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The general problem with the complexity of the system is at the root of many of its woes. Nowhere is that more obvious than in the Departments struggle with error and fraud. Tax credits suffer from the biggest error and fraud rates in Government, but, crucially, there are neither routine estimates of fraud and error nor targets set for reducing them. In 2003-04, between £1.06 billion and £1.28 billionalmost 10 per cent. by valuewas incorrectly paid to claimants.
I look forward to hearing the Ministers response to the recommendation of the Public Accounts Committee that targets and estimates should be introduced urgently. This issue highlights the recurring difficulty of establishing the true scale of the problems in the system and how effectively they are being tackled, because we simply do not have access to sufficient information to make those judgments. We desperately need earlier estimates of overall levels of error and fraud to use as benchmarks to assess the effectiveness of action to combat those problems. As was outlined in the Committees report last week, the e-portal system was deficient from the outset and was entirely unsuited to the inevitable onslaught from organised criminals. The entire system was unable, by its very design, to give proper protection against error and fraud.
Many of my constituents feel that the Government have placed greater priority on trying to chase and claw back money from hard-working families who have been unwittingly overpaid instead of rolling up their sleeves and dealing with the internal problems that have allowed such high levels of fraud and error to occur. The Chancellor is searching around for new ideas for his first 100 days in No. 10, but I suggest that he should concentrate first on sorting out the mess in the tax credit system. The Government seem to be perpetually in denial about the scale of the problem, but the ongoing difficulties can no longer be passed off as teething problems that are common to any new administrative system. They are deep-rooted difficulties at the heart of the system.
The first steps to solving the overall problem are to accept its seriousness and scale and to get to grips with the problems and their causes. The recent parliamentary ombudsmans report, Tax credits: putting things right, made 12 key recommendations that were widely supported by families and Parliament alike. Many months on, however, I believe that only four of those recommendations have been implemented. If the situation has changed substantially, I would welcome some clarification from the Minister. If the other eight recommendations still have not been accepted, I should like to know why. Why have so many of the ombudsmans recommendations been ignored? Why are 2 million eligible people now deciding that applying for tax credits is not worth the risk? Why are hard-working families being made to pay for mistakes that they have not made? I look forward to hearing the Ministers replies.
Our new Tax Credits are both symbol and substance of this Governments ambition for Britain.
If they are a symbol for anything these days, it is error, fraud and incompetence. The substance, as we have heard from the Public Accounts Committee, is the £5.8 billion that was overpaid to claimants in the first three years of the current tax credits scheme; the £1.9 billion of overpayments that have either been written off or are likely to be written off; and finally, the increase in the income disregard, which was intended to reduce complexity and errors, that is costing £500 million a year. The Paymaster General must be sick and tired of coming before the House to explain the latest sorry tale on tax credits, and she must also be tired of being used as a human shield. I am sorry that she is unwell and is unable to be here, and I wish her a speedy recovery.
At the time of the Treasury Committees Budget hearing, the Chancellor had not answered a direct oral question on tax credits for 1,050 days. Another 48 days later, he still is not prepared to accept that the buck stops with him. Perhaps, after 1,100 days of avoiding the issue, he will see fit to use his first 100 days in his new office to confront some of the issues that three separate Select Committees have raised with such monotonous repetition.
On the theme of repetition, I have three points to make, and I look forward to hearing the Financial Secretarys response in the Paymaster Generals absence. According to Her Majestys Revenue and Customsthe latest facts that I have go up until 2005two fifths of the moneys paid out involve overpayments and one fifth of them involve underpayments. So, three fifths of the money that is paid out to claimants is paid wrongly. I shall go into that later, but given an uptake of only 25 per cent., only two fifths of 25 per cent. of the people who should be getting money are receiving the right sum. That is the tragedy.
I should cite a comment made by the hon. Member for Newcastle upon Tyne, Central (Jim Cousins), who serves on the Treasury Committee with me. He gave his verdict on that state of affairs during the Treasury Committees follow-up session, and I shall repeat it for the record. He said that
under or overpayments of tax credits
is a shocking, devastating damage to the whole welfare reform policy...these administrative deficiencies have a major impact on the Government's welfare reform policies.
The tax credit system is a shamblessuch a shambles that Ive had to help out one of my constituents financially, only the second time that I have ever done this, and the first was for a child. I dont know if I will ever get the money back, but what else can you do when the tax credit system is such a total mess?
That tragedy, and the emotion shown by my colleagues on the Treasury Committee, is driven by the fact that the poorest members of societysome 97 per cent. of people who earn less than £10,000should be receiving the tax credits. They deserve them, and they should be receiving the right amount. As we heard so eloquently from the hon. Member for Edinburgh, West (John Barrett), this situation puts an enormous amount of stress on these families.
I live in a fairly well-to-do constituency, but 25 per cent. of the people who come to my surgery do so because they have received the wrong amount. These people have received letters that come across, to them at least, as highly aggressive and put even more stress on them, because they are being asked to give back, in some cases, thousands of pounds, and they simply do not know what to do.
The financial problem is compounded by the fact that an enormous amount of money has been written off. When we had our Treasury Committee hearing, the amount was £400 million, but I believe that the Public Accounts Committee recently said that the amount to be written off was a whopping £1.9 billion. Braintree has been waiting for a community hospital for a couple of years, and we have been told that it will cost about £5 millionfor the sum we are talking about, we could build 200 community hospitals in Braintree. I believe that the hon. Gentleman used the word shambles, but that is an understatement of the gross financial mismanagement of tax credits.
My second point concerns the enduring complexity of the system, which has shrugged off all previous attempts at simplification. As I have said, the tax credit system is relied upon by millions of the poorest people, which is why the failures in its administration are such a scandal. Large numbers of people are put off from applying for money to which they are entitled simply because of the complexity of the system. In the poorest communities, where people should be applying for tax credits, word gets around very quickly. The word on tax credits is that they are often more hassle than they are worth. If nothing else, that is a condemnation of a system that the Chancellor, with the best will in the world, wants people to take up.
I have brought a copy of the forms with me, and they illustrate the problem. I know that this is not show and tell, but I do not know whether the Financial Secretary has even seen a copyhe probably does not use the system. I admit that these forms date from 2005, so it is, at least, conceivable, if not probable, that things have got a little better. For the benefit of the Hansard reporter, I should say that there is a 12-page main form, with four additional pages to use if, like me, someone has more than two children, and a whopping 56 pages of guidance notes. I have at least two degrees, one of which is a finance degree from Harvard business school, and I find it challenging enough to deal with the complexities of the forms. Of course, the most useful information to claimants does not even come from HMRCit is the four-page advice guide from Citizens Advice on what to do in the event of an overpayment.
I repeat that tax credits are intended for the poorest and most vulnerable members of our society, who often lack the time and education to deal with them. The sheer volume of criticism that the system has attracted does not seem to have dented the commitment of Ministers to carry on regardless. Even if HMRC can improve fraud and error rates from their current woeful levels, there is little evidence that anything is being done to confront the root cause of that fraud and error, which is the complexity. HMRC is sticking its fingers in the dam and, as the Public Accounts Committee report from last week has shown, it is running out of fingers.
My final point also concerns uptake, but it relates to the more cynical side of uptakethe extent to which it is budgeted for. I tried to get answers straight from the horses mouth when the Chancellor appeared before the Treasury Committee earlier this year but, to stretch the analogy, it was a bit like pulling teeth. HMRCs report on child tax credit and working tax credit take-up rates, published in March this year, forms the basis for budgeting uptake. For public expenditure purposes, the Treasury assumes that take-up will continue to be in line with current rates.
This was an issue when the Treasury Committee examined the Budget, because we were worried that the Chancellors abolition of the 10 per cent. starting rate of income tax would result in a leap in the take-up of working tax credit, which had not been budgeted for. The Treasury has in fact budgeted for an uptake of about 25 per cent. Should one create a system in which one assumes that only 25 per cent. of people will apply and take up the tax credits which are their due and which they richly deserve? The answer is no. If everyone who was entitled to working tax credits claimed them, I believe that there would be a hole of more than £1 billion in the public accounts.
Again, I tried pushing the Chancellor on this issue. Those of us who come from a business background would do some sort of financial modelwe would do a sensitivity analysisand we would ask, What would happen if there were 50, 60 or 80 per cent. take-up? Those are the aspirations mentioned by the Chancellor. He wants more people to take these things up, but he could not answer my question. I suspect that he and his team had done no financial analysis on a much greater take-up of working tax credits.
The Chancellor would not comment on any potential increase in take-up, because he thought that any figure I gave him above the level of his projection was hypothetical and, thereforein a leap of logicimpossible. I was delighted when he admitted to a group of schoolchildren recently:
I did maths at school and one year at university but I dont think I was...very good at itand some people would say it shows.
I guess that I am one of them. If there were less wastage, which HMRC now seems to accept as a fact of life, perhaps the system could afford to sustain an uptake of working tax credits of more than 25 per cent.
My final concern about the tax credit system is that after all the mistaken payments, the write-offs, the fraud and the wastage, the Chancellor is counting on people not to use it to capacity. It is tempting to think that the system has been designed to fail, but fail it has, and that is the Chancellors legacy.
Danny Alexander (Inverness, Nairn, Badenoch and Strathspey) (LD): I congratulate my hon. Friend the Member for Edinburgh, West (John Barrett) on securing this debate on this important subject. He has been a doughty campaigner on the issue, as shown by the number of times he has succeeded in winning Adjournment debates on it. I am sure that the way in which he made the case on behalf of his constituents found an echo with all hon. Members here today. We have all dealt with similar cases.
Danny Alexander: I may as well resume from the very beginning. I was paying tribute to my hon. Friend the Member for Edinburgh, West for his assiduous campaigning over a number of years, which has gained him a strong reputation as someone who takes a close interest in this subject. He is one of a group of MPs from both sides of the House whose assiduous work has put a lot of pressure on the Government to make changes, and they have done so, although I shall argue that the changes need to go much further.
The debate follows the very useful discussion that we had in this Chamber in March, in which many of those present were involved. That debate was in response to the Treasury Committees recent report on tax credits, which made some pretty pungent criticisms. Indeed, we appear to get a report making strongly worded criticisms of tax credits every month or so, given that we have also had the 22nd report of the Public Accounts Committee since then. That report also makes significant criticisms and comments regarding the operation of the tax credit system, and I shall bring one or two of those to hon. Members attention today.
It is worth saying at the outset that Liberal Democrat Members see the idea of the tax credit system and of boosting the incomes of low-income families to make work worthwhile as a good one, and it is important to see the issue in that context. Sadly, that good idea has been badly let down by the implementation and the way in which the system is administered.
As we know, not least from recent speeches by the Chancellor of the Exchequer, Ministers, and perhaps Treasury Ministers in particular, seem to be in the mood to admit past mistakes. That is particularly true of the Chancellor, although he seems largely to be admitting mistakes on behalf of other Departments rather than his own. None the less, perhaps the Minister will have a chance today to admit to one or two mistakes in relation to the tax credit system.
I wonder, however, whether we are being over-optimistic in expecting the Chancellor to take responsibility on this issue. I noted with interest a report in TheMail on Sunday about a documentary that went out on Channel 4 on Monday or Tuesday of this week, although sadly I was unable to see it. The article quoted Sir Nicholas Montagu, the former head of the Inland Revenue, who told Channel 4 that the Chancellor had apparently disappeared during the tax credits controversy. Sir Nicholas continued:
What was disastrous and I dont mince that word was that the system was fundamentally flawed. I did not actually see the Chancellor during the worst of that period.
In his own inimitable way, the hon. Member for Braintree (Mr. Newmark) made the same point when he said that, until recently, the Chancellor had not answered oral questions on tax credits on the Floor of the House for more than 1,000 days.
Danny Alexander: I am not a psychologist and I would not wish to comment on the Chancellors character, so I will leave that to others. In this context, I am more interested in commenting on his policies and his attitude to them, which seems to be characterised by taking the credit when things are good and running to hide when they are not so good.
Mr. Philip Dunne (Ludlow) (Con): I apologise for not being able to be here for the opening remarks by the hon. Member for Edinburgh, West (John Barrett) and I congratulate him on securing the debate. One of the conclusions of the report published by the Public Accounts Committee, on which I serve, was that the complexity of the system invented by the Chancellor and the Treasury was such that the Treasury itself could not work out the impact of some of the measures that it had put in place to reform and improve the system. It took months of persistent questioning by my Committee and other Committees to get the Treasury to admit the cost to the Exchequer of increasing the income disregard from £2,500 to £25,000. That measure was designed to get the Chancellor off the hook so that he would not have to deal with the monthly, weekly and daily criticisms that many of our constituents made to us.
I have just a second quick question, if you will indulge me, Dr. McCrea: the reform failed to deal with some of the many difficulties that are inherent in the system, not least of which is what to do when incomes decline and circumstances fluctuate for individuals, and what happens when couples split up. Who is responsible for the overpayment?
Danny Alexander: I certainly think that the points that the hon. Gentleman has made, to which the excellent report of the Public Accounts Committee drew attentionI congratulate him on his work in ferreting out the informationare important.
The point about the flow of information on tax credits is one that I want to return to. The glacial pace at which information is forthcoming is one of the most frustrating aspects of the debate, for those of us who want to scrutinise the system and hold it to account in real time. Too often we appear to be debating on the basis of information about what the system was like two, three or four years ago, when we know from the experience of our constituents today that many of the same problems still exist. It is hard to get to the bottom of the issue and find out the extent of those problems, because the Department seems to be quite unwilling to bring forth even basic management information of the sort that, for example, the Department for Work and Pensions seems perfectly able to produce on benefit administration. The Treasury could learn a lot from that Department. It is not often that I say that anyone could learn a lot from the Department for Work and Pensions, but in this case, on information provision, certain lessons could be learned.
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