Draft Tax Credits Up-Rating Regulations 2014
Draft Guardian’s Allowance Up-rating Order 2014
Draft Guardian’s Allowance Up-rating (Northern Ireland) Order 2014
The Committee consisted of the following Members:
† Dakin, Nic (Scunthorpe) (Lab)
† Doran, Mr Frank (Aberdeen North) (Lab)
Field, Mr Frank (Birkenhead) (Lab)
† Fullbrook, Lorraine (South Ribble) (Con)
† Glen, John (Salisbury) (Con)
† Hemming, John (Birmingham, Yardley) (LD)
† Jones, Mr Marcus (Nuneaton) (Con)
Lazarowicz, Mark (Edinburgh North and Leith) (Lab/Co-op)
† McKinnell, Catherine (Newcastle upon Tyne North) (Lab)
† McDonagh, Siobhain (Mitcham and Morden) (Lab)
Moon, Mrs Madeleine (Bridgend) (Lab)
† Morgan, Nicky (Economic Secretary to the Treasury)
† Paice, Sir James (South East Cambridgeshire) (Con)
† Rudd, Amber (Hastings and Rye) (Con)
† Shepherd, Sir Richard (Aldridge-Brownhills) (Con)
Wilson, Sammy (East Antrim) (DUP)
Margaret McKinnon, Committee Clerk
† attended the Committee
Sixth Delegated Legislation Committee
Tuesday 18 March 2014
[Mr Adrian S anders in the Chair]
Draft Tax Credits Up-rating Regulations 2014
2.30 pm
The Economic Secretary to the Treasury (Nicky Morgan): I beg to move,
That the Committee has considered the draft Tax Credits Up-rating Regulations 2014.
The Chair: With this it will be convenient to consider the draft Guardian’s Allowance Up-rating Order 2014 and the draft Guardian’s Allowance Up-rating (Northern Ireland) Order 2014.
Nicky Morgan: It is a pleasure to serve under your chairmanship this afternoon, Mr Sanders.
It is a requirement that I confirm that the provisions contained in the orders and regulations before the Committee are compatible with the European convention on human rights.
In terms of the purpose of the regulations and the orders, the regulations increase the maximum rates of the disability elements of tax credits—the disabled child and severely disabled child elements of child tax credit, and the disabled worker and severely disabled worker elements of working tax credit—in line with the consumer prices index. That decision was taken to protect those benefits that help with the extra cost of disability. The regulations also increase the earnings threshold for those entitled to child tax credits only, after which payments begin to be tapered away.
The orders increase by CPI the rate of guardian’s allowance, which is the payment made to provide support to those who look after a child whose parents are deceased.
In the autumn statement 2012, we announced that the basic element and the 30-hour element of working tax credit would be uprated by 1% in 2014 and 2015. That was alongside the announcement that the child element of child tax credit and the couple and lone parent elements of working tax credit would be uprated by 1% for three years from April 2013. It was also announced in the autumn statement 2012 that the rates of child benefit would increase by 1% in 2014 and 2015. The 1% increases are not being considered by the Committee today, because those will be introduced by the Child Benefit and Tax Credits Up-rating Order 2014. That is a separate “no procedure” instrument made in accordance with the provisions of the Welfare Benefits Up-rating Act 2013.
The regulations and orders before the Committee protect the most vulnerable by ensuring that the guardian’s allowance and the elements of working tax credit and child tax credit designed to assist with the extra costs of
disability keep pace with the change in prices. The Government have ensured that those elements of financial support paid to low-income and vulnerable households have kept pace with inflation and will continue to do so until the end of this Parliament. Those decisions must be seen in the context in which they were taken. The Government inherited an exceptional fiscal challenge. The financial crisis of 2008 and 2009 resulted in the largest deficit since the second world war, and unsustainable levels of public spending. Under our predecessors, welfare spending had spiralled out of control, and has continued to rise—from 11% of GDP in 2007-08 to more than 12% today. Tax credits spending also rocketed under the previous Government by an extraordinary 340% compared with the benefits they replaced. In a constrained fiscal climate, that is simply unaffordable, and puts pressure on spending on public services.The decisions to under-index child benefit and certain elements of the tax credit rates were not taken lightly. They mean, of course, that the rates will reduce in real terms. Uprating the basic element, the 30-hour element, the couple and lone parent elements and the child element of tax credits by 1% will save £1.65 billion by 2015-16, and the 1% uprating of child benefit will save £360 million by 2015-16. That is why it was necessary to take those difficult decisions.
The Committee will be aware that the decisions on uprating contained in the regulations are part of a wider package of uprating measures. The Minister of State with responsibility for pensions, my hon. Friend the Member for Thornbury and Yate (Steve Webb), has already presented to the House the Social Security Benefits Up-rating Order 2014, which fulfils the statutory duty on the Secretary of State for Work and Pensions to review the rates of social security benefits and provides for the uprating of certain benefits and pensions in 2014-15.
Let me assure the Committee that it is this Government who are taking important steps to support hard-working families. We are supporting working families through raising the personal allowance. Since 2010, the Government have announced successive increases in the personal income tax allowance, totalling £3,525. By April this year, the personal allowance will rise by another £560 to £10,000, following the largest cash increase in history of £1,335 in April 2013.
By April 2014, the Government’s personal allowance increases will have benefited more than 25 million people by an average of £446 and will have lifted more than 2.7 million individuals on low incomes out of paying income tax altogether. We are also supporting families through cancelling increases in fuel duty and freezing it for the remainder of the Parliament. At the same time we are providing a grant equivalent to a 1% rise in council tax to every local authority in England that chooses to freeze or to reduce council tax over the next two years.
Alongside the broader steps that the Government are taking to support hard-working families with the cost of living, the provisions before us will ensure that support for the most vulnerable in the tax credit system is protected, even in the context of difficult decisions elsewhere. The Government’s approach is helping to secure the recovery now and for the longer term, and I commend the orders and the regulations to the Committee.
2.36 pm
Catherine McKinnell (Newcastle upon Tyne North) (Lab): It is a pleasure to serve under your chairmanship, Mr Sanders. I covered the equivalent delegated legislation Committee this time last year in my previous role as shadow Exchequer Secretary to the Treasury, because the then Economic Secretary and shadow Economic Secretary were dealing with the Committee stage of the Financial Services (Banking Reform) Act 2013 on the Floor of the House. Little did I know then that I would be standing in here my current role as shadow Economic Secretary. As I said last year, there is no doubt that the draft measures before us today will detrimentally affect the incomes of many thousands of hard-working families up and down the country at a time when they continue to face a cost of living crisis, with far too many regularly finding that there is simply far too much month at the end of their money.
The Tax Credits Up-rating Regulations 2014 increased child tax credit by just 1% from April 2013, in line with the Chancellor’s decree at his 2012 autumn statement that increases in most working-age benefits should be limited to 1% a year for the next three years, claiming that any greater a rise would not be “fair to working people”. Last year’s regulations also saw the basic and 30-hour elements of the working tax credit remain frozen, as they have been since April 2011, while the second adult and lone parent elements were increased by just 1%. As the Minister outlined, the disability and severe disability elements rose by inflation, but by the CPI rather than the RPI measure.
At the same time that the Chancellor chose to give a £3 billion tax cut to the top 1% of earners—85% of whom are men—and leave those earning over £1 million an average of £100,000 better off, he also chose to cut substantially the real-terms income of ordinary working families across the country. Since then, the passing of the Government’s Welfare Benefits Up-rating Act 2013 sets in stone the Chancellor’s decision to cap the annual increase in most working-age benefits at 1% in real terms in both 2014-15 and 2015-16. Of course, the Treasury has never been statutorily obliged to uprate tax credits under the provisions of the Tax Credits Act 2002. However, it is statutorily obliged, under section 41 of the 2002 Act, in each tax year to review the levels of tax credit payments, to prepare a report of each review and to publish the report and lay a copy of it before each House of Parliament. From this year’s review, published on 12 February, we can see that quite a difference exists between the proposed level of child and working tax credits from April 2014 and the level they would have reached had they fully retained their value. The basic element of the working tax credit will be £35 less than if it had retained its value. The second adult and lone parent elements will also both be worth £35 less. The 30-hour element will be worth £15 less.
Of course, every element of the child tax credit—all being raised by just 1%—will also have significantly reduced in real value when compared with prices. For example, the disabled child element and the severely disabled child element will be worth £45 less. Perhaps the Minister could confirm that the figures are correct and that the Government will hit people’s pockets by those amounts.
As I outlined earlier, the reason for the changes is the Chancellor’s belief that they are fair to working people. I fear that he and his Conservative and Lib Dem colleagues
remain under the misapprehension that those hit by the 1% cap are what they might call “shirkers”. That could not be further from the truth. The Resolution Foundation has calculated that 68% of the households affected by the overall 1% uprating decision comprise people in work. Figures from the Institute for Fiscal Studies indicate that 7 million working households will be on average £165 worse off over the next three years as a result of the decision. The Children’s Society estimates that the decision to uprate working-age benefits by just 1% will affect up to 40,000 soldiers, 300,000 nurses, 150,000 primary and nursery school teachers and more than 1 million administrative workers and secretaries. The 1% uprating could mean that a nurse on £530 a week who is a lone parent with two children lost £424 a year by 2015.Perhaps most worrying of all is the impact of the 1% uprating on child poverty. The Minister of State, Department for Work and Pensions, the right hon. Member for Wirral West (Esther McVey) was forced to confess that the uprating measures over three years
“will result in around an extra 200,000 children being deemed by this measure to be in relative income poverty compared to uprating benefits by CPI.”—[Official Report, 15 January 2013; Vol. 556, c. 715-16W.]
By the Government’s own admission, an extra 200,000 children will fall into poverty as a result of the 1% uprating decision. That is a shameful admission, which is compounded by the IFS’s projection that, by 2020, 1 million more children will live in relative poverty than did in 2010. That suggests that the tax and benefit changes that were introduced since April 2010 can account for almost all the increase in child poverty that is projected in the next few years. That is after the impact of universal credit is taken into account.
The Social Mobility and Child Poverty Commission’s first annual progress report summed up the current situation:
“Today child poverty is overwhelmingly a problem facing working families, not just the workless. Two-thirds of Britain’s poor children—compared to less than half in 1997—are now in families where an adult works. The available data suggests that in three-quarters of those, somebody already works full-time. The principal problem is that those working parents simply do not earn enough money to escape poverty.”
Yet those are the families that the Government have chosen to hit with the 1% uprating decision.
Instead of wasting time squabbling about definitions of child poverty, when will the Government wake up to the real impact of their decisions on some of the people who are least able to bear the burden? The Opposition are committed to reducing the deficit, and we know that we will have to finish the job that the current Government have failed to finish of getting the deficit down. However, it is vital that those with the broadest shoulders bear their fair share of the burden, which, as the Minister knows, currently hits women four times harder than men. That is why we voted against the tax credit uprating regulations last year. However, we know that the decision has been made, so we will abstain on today’s measure.
The Minister explained that the guardian’s allowance is paid to those who are raising children whose parents have died. Unlike tax credits, that allowance is subject to a statutory uprating and previous Governments chose to increase rates annually at least in line with the retail prices index. However, as announced in the 2010 Budget,
the Government chose to adopt CPI for uprating benefits, including the guardian’s allowance from April 2011. That allowance is one of the few benefits to remain unscathed by the subsequent move to uprate benefits by 1%. The order increases the guardian’s allowance by CPI as at September 2013 by 2.7% as opposed to 3.2% —the RPI measure for the same month.The general issue of whether RPI or CPI is the most appropriate measure for uprating benefits and indexing pensions has, of course, been discussed elsewhere at great length. However, it is undeniable that CPI is less generous than RPI, with the Office for Budget Responsibility assuming a long-run difference between RPI and CPI inflation of 1.3 percentage points. It is therefore clear that the impact of the change to CPI in uprating the guardian’s allowance will increase over time—and in perpetuity if the Government get their way.
Thus, although the Opposition have been clear that the temporary use of CPI rather than RPI as part of a balanced deficit reduction programme is acceptable, we do not support the decision to adopt CPI permanently as a measure for uprating pensions or other benefits. Indeed, the Minister knows that the Opposition abstained on the equivalent orders on guardian’s allowance last year and in 2012 on those grounds. We believe that the guardian’s allowance should be uprated, but we object to the Government’s intention to erode it long term. In the long term, the previous mechanisms for uprating should be adopted. We will therefore abstain today.
2.45 pm
Nicky Morgan: I am sure the hon. Lady is delighted to be back here today to discuss the regulations and the orders, but her speech was really very poor and I expect better of her. She did not give us the context.
Catherine McKinnell: That is not my job.
Nicky Morgan: The hon. Lady says that is not her job, but that typifies why she and her colleagues are on the Opposition Benches and we are in power. This Government have taken the difficult decisions needed to row back from the financial situation that this country was facing.
The hon. Lady talked about tax rates. That is a favourite subject of the Leader of the Opposition—he returns to it every Wednesday in the House when he cannot think of anything else to say—but the top rate of tax is now higher than at any point during the 13 years of the previous Government. The top 1% of income tax payers in this country are paying 30% of the tax towards our essential public services.
What the Opposition seem to miss is that the welfare system has to be fair to those who receive benefits but also to those who are paying the taxes. That is one of this Government’s key messages with the benefits cap and the welfare cap that we will hear more details about shortly. Had the previous Government—of which I appreciate she was not a member—not crashed our economy, every household would be better off by £3,000 compared with the figures she bandied about. She talked about the Opposition being committed to reducing the
deficit, but it is their deficit that the Government are trying to bring down. [ Interruption. ] The hon. Lady does not seem to understand the difference—many Opposition spokesmen do not—between the deficit and the debt. The deficit is the gap between what the Government get in taxes and what they spend. That has come down by one third since 2010.Before I move on to the detail of the hon. Lady’s comments, I have to wonder whether, when she talks about CPI and RPI, she is saying that Labour would restore the previous system if they were elected. Does she want to tell us about that spending commitment?
What the hon. Lady has missed out—again, something the Opposition often omit—is the rise in the personal allowance, which those who are receiving tax credits also benefit from. This year, almost three quarters of those in-work families who are in receipt of tax credits will have benefited from rises in the personal allowance since 2010. For the average family, that is equivalent to just over £700 by the end of this Parliament. I have already mentioned that tax credits spending rocketed under the previous Government by an extraordinary 340% compared with the benefits they replaced.
The hon. Lady also mentioned child poverty. Like her—in fact, like all Members on both sides of the House—the Government want the number of children living in poverty to come down, but we are not going to ignore the underlying reality of child poverty. As a Government, and, indeed, across the House, we have to tackle the root causes of child poverty. We can publish numbers that show one thing or another, but we all know from our constituency casework that that does not properly tackle issues such as alcohol dependency, mental health problems, worklessness and lack of skills.
The fact is that the proportion of children in relative poverty who live in families where no adults work has fallen from 40% in 2010-11 to 34% in 2011-12. That is based on median income, which of course has come down because of the recession, so we are not solving the problem but playing around with numbers. This Government are serious about tackling the root causes of poverty. As we have seen, the Institute for Fiscal Studies has found it hard to forecast the number of children in poverty. Its forecast came down by 100,000 but the number came down by 300,000 on some measures.
The hon. Lady also talked about the change from RPI to CPI. I ask her, what would the Labour party do? Will it go back to RPI if it is given back control of the economy—something I sincerely hope will not happen—in May 2015? She mentioned that the switch was tested in both the High Court and the Court of Appeal, which found for the Government in making that switch, making our welfare system far more sustainable. The Government’s decision to increase the child element of child tax credit by CPI meant that it increased in April 2011 by £180, meaning that these families are still receiving more financial support through that payment than if the Government had uprated this element by CPI in each year.
As I said in my introduction, alongside the steps the Government are taking to support hard-working families, the regulations and orders protect the most vulnerable by ensuring that the guardian’s allowance and the elements of the working tax credit and child tax credit designed to assist with the extra costs of disability keep pace with the change in prices. The Government have ensured that
those elements of financial support paid to low-income and vulnerable households have kept pace with inflation, and they will continue to do so until the end of this Parliament.I ask that the Committee support the regulations and orders, although I note that the Opposition will abstain, which is typical—neither here nor there—and shows that they have no economic plan, long term or otherwise. It is this Government who are taking the difficult decisions to put our economy on a sustainable footing. Today’s changes are a part of that.
draft guardian’s allowance up-rating order 2014
That the Committee has considered the draft Guardian’s Allowance Up-rating Order 2014.—(Nicky Morgan.)
Draft Guardian’s Allowance Up-rating (Northern Ireland) Order 2014
That the Committee has considered the draft Guardian’s Allowance Up-rating (Northern Ireland) Order 2014.—(Nicky Morgan.)