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Lord Campbell of Croy: My Lords, I am grateful to the noble Lord for his reply. Is government support being provided? I ask that because it is estimated that the cost of generating electricity from waves has decreased significantly, and because of the environmental advantages.

Lord Sainsbury of Turville: My Lords, wave energy research was stopped in 1994 because of cutbacks in the amount of money for renewable energy research. Since then further work has been done. Although wave energy generation is clearly for the long term, it is felt that it should be part of the research that we undertake. As regards costs, this method remains extremely expensive as compared with the alternatives.

The Earl of Lauderdale: My Lords, will the Government say when this report will be made public, and will it distinguish--as it should--between wave energy and tidal energy?

Lord Sainsbury of Turville: My Lords, we are talking here about wave energy rather than tidal energy. As regards the two reports, the consultation document has already been made available; that is, the one I have already mentioned, New and Renewable Energy--Prospects for the 21st Century. A report from the Foresight Marine Panel, entitled Energies from the Sea: Towards 2020, also makes the case for wave energy.

Baroness Miller of Hendon: My Lords, although I believe it is generally agreed that wave energy is an excellent source of renewable energy, as the Minister indicated, the cost of that is somewhat prohibitive at the present stage of technology. Will the Minister say why the Government continually set their face against gas-fired power stations which are both economical and environmentally friendly?

Lord Sainsbury of Turville: My Lords, what we are discussing here is a programme for renewable energy research which is looking at the future. Although, under the third Scottish renewables obligation, the cost was about 6p or 7p, this is felt to be a good investment for the future. I was asked about gas-fired stations, which we have discussed on a number of occasions. That is a separate question and relates to the right speed for going

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into that programme. It is still the case, as I have made clear to the House before, that currently the marginal cost of coal-fired stations is lower.

Viscount Addison: My Lords, can the noble Lord say whether there will be a greater use of tidal energy as opposed to wave energy? Many noble Lords live next to rivers and see a tremendous amount of water running past. It seems a shame that many of the old mills cannot be brought back into operation as they could generate enough electricity to supply villages around the country. I should like to see some support from the Government to that end.

Lord Sainsbury of Turville: My Lords, it is obviously a question of priorities but it is felt at this point that wave energy is the best option. There have been proposals on tidal energy but they involve huge capital costs which at this point preclude their consideration.

Lord Hughes of Woodside: My Lords, did I misread the newspapers last week when I thought I read that the Government had just approved a gas-fired power station in Wales? If that is the case, is it not about time that the Front Bench opposite also read the newspapers?

Lord Sainsbury of Turville: My Lords, far be it from me to comment on the reading matter of noble Lords on the other side of the House, which I am sure is a proper kind of reading and included that point.

Lord Ezra: My Lords, the Question relates specifically to wave energy but the efficient use of all forms of energy and the reduction of emissions from energy production are also relevant points. Will the noble Lord confirm that in the case of coal, for example, the Government still intend to proceed with ways in which coal can be used more efficiently while at the same time reducing emissions?

Lord Sainsbury of Turville: My Lords, I can confirm that. The noble Lord will have noticed that with the climate change levy there is a proposal for a fund of another £50 million which will provide more support not only for renewable energy, but also for projects involving greater energy efficiency.

Lord Skelmersdale: My Lords, the Minister mentioned three contracts that have been awarded under the SRO. Does he expect those to come to fruition? One of the great problems with both the non-fossil fuel obligation in England and Wales and the SRO in Scotland is that many projects do not come to fruition and therefore the contracts are abandoned.

Lord Sainsbury of Turville: My Lords, we expect those contracts to come to fruition, but such projects involve a speculative element. Before such a contract comes into being time is allowed to enable people to put the project together.

Lord Campbell of Croy: My Lords, are experiments or trials being planned or carried out at other marine

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sites besides the island of Islay, where the present experiment in wave energy is continuing, in view of the extra amount of money available from the renewables obligation in Scotland, to which the noble Lord referred, and the non-fossil fuel obligation which applies in England and Wales?

Lord Sainsbury of Turville: My Lords, we look at projects from other parts of the country, but the fact is that, in this as in many other matters, Scotland leads the way by having bigger and more waves. That makes it a very suitable place for this kind of project.

Lord Mackay of Ardbrecknish: My Lords, as I was canvassing last week for the Scottish parliamentary elections, I missed the announcement of the gas-fired power station in Wales. First, can the Minister say where it is in Wales? Secondly, if wave energy is such a good idea on Islay, why has the Secretary of State turned down a planning application for a wind farm in Kintyre?

Lord Sainsbury of Turville: My Lords, wind power is a completely different issue. Like all forms of energy, it has its fierce opponents. There is also the very important issue of visual pollution, which I am sure was given due regard.

Lord Mackay of Ardbrecknish: My Lords, will the noble Lord answer my first question?

Lord Sainsbury of Turville: My Lords, I thought that had been made clear by my colleague shouting out the answer.

Tax Credits Bill

3.4 p.m.

The Parliamentary Under-Secretary of State, Department of Social Security (Baroness Hollis of Heigham): My Lords, I beg to move that this Bill be now read a second time.

Noble Lords will be aware of the proposed introduction of working families' tax credit and disabled persons tax credit. The Chancellor of the Exchequer made the announcement in another place on 17th March 1998 and noble Lords had an earlier opportunity to debate some of the broad policy principles during the passage of the Tax Credits (Initial Expenditure) Act 1998. That Act gave authority to the Inland Revenue and the Department of Social Security to spend money and begin work on the development of the tax credits to build on and replace two existing benefits, family credit and disability working allowance.

A joint project--with the Inland Revenue and the Benefits Agency--has been set up to implement the proposals and the Inland Revenue has held extensive consultations with representative groups to develop the details of the scheme. It has also been working closely with other government departments, such as the DSS and the Department for Education and Employment.

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Those two introductory paragraphs I had estimated might be coterminous with the departure of most of your Lordships from the House. I now turn to the substance of the Bill which provides for the introduction of tax credits, their administration by the Inland Revenue and for them to be paid through the pay packet. It may be helpful if I spend some time sketching in the background to their introduction.

First, perhaps I may say something about labour market trends. Since the objective of full employment was first set out in 1944 there have been major demographic and social changes affecting the labour market and the global economy and a rise in female and in part-time employment. Over the past 20 years in particular, structural unemployment has been on an upward trend, accompanied by the wide swings in the level of employment which go with the boom and bust economic cycle. The labour market participation rates of certain groups of individuals, including men aged over 50--particularly those with poor skills--lone parents and disabled people have all declined substantially, and the number of households where no one is in work has risen dramatically. The problem is particularly acute among families with children and is a major factor in child poverty.

The build up of long-term worklessness associated with previous recessions has proved immensely damaging for individuals, destroying their connections with the labour market, their skills and their employability. It has meant that, as the economy began to move into recovery, the upturn was cut off by labour market bottlenecks, by skill shortages and wage inflation while at the same time worklessness remained at unacceptable levels. So the challenge facing the Government is to promote employment opportunity for all in the very different labour market of today.

What are the obstacles to work? Lack of work is the most important pathway into poverty and work is the best way out. Most of those with low incomes are poor because no one in their household has paid work. But also, one in five low income households remains stuck on a low income even though all the working age adults in their household are in work. For those who are trying to move into work, or trying to move up the employment ladder, there are two major problems. I am sure your Lordships will be familiar with both. They are the unemployment trap and the poverty trap.

People are understandably reluctant to take work that does not pay, even though they remain strongly attached to the labour market. Too often, the gap between in-work and out-of-work income is too small to encourage people to move off benefits--the unemployment trap. And, once in work, many people on low income face an unacceptable poverty trap in which improvements in their pay are clawed back by the combined effects of the tax and benefit system. It means that they may be paying almost penal rates of deduction. Those distortions are frustrating the ambitions of people on low income and contributing to family poverty. They also contribute to high levels of structural unemployment and low levels of labour market participation. Measures to address tax and benefit

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distortions are therefore an important element of the Government's economic programme as well as a crucial element of the reform of the welfare state. We are determined to make work pay by tackling those obstacles--the unemployment trap and the poverty trap--to moving into work, staying in work and moving onwards.

Since 1979 the number of non-pensioner families--that is, families of working age--living in workless households has more than doubled as households have polarised between "work rich", where more than one person is in work, usually a husband and wife, and "work poor" households where no adult is in work. In 1995-96, eight out of 10 working age households with less than half average income--almost 8 million people--had no full-time worker, up from five in 10 (in 1979) to eight in 10. A third of children, as a result, now live in relative poverty. That is almost 3 million more poor children than in 1979. Over 80 per cent. of those children live in families where no one has a full-time job. Over 80 per cent. of workless households are dependent on benefit; that rises to over 90 per cent. of workless households where there is a couple with children. It has led not only to worklessness and relative poverty, but also to greater income inequality.

As I said earlier, the unemployment trap occurs where net income after taxes and in-work benefits is little or no better than income out of work. Such low returns from working reflect partly the low level of entry wages that some people are able to obtain: entry wages are on average only two-thirds of the median wage for the job. For someone falling out of work but then returning, it takes on average four years to recover the level of pay that that person received when he or she dropped out of work. Yet research shows that it is the entry wage, not the wage that people may receive four or six years on, that determines people's perception of the financial returns from entering work. A survey of the barriers to moving into work based on people on income support indicated that the biggest single reason why people were reluctant to move from income support into work was the low level of entry wages. Over a third of those questioned cited that as the reason--twice as many as cited the lack of affordable childcare, for example.

But for some, particularly those with large families, the financial gains from working can be small even at moderate earnings. The tax and benefits system plays a key role here. The severity of the unemployment trap depends primarily on a combination of two factors. The first is the generosity of out-of-work benefits, which reflect family size--unlike wages--and which erode the return from work, particularly for those in a large family. The other is the wages that can be obtained from working plus the generosity of in-work benefits, which will increase the return from work. The position of the unemployment trap is on the fulcrum between those two.

The poverty trap arises when people in work cannot improve their net income significantly by increasing their pay because that is largely offset by income tax and particularly withdrawal of in-work benefit. Whereas higher in-work benefits improve the unemployment trap--that is, they make it more attractive to work--

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they tend to make the poverty trap worse because they mean more families receiving those benefits and hence facing high withdrawal rates.

For those with sufficient income or hours to take them off JSA or IS, the return from futher increases in earnings can be reduced by national insurance contributions, income tax, the progressive withdrawal of family credit, housing benefit and council tax benefit. The overall size of the marginal deduction rate facing a low earner depends on which benefits are being received, but it can rise to 97 per cent. for those who are also on family credit, housing benefit and council tax benefit, as well as paying NICs and tax. Because withdrawal of benefits is calculated on the basis of income after tax and other benefits, the overall rate cannot normally exceed 100 per cent., but at certain points it can go higher where both housing benefit and council tax benefit are being withdrawn. People are actually worse off for every extra pound they earn. Surely that must be perverse.

Marginal rates for low earners tend to be higher for those with children, because they may then be affected by the withdrawal of family credit, or those with high rents and/or council tax, because they may then be affected by the withdrawal of housing benefit or council tax benefit. About three-quarters of a million working families, about 5 per cent. of the total, have marginal rates of 70 per cent. or more currently. That is approximately twice the number that existed in the mid-1980s. That is in part a result of the previous administration's decision to move away from investing in social housing and instead to deregulate housing rents, which therefore went up. Housing benefit took the strain, thus increasing that dependency trap by thousands. Absurdly, nearly half of those on family credit, 45 per cent.--500,000 people--also pay income tax, even though their hourly rate may be below the minimum wage. So we pay in-work benefits to subsidise unacceptably low pay, and we then proceed to tax part of those in-work value benefits away. Can there be a better argument for the integration of tax and benefit structures? Under WFTC, 97 per cent. of those families, the 500,000 who are being taxed on their benefits, will be taken out of tax altogether.

I now turn to the working families' tax credit. Last year, the Chancellor of the Exchequer signalled a major step towards overcoming the twin obstacles of the poverty trap and the unemployment trap. He announced the introduction of the working families' tax credit to replace family credit to ensure that work is rewarded and not penalised. Its greater generosity helps to spring both the unemployment trap and the poverty trap. It makes it attractive to move into work and it allows people to keep more of their pay as they go up the earnings scale because the tapers are more shallow.

Combined with the national minimum wage and changes to NICs, the WFTC will provide a minimal level of weekly take-home pay. The WFTC, which will be introduced on 5th October 1999, will provide a guaranteed minimum income of £200 for families with one member in full-time work earning the national minimum wage and reduce the tax burden on families so that those with earnings of less than £235 a week, or

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£12,000 a year, will no longer pay any net tax; it will reduce the number of people with marginal tax rates of over 70 per cent. by 500,000; it will provide the opportunity to develop greater support for the costs of childcare; and the disabled person's tax credit will also provide a guaranteed minimum income of at least £155 a week for a single disabled person who moves from benefit to full-time work earning the national minimum wage, and £230 for a couple with one earner and one child.

The Tax Credits Bill legislates to convert the existing benefits into the new, more generous tax credits. It sets out the framework within which the tax credits will operate. The Bill builds on the existing legislation for the benefits which are being replaced. It provides that the main features of family credit and disability working allowance will apply to WFTC and DPTC, and that the functions of the Secretary of State are transferred to either the Treasury or the Inland Revenue.

Much of the detail of the existing benefits is in secondary legislation. The Bill therefore includes a large number of existing regulation-making powers, where the details of the scheme will be set out. It adds few new regulatory powers. Rather it re-establishes the existing powers of family credit and transfers them to WFTC. The Bill also contains consequential provisions to establish the administration of the tax credits by the Inland Revenue.

Much of the detail of the scheme and that for payment through the pay packet has already appeared in the booklet, Working Families Tax Credit and Disabled Person's Tax Credit, published last December and in the draft regulations published for debate in the other place.

It may be helpful if at this point I explain how the tax credits will work. In October 1999 WFTC and DPTC will begin and will be administered by the Inland Revenue. Applications for the tax credits will be made to the Inland Revenue at the new tax credit unit. It will asses and pay the award.

WFTC will be available to families who have one or more children living with them, who work at least 16 hours a week, are resident in the United Kingdom and have savings of less than £8,000. The qualifications for DPTC are similar, except that applicants must have savings of less than £16,000, and they do not need to be looking after a child. To qualify for DWA they must have one of a number of qualifying disability benefits or have been receiving one up to 56 days prior to their application. But the Bill extends this period to six months. I shall return to that later.

The WFTC will include one adult credit per family--it is a household credit--while the rate of DPTC adult credit will depend on whether the applicant is single or a member of a couple. The distinction is that the credit is by definition of the disability as opposed to the family. Both WFTC and DPTC will also include child credits, depending on the number and age of the children, a 30-hour credit, as now with family credit, and a childcare tax credit. The DPTC will in addition include a disabled child's tax credit. The total amount of WFTC or DPTC for which a family qualifies is calculated by adding together the appropriate tax credits.

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The full amount of WFTC will be available to those whose income net of tax and NICs is below £90 per week. If net income is above £90, the maximum WFTC is reduced by 55p for each additional £1, not 70p as now under family credit. The full amount of DPTC is available to a single person whose income net of tax and NICs is below £70 per week and to a couple or lone parent whose net income is below £90 per week. Above those amounts the taper is reduced by 55p for every extra £1 of income.

Compared with family credit, the credits under WFTC and DPTC are more generous, the threshold is higher and the taper of withdrawal is more gentle. Once the weekly amount of tax credit payable has been awarded, it will normally be fixed for 26 weeks, as with family credit now. Couples applying for WFTC will be able to choose which partner applies for and receives the tax credit--a point worth emphasising. Awards will be paid to the applicant by automatic credit transfer into the applicant's bank account or, if the applicant chooses, by order books.

As I have mentioned, the tax credits also include a childcare tax credit. This will be more generous than the childcare disregard in family credit which it replaces and will assist the poorest families. Under family credit a family earning less than the threshold of £79 a week cannot, in practice, obtain help with childcare costs because it is already receiving maximum family credit and therefore the disregard of childcare costs cannot come into play. With working families' tax credit, the credit effectively reimburses 70 per cent. of what is paid out for assisted childcare, so the poorest stand to gain. The credit will play a key role in underpinning the national childcare strategy by ensuring that good quality childcare is affordable for low and middle-income families.

We have therefore decided to raise the age limits applicable under family credit so that parents will be able to claim for childcare for children up to the age of 14, ensuring that the credit is in line with the national childcare strategy. We all know that children of 12 and 13 need supervision as much as younger children. We shall also raise further the age limit in the case of children with a disability so that their parents will be able to claim childcare costs up to the age of 16 and extend the range of childcare costs which can qualify for the tax credit to cater better for good quality out-of-school provision needed for older age-group children, the 8 year-olds plus.

We have also proposed that in calculating income for WFTC purposes there will be full disregard for maintenance payments, something I am very pleased about. That will be a significant contribution towards tackling child poverty. At the moment a lone parent on family credit keeps only the first £15 of the maintenance and thereafter it is netted off the family credit. In future she--it is usually she--will keep every penny, on average, over £30 or £31. Children will see their fathers directly paying maintenance for their upkeep and the family and the children will be better off.

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Finally, we have also recognised that one of the problems with moving into work is the financial uncertainty between losing income support and the start of wage payments. To help ease the transition for lone parents, the Chancellor announced in his Budget that from October 1999 their out-of-work income support will be extended for two weeks--a fortnight's roll-over--when they move into employment. As IS and jobseekers' allowance are often paid up to two weeks in arrears, this will effectively allow up to four weeks' roll-over of IS or JSA alongside the existing four weeks' roll-over of housing benefit and CTB. This, too, will smooth the move into work. Many people have told us that it is the first month, before they receive wages and when they have lost benefit, that is the hardest to cope with.

The disabled person's tax credit will replace the DWA. It will be more generous than the benefit it replaces, with increases in the thresholds and a more gentle taper. There are many experts on disability in this House, some of whom I see here today. They will know what the flaws with disability working allowance have proved to be. It does little to help people who become disabled while working to stay in work, despite all the evidence showing that unless a disabled person stays with his or her existing employer it is most unlikely that another employer will employ him or her. Nor has it been as successful as anticipated--and we all hoped it would be successful--in encouraging people to move from out-of-work benefits into work. When it was first introduced we expected that around 50,000 disabled people would claim it. The figure has climbed very slowly to about 14,000, only a quarter of those whom we hoped would be eligible.

What are we going to do about DWA? To address the first point, the Government propose creating a fast-track gateway to the disabled person's tax credit. This will be for people who have been on statutory sick pay or equivalent benefits for 20 weeks and who are therefore effectively still employed by their employer, who can show that their condition will represent an obstacle to their participation in the labour market for the next six months and who face a drop in income from returning to work. In other words, we are effectively constructing a partial capacity benefit for those in work whose earnings will fall by virtue of their disability while they remain with the same employer. This seems to me an important move in allowing disabled people to remain in work, with more flexible working conditions. We shall bring forward any necessary new clauses at Committee stage.

To tackle the second problem with DWA and to get people who are out of work into work, as opposed to keeping them in work, we propose two new measures. The first is to use the qualifying benefit rule. At present, to be eligible for DWA a claimant must either be claiming disability living allowance or have claimed incapacity benefit within the past 56 days. However, 56 days may not be long enough for someone to find a job whose entitlement to incapacity benefit has been withdrawn because of improvements in his or her

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condition but who is still at a disadvantage in the labour market. We are therefore extending that period to six months.

Secondly, we are extending the housing benefit and council tax roll-over, which applies to income support but not to disability benefits, to disabled people. In addition, noble Lords will recall that last October the 12-month linking rule came into effect, which means that if a disabled person on a fairly high level of benefit--because it is long-term benefit--takes the risk of going into work, should that work break down, he or she can go back on to the higher level benefits rather than go back down the snake and have to start all over again. This linking rule takes away some of the risk that disabled people perceive in leaving secure benefits and trying out work.

Putting those three measures together--the fast-track procedure, the roll-over, and the 12-month linking rule--we believe that we shall not only be able to help disabled people remain in work but also help them to move into work more speedily.

From April 2000 WFTC and DPTC will become payable to employees by their employer in their pay packet. Self-employed applicants will continue to be paid direct by the Revenue, as will couples who have opted for the tax credits to be paid to a partner who does not have an employer. As with the general scheme, draft regulations for the scheme for payment by employers have been published for debate. These proposals have been developed over several months in full consultation with representative bodies. We wish to pay tax credits through the pay packet to cement the link between work and the rewards of work.

After April 2000 all claims will still be made to the Inland Revenue, who will assess the award. If, however, the tax credit is to be paid through an employer, the Inland Revenue will notify the employer of the amount of tax credit to be paid, when to start payments and when to stop. The employer will add the amount of the tax credit to the employee's net pay for each pay period. I emphasise that the Inland Revenue will do all the work of calculation. The employer will need only to add the sum notified to the pay packet. That amount will be shown on the employee's payslip. This stage of tax credits will inevitably involve some changes for employers, including the need to ensure that their systems are able to make the payments and account for them to the Inland Revenue. In its consultations with employer and other business representatives the Revenue has been discussing the design of the scheme to ensure that any extra costs are kept to a minimum. A draft regulatory impact assessment has been published along with the draft regulations I mentioned.

Employers will pay tax credits out of the PAYE tax and NIC deducted from their workforce with additional funding from the Inland Revenue if necessary. However, some employers will not be asked to pay tax credits through the payroll where they do not currently deduct PAYE tax or NICs as they will not have any money with which to pay it. In those cases employers will not pay tax credits; their employees will receive it direct from the Inland Revenue.

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That is a broad summary of the tax credit scheme. There will be some specific additional powers. There is a provision to bring the tax credits under the care and management of the Board of Inland Revenue and include within them the duty of confidentiality. There are measures to ensure security to combat fraud. There is also protection of employees' rights to ensure that they do not suffer unfair dismissal as outlined in Schedule 3 at the hands of unscrupulous employers. The Bill also allows for any necessary exchange of information between the Inland Revenue and the DSS to carry on the business of tax credits and remaining social security benefits.

Appeals about tax credit claims will be heard by the new unified appeal tribunals set up under the Social Security Act which your Lordships debated last year. That is because these tribunals will have the experience, for example in assessing disability, to deal with the type of cases that come before them. In the longer term we intend to pass jurisdiction to the tax commissioners so that they hear all appeals on tax credits. WFTC and DPTC are to be excepted matters for Northern Ireland and outside the legislative competence of the Assembly because they are part of the Inland Revenue's UK-wide tax system.

These are the main provisions of the Bill. I hope that the House will forgive me for taking some time to explain this technical matter. The Bill when enacted will allow for the introduction of a system that provides much needed help to low income families and disabled people. It will give real financial encouragement for them to move into work by significantly boosting their earnings and providing extra help with childcare costs. It will unambiguously improve the rewards from work by providing a clear link with employment. It addresses the unemployment trap; in other words, one is better off working. It also addresses the poverty trap because one keeps more money as one's earnings increase. It combines making work pay with supporting families who re-enter work, and it will help to lift them and their children out of poverty. I commend the Bill to the House.

Moved, That the Bill be now read a second time.--(Baroness Hollis of Heigham.)

3.33 p.m.

Lord Higgins: My Lords, as in previous debates relating to social security the House will be grateful for the very clear exposition by the noble Baroness of an extremely complex Bill and of the even more complex subject with which it seeks to deal. But whatever the Government's original intention--I believe we can all agree that the need to tackle the unemployment and poverty traps is of great importance--in very many respects this Bill is a bad and disappointing one. In some ways, it is a wasted opportunity. The reality is that this is not a tax credits Bill. If it were such a Bill, I should certainly be among those who welcomed it enthusiastically.

Over the years a vast number of attempts have been made to integrate the tax and benefits system to overcome the problems to which the noble Baroness

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referred. To go back into ancient history, as long ago as 1974 the then government announced that they intended to introduce a tax credits Bill to integrate the two sides. They recognised that they could not afford to do so immediately, but they said that they intended to legislate and to introduce such a Bill over four years. Alas, the general election of 1974 intervened. A committee was then set up comprising three people: the noble Baroness, Lady Castle, the noble Lord, Lord Barnett, and one other whose name for the moment eludes me. At all events, the opportunity was lost. I have never managed to discover why that government turned down that idea. Over time, everyone has wanted to see this idea achieved.

However, this Bill is not a tax credits Bill. I have tried to think of alternative titles. I forget whether the title of a Bill can be amended in your Lordships House. This measure is that most improbable animal--an Inland Revenue hand-out Bill. That gives one grave cause for concern. Even the title is wrong. Clauses 1 and 2 immediately give the game away. Under Clause 1 certain benefits are to be known as "tax credits". Spin-doctoring is all very well but to legislate to make one word mean what is normally regarded as something quite different is extraordinary. Clause 2 is concerned with the transfer of functions relating to tax credits. If it really were a tax credits Bill, there would be no need to transfer this matter to the Inland Revenue.

Very disappointingly, as the Government's ideas on this subject have changed, the Bill has itself changed very significantly. The idea was originally put forward by, among others, Mr. Martin Taylor who was looking at the issue. It was discovered that the Inland Revenue did not believe that it was possible to integrate this matter with the PAYE system. As a result, instead of going back to the very beginning, the Government have proceeded with this rather extraordinary proposal whereby the working family's tax credit and the associated credits will effectively be disbursed by the Inland Revenue. Although we are told that it is a flagship, in many respects it is a vessel that is sailing under false colours.

We shall do everything that we can to improve the Bill--and there are many respects in which the Bill can be improved, not least because interests as wide-ranging as the Institute of Directors and the CBI on the one hand and the TUC on the other have objected to some features of the Bill. Further, those groups which are most closely involved in this area, such as the Child Poverty Action Group and the National Association of Citizens Advice Bureaux, have also raised very considerable doubts. Perhaps I may quote the NACAB. Although it welcomes the increased expenditure, it is by no means certain that the problems intrinsic to

    "a means tested wage subsidy"

help to solve the poverty and unemployment traps to which the noble Baroness referred. On the contrary, it is fearful that it will make some of those problems worse rather than better.

I list some of those matters that I believe are objectionable. For some noble Lords who take part in social security debates a number of these matters will

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appear almost traditional. First, the Treasury appears to be taking over more and more of the responsibilities of the Department of Social Security. Following the transfer of the Contributions Agency, we have the Bill that is now before us.

Secondly, in line with other moves by the Government, means-testing has been increased. This Bill brings into the dependency net many people who previously were not within it, although the avowed intention of the Prime Minister before the general election was that the Government would reduce the extent to which people became dependent on the social security system.

Next, there is the promise to reduce the expenditure of the Department of Social Security. In the Comprehensive Spending Review we see a massive increase in that expenditure. As far as concerns this Bill, the figure involved is about £1.5 billion. It may be even higher following the recent Budget Statement by the Chancellor. Therefore, we face a very real problem.

From the Government's presentational point of view, the picture is rather advantageous. On the one hand, this can be presented in some ways as a tax cut and, on the other hand, as a reduction in the expenditure of the Department of Social Security.

In addition, there are all of the usual problems relating to the matter being dealt with by regulation. Will we have before Committee stage drafts of all the regulations that the Minister envisages being introduced? With particular regard to the childcare tax credit, which was introduced only at the very last minute in the other place, will we have the guidelines that will tell us whether or not a particular arrangement for childcare will qualify for benefit?

The Bill raises a number of more specific problems, particularly that which is commonly called the "purse-to-wallet problem". Grave concerns have been expressed outside that instead of benefits being paid, generally, to the wife, there will be a choice. The couple will have to choose who should receive the benefit--and that may give rise to some dispute. The noble Baroness raises her eyebrows. I do not find that a remarkable suggestion. It would seem that instead of family credit being paid to the wife, under the Bill on some occasions it may not be. Is it common ground between us that it is better that family benefit should be paid to the wife rather than to the husband? Research by Rowntree and others suggests that when it is paid to the mother, it is more likely to be spent on the child. Perhaps the Minister will clarify whether or not that is common ground.

Outside bodies have also raised problems in respect of fraud. The Government have made a great thing about tackling fraud, despite in some cases apparently withdrawing the mechanism for dealing with it. I shall not dwell on the problems now. My noble friend Lord Astor of Hever will deal with them in some depth.

Problems surrounding confidentiality have also been stressed by outside groups. Also, there cannot be any dispute about the fact that there will be problems concerning the burden on business. They will have to be discussed at a later stage.

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All those problems will require a great deal of attention in Committee, on Report and at Third Reading. In addition, we have the Government's proposals for the childcare tax credit and the disabled person's tax credit--remarkably, an issue that there was no opportunity to discuss in Committee in another place. That is an extraordinary situation and it places an additional burden on your Lordships. The Minister indicates dissent, but it presents your Lordships with an additional set of problems, which must be discussed in considerable detail.

I have already stressed the problems surrounding means testing and marginal tax rates, to which the noble Baroness referred. One must, of course, take the withdrawal of benefits into account as well as whatever the tax rate may be. Am I right in thinking that although it is true that the Bill reduces the number of families paying a high marginal tax rate, it increases the number who will pay tax at 60 per cent.? Perhaps the Minister will clarify that point. She stressed strongly that was something she saw as a virtue of the Bill.

The cost to the Exchequer will be considerable--something like £1.5 billion, which is carefully disguised in the Treasury documents as accounting and other adjustments. Has the basis on which that was put in the Red Book been approved by the impartial bodies that normally do that? It has enabled the Government to present their public expenditure and tax plans in a more favourable light than reality would justify.

My next point arises, rather cogently, from the quotation that I used a moment ago from the NACAB, which called the Bill's proposals a means-tested wage subsidy. That is a rather unusual device, but it is the reality of what is proposed in the Bill. Is that in conformity with European Union law? If it is a subsidy of that kind, other countries might feel that it is unfair competition.

I turn to the centrepiece of the Bill. The Government's whole argument is that, as they were not able to do this through PAYE, the benefit must be paid through the payroll so that people understand that they get more from working than from being on benefits. I find it strange that the Government feel that people who go to work and suddenly find that they are receiving additional benefits will not realise that is the reason, but be that as it may. The choice as to how the credit is to be paid will apparently be available to couples but not lone parents who--whether they like it or not--will have the benefit paid through the payroll. Couples may decide whether to have it paid in that way or through the post office. The Government say that they cannot do that for lone parents because they would not realise that they are gaining from working.

The TUC seems to share my view that such an arrangement is most unfair on lone parents, who will be denied that choice. Of course the argument cuts both ways. If the Government give people the choice, our argument against the credit being paid through the payroll is somewhat diminished. Conversely, the Government's argument the other way is rather better. The National Council for One Parent Families also sees

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that as a problem. Perhaps the Minister will make clear exactly what the situation is and why lone parents should be deprived of that choice.

I referred to the wallet to "purse-to-wallet" argument, which I believe is likely to cause problems. No doubt we shall return to that point in Committee and at later stages. Much of the argument is that tax credits are much better than existing family benefit because there will be much less stigma attached. One would have thought that that was reflected, at least to some extent, in the degree to which a particular benefit is taken up. I believe it is common ground that 72 per cent. of family credit is taken up--or 85 per cent. if one calculates it on an expenditure basis--and that 91 per cent. is taken up as far as lone parents are concerned. It was suggested in another place that take-up reflected need rather than a feeling that there was some stigma attached. We know that the need may be equally great among some pensioners on income support, yet that has no way near the take-up rate of family credit. Does the Minister expect the take-up rate to be significantly higher under the new arrangement? If so, how much higher than 91 per cent. so far as lone parents are concerned?

There are real problems in respect of confidentiality. Despite the Government's denial in another place, one is receiving representations that there will be real problems if payments are made through the pay packet. The CAB points out that the employer paying the tax credit will know whether the employee has other jobs. If that is not true, no doubt we can exchange views and the Minister will be able to set our mind at rest. Groups at the forefront in helping people to deal with a highly complex social security and tax system are under the impression that the employer will know whether or not the employee has another job.

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