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We have a benefits system that is getting worse, not better, getting more complicated, not simpler, and costing more, not less. It has taken the Conservatives to bring the matter to the Floor of the House. It is
interesting that Mr. Speaker decided to throw out the amendments to the motion because they were not worthy. We wanted to discuss issues of overpayment, fraud and incompetence in the administration of the tax system. We wanted the Chancellor to reply, since he created the system in the first place, but he is not here.
In their amendment the Government usually cite a great many statistics. I am glad to hear that some of the £15 billion that is being spent on the tax system is going to some places, but with just under half the people not getting the right amount, there are clearly questions to be answered. They were not answered today. I hope that the shadow Chancellor will have the wisdom to call another debate when the Chancellor can fit it into his diary and be present in the Chamber. However, the Government have been forced in their amendment, which has been thrown out, to acknowledge that there are IT problems and that there have been administration cock-ups, and to acknowledge the need for more changes yet again in a system that the Chancellor created.
We have had enough renaming, rebranding and restructuring. We need a radical overhaul of the tax system, with a programme that simplifies it to its core, that is revenue neutral and that reduces the gap between the cost of paying a tax and the amount of tax collected. Until we go down that road, more and more of the £15 billion that has been spent every year will be wasted.
Mr. Mark Francois (Rayleigh) (Con): It is a genuine pleasure to sum up the debate today for Her Majestys Opposition and to highlight what has become the shambles of the tax credits system as administered by the Government. The system now costs some £16 billion a year, or the equivalent of 5p on the standard rate of income tax. It incorporates some 6 million families, of which some 2 million were overpaid in 2004-05, while at the same time just under 1 million families were underpaid. In other words, nearly half of all the payments in the entire system were incorrect. I therefore welcome the Chief Secretarys admission that the system has serious problems, and his acceptance this afternoon that there is now a consensus that tax credits should be retained. It was important that the Government accepted that there was a consensus to retain them, and we welcome that.
However, the tax credits system, as it is currently configured, is seriously flawed. It is prone to fraud and it is also far too complicated, to the extent that many of the claimants who use it do not fully understand what they are claiming, many of the staff who administer it do not really comprehend it properly, and it is all based around a computer system that itself is highly unreliable, as was brought out clearly in the typically punchy contribution of my hon. Friend the Member for North Thanet (Mr. Gale). That serves only to compound the mistakes in the system itself.
The Governments defence, as outlined in their hurried written statement that was rushed out on Monday, is essentially that the package of remedial measures announced in the December pre-Budget report will put things right. But six months on, they
still refuse to tell the House what the package will really cost, and even then, they admit that this will reduce the overpayments by only a third, so well over 1 million families will still be overpaid even when the package is fully up and running. The PBR package does not address the problems at the heart of the current systemnamely, its excessive complexity and its dependence on unreliable information technology. [Interruption.] The Chief Secretary has returned just in time for me to welcome his acknowledgement of our consensus. In effect, the PBR package is an attempt to place a sticking plaster over what has become a gaping wound.
Since the new, and supposedly more flexible, system was introduced in 2003, a series of independent reports has subsequently criticised the operation of the Chancellors system. In June 2005, after receiving thousands of individual complaints about the new system, the parliamentary ombudsman produced a report that concluded:
A review of all the cases referred to the Ombudsman shows that the greatest difficulties are suffered by the core group that the tax credit system is aimed at helping, mainly families on low incomes.
The Government intended the new tax credits to provide a system that was simple for people to understand and to administer. In practice, many people have found the scheme difficult to understand. Many have complained to the Inland Revenue about the system and the frustration and misery it has caused to claimants.
In January 2006, after reviewing the ombudsmans findings, the Public Administration Committee delivered the following damning verdict on the IT system, which underlines the current tax credits system. It said:
We are concerned that the IT system which is supposed to enable an efficient delivery of the scheme has in fact been a root cause, first of creating some of the problems which have led to the criticism and complaints about the scheme and then of acting as a barrier to resolving them quickly.
Then, in April 2006, we had a scathing report by the Public Accounts Committee that looked at the fraud and errors in the system, including overpayments that totalled £1.8 billion in 2004-05. It concluded:
The Department does not have reliable or up to date information on levels of claimant error and fraud in tax credits. The absence of this information and its analysis seriously impairs the Departments management of the schemes and its ability to safeguard taxpayers money.
Can the Paymaster General tell us the true extent of the fraud that is now inherent in the tax credits system? We were promised those figures in the springlet us have them now. Picking up on what my hon. Friend the Member for Tunbridge Wells (Greg Clark) cleverly pointed out, we still have not had the cost of the tenfold increase in the disregard, and we are now told that it is not in the public interest to tell us, as elected
Members of Parliament, what that figure is. Will the Paymaster General tell us why?
Only yesterday we had, as the right hon. Member for West Dunbartonshire (Mr. McFall) said, a very objective report from the Treasury Committee, which looked in great detail at the administration of the system and concluded:
It is obvious to us that the Paymaster Generals account makes no reference to causes of overpayments which have arisen as a consequence of the Departments own processesfor example official error and IT systems error. Rather, the Paymaster General has referred only to those causes of overpayments which can be attributed to claimant error or omission, or to the design of the tax credits regime, or a combination of both.
There is also a growing consensus among the voluntary sector that the current system does not work properly. As we have heard, the National Association of Citizens Advice Bureauxcitizens advice bureaux now advise tax credit claimants as a major part of their work loadprovided a frank commentary on the problems in the system:
Last year Citizens Advice Bureaux across the UK advised on around 150,000 tax credit problems. CAB experience is that the recovery of overpayments has caused significant hardship to many families as payments have stopped without warning or explanation.
Enforcement is driven by computers that have no means of identifying the illiterate, blind, disabled, mentally or chronically ill
an overpayment of tax credits can lead to a downward spiral of a familys fortunes into a morass of debt.
Even the Fabian Society has acknowledged that the system is not working. In its report, Narrowing the Gap, issued earlier this year, it admitted that the system had faults and that tax credits were associated with complexity and administrative problems. Now it has a sleeper within the Treasury arguing that agenda, as the report was launched by none other than the Economic Secretaryand where is he?
It needs to be remembered that this system was established to assist people on low incomes. In many cases, it is doing precisely the opposite. It needs to be reformed in order to continue to provide help to people who need it but without driving them to distraction in the process. As far as the current configuration of tax credits is concerned, the Treasury is shuffling the deck chairs on the Titanic, with the Economic Secretary particularly desperate to get one before they all disappear.
Perhaps the greatest irony of all is that the architect of this system is the Chancellor himself, who famously said in the mid-1990s that he wanted to abolish means-testing. Yet the current system is the apotheosis of that concept, against which there is now an overwhelming consensus that it needs to be reformed. The Prime Minister referred at Prime Ministers
questions earlier this afternoon to: Working families tax credit, which makes work pay for people.
Working families tax credit was abolished three years ago. That is the old system. We are debating the new one. The Chancellor has created a system that is so complicated that even the Prime Minister does not understand it, so what hope is there for a single mother, who perhaps has not had a strong financial education, living on a run-down council estate struggling to fill in the forms and deal with the bureaucracy that the Select Committee identified?
The greatest shame is that the system was the Chancellors personal creation. It was his pet project above all others. Yet when the day came for him to be held to account, what did the iron Chancellor do? He ran away. Unusually, the Governments amendment has not been selected, so hon. Members have a clear choice. They can put up with the shambles that is the current system, and go along with the fact that the Chancellor invented it but would not come and defend it, or they can join us in the Lobby and protest against a system that drives ordinary working families to distraction. I hope that they will do the latter.
The Paymaster General (Dawn Primarolo): We have had another interesting debate on tax credits. As always, the Conservatives miss the pointabout tackling child poverty, helping those with volatile incomes and helping people into work.
I welcome the Treasury Committee report and congratulate my right hon. Friend the Member for West Dunbartonshire (Mr. McFall), not only on steering through that helpful contribution to the general debate, but on presenting the outstanding issues so comprehensively and in such a considered way today.
The debate divided into two halves. The first dealt with administration and the second considered a flexible systemthe tax credit system as it is nowversus a fixed system. I shall revert to those points later.
My right hon. Friend the Member for West Dunbartonshire specifically mentioned the pause or the 30 days and the appeals process. I shall respond to those points shortly. He also made it clear that Her Majestys Revenue and Customs must put the needs of the claimants first. I agree with him and the Committee. He also said that there must be a shift in the fundamental culture of HMRC if tax credits are to be a success. I agree with him about that and so does the Department, as the report acknowledges.
The hon. Member for North Thanet (Mr. Gale) made several things absolutely clear but I shall pick on one of them. He said that the system was about people. I could not agree more. He knows that I have made it clear both in private meetings and in exchanges across the Floor that it is crucial to do what needs to be done to take forward a basically sound policy and ensure that its administration is right.
My hon. Friend the Member for Northampton, North also highlighted the challenges that remained to
be met of the changing circumstances that people experience in their lives and the accuracy and swiftness of the Departments response. She made important points about child care, to which I want to refer.
My hon. Friend the Member for Denton and Reddish (Andrew Gwynne) echoed the point about the important contribution that tax credits have made in his constituency and in constituencies throughout the country.
Let us be clear: the tax credits deliver three key achievements. They improve incentives to work, they reduce tax on low to middle income families, they help dramatically to reduce child poverty and they have played a major role in helping people into work and to move up the employment ladder, ensuring that work pays over benefits.
I am not surprised that a party that presided over doubling child poverty when in power attaches so little credit to those achievements. When we seek a consensus in the Chamberthe consensus to which my right hon. Friend the Member for West Dunbartonshire referredit is to get all Opposition parties to commit themselves to the principle of eradicating child poverty and the practical means of achieving that. Every time the Conservatives and the Liberal Democrats were challenged by Labour Members this afternoon, they were unable to say how they would match the huge contribution that tax credits have made to this important debate.
Let us remind ourselves of that contribution. A couple with two children moving into full-time work on the national minimum wage will be £41 a week better off, compared with £34 in 1997. A lone parentand I can assure hon. Members that they can read and writewith two children moving into full-time work on the national minimum wage will be £76 a week better off, compared with £54 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 £39 a week in 1997.
Tax credits are central to reducing the tax on low and middle-income families, as the recent OECD study shows. The tax paid by a couple with two children earning £21,000 a year has fallen from 17.3 per cent. of gross earnings in 1997 to 9.8 per cent. in 2004. That is the lowest rate in any G7 country. In the UK, a single-earner family with two children can now earn just under two thirds of the average wage before they start to pay any tax. Those are the benefits of tax credits. That is the contribution that is being made by a policy that the Treasury Committee unanimously agreed in principle was the right way to proceed. It has reduced poverty and raised children out of living on absolute low incomes.
Are families responding to this in a positive way? We have only to look at the take-up figures to see the answer. In the first year, 93 per cent. of families on an annual income below £10,000that is low pay by any definitionclaimed their entitlement, compared with 50 per cent. in the early years of family income supplement, and 57 per cent. for family credit.
My right hon. Friend the Member for West Dunbartonshire asked about appeals and about the pause. On the latter point, the Department entirely supports in principle the ombudsmans
recommendation to give taxpayers notice before commencing recoverythe so-called 30 daysand we are considering how we can integrate such a pause into the information technology system without jeopardising it. On appeals, we are exploring with the adjudicators office the feasibility of introducing a fast-track process to provide claimants with the timely, accurate response that my right hon. Friend described. We have done that in close consultation with the ombudsman, who circulated a letter to every Member of this House on 27 March 2006 stating:
Since I published that report, my staff and I have had regular discussions at senior level with staff in the Revenue, including the Tax Credit Office and the Adjudicators Office.
The key objective in tackling poverty is to consider how the needs of familiesespecially low-income familieschange, and how we can respond to those changes. We know that their incomes are volatile. More than a quarter of households analysed by Professor John Hills had erratic and high levels of income changes. The statistics for tax credits show that 1 million families saw their income fall between 2003 and 2004, and 700,000 of them would have been worse off under a fixed system. We would have to bear that in mind if we went back to a fixed award system. They would not have received the extra money that tax credits provide for them. We need that flexibility, and of course that means that there sometimes has to be an end of year adjustment. Let us keep this in perspective, however. Fifty-four per cent. of the overpayments are less than £500, and 31 per cent. are less than £200.
In 1997, only 800,000 families received family credit; 6 million now receive tax credits. In 1997, only 50 per cent. take-up was achieved; now take-up is 93 per cent. among the poorest families. Today the income tax liability of 3 million families has been effectively wiped out by tax credits which ensure that they can use their money to spend on their families.
The consensus that we seek today is one that includes the Tories and the Liberal Democrats. We seek a commitment to the eradication of child poverty, a commitment to recognising that people have volatile incomes, and a commitment to willing the means. Today the Conservatives failed in that regard. That is no surprise in the case of a party that presided over child poverty in the 1990s.
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