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We also have some concerns about the idea that all tax measures that fall within the scope of the new clause must be phased over a reasonable period, because importing that obligation into statute as a general rule might be too inflexible. As I will discuss—no doubt the Chief Secretary will discuss this, too—the Government could take a number of different measures to mitigate the impact of a tax change, which might involve phasing in a measure or using the
benefits system. Indeed, it is important that we debate the use of tax credits in that context.
Furthermore, I fear that the new clause might mean that almost all tax changes would have to be subjected to phased implementation, and while such measures would certainly be justifiable and welcome in some contexts, we hesitate to impose a blanket obligation in all cases. We also believe that the underlying issues raised by the new clause—the importance of moving to greater transparency and objectivity in tax policy—are so important as to merit further detailed consideration before we could make a commitment to a proposal such as this. That is one reason why the shadow Chancellor asked my noble Friend Lord Howe a few months ago to investigate how we might implement some of our independent tax reform commission’s proposals for improving the way in which we make and scrutinise tax law.
Mr. Field: At Easter, the hon. Lady could be cast in the role of Pontius Pilate without any difficulties given the hand-washing that is being done. For those of our constituents—she will have some—who will be made worse off by this measure, what changes do the Opposition propose to protect their very modest standard of living?
Mrs. Villiers: One of the best changes would be a change of Government. I emphasise that we believe that putting pressure on the Treasury to carry out the sort of analysis referred to in the new clause would make a significant contribution not only to improving the quality of our tax law but to enhancing and improving the fairness of future Budgets, and dealing with some of the grave concerns that the right hon. Gentleman raises. We believe that the sort of analysis provided for in the clause would help to ground Budget decisions on empirical evidence and reduce the opportunity to use them for cynical political tricks.
As we have stated repeatedly in the Budget debate, on Second Reading and in Committee, we are concerned about the impact of the Chancellor’s Budget on those on low incomes. As the right hon. Member for Birkenhead pointed out today, and as the shadow Chancellor pointed out in his speech in the Budget debate, the abolition of the 10p band amounts to a shift in the tax burden from those on middle incomes to those on low incomes.
We have heard that one in five households will be worse off as a result of the Budget—5.3 million families—and many of those will be people on low incomes hit hard by the loss of the 10p band. Some of the people worst hit by the changes will be those on wages of between £5,225 and £18,000. The right hon. Gentleman is right that I have many of those in my constituency who are concerned about the changes—cleaners, nurses, shop assistants and catering workers, not millionaire executives.
In giving evidence to the Treasury Committee in March, Robert Chote of the Institute for Fiscal Studies set out a number of groups of people who will lose out, several of which have been mentioned this evening, but it is worth going through them in turn. According to Mr. Chote, 2.2 million of those losing out are single working people with no children who are not getting the working tax credit because they earn more than
£12,500 but less than £18,000, or because they work fewer than 30 hours, or because they are too young. He states that 1.2 million are two-earner couples with no children. They may not qualify for the working tax credit or they may fail to take it up. They may also be in the position where the two earners both lose under the income tax and national insurance changes, but there is only one gain from the tax credit, which is assessed per household. A couple both earning £7,445 would suffer the maximum loss of £446.
Mr. Chote states that 400,000 are one-earner couples without children, most of them because they will be in an income range of about £17,000 to £18,5000 where they are not compensated by tax credits. There are 700,000 two-earner couples with children who lose twice from the income tax and national insurance changes, but gain only once from child tax credit or working tax credit.
The hon. Member for Wolverhampton, South-West (Rob Marris) adverted to the point that 300,000 of these people are tax-paying women between the ages of 60 and 64 who do not get tax credits and are too young to be compensated by the rise in the pensioner tax allowance. A further 500,000 are non-workers who are early retirees or who are on incapacity benefit.
In making an effective assessment of the impact of tax changes on different income decile groups as provided for by new clause 14, it is critical that the Chancellor take into account the wider economic picture. The hardship caused by tax increases is clearly more keenly felt when families feel that their household budget is already under strain. With inflation hitting a 16-year high earlier this year, many families on lower incomes are struggling to make ends meet. Last year, inflation was almost double the EU average, and disposable incomes rose at the slowest rate for nearly a quarter of a century. Two weeks ago, the Office for National Statistics announced that, for the sixth month in a row, regular pay failed to keep pace with inflation and real living standards fell again.
The Council of Mortgage Lenders also recently reported that home owners are suffering the highest mortgage burden for 15 years and that further rate rises could be on the cards. Personal debt now stands at a staggering £1.3 trillion in Britain, and problem debt is worsening by the day. All these factors should be taken into account before the Chancellor imposes tax increases on Britain’s hard-working families.
Stewart Hosie: I thank the hon. Lady for reading into the record the entire list of categories of people who are suffering, and for her subsequent comments. I believe that one of the worst factors in this is the fact that the unclaimed working tax credit for those who are entitled to it amounted to about £5 billion last year. She will correct me if I am wrong. Does she agree that that merely exacerbates the problem and makes it far worse than it ought to be, and that it is a failure that is purely in the hands of the Government?
Mrs. Villiers:
The hon. Gentleman makes a strong point, and I shall come to that issue. If the Government are relying on tax credits to soften the blow of the abolition of the 10p band, they must do something to improve the way in which the system works and to raise take-up rates. That is critical if we
are not to see the hardship caused by the Budget becoming really significant.
In making changes to tax rates and assessing their impact on different income groups, the Chancellor should bear in mind the pattern of poverty in 21st century Britain. According to the Institute for Fiscal Studies, poverty among adults without dependent children—a group significantly affected by the tax changes in the Budget—is now at its highest point since records began in 1961. That group now makes up one third of the total of Britain’s poor.
A number of deeply worrying points emerged from the most recent Department for Work and Pensions figures on poverty, covering the period between 2004-05 and 2005-06. These were analysed by the IFS and show that relative poverty and income inequality actually got worse last year. The number of people in relative poverty rose from 12.1 million to 12.8 million.
A range of measures demonstrates the recent increase in inequality of income. The most commonly used measurement, the Gini coefficient, tells us that income inequality has increased in total during the Chancellor’s 10 years at No. 11 Downing street. The DWP figures also show that the number of people living in absolute poverty rose by 400,000 to 7.4 million—12.6 per cent. of the population—last year. There are more people in deep poverty now than when the Chancellor entered Downing street. There are 600,000 more people on less than 40 per cent. of median income now than there were in 1997, and the poor are getting poorer. Recent Government data show that the real incomes of the poorest 20 per cent. actually fell last year.
Many people—not just those on this side of the House—have expressed concern about this state of affairs and about the impact of the Budget on tackling poverty. The right hon. Member for Birkenhead today repeated his concerns about the impact of the Budget on those on low incomes, but he was not alone among his Labour colleagues in expressing anxiety. As the hon. Member for Birmingham, Selly Oak (Lynne Jones) acknowledged, the Budget neglected poorer people who have no children. The hon. Member for Coventry, North-West (Mr. Robinson) has pointed out that the Budget is hurting many people whom the Government never set out to hurt, and the right hon. Member for Darlington (Mr. Milburn) admitted in the Budget debate last year that, under Labour,
“poverty has become more entrenched.”—[ Official Report, 28 March 2006; Vol. 444, c. 710.]
Turning to the point raised by the hon. Member for Dundee, East (Stewart Hosie), in assessing the impact of tax changes on different decile groups, it is critical to look at the marginal rates of taxation that they face, as they have a significant impact on incentives to work and to emerge from benefit dependency. Mike Warburton of Grant Thornton said after the Budget:
“Families on low incomes will really lose out because they will pay a marginal rate of tax at 70 per cent. starting from an earlier point.”
With the abolition of the 10p band and the increase in the tax credit withdrawal rate, the Budget leaves many low-income families with marginal tax rates of even more than 70 per cent., as their benefits are withdrawn with each extra pound they earn. Of course, such rates make it much harder to escape the poverty trap.
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In conducting an assessment of this issue in relation to different income groups, the Chancellor must take into account the interaction with the tax credit system. To return to the point made in an intervention by the right hon. Member for Birkenhead, one of the ways in which we can help those who are hit hard by the Budget is to get the tax credit system to work effectively, and to reform it so that we grapple with the chaos that has characterised it over the past couple of years. As Francesca Largerberg of the Institute of Chartered Accountants said after the Budget:
“It is now seemingly necessary for those with incomes between £5,225 and £18,605 to get to grips with the tax credit system and claim in order to negate their losses.”
Both the Chancellor and the Chief Secretary have defended the abolition of the 10p band on the ground that tax credits will compensate some of the families affected. As I have set out, however, not everyone qualifies for tax credits, and as we heard from the hon. Member for Dundee, East, not everyone claims them. As Ms Largerberg went on to explain:
“Tax credits may in some cases claw back lost income but they are often difficult to claim and some lower earners may not be eligible”.
The figures for the uptake of working tax credit among childless households—as we have established, a group significantly affected by the loss of the 10p band—are as low as 25 per cent. of the total entitlement and only 19 per cent. of eligible claimants. If the effect of a tax increase is to push more people into the tax credit system, one must assess the way in which the system is working to analyse properly the impact of the change proposed. The latest available figures show a depressing picture. Of 5 million payments made, more than 2 million were overpaid and almost 1 million were underpaid, which means that more than half the payments in the system were wrong. At least £200 million has been lost through fraud. The tax credit website had to be taken offline because of wholesale attack by fraudsters.
As the Chief Secretary will be well aware, every MP has had constituents coming to advice surgeries to explain their desperate problems with huge bills for overpayment that they simply cannot afford to meet. The former Secretary of State for Work and Pensions, the right hon. Member for Sheffield, Brightside (Mr. Blunkett) said:
“The tax credit system is a shambles—such a shambles that I’ve had to help out one of my constituents financially, only the second time that I ever have done this, and the first was for a child. I don’t know if I will get the money back. I suppose it is a foolish thing to do, and it has to be on the pain of death that they don't tell people. But what else can you do when the tax credit system is such a total mess?”
Sir John Bourn, the Comptroller and Auditor General, said:
“People have been helped, but why do that in a way which causes such misery? And we’ve spent far more than necessary because we’ve had to write off the hundreds of millions of pounds we simply can’t get back.”
The right hon. Member for Birkenhead has said:
“Tax credits are clearly the bluntest of anti-poverty weapons and are the equivalent of attempting delicate key hole surgery with a hacksaw.”
To conclude, it is regrettable that the Chancellor has taken so long to answer the questions tabled by the right hon. Member for Birkenhead regarding how his Budget has impacted on different groups. That is further proof that the kind of serious and thoughtful assessment of the impact of tax rises on different income deciles envisaged by new clause 14 was very far from the Chancellor’s mind in preparing his Budget. He was so desperate to grab the headlines with his basic rate tax cut con that he was prepared to do anything to achieve it, even if that meant hardship for people grappling with poverty, low incomes, falling living standards, problem debt and rising interest rates. Because he wanted to pull a fast one during the Budget debate, the 10p band had to go.
Of all the critical comment that followed the Budget debate, that of a former Member of this House, Michael Portillo, writing in The Sunday Times about the closing seconds of the Chancellor’s Budget speech, summed up the position most effectively:
“30 seconds of theatre...had made poorer all those on low incomes who pay tax only or mainly at 10 per cent. Some will be compensated with tax credits, but not all. The chancellor cannot explain why he once thought that the lowest earners needed protection...but now has changed his mind. Those at the bottom of the pile have been sacrificed for the sake of a quick laugh. Politics, it seems, is but a game played with people’s lives. It is astonishing that a chancellor who has worked with some success to redistribute income has, in his last budget, penalised the poorest but rewarded higher rate taxpayers.”
Rob Marris: We need to put this very important debate in context. The hon. Member for Chipping Barnet (Mrs. Villiers) did that a bit, although somewhat grudgingly, and she gave some useful figures. However, it needs to be put in the context of what the Government have done in 10 years to address poverty. On pensioner poverty, they have introduced the winter fuel allowance, the minimum income guarantee and the pension credit. Pensioner poverty has come down a lot. There are problems with take-up and so on, but the Government have addressed the situation of older people.
David Taylor (North-West Leicestershire) (Lab/Co-op): Has my hon. Friend seen the report by the Chartered Institute of Taxation which calls for tax reform for older people on low incomes, not least because face-to-face advice in tax offices and inquiry centres is being withdrawn, home visits to the elderly and disabled are disappearing, and paper forms are disappearing in favour of the telephone and the internet, which many older people find difficult to use? How can they get their tax right in the fluid situation that we are discussing? Does he accept that there is a problem?
Rob Marris: While I do not want to go too far down that path, I agree that there may be difficulties for some pensioners, although one has to be careful not to aggregate all pensioners together. For example, almost 90 per cent. of pensioners over the age of 85 have a bank account, despite all the talk about the Department for Work and Pensions and the Post Office card account. However, one has to make special arrangements for vulnerable pensioners, and the Government have tried to do that.
In terms of family poverty, we have had tax credits, and child benefit has gone up substantially, especially for the first child. The minimum wage has done a lot to address poverty and family poverty in particular. Above all, we have 2.5 million more jobs.
The point that has not been made about new clause 14 is that the proposals would take effect from April 2008. They are not in this Finance Bill. That gives us a chance to pause for reflection and to consider the figures that have been mentioned. It is vital that we get more clarity from the Government on those. According to table A1 on page 208 of the Red Book, the drop from 22 to 20 per cent. in the basic rate of income tax will cost the Treasury £8 billion in 2008-09, the first year it is due to come in. However, the cost to the taxpayer of abolishing the starting rate of 10p in the £1 in tax year 2008-09 will be £7.3 billion.
I am not an accountant, but my reckoning is that every hon. Member will benefit from that. We are all higher-rate taxpayers, and they are much less than 10 per cent. of the working population in this country. We can all declare an interest in the 10, 20 and 22 per cent. rate, but intuitively the change says to me that there is a shift in the wrong direction, which is why I want more figures. Depending on those figures, my right hon. Friend the Member for Birkenhead (Mr. Field) may have a point about transitional relief, but it is difficult for him—he has not suggested otherwise—and the rest of us to know about transitional relief until we know what we are transitioning from. We have not yet got clarity on the figures.
I happen to think that we will get those figures well before next April, which is when the transition is due to take place, and we can have a look at them then. For that reason, I would not support my right hon. Friend were he to press the new clause to a vote, although I understand the spirit of it. I am confident—perhaps naively—that we will get the figures. I urge the Government to produce more figures, and I hope that my right hon. Friend the Chief Secretary will do so. Depending on those, the Government might need to reconsider the matter. That is my initial reaction to the debate in the press, the Chamber and Parliament on the effect of abolishing the starting rate and the corresponding cut in the basic rate of income tax.
It may well be that when the Government have had another look at the issue and we have fuller figures, those of us—I count myself as one of them—who are loyal Back-Bench MPs by and large, but who are uneasy about the direction of the change, may have our fears stilled. At the moment, however, without that information, we still have those fears.
Julia Goldsworthy: The loyalty of the hon. Member for Wolverhampton, South-West (Rob Marris) is being stretched so far that he is having to justify his intention to vote against the new clause on the basis that we need more information and we have another nine months in which to get it, but that is a weak argument. These tax changes were the centrepiece of the Chancellor’s last Budget. Does it matter when they will be implemented? In the closing sentence of the Budget, the Chancellor said that
“to reward work, to ensure working families are better off and to make the tax system fairer, I will from next April cut the basic rate of income tax from 22p to 20p”.
From the debates on Second Reading, in Committee and now on Report, it is clear that, for many people in work and families, the Budget will not make the tax system fairer. People paying a higher rate of tax will benefit, and we are not sure why that will make the tax system fairer.
If the information had been made available at the point at which the Chancellor made that announcement— in the Red Book, which also gave details of how the decisions would interact with each other—everyone would have been able to make a fair assessment. The reality is that after the Chancellor sat down no one had any idea how the cut in the basic rate of taxation would be funded until, after leafing as rapidly as they could through the Red Book, they discovered that it was through the abolition of the 10p rate, a decision referred to by the Chancellor with the words:
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