and consistently opposed the dramatic improvements that we have seen in work incentives, reductions in tax burdens and reductions in child poverty.
I will say a little more about those three key improvements. Tax credits have improved incentives to work. Together with our wider economic stability, they have helped to increase the number of people in work by more than 2 million since the spring of 1997. Since then, long-term unemployment has reduced by 450,000. For example, from this October, a couple with two children moving into full-time work on the national minimum wage will be £41 a week better off for having done so. A lone parent with two children moving into full-time work on the national minimum wage will be £76 a week better off compared with the £54 that that person would have received under the system as it was in 1997. A single person without children moving into full-time work on the national minimum wage will be £58 a week better off compared with the £39 that they would have received under the system as it was in 1997. There have been substantial improvements in the incentives to move into work, and they are one of the main reasons why we have seen such a big increase in the employment rate.
Mr. Vara: The Minister is keen to emphasise the positive aspects of the system. Will he concede, bearing in mind some of the recipients of tax credit are the poorest in the land and some of the most vulnerable, that he and the system are doing such people no favours by increasing bureaucracy and the responsibility on them to make claims without there being a similar impact on the administrators?
Mr. Timms: There is a big impact on precisely the people to whom the hon. Gentleman refers, and that is for the good. For example, the tax credit system has reduced substantially the tax burden on low to middle-income families, precisely those to which he refers. That tax take of 9.8 per cent. on a single earner couple on £21,000, with two children—the manufacturing average wage—is now, according to OECD studies, the lowest rate of any country in the G7. There has been a huge gain for middle and low-income families. The single earner family with two children can now earn just under two thirds of the average wage before they start to pay any net tax. Thanks to tax credits, the number of families with children paying no net tax will have risen by more than 500,000 to more than 3 million this year. Those improvements should attract wide support from across the House.
Mr. McFall: I thank my hon. Friend for his remarks on the constructive but critical report of the Treasury Committee. It says clearly that tax credits are right in principle. The core issue is whether we want a flexible system or a fixed system. I would wish to take up that issue if I were to catch the eye of the occupant of the Chair. I have not had a response from the shadow Chief Secretary about the core issue. Where are the Opposition going? Are they fixed or flexible? Will my hon. Friend address that core issue.
Mr. Timms:
If I understood him correctly, the shadow Chancellor wants a more flexible inflexible system. However, I look forward to the contribution of my right hon. Friend the Member for West
Dunbartonshire (Mr. McFall), as I agree that this is a very important point indeed.
The third big gain from the system is the fact that tax credits have helped to achieve a significant reduction in child poverty—700,000 children have been lifted out of relative poverty since 1997, compared with a doubling of child poverty in the previous 20 years under the Tory Government. There is recognition across the House that child poverty must be tackled. Previously, the Opposition did not acknowledge that, but they do so today, which is another reason for the broad agreement that, as the Treasury Committee said, the tax credit system is right in principle. Tax credits provide support for 20 million people—a third of the population—and assist 6 million families and just over 10 million children. Take-up is substantially higher than in any previous system of income-related financial support for families in work, and it has risen much faster than it did under previous benefit systems such as family credit. The people most likely to take up their entitlement are the low-income families who stand to benefit the most.
Anne Milton (Guildford) (Con): The Chief Secretary is talking about statistics, but we are talking about individuals. For anyone listening to our debate, it is individuals who matter. In my Guildford constituency, it is a story of telephone calls that are not answered or returned. Recently, the worst case with which I dealt was one in which someone received an overpayment of £9,000 that they were asked to repay in monthly instalments of £600, which is far beyond their means. Until the Chief Secretary and the Government accept that the problem affects individuals and until they stop citing facts and statistics, we will not make any progress. I should like to ask the Chief Secretary—
Madam Deputy Speaker: Order. The hon. Lady has made her point.
Mr. Timms: I am afraid, Madam Deputy Speaker, that I shall continue to cite facts. Individuals are better off in work, instead of being on benefits, as they were in the past. Individuals have a lower tax burden, thanks to the tax credit system, and 700,000 individual children are not growing up in poverty, although they would have done so under the system administered by the Opposition.
Mr. Bailey: We should talk about individuals. Individuals whom I have met on the doorstep say that tax credit has transformed their personal financial circumstances. If Opposition Members were completely honest, they would have to include that in the equation. However, does my hon. Friend agree that an obvious overpayment factor was built into the system? In itself, that should not mean that a family suffers hardship when their income increases and they have to repay it but, in a small minority of cases, the calculations are wrong, resulting in difficult circumstances. Furthermore, does my hon. Friend not agree that the alternative is a fixed, inflexible system that penalises people far more?
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