The Financial Secretary to the Treasury (Jane Kennedy): I beg to move

The Chairman: With this it will be convenient to consider the draft Guardian’s Allowance Up-rating Order 2008, the draft Guardian’s Allowance Up-rating (Northern Ireland) Order 2008 and the draft Child Benefit Up-rating Order 2008.

Jane Kennedy: What a pleasure it is to be here under your chairmanship, Miss Begg. It was a pleasant morning when I came in. There were blue skies but I think we are heading towards the Easter holiday weather.

Today is an important opportunity for us to talk about the changes we are making in the rates of tax credits, child benefit and guardian’s allowance. It might be helpful if I say a few words at the beginning and then there can be comments and questions from members of the Committee.

Tax credits, together with child benefit, deliver financial support to the vast majority of families with children in the UK and they are central to our commitment to tackle child poverty. I am pleased to introduce these regulations and orders, which increase certain elements and thresholds of tax credits and raise the rates of child benefit and the guardian’s allowance. The regulations and orders are compatible with the European convention on human rights.

I shall deal first with the tax credit uprating regulations. Tax credits, as I have said, play a major role in ensuring that work pays and in tackling child poverty. Overall, nearly 6 million families containing nearly 10 million children are benefiting from tax credits. These regulations increase the child element of child tax credit by £175 above earnings to £2,085 a year from 6 April 2008. This element has increased by £640 since its introduction in April 2003, thereby benefiting 6.9 million children. The regulations also increase the disabled element of child tax credit in line with prices.

In Budget 2007 we announced the next stage in modernising the tax and benefits system, which included increasing the thresholds for working tax credit by £1,200 to £6,420 in April 2008 and raising the withdrawal rate to 39 per cent. for those who have income above the threshold. The regulations bring that into effect and further strengthen the incentives to work while retaining the current focus of tax credits. They also increase most of the other working tax credit elements in line with prices.

I turn now to the child benefit uprating order and the guardian’s allowance orders. Child benefit is payable to more than 7 million families for about 13 million children and young people, providing almost all families in the UK with a worthwhile contribution towards the cost of bringing up their children. These instruments increase rates in line with prices. From 7 April 2008 child benefit will be worth £18.80 per week for the first child and £12.55 for each subsequent child.

We continue to meet our commitment to increasing child benefit in line with prices. As a result of these increases, the rate payable for the oldest qualifying child remains more than 25 per cent. greater in real terms than the rate payable in 1997. A family with two children now receives more than £31 a week. In last week’s Budget my right hon. Friend the Chancellor went further: the rate for the first child will increase to £20, not from 2010, as previously announced, but from April 2009. Guardian’s allowance will increase to £13.45 per week from April 2008.

Having gone through the bare essentials of the orders, I will pause and invite comments from Members.

Mr. David Gauke (South-West Hertfordshire) (Con): It is a great pleasure to serve under your chairmanship for the first time, Miss Begg. I am grateful for the opportunity to discuss the various uprating orders. It will come as no surprise to the Financial Secretary to learn that we have no intention of opposing any of the measures, but I want to ask a number of questions and make some points about them.

As the right hon. Lady pointed out, various elements of tax credits and other benefits are being uprated, but at different levels. Some are being uprated in line with inflation, which for these purposes is the retail prices index. That applies to child benefit, the guardian’s allowance and working tax credit. I note from last week’s Budget that next year child benefit will increase by slightly more than the rate of inflation, at 6.38 per cent. for the first child. Will the right hon. Lady explain why benefits are increasing at different rates? The family element of the child tax credit and the baby addition are frozen again, as they have been since 2003-04, whereas many of the other elements of child tax credit are increasing above the level of prices. I would be grateful if she told us why.

I turn to a point that is, to some extent, one of economic theory. There is no need for the Financial Secretary to look quite so petrified. Having had dealings with her in the past, I know that she will in no way misconstrue or misrepresent what I shall ask.

Jane Kennedy: There is always a first time.

Mr. Gauke: There is always a first time, but I wish to explore a particular matter. As I have said, many of the upratings are in line with inflation or above it; for example, child benefit is being uprated by nearly 4 per cent. Why are those increases not considered inflationary, when the Government maintain that a pay increase for the police of about 2.5 per cent., for instance, would be inflationary? I make it clear that I do not believe the orders are inflationary, but nor do I believe that a 2.5 per cent. pay increase for the police would be. There may be a problem of budget deficits, but not one of inflation. I ask that question not to give any hint of opposition to the orders but to explore the Government’s thinking on why some increases of 3 or 4 per cent. are inflationary whereas others are not. Will the Financial Secretary distinguish the two?

As I have mentioned, the child tax credit increases are greater than the rate of inflation. In the package of measures to support families, they are greater than the increases in child benefit. One could therefore argue that greater reliance is being placed upon the former. What does the Financial Secretary think about the concerns expressed by the right hon. Member for North Tyneside (Mr. Byers) in the Budget debate on Thursday, in which we both spoke? He said:

He made two points on the matter. First, he said that the taper goes to too high a level—he gave the example of households with an income of £66,000. He also spoke about the impact of tax credits on the marginal deduction rate, pointing out that there are now nearly 2 million people with a marginal deduction rate above 60 per cent., which is an increase of 1 million since Labour took office in 1997. That is partly because of tax credits and the uprating, and partly because of the doubling of the 10 per cent. band.

The right hon. Lady said that tax credits are central to the Government’s attempts to reduce child poverty. We share concerns about child poverty and aspire to abolish it by 2020, which is the Government’s target. Does she share the concern raised by the Institute for Public Policy Research? That concern is that there has been progress in reducing child poverty in workless households, from 2 million children in 1997 to 1.4 million, but not in working households. There are still 1.4 million children in working households that do not pass the Government’s child poverty test. There has not been a substantial increase, and in that context the Minister referred to tax credits being central to encouraging people to work and thereby reducing poverty, yet that statistic suggests that tax credits have not been successful in meeting the Government’s policy objective.

In our debate on Thursday, I raised with the right hon. Lady the issue of the couple penalty in the tax credit system. In the Budget debate winding-up speech she said:

I think that she also referred to some documentation published with the Budget last week. Can she tell us more about what the Government consider doing about the couple penalty, which is one of the key issues in addressing the child poverty target? The upratings are an attempt to address the child poverty target, but what is the Government’s assessment of their ability to meet their 2010 target? I understand that the Department for Work and Pensions said in its annual report that it does not expect to do so. In which year do the Government expect to meet their target of halving the number of children living in poverty, those in households living on 60 per cent. or less of average household income? Can the Minister also confirm that the number of children living in extreme relative poverty—in households living on 40 per cent. or less of average household income—increased between 1998-99 and 2005-06 from 1.4 million to 1.8 million? Even at the 60 per cent. level, the number of children in poverty increased by 100,000 in 2006.

The right hon. Lady is aware of the administrative difficulties of tax credits. For 2005-06, the number of families affected by overpayments was 1.9 million, and the value of those overpayments was £1.7 billion. In last week’s Budget, the comment in the Red Book was that it is expected that overpayments will be reduced by a third. To know whether we will get value for money for the upratings, I would welcome more clarity as to whether it is the number of families affected or the value of overpayments that will be reduced by a third, or whether they both will. It should be noted, however, that when the current tax credit system was designed it was expected that 750,000 families a year would receive overpayments, so we are still substantially above that number.

Given that we already have a hint in the Red Book as to the figures for tax credits, is it possible to provide more clarity about one or two other issues relating to tax credits? For example, what amount of overpayment will be written off and how much will be recovered? The Public Accounts Committee report in January mentioned that £0.7 billion had already been written off and that a further £1.6 billion that had been overpaid was unlikely to be recovered. Is there any further indication that those figures will be correct?

It would also be helpful to know whether administrative costs are continuing to rise. In 2003-04, the administration costs for tax credits were £406 million, and for 2006-07 they were £587 million, which was a substantial increase. Are there any more figures that we could be given on that point?

I would also be grateful to know what progress has been made in recovering the sums relating to the claim with Electronic Data Systems. The Government settled the claim with EDS being liable for £71 million, but that was slightly dependent upon further contracts being awarded to the company. What information can the Minister provide with regard to complaint handling? Inadequacies in the complaints handling system were raised in both the Public Accounts Committee report to which I have referred and the parliamentary ombudsman’s report in October 2007. Are those matters being addressed and what is her assessment of them?

Finally, where do we stand with regard to error and fraud? There have been a number of reports on the issue—the National Audit Office has looked at it and the Public Accounts Committee was unimpressed with progress on it. About £1 billion a year is lost through error and fraud, so I would be grateful if the Minister could indicate whether progress has been made. In conclusion, however, we will not be opposing the measures proposed today.

Paul Rowen (Rochdale) (LD): I am grateful, Miss Begg, to serve under your chairmanship. We welcome the increases and certainly will not oppose them, but with regard to the earlier comments about child poverty, it would be remiss of the Financial Secretary not to give a clear statement this afternoon on where the increases that we are agreeing today and those that were announced in the Budget last week will lead on the Government’s child poverty target. According to our estimates, we certainly cannot see the target for 2010 being met without additional resources being put into the system. I would be grateful if she could outline what further proposals she has for the next two years to ensure that the target is met. It is a clear commitment.

The uprates relate to the RPI, but that provides a broad-brush approach. Increases in food and fuel prices are a disproportionate proportion of many family’s budgets, particularly for those on low incomes. What assessment has the Financial Secretary made of the effects of fuel poverty and the above-inflation increases in food prices on families in that position? Although the increases in line with the RPI are welcome, does not she accept that in most cases they will not be sufficient to deal with the high increases in fuel and food prices? I know that last week the Chancellor announced increases for pensioners to deal with fuel poverty, but the cost of fuel is now an increasing part of a family’s budget and is of increasing concern, particularly for low-income families.

The other issue that I want to raise with the Financial Secretary is worklessness, which has been referred to in the media this week, and part of my constituency was mentioned. What assessment has she made of the effect that the uprates will have on encouraging families that are on benefits to see the advantages of working? We need to move towards a situation in which it is made far more attractive for people to work rather than stay at home. Increases in line with inflation alone are unlikely to do that if families are caught in the benefits trap and the advantages of going to work are not sufficient to encourage them to do so.

Jane Kennedy: I am grateful to both Opposition parties for indicating that they do not intend to oppose the orders. I am sure that it was not lost on my hon. Friends, as it was not lost on me, that, yesterday, the official Opposition did not oppose any of the Budget measures that brought increases in allowances or financial benefits, raised thresholds or were an overall cost to the Exchequer. However, they systematically voted against all the revenue-raising measures and, in particular, against important ones such as the vehicle excise duty measure and the alcohol tax measures, on which I was watching to see how people voted. One cannot vote to improve child benefit and child tax credits without willing the means to resource them. The Conservative party should consider that point carefully.

The hon. Member for South-West Hertfordshire asked me an interesting question, the economics of which we could spend the afternoon debating. He asked why the measures were not inflationary, whereas public sector pay rises in general—police pay was given as an example—would be described as potentially inflationary. Some hon. Members will remember the real connection between pay and inflation and the aspirations of employees when that debate was loudly conducted in the 1970s and early 1980s.

Public sector workers have made the point to me, as they will have done to many Members, that private sector pay is increasing at almost double the rate of that in the public sector. In that context, it is important to remember that the increases that we are debating today, and I hope that we will be supporting, have been fully costed and factored into the public finances. The factors that play into the overall state of the British economy when we are calculating inflationary pressures have been taken into account, whereas pay pressures, particularly in the private sector, are beyond the influence of the Government. However, public sector pay is not beyond our influence and therefore we use that influence to hold pay commitments in check.

The hon. Gentleman asked me to explain why some support for some earners had been uprated whereas it had not been for others. The answer is fairly straightforward and I will try to explain it succinctly. Given that we have limited resources, we have to find the right balance between supporting families with children across the whole income range, and targeting support appropriately for families with lower incomes, whom we believe need it more. We are committed to the long-term aim of eliminating child poverty within a generation. The regulations, together with the other measures in the pre-Budget Report 2007 and Budget 2008, will help to lift a further 500,000 out of poverty. In considering which elements of the child tax credits and family tax credits system to change, we focus the greatest relief on the families who would receive the greatest benefit—that is, families on the lowest incomes.

The hon. Gentleman is right to remind us, and me in particular, as I was there to hear it, of the contribution made by my right hon. Friend the Member for North Tyneside on the matter, who argued that big government is intrusive. Indeed, he continued the discussion with me after the debate. He believes that the taper goes too far up the income scale and that we could do more to help families on low incomes if we narrowed the scale of assistance given by tax credits.

I will share with the Committee what I shared with my right hon. Friend. We set up tax credits deliberately to indicate to taxpayers with families in particular that they ought to consider them as their entitlement. It is true that, in some cases, people on incomes up to £60,000 can receive some help and support. Our objective was first to “make work pay”, but also to bring the benefits of work to families. The taper is there to remove, as far as possible, any stigma that may be attached to something that might otherwise be seen as a state benefit. I believe that it has worked. The high level of take-up among families with children is indicative of the fact that people accept that it is an entitlement that they may benefit from and that is why so many families at the upper end of the income scale apply for and receive tax credits.

The hon. Members for South-West Hertfordshire and for Rochdale asked me for a clear and bold statement about reaching our target. We did that in the Budget and I did so in the debate last week. We are quite clear that we have set ourselves a challenging target to halve child poverty by 2010. It is worth remembering that child poverty doubled in the years before we came into government. I am always delighted that it is now almost a settled area of policy that child poverty is something that Government efforts should be concentrated on eradicating.

Barry Gardiner (Brent, North) (Lab): I heartily endorse all that my right hon. Friend has been saying. Can she quantify the total cost of these measures so that we can have some idea of the scale of the improvement in people’s lives that will be created?

Jane Kennedy: Off the top of my head, I know that we spend more than £23 billion on child tax credits. I cannot remember the exact amount that we are spending this year and next year on child benefit, but I can certainly provide that information for my hon. Friend.

On the question of the target, I can assure Members on both sides that the Government are determined to do everything we can to achieve that target in 2010 and then to go forward to 2020. The document I referred to in the debate last week is the opening of a further debate, inviting suggestions and engagement from those who take a very keen interest in this issue, about how we might do that.

I have been particularly interested, largely as a result of my experience in front of Select Committees recently, in the performances of different regions within the UK around the issue of child poverty. In London, we are holding the numbers of children in relative poverty stable. The figures would have gone backwards and there would have been more children in relative poverty if we had not introduced the measures that we have. I want to understand why we are not making more progress in London, whereas in Scotland—you will be pleased to hear, Miss Begg—and other parts of England, such as the north-west and north-east, there have been incredible achievements in reducing the numbers of those in child poverty. That is gratifying to see, but we need to understand why it is not happening to the same extent in London. I do not think it will be that difficult to understand that. We know that there are issues around the way that housing benefit and council tax benefit act as barriers to people going into work. I cannot stress strongly enough how much we believe that work is the route out of poverty in the end. The more families we can get into work and the more we can help families up the income scale, the more children will assuredly be taken out of poverty.

Mr. Gauke: Does the Financial Secretary agree with the assessment made by the IPPR that the progress that has been made on reducing the number of children in relative child poverty has been within workless families? Although I entirely agree with her that work is the long-term sustainable way of addressing this problem, progress has not been made in that area.

Jane Kennedy: There have been some very interesting reports on that, such as the recent report from the IPPR, the findings of which I am looking at with interest. A report was also published about three weeks ago by the London Child Poverty Commission, which I am looking at with great interest. It set out not only some clear analysis that is worth learning from, but made some sensible recommendations that I and ministerial colleagues in the Department for Work and Pensions and the Department for Children, Schools and Families will look closely at to see what we can take forward.

I have been inspired and now have the answer to the question from my hon. Friend the Member for Brent, North. The tax credits uprating that we are considering today will cost around £2.64 billion and the cost for uprating child benefits will be approximately £400 million. I am grateful for that because it has saved me having to write to him.

The hon. Member for South-West Hertfordshire asked me what we would do to address the couple penalty in tax credits, but I am still to be convinced that the couple penalty ought to be addressed. With regard to tax credits, we treat couples and lone parents in the same way. We look at the circumstances of the family and at the household’s income. The level of financial support that we give a household is determined by its economic need and is based on the number of children and the income. It is true that children of lone parents are twice as likely to be in poverty as those living with couples. I am looking at all aspects of tax credits, so we will constantly keep an eye on that and look for anything that demonstrates inherent unfairness. However, as I have said, I have not yet been convinced that that is the case.

Mr. Gauke: I am grateful to the Minster for generously giving way. The IPPR is a think-tank that is somewhat closer to her party than to mine, but it makes the point in its report that the

That is one of the problems that exists within the current structure.

Jane Kennedy: If the hon. Gentleman is questioning whether I accept what the IPPR says, my answer is that I do. I acknowledge the problem, and that runs somewhat counter to our intention, which is to encourage adults to work, including second adults in a family. I appreciate that, but with regard to our overall objective of making the tackling child poverty the top priority, I think that we have got the focus right.

The hon. Member for South-West Hertfordshire asked me about the DWP report. The Chancellor is the Cabinet Minister charged with delivering the Government’s commitment on child poverty and I am the Treasury Minister who is taking the challenge forward. I have explained that we deliberately set ourselves a challenging target, but that does not mean that we are planning to fail. On the contrary, I was absolutely delighted to be able to bring forward the proposals made in the Budget. The organisations, charities and voluntary organisations that have been lobbying extremely hard for more work on that received it very well and indicated that they accept that it is a big step towards the target. However, we are not yet there. I am not in a position to say today how we will meet the target for 2010, but the hon. Gentleman can be assured that we intend to meet it.

The hon. Member for South-West Hertfordshire asked me a number of questions, so if I miss any, I hope that he will accept that I will read Hansard and write to members of the Committee on those points. He asked me about the EDS contract, which is a fair question. We have reached a settlement with EDS, have told it that the rate of payments must be accelerated and are discussing further steps with it to achieve that. Her Majesty’s Revenue and Customs remains determined to be paid in full and will, if necessary, go to court to achieve that, but I hope that we can resolve the matter without recourse to the law.

Before I come to the final question from the hon. Member for Rochdale, the hon. Member for South-West Hertfordshire asked me about complaints and about error and fraud. I am keeping a close eye on both those areas, and I am working with HMRC staff to improve the performance of HMRC. The tax credit office now aims to acknowledge all complaints with 48 hours of receipt and, at the same time, gives the customer the name and direct telephone number of the officer dealing with their complaint. The tax credit office now maintains direct contact with the customer until the complaint is resolved. That is a change in its way of working. I expect to see improvements in the complaints figures.

The hon. Member for South-West Hertfordshire is right that there is a great deal of interest—quite properly—in error and fraud. When I served as Minister for Work, error and fraud was a significant area of work for Jobcentre Plus, and I have sought to apply some of the lessons I learned in that post to the work of HMRC. We will soon publish error and fraud statistics.

The hon. Member for Rochdale asked me about fuel poverty. He will understand why we raise the various elements of tax credits in line with prices. The RPI does what it says on the tin. We are monitoring the impact of fuel price rises but, as I said earlier, we believe that work is the route out of poverty. Rather than extend winter fuel payments to families, we would prefer to see help for those families that would enable the adults to work and that would increase support for working families. That is the best way of achieving that aim.

I hope that I have answered most of the questions. As I said in the introduction, these regulations and orders increase some of the rates and thresholds, and are in line with our commitment to make work pay and to tackle child poverty. I commend the regulations and orders to the Committee.

Question put and agreed to.

Resolved,

Resolved,

Resolved,

Resolved,

Committee rose at eight minutes past Three o’clock.