Draft Guardian's Allowance Up-Rating Order 2012
Draft Guardian's Allowance Up-Rating (Northern Ireland) Order 2012
Draft Tax Credits Up-Rating Regulations 2012
The Committee consisted of the following Members:
† Brine, Steve (Winchester) (Con)
† Connarty, Michael (Linlithgow and East Falkirk) (Lab)
† Duddridge, James (L ord Commissioner of Her Majesty’ s Treasury)
† Gardiner, Barry (Brent North) (Lab)
† Harris, Rebecca (Castle Point) (Con)
† Hemming, John (Birmingham, Yardley) (LD)
† Hillier, Meg (Hackney South and Shoreditch) (Lab/Co-op)
† Javid, Sajid (Bromsgrove) (Con)
† Love, Mr Andrew (Edmonton) (Lab/Co-op)
† Newton, Sarah (Truro and Falmouth) (Con)
† Ollerenshaw, Eric (Lancaster and Fleetwood) (Con)
Sharma, Mr Virendra (Ealing, Southall) (Lab)
† Skidmore, Chris (Kingswood) (Con)
† Smith, Miss Chloe (Economic Secretary to the Treasury)
† Timms, Stephen (East Ham) (Lab)
† Williams, Stephen (Bristol West) (LD)
Wilson, Sammy (East Antrim) (DUP)
Sarah Heath, Anne-Marie Griffiths, Committee Clerks
† attended the Committee
Eighth Delegated Legislation Committee
Thursday 8 March 2012
[Philip Davies in the Chair]
Draft Guardian’s Allowance Up-Rating Order 2012
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The Economic Secretary to the Treasury (Miss Chloe Smith): I beg to move,
That the Committee has considered the draft Guardian’s Allowance Up-Rating Order 2012.
The Chair: With this is will be convenient to consider the draft Guardian’s Allowance Up-Rating (Northern Ireland) Order 2012 and the Draft Tax Credits Up-Rating Regulations 2012.
Miss Smith: It is a pleasure to serve under your chairmanship, Mr Davies. A preliminary requirement is that I confirm that the provisions contained in the draft measures before the Committee are compatible with the European convention on human rights, and I so confirm.
When we came to government, we inherited the deepest recession since the war and the largest public deficit in our modern history. The UK economy is recovering, therefore, from the biggest financial crisis in generations. The June 2010 Budget set out the Government’s plans to reduce the deficit and to rebuild the economy. Since then, the UK economy has been hit by a series of shocks, which have significantly weakened the economic and fiscal outlook: we have higher than expected inflation, the euro area crisis has increased instability and uncertainty, and the full-scale and persistent impact of the 2008 to 2009 financial crisis has become clearer. It is vital for us to tackle that deficit, and doing so is a vital precondition for growth, but that has meant some difficult choices.
The Government believe that the welfare system must remain fair and affordable while protecting the most vulnerable, and we are committed to that. Even as we tackle the deficit, however, it is vital that we protect and support low-income families. The deficit must be tackled fairly and responsibly, so that those who can contribute do so and those who are less able to do so are supported. That is why, as a result of our tax, tax credit, benefit and public service spending changes introduced at the autumn statement 2011 and in previous fiscal events, the top 20% of households will make the greatest contribution towards reducing the deficit, as a percentage of their income and benefits in kind from public services.
Stephen Timms (East Ham) (Lab): Will the Minister give way?
Miss Smith: Does the right hon. Gentleman wish me to give way before I have been able to speak about today’s business?
Stephen Timms: I apologise for interrupting so early, but I want to clarify the Minister’s point, because, if I understand the position correctly, the draft measures before us are rather different from what the Chancellor
said about tax credit uprating in the October 2010 comprehensive spending review. Will the Minister confirm whether I have understood that correctly and what the reasons for the differences are?Miss Smith: If I go ahead with discussing what we are doing, I have no doubt that the right hon. Gentleman will be able to make up his own mind about whether there is a difference between the statutory instruments we are discussing and the far larger document that was the CSR.
The draft measures put into effect a number of reforms to tax credits that were announced in the 2010 Budget and the 2011 autumn statement. The changes will be made to ensure that we tackle the deficit fairly and that tax credits are targeted on those who need them most. A number of elements will continue to be increased in line with the consumer prices index, at 5.2%, including the disabled worker, severely disabled worker, child, disabled child and severely disabled child elements. The couple and lone-parent element of working tax credit will be frozen, and the basic and 30-hour elements will remain frozen. The family element of the child tax credit is payable to families with an income of up to £40,000, but from April 2012 that threshold will be removed and therefore the family element will be withdrawn immediately after the child element.
From April 2012, in-year falls of income of less than £2,500 will be disregarded when recalculating tax credit awards. The 50-plus element of working tax credit will be removed; that is time-limited to one year and will not affect anyone who is currently claiming. Couples with children will need to work at least 24 hours combined, with one partner working at least 16 hours per week, to qualify for working tax credit. Previously, depending on a family’s circumstances, new claims and changes of circumstances could be backdated by 93 days, but, from April 2012, that will be reduced to one month.
The Government are committed to help hard-working families and to ensure that being in work pays. The best way to help working people is to take them out of tax altogether. In April 2012, we will make a £630 increase in the income tax personal allowance, taking it to £8,105. That is in addition to the £1,000 increase in April last year. Together, those increases will benefit 25 million individuals and take 1.1 million low-income individuals out of tax from April 2012.
Stephen Timms: I want to take the Minister back to the question I asked a moment ago. When the Chancellor made his statement in October 2010, he rightly attached a good deal of importance to the point that the changes that he was announcing would not increase child poverty over the following two years. What the Minister is describing today is rather different from what the Chancellor said. What impact does she expect the changes to have on child poverty over the coming year?
Miss Smith: As the right hon. Gentleman well knows, the other significant event that occurred between the CSR and now, as we find ourselves together in this Committee Room, is the publication of our child poverty strategy, in which we set out how we intend to tackle child poverty—we support strongly the need to do so. As I have been saying throughout my speech, we clearly need to protect the most vulnerable in society, but we intend to do that by focusing on the broader picture.
In our view, child poverty is about not only income transfer, or the transfer of money or cash—he and I have had that debate in other Committees—but the broader services received by families. To give a more direct answer, our outlined approach has meant us taking a number of decisions, which we shall no doubt get into during our debate, such as on the above-inflation indexing of certain elements.I return to why we have to do that—the fact that we must ensure that tax credits are focused where they are needed most—and to the broader picture that I have articulated, which is our belief that solving child poverty is not only about income transfers. The right hon. Gentleman must be aware of the figure cited by others, which is that, under the previous measure of relative income poverty, analysis shows an estimated increase of about 100,000 in 2012-13, but he must also be aware of the strong argument made by the Government that that does not represent a forecast of the actual change in child poverty year on year.
Miss Smith: I am afraid that I must press on, but I have no doubt that the right hon. Gentleman will be able to outline his own views in greater depth shortly. I must finish my opening comments.
I was about to come on to universal credit and to how that new benefit—an important Government reform—will unify the complex system of means-tested out-of-work benefits, tax credits and housing support in one single payment—the right hon. Gentleman and I sat on the Committee that considered the Welfare Reform Bill, which introduced the credit.
Under universal credit, the award will be withdrawn at a single rate, with the aim of offering a smooth transition into work and encouraging progression in work. For parents on working tax credit, the Government will continue to provide support for 70% of child care costs, up to a weekly limit of £175 for families with one child and £300 for those with two or more children. That support will be extended under universal credit to those working fewer than 16 hours, allowing 80,000 additional families to receive help with child care costs and giving second earners and lone parents, typically women, a stronger incentive to work.
The Government are committed to restoring the country to sustainable growth and prosperity. We know that that is not an easy path to tread, but we have not shirked our responsibility to take the tough decisions that will return the UK to economic stability. I see many of the measures before us as part of that effort, and I commend them to the Committee.
1.9 pm
Stephen Timms: I, too, am delighted to be serving under your chairmanship, Mr Davies. I thank the Minister for her remarks, although I am a little surprised that she was not willing to give way more. The custom in such Committees, as she knows, is to do so. I will comment at rather more length than her on exactly what the Government are doing with these measures.
As the Minister said, the draft tax credit regulations uprate a number of elements of working tax credit and child tax credit, and the draft orders uprate guardian’s allowance in line with the CPI inflation index, rather than using the retail prices index, as was policy in the
past. That is, the amounts will be increased by 5.2%, or CPI in September 2011, as opposed to 5.6%, or RPI in the same month.We have discussed the Government’s general policy on uprating elsewhere, so I shall not detain the Committee unduly by repeating that debate. The Government have claimed that CPI is a more appropriate measure for uprating benefits and pensions than RPI. What is certainly true is that it is less generous; whether it is more appropriate is a matter for debate. Since 1989, the gap between the RPI and RPIX—RPI excluding mortgage payments—and the CPI measures has been 0.7% on average in a year, and the Office for Budget Responsibility’s November “Economic and fiscal outlook” states that the long-run difference between RPI and CPI is likely to be twice that, at around 1.4 percentage points. The OBR therefore thinks that the gap between an RPI uprating and the CPI uprating that the Government are applying in these measures and want to apply in perpetuity will get wider as time goes on.
The long-run average difference of 1.4 percentage points per year, if used indefinitely as the Government propose, represents a significant and growing hit to the income of people on modest incomes, and it will be taking its toll, if the Government have their way, long after the deficit has been overcome, albeit we will now take a number of years more than the Government first thought to reduce the deficit to zero and turn it into a surplus. Had the uprating change been temporary, we could have seen some merit in it as a contribution to reducing the deficit, but, as a permanent measure—factored permanently into future budget calculations, including in periods when there is no longer a deficit—we do not agree with it. Penalising people in that way is wrong. I am not objecting to the use of the mechanism for the coming year, but Labour Members object strongly to the permanence of CPI uprating, so we have abstained on the series of uprating statutory instruments considered in the past few weeks.
To be clear, I shall not urge my hon. Friends to vote against the two draft orders on guardian’s allowance, but I want to say rather more on a number of elements in the Draft Tax Credits regulations. It is important for the Committee to be aware of precisely what the Government are doing in that measure. When they were elected, they made much of the fact that they would not only index the child tax credit, but over-index it by significantly more than inflation. Members might recall what I was pressing the Minister about a few minutes ago, which is what the Chancellor said about the CSR in the House on 20 October 2010:
“I can announce today that I am increasing the child element of the child tax credit by a further £30 in 2011-12 and £50 in 2012-13 above indexation”—
compared with what the previous Government were planning—
“and it will provide support to 4 million lower-income families. And I can confirm that using the same model we inherited, the spending review will have no measurable impact on child poverty over the next two years”.—[Official Report, 20 October 2010; Vol. 516, c. 959.]
The Minister referred to the previous method for calculating child poverty. She is correct: it was previously used by the Chancellor, who said that there would be zero impact on child poverty as measured by that method. Under the regulations, that clear pledge, made since the
election by the Chancellor himself, is being abandoned. According to a wide range of estimates—the Minister confirmed the figure under pressure a few moments ago—the measure will increase the number of children growing up in poverty by 100,000 during next year alone.The Prime Minister still talks about the commitment to increase child tax credit beyond inflation. In fact, he talked about it yesterday at Prime Minister’s questions. In answer to my right hon. Friend the Leader of the Opposition, the right hon. Gentleman said:
“We have increased the child tax credit that goes to the poorest families in our country.”—[Official Report, 7 March 2012; Vol. 541, c. 841.]
He is right. The Government increased it last year. The first bit of the Chancellor’s promise of 20 October 2010 was indeed fulfilled. However, under the regulations, the second part of that promise is being abandoned. The Government said that they would increase child tax credit in real terms this year. That increase should have been going forward under the regulations, but it is not.
We are becoming familiar with pre-election promises being broken, such as no top-down reorganisation of the NHS and so on. The regulations deal with a post-election promise being broken, so it is not only a pre-election promise or promises made to try to persuade people in the run-up to the election, but promises that have been made since then, that are being abandoned. It is important that members of the Committee are aware of the significance of the measure that we are discussing. The intention was to over-index the child element of child tax credit by £110 in the year ahead. That increase will not now take place. The substantial sum of £110 is being taken away, even though the Chancellor promised it under the spending review in autumn 2010.
I wish to draw attention to other changes under the measure, which the Minister referred to and which members of the Committee need to weigh carefully before deciding how to vote. As she said, the regulations do not uprate the basic element, the second adult element, the lone-parent element or the 30-hour element of working tax credit. At a time when RPI was 5.6% per year until last September, those sums are all being frozen. The family element of child tax credit is being frozen, too.
We strongly oppose the substantial cut to the incomes of working families as a result of the changes. The Minister hinted that the Government are taking such action because borrowing is a great deal higher than they thought it would be when they started down this road, and that because their policy has not delivered the growth that Ministers predicted. Last November, the OBR told us that the Government would now be borrowing £158 billion more over the life of this Parliament than was forecast when the deficit reduction strategy was announced. There might be different views in Committee about the reasons for that failure. In passing, the Minister suggested a reason, but the fact that the strategy has failed is beyond dispute. The whole point of the strategy was supposed to be to eradicate the deficit in this Parliament. We now know that that will not be accomplished. The strategy has failed.
The Minister did not give us such an explanation, but others have suggested that the reason for the freeze in
the lone parent and 30-hour elements of the working tax credit is to fund the youth contract. That is certainly much needed, but it is too little and much too late, following another election promise that was broken when the future jobs fund was axed. Here we are, almost two years later, still without the new contract in place, and record youth unemployment as a result. Our case is that the tax on bankers’ bonuses introduced by the previous Government should be reapplied to fund the cost of 100,000 jobs for young people.The Chair: Order. I have been giving the right hon. Gentleman some latitude, but if he stuck more closely to the measures before us, rather than giving a more widespread view on general economic policy, that would be helpful to the Committee.
Stephen Timms: I am grateful, Mr Davies, and I will do precisely that.
Instead of the policy I was just explaining, the Minister has, in this measure, chosen to cut the incomes of working families. That is the choice that the regulations represent: cash being taken away from people on modest incomes, instead of taking it from people on enormous incomes. They also install an income fall disregard, which the Minister mentioned. In future, if someone’s income goes down by up to £2,500, their tax credit award will not be changed at all, when in the past it always was. Indeed, it was one of the strengths of the tax credit system that if someone suffered a fall in income, it could quickly respond to give some additional help. That is being taken away, should income fall by up to £2,500 a year.
I looked at what the House of Commons Library says about that. It rightly made the point that there was a big disregard for income increases under the old system, before the election. If someone’s income went up by up to £25,000 a year—a large sum indeed—they did not suffer any reduction in their tax credits. That figure has been reduced to £10,000 for the current year and will go down to £5,000 next year.
It is a novelty, however, to introduce a disregard for income falls as well. That means, simply, that people whose income is reduced by a potentially considerable sum will receive no additional support in their tax credits for that year. That means that tax credits will cease to be as responsive a safety net as they were always intended to be. That safety net proved particularly important and valuable during the crisis. I oppose the introduction of the new disregard.
The cut to pay for the youth contract is wrong. If the Government really mean, “We are all in this together,” they would not be taking the money they need for this policy from working people on modest incomes. They would find others, far better able to have their incomes reduced, than the group targeted by this measure. We have offered a clear alternative to what the Government have proposed and we will oppose the choice that they have made. The cut in respect of the youth contract is to fund a programme about which the Financial Times helpfully informed us on 24 November last year:
“The plan was agreed despite fierce resistance from Conservative ministers”.
There was some sort of wrangle, on which I imagine the Minister will not shed much light, although if she can do so we would be interested. It appears that she and
her hon. Friends were strongly opposed to that measure and that it was forced through by others.The regulations also abolish the second income threshold for tax credits, so that the family element is withdrawn immediately after the child element, as the Minister mentioned. That, however, is not the only raid that the Government are making on the incomes of low-income working families. At the same time—she referred to this, too—they are increasing the hours requirement for receipt of tax credits by couples from 16 to 24 hours a week. That will result in more than 200,000 families—representing about 900,000 people, both children and adults—losing on average £2,400 a year, and up to £4,000 a year if they cannot get the extra hours to raise their working hours to 24 a week. Given that more people than ever are working part-time when they want to work full-time, it will be extraordinarily difficult for many of those 200,000 families to find extra hours.
I remind the Minister what the latest release on unemployment from the Office for National Statistics says:
“The number of employees and self-employed people who were working part-time because they could not find a full-time job increased by 83,000 on the quarter to reach 1.35 million, the highest figure since comparable records began in 1992.”
That is 20 years ago. The Government are attacking the reward that people see from work. As a result of the change, it will be drastically reduced for some and there will be no reward at all from being in work for others—they would be no worse off on benefits. A few will actually see a drop in their in-work income, compared with what their income would have been if they sat at home and did nothing.
The thrust of Government policy is supposed to make it clear that people will be better off in work, yet with the change the Minister describes, the Government are ensuring that some people will be worse off if they go out to work than if they stayed at home. I know that she is familiar with Government policy on such matters, because she and I were on the Committee that considered the Welfare Reform Bill. A bizarre feature of the change is that it directly contradicts what that legislation, now an Act, does and what the Secretary of State for Work and Pensions has been arguing for with universal credit. She will recall from that Committee that her colleagues in the Department for Work and Pensions made a virtue of the elimination of the hours rule altogether—reducing the threshold from 16 hours to zero—but her Department is increasing it from 16 hours to 24.
It is no surprise that when the Secretary of State for Work and Pensions was asked at oral questions about the change the Treasury is making, his response was:
“The tax credit system… is administered and run by the Treasury.”
He went on to say that my hon. Friend the hon. Member for Stockport (Ann Coffey)
“said that I was bringing this measure in, but the Treasury has made that policy decision.”—[Official Report, 5 March 2012; Vol. 541, c. 556.]
So it is nothing to do with him. Hansard then says “[Interruption.]”, which indeed there was.
It is clear that there is substantial disagreement between the Treasury and the Secretary of State for Work and Pensions. Before the Committee today, the Minister and the Government are directly contradicting Government
welfare reform policy. That is an exceptionally glaring example of incoherence across Government.Given that the transition to universal credit is expected to take until 2017, some people will suffer for the next five years as a result of this policy. Universal credit will not come to the rescue until 2017, in some cases. It will start for some people in two years’ time, in April 2014, but others will have to wait another three years and will find themselves worse off in work than on benefit for that time. The truth is that it will not take many people leaving work before the modest savings to the Exchequer are more than made up for by the extra cost of benefits and reduced tax take.
Since the Government changed the child care element of working tax credit, which is covered by the regulations, 44,000 fewer people are claiming it. We do not know how many of them are not claiming because their job has disappeared, but some will have undoubtedly given up claiming because they have chosen to give up work, because it is no longer worth their while. I fear that the change to the hours rule will have the same consequence for a significant number of people, making it harder rather than easier to close the deficit.
We will abstain on the two orders relating to the guardian’s allowance, but we will not abstain on the tax credits regulations. That will take money away from families when it should be taken from others who are better off, and break a clear promise made by the Chancellor himself since the election—less than 18 months ago. It is a promise that was referred to yesterday in the House by the Prime Minister himself.
The regulations will, as the Minister has confirmed, directly raise the level of child poverty, which the Government assured us their proposals would not do. The Institute for Fiscal Studies has calculated that the number of children growing up below the poverty line will now rise by 400,000 by the end of this Parliament. That is a very unfortunate consequence of the changes that the Government are making. I hope the Committee will oppose the tax credits uprating order.
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Michael Connarty (Linlithgow and East Falkirk) (Lab): I thank my right hon. Friend the Member for East Ham for a most illuminating and incisive analysis of the damage that these paltry, cheap cuts in the value of tax credits will do to hundreds of thousands of people in all constituencies, who may have voted—for all parties—thinking there was some promise that at least the tax credit system would support them through the recession if they could find employment.
Saying that if income falls by £2,500 there will be no adjustment to tax credits is the biggest incentive for people to give up on the hope of employment. In past years, one of the most damaging things was the taper, whereby if someone got a minor promotion and received £1 extra, they would lose £2 of tax credits. That made people think it was not worth while having the ambition to become a supervisor or to move out of the worst paid job. To put reverse the situation and say that someone will not be supported by the tax credit system if they have to take a cut, because of hardship and troubles in the company, is a disincentive.
Some of my local companies have asked people to take a reduction in wages to get those companies through the recession. This is a disincentive to the approach that
someone can work their way through hard times, and it is an appalling thing for the Government to do. I will circulate this to all the people in my constituency, both those who voted for me and those who did not. They will be shocked and appalled that the Government are taking such a sharp and nasty line towards people who are struggling and trying to make ends meet by taking low-paid employment, which may be all that is available in their area.1.32 pm
Miss Smith: I have a couple of points of detail to respond to. I shall also take the opportunity to remind the Committee of the specifics in the regulations before us.
First, I must clear up a point of confusion prompted by the right hon. Member for East Ham. If I heard him correctly, he intends to abstain on uprating the guardian’s allowance. Will he tell us whether he does not believe that what is essentially an orphans’ benefit should be uprated in line with prices?
Stephen Timms: I am delighted to respond to the Minister’s invitation. Our position is that we do think the guardian’s allowance should be uprated. We believe, however, that in the long term the previous mechanism for uprating should be adopted—that is to say, in line with RPI—and there should not be a permanent switch to CPI. We do not think, to quote her, that “orphans’ benefits” should be eroded in the way the Government intend to do over the long term. I am afraid we are not able to support the Government’s policy, and that is the reason for the position we will take this afternoon.
Miss Smith: Hon. Members will be able to see the inherent confusion in that position. There could equally easily be letters going out to everybody who has voted for anyone in this room, suggesting that the Opposition are constitutionally unable to bring themselves to vote on such a simple measure in one year, let alone in other years, when they may reach a decision later. I am afraid to say that they leave us at that point.
John Hemming (Birmingham, Yardley) (LD): My understanding, which the Minister may be able to clarify, is that the Monetary Policy Committee of the Bank of England was given the consumer prices index as the correct measure of inflation. Will she explain which Government suggested that?
Miss Smith: I certainly shall. I thank my hon. Friend, who has brought me neatly on to my next points. It was, of course, the Labour Government who gave the Bank of England its independence, as a result of which it gained many of the powers—[Interruption.]
Miss Smith: I shall go on to explain why we use CPI. There are three reasons. First, it ensures consistency with the measures of inflation used by the Bank of England, as has just been mentioned. Secondly, the differences in calculation mean that it can be considered a better representation of how consumers change their consumption patterns in response to price changes.
Thirdly, and importantly in the context of our debate, the CPI measure excludes the majority of housing costs faced by home owners. We should note that low-income households are subsidised separately through housing benefit. The majority of pensioners, of course, own their homes outright, although we are not talking about pensioners today. So there are at least three clear reasons why we use CPI.
Stephen Timms: As has just been mentioned, the UK Statistics Authority has made the point that CPI is not a satisfactory index, given that it does not reflect the full costs of housing increases. It—or perhaps it is the ONS—is looking at including the cost of owner-occupied housing in the CPI in future. It will come forward some time in the next year or so, I think, with a proposal for how the CPI measure should be amended.
Will the hon. Lady say whether the Treasury’s view will be that that amended version of CPI should be used, or whether it will want to stick with the current—and, according to the UK Statistics Authority, inadequate—measure of CPI used at the moment?
Miss Smith: I fear that the right hon. Gentleman is trying to lead me astray into something about which, as he well knows, neither he nor I could comment, given the independence of the ONS in relation to its pronouncements in that area.
Miss Smith: I beg the right hon. Gentleman’s pardon, but I have to press on. [Interruption.]
Barry Gardiner (Brent North) (Lab): The hon. Lady should understand that there is a difference between a principle and the mechanism through which the principle is carried out. That is what the Opposition object to, and that is why we will not be supporting her.
Miss Smith: I continue to be shocked at the Opposition’s failure to make a distinction between principle and practicality in the uprating of the guardian’s allowance. On that point, I should be able to continue with my comments.
Stephen Timms: I want to clarify something. I was asking the Minister about the Treasury’s policy. How will the Treasury respond? I was not asking her to comment on what the ONS would do; she was right to say that that would be an independent matter. My question was about how the Treasury would respond to that recommendation when it comes forward.
Miss Smith: The right hon. Gentleman has elucidated his point no further, I am afraid. He knows as well as I do that he is asking me to comment on a potential future event. I am unable to do that in the context of the Committee today. We may return to the issue at another time and in another place.
I turn back to what we are here to do today. I remind the Committee of the only four things in the tax credits uprating regulations; we have briefly covered the guardian’s allowance order. Those four things are the following: first, to taper the family element immediately after the child element; secondly, to introduce the income fall disregard of £2,500; thirdly, to freeze the couples and lone-parent elements of working tax credit; and fourthly,
to increase other elements by CPI at 5.2%. I went over that latter point in more detail, in list form, during my opening comments. I have to make a few remarks that tackle what has been said today, but I have set out the framework—those four things—with which we are working.I turn to child poverty, an issue which the right hon. Gentleman raised in his speech and interventions. Yes, the Government increased the child tax credit by £180 over inflation in April last year. As he is well aware, that was a short-term measure, put in place until a more sustainable long-term strategy could be formulated. I have already referred to that strategy, which the Government published. It seeks to make real progress, not simply a financial transfer, on improving the life chances of children.
Stephen Timms: Perhaps the Minister is about to answer my question, but I want her to confirm that at the same time as announcing the £118 increase, the Chancellor also announced the £110 increase for the coming year, and that has now been abandoned.
Miss Smith: The right hon. Gentleman brings me to the explanation I was about to give of exactly that situation. First, CPI in September 2011—September figures are used for such calculations—was much higher than expected at the time of the spending review in 2010. It was 5.2%, and applying that to all benefits and tax credits would simply have been unaffordable. I shall come in a moment to why it is fair to refer to that as unsustainable and unaffordable. However, we maintained it, and it is worth £135, for the child element. I should point out that in April, as the right hon. Gentleman knows perfectly well, 80% of tax credit claimants will receive a rise above or equal to average earnings.
On sustainability, the right hon. Gentleman knows—indeed, I think he was in office at the time—that his Government allowed 90% of families with children to be eligible for tax credits. He also knows about the bill for billions of pounds in tax credits that was racked up by his Government. I call that unsustainable and unfair in terms of the public spending burden it placed on other areas of the state.
Stephen Timms: Why, though, was it sustainable in the Chancellor’s mind in October 2010 to increase it by £110, when it is not sustainable now? The Minister is suggesting a change of principle, but clearly the Chancellor was happy with it at the time.
Miss Smith: I have already answered the right hon. Gentleman’s question, but I am happy to reiterate. The September measurement of CPI was higher than expected, and as someone far more famous than any of us in this room said, when facts change, we must revisit our opinions. That is a fair and sustainable way of coming to public finances.
I want briefly to cover a point about child poverty targets. I do not want the Committee to think that the coalition Government are not fully committed to the goal of eradicating child poverty; they are fully committed to that goal by 2020. The spending review and all fiscal and Government events since then seek to assist children from lower income backgrounds to have the chances in life that they deserve. I can point the right hon. Gentleman to examples such as the extension we made to 15 hours a week of free early education and care for all disadvantaged two-year-olds from 2012-13. Perhaps he disagrees with that. I wonder what his party thought of it in the
frankly inconsistent way it has gone about many of its fiscal statements since it has been in opposition.On a point that brings us back to the tax credit regulations before us, we seek to refocus tax credits on those who need them most. We are unashamed about that goal. I said that the right hon. Gentleman’s Government allowed 90% of families with children to be eligible. We want that to be six out of 10.
Michael Connarty: On the statement that tax credits are being refocused on those who need it, how can the Minister say that if someone’s income drops by £2,500 they will receive no increase in their tax credits? Clearly, if someone loses £2,500 of a very low income, they lose a great deal, and may be put into dire poverty, which might mean that they could not feed their children. How can the Minister say that tax credits are being refocused on those poor people?
Miss Smith: I ask the hon. Gentleman to think with the breadth that is appropriate to the situation, and to try to understand the totality of what that family—
Miss Smith: The hon. Gentleman should try to understand the totality of what that family might receive from the state, and that must include services and benefits in kind. I appreciate his point. This is an income disregard. We are introducing it for the first time, and I appreciate that it is a new introduction. However, it is fair to say that with the mess of inaccurately calculated tax credit awards that all MPs are familiar with from our correspondence, it is important to pay attention not only to limiting the confusion that is caused when someone’s income rises—the Labour Government allowed it to rise by £25,000 before amending it, which is very close to the average income in total—we must also pay attention to when it drops. It is fair to focus on the most needy. There are people on the income scale below those in his scenario, and I do not pretend that life would be easy at that point. I do not think any of us would do so.
I move on to something that it is extremely important to make clear in this uprating. The other thing we are doing, about which we have not yet spoken, is tapering the family element immediately after the child element. I challenge the hon. Gentleman, or any Opposition Member, to say whether they disagree with the idea of removing such tax credits from people who earn up to £41,000, because that is what we are seeking to do today. We seek to withdraw tax credits from earners in the £40,000 arena down to the £20,000 scale. That measure is fair, and I am pleased to confirm that that is what these regulations do.
I shall briefly turn to the change in the number of hours, which is also fair, although it is not in the regulations. The change has received much airing in the House, and elsewhere, this week. It is not in the regulations, but I emphasise its fairness because it seeks to place couples under requirements similar to those that lone parents have always been under. [ Interruption. ] Perhaps the hon. Members who are groaning could explain their sympathy for lone parents in such circumstances.
Mr Andrew Love (Edmonton) (Lab/Co-op) rose—
Miss Smith: The hon. Gentleman rises to do just that.
Mr Love: Does the Minister accept that many people affected by the regulations will find that they are earning less in work than they would on benefits and that they will inevitably choose to go on benefits, thereby destroying her policy of making work pay?
Miss Smith: I am particularly pleased that the hon. Gentleman takes me to that point, because I would like to comment on it, although as I keep stressing, the change is not in the regulations, so Mr Davies may choose to stop me at any point.
I believe the hon. Gentleman refers to the figures that have been cited in a number of parliamentary questions this week. I believe the figures were discovered by the hon. Member for Stockport, who is not here to answer for them. Her parliamentary question suggested that a typical family would be £736 better off if they gave up work. According to Treasury figures, however, although the family would potentially be better off on benefits in the short term, if they found the extra hours, they would be £1,976 better off over the year. That is what I call a work incentive, which is why we see this as a precursor to the sound principles of universal credit.
Meg Hillier (Hackney South and Shoreditch) (Lab/Co-op) rose—
The Chair: Order. We have gone off on a slight tangent. I hope the hon. Lady’s intervention will address the measures, rather than pursue that tangential discussion. If her intervention addresses the measures, that is fair; but if we are going off on a tangent, I would rather bring the debate back to the measures.
Meg Hillier: It is important that I have a chance to quiz the Minister on her point.
Several times this week, the Minister has repeated her comment that people need only find a few more hours to be better off. She keeps reiterating the increase in vacancies, but vacancies for full-time jobs are different from a few extra hours on an existing job. I ask her again, where will my constituents find those few extra hours? I can tell her that they are unable to find them, which rather blows a hole in her argument.
Miss Smith: I shall be extremely brief and reiterate the answer I have given elsewhere this week. In the last quarter, as the hon. Lady has already said for me, vacancies were up and more than 1 million people moved into employment. I hear her point that part-time work is different from full-time work. From a data-driven approach, however, we firmly believe that the economy is shifting in those ways. We believe it is fair to ask couples to find those few extra hours, just as lone parents are already asked to find them.
I have already mentioned that the change to the number of hours, which is not in the regulations, and the changes in the regulations are entirely consistent with the principles of universal credit, namely that we expect people to progress from part-time to full-time work, and that work should pay. That brings me to the end of the Committee’s questions, unless a fresh one is about to arise.
Stephen Timms: The Minister has rightly emphasised that the hours change is not in the regulations. Can she tell us where it is? Presumably, another order will make that change. Is that still to come?
Miss Smith: In short, yes. As I said in my introduction, the Government have had to take urgent and flexible action to tackle the previous Government’s unsustainable welfare bill. Welfare spending now accounts for one third of all public spending. I referred in brief to spending on tax credits, which increased from £18 billion in 2003-04 to an estimated £30 billion in 2010-11. That is unsustainable and unfair, and the reforms to tax credits outlined in the orders and regulations are fair and proportionate. They tackle the deficit by ensuring that tax credits are targeted at those who need them most, and restricting eligibility for tax credits to fewer than the unsustainable numbers in the system over which the right hon. Gentleman presided.
Through all the tough decisions that we have taken in the Budget and the autumn statement, we are ensuring that we tackle the deficit in a fair and responsible way. As a result of that commitment, the highest decile of earners will make the greatest contribution towards reducing the deficit, both in cash terms and as a percentage of their income. On that note, I commend these measures to the Committee.
That the Committee has considered the draft Guardian’s Allowance Up-Rating Order 2012.
Draft Guardian’s Allowance Up-Rating (Northern Ireland) Order 2012
That the Committee has considered the draft Guardian’s Allowance Up-Rating (Northern Ireland) Order 2012.—(Miss Chloe Smith.)
Draft Tax Credits Up-Rating Regulations 2012
Motion made, and Question put,
That the Committee has considered the draft Tax Credits Up-Rating Regulations 2012.—(Miss Chloe Smith.)
The Committee divided: Ayes 10, Noes 6.
AYES
NOES
Question accordingly agreed to.