The Financial Secretary to the Treasury (Mr. Stephen Timms): I beg to move,

The Chairman: With this it will be convenient to consider the draft Guardian’s Allowance Up-rating (Northern Ireland) Order 2009 and the draft Tax Credits Up-rating Regulations 2009.

Mr. Timms: I bid you a warm welcome to the Chair, Mr. Fraser.

Tax credits, together with child benefit, deliver financial support to the vast majority of families with children in the UK and are important in addressing child poverty. With many families currently facing difficult times, the benefits of the flexibility in the tax credits system are particularly important. If a family’s income is reduced by cuts in overtime or reduced working hours or working days, they may well benefit from increased tax credits that provide support in those circumstances. Between April and December last year, more than 400,000 households received extra tax credits following a reduction in income, which in the current circumstances is obviously particularly important. The orders and regulations before the Committee today will increase some elements and thresholds for tax credits and raise the guardian’s allowance, and in my view they are compatible with the European convention on human rights.

I will turn first to the draft Tax Credits Up-rating Regulations 2009. Tax credits ensure that work pays and tackle child poverty. Overall, nearly 6 million families, containing almost 10 million children, are benefiting from them. The regulations bring forward from April 2010 to April 2009 the Government’s commitment to increase the child element of the child tax credit by £25 above indexation. Added to the existing commitment to up-rate the child tax credit, as set out in last year’s Budget, that means that the child element will increase by £75 above indexation to £2,235 from April 2009. Since its introduction in April 2003, that element will have increased by £790.

As a result of that increase, along with increases in working tax credits and the national minimum wage and other changes that have been announced, a family with two children and a single earner working full time on the national minimum wage will receive about £10 extra a week in tax credits compared with the previous year. Other rates and thresholds are also increased by the regulations: the disabled element of child tax credit and most of the other working tax credit elements increase in line with prices.

Turning to the guardian’s allowance orders—

Sir George Young (North-West Hampshire) (Con): Before the Minister moves on, will he explain why the annexe to the explanatory notes for the regulations shows that the normal family element and the baby addition family element have not been increased at all? Will he also confirm whether the second income threshold shows that people with £50,000 a year are still entitled to tax credits?

Mr. Timms: Yes, the right hon. Gentleman is absolutely right to say that not everything to do with tax credits is being raised. Given constrained resources, we have to find the right balance between supporting families with children across the income range and targeting support on families with lower incomes. Raising the child element, as set out in the regulations, allows us to do that, whereas the family element is available over a much broader range of income. He is right in saying that households on £50,000 benefit from tax credits, and at the upper part of that income range it is from the family element.

Mr. Michael Jack (Fylde) (Con): The Minister indicated that the percentage increase in inflation has guided the changes in working tax credit, but will he explain for the Committee’s benefit why the child element in the child tax credit rises by 7 per cent.?

Mr. Timms: Indeed; in the pre-Budget report, my right hon. Friend the Chancellor announced an additional £25 in the child element, building on the announcement made at the time of the Budget last year of an additional £50 beyond indexation. The right hon. Gentleman is absolutely right in saying that we are making a substantial increase in the child element of the tax credit system. We want to give additional help to families with children at what we all know is a difficult time in the economy. We are therefore making a substantial increase in that element, and I suggest that that is the right thing to do, particularly given our commitment substantially to reduce child poverty further.

On the guardian’s allowance, the rates will increase in line with prices to £14.10 a week from April this year. Normally, we would have debated that in conjunction with the child benefit orders, but we brought forward the increase in child benefit from April to January, so we debated that order before Christmas. However, were unable to have the debate on the guardian’s allowance at that earlier time. A family with two children will have gained £24 from the increase in child benefit being brought forward in that way.

The increases introduced by these instruments will deliver still more support in the coming financial year. We remain committed to the eradication of child poverty, and the child element is a particularly effective tool for addressing that. Tax credits more broadly will remain key. As a result of all the changes to the personal tax and benefits system since 1997, families with children in the least well-off fifth of the population will be £4,400 a year better off. I commend the regulations and orders to the Committee.

Mr. David Gauke (South-West Hertfordshire) (Con): It is a great pleasure to serve under your chairmanship for the first time, Mr. Fraser. I thank the Minister for introducing the orders and the regulations. I shall start by asking some questions, bearing in mind the points that have been raised by my right hon. Friends the Members for North-West Hampshire and for Fylde. I am fortunate to have such distinguished support today, and I thank the Whips for that.

Various elements are being up-rated, but the Government’s thinking behind the different elements is not always clear to members of Committees such as this. Some elements are up-rated by earnings, some by prices and some not at all. The way in which the various elements are changed seems to vary from year to year. For example, the working tax credit first income threshold was increased considerably last year, by £1,200, which was proportionately a much bigger increase than that for the child tax credit last year. However, there is no increase for the working tax credit this year, but there is a 7 per cent. increase for the child tax credit. The disabled child element is up-rated this year by more than the increase in prices, but in previous years it has been up-rated in line with prices.

My right hon. Friend the Member for North-West Hampshire highlighted one area in which there is some consistency. The family element—the normal element and the baby addition—has not been increased, and nor has the second income threshold. Indeed, that has been the case since 2003-04. The Minister has attempted to explain that point, particularly in regard to the family element, but, for the Committee’s benefit, will he elaborate on why, for example, it was considered necessary to increase the disabled child element by more than prices this year but not in previous years? Will he elaborate also on the relative significance of the working tax credit last year as compared with this year? It would be helpful if we knew the factors that influence the Treasury when it makes those decisions annually.

I also note that the explanatory memorandum on the tax credits up-rating states that, in the last pre-Budget report in November, the cost was estimated to be £1.77 billion. That is less than the cost of the previous year’s up-rating, but the Minister said that many people are experiencing difficult times, and, given that a lot has happened to the economy since last November, I should be grateful if he were to state whether the Government still consider the PBR’s estimated up-ratings cost to be accurate. If it is not possible to provide an answer now, will it be possible to provide one when the Budget is delivered in April?

It is worth asking—particularly today, when figures show that inflation has not fallen as much as was widely anticipated but the retail prices index was down at 0 per cent. and is expected to fall further—what would happen in the event that either RPI or earnings went negative? Are the Government committed to ensuring that there are no reductions in thresholds or amounts regarding any element of tax credit up-rating next year, given that many such elements are based on either prices or earnings? Given that the consequence of these tax credit regulations will be an additional £1.77 billion of public expenditure, it is appropriate to ask the Minister about its impact on reducing child poverty. He referred to it, so is it still the Government’s target to halve child poverty by 2010? If so, do they accept that the target will be missed? Last week, the Child Poverty Action Group stated why it believes that the target will be missed by about 700,000 children, so does the Minister accept that the target will not be met, whatever progress may be made as a consequence of the provisions that we are debating?

Another concern is the figures for take-up—specifically take-up of working tax credit for families without children. The latest available figures are for 2005-06, and for working families without children the central estimate is that take-up is only 22 per cent. by case load and just 28 per cent. by expenditure. Have there been any changes—any progress—in that area?

The Chairman: Order. May I remind the hon. Gentleman that he must keep his comments and questions in line with the order that is before us this afternoon?

Mr. Gauke: Thank you, Mr. Fraser. I do not intend to dwell on this point, but I asked that question to establish whether the additional expenditure that we would be approving in the order would be effective in reaching those who have been hit hardest, which is clearly the Government’s intention.

The Public Accounts Committee published its review of tax credits today, in which it highlighted its concern about the high level of overpayment. If we authorise this additional expenditure, I am sure that we will want to ensure that money will get to the right people and that there will not be unnecessary overpayments or underpayments. The Public Accounts Committee is concerned that the system is not as effective as it might be, and that overpayments continue to affect too many people—1.3 million families in 2006-07. I acknowledge that annual overpayments have been reduced from £1.9 billion to £1 billion, but that level is still higher than the £750,000 originally envisaged by the Government. I would be grateful if the Minister touched on that briefly and explained the extent to which the reduction has been achieved through improved administration of the tax credit system. Has there been improvement as a consequence of the measures announced in the 2005 Budget, particularly the increase in the disregard from £2,500 to £25,000? I note that the figure for the tax credits up-rating regulations has remained at £25,000 for next year as well.

The Public Accounts Committee has also raised its concern that there has been little progress on underpayments. Does the Minister accept that? What measures will be introduced to address that issue? Also, does he accept that about £4.3 billion of overpayments is still to be recovered?

The Chairman: I remind the hon. Gentleman that we are discussing a particular order. If he would keep his remarks in line with the order, rather than drifting from the point, I would be most grateful.

Mr. Gauke: I am grateful for that, Mr. Fraser. I raised the issue of child poverty because the Government have highlighted, in the explanatory memorandum, the fact that tax credits are part of their commitment to tackling child poverty. That is why I wanted to analyse whether they are making progress on that; I thought it might help the Committee. However, I take your comments on board and will comply with them.

I note that, according to the Public Accounts Committee report, a ministerial colleague of the Minister, the Exchequer Secretary to the Treasury, was a member of that Committee. As such, I am sure that she is associated with the report and that the concerns raised in it will have been brought to his attention.