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Lord Higgins: My Lords, I am grateful to the noble Baroness for giving way. That does not, in any way, make this a genuine Tax Credits Bill. It is quite beside the point. If I understand her correctly, she is quoting from the experience at that time. There may be joy in Heaven about one sinner who repented, but what actually happened in the event?
Baroness Hollis of Heigham: My Lords, in the event, with considerable reluctance, the Government decided to pay family credit through the woman. However, in taking the issue through the House of Lords, the noble Baroness, Lady Trumpington, said:
- "The case for closer alignment of the tax and benefit systems has been strongly advanced ..."--[Official Report, 23/6/86; col. 41.]
She went on to say that the Government would continue to consider it and that they would wish to return to it as soon as possible. Unfortunately, the Government of the day did not do so and we are now taking that mission forward.
Baroness Hollis of Heigham: My Lords, the opposition was coming primarily from business which, as ever, resisted the minimum wage and fairness at work procedures. It is resisting the WFTC and resisting taking responsibility for statutory sick pay and statutory maternity pay. It is resisting anything that can be regarded as the proper responsibility of business. It was to that lobby, in particular, that the Government of the day deferred though acknowledging that the arguments were for exactly what we are suggesting; that is, a tax credit system integrated through the tax system in order to encourage people to work.
The Government of the day responded to the fears of business, as it always does, to avoid taking proper responsibility for their employees. They failed at the time to support a minimum wage and the like. We are in no such position. We believe there is a proper role for Government which is to regulate the playing field. We believe there is a proper role for employers and employees and that we will get that balance correct. It was not done under the previous Government. We believe that we are now in a proper partnership of regulation and co-operation in which the rights of employees, as well as the responsibilities of employers, are properly protected. I hope that the Government will get the support they should, in that case, from the Opposition parties.
The noble Lord, Lord Higgins, made much of the point about increasing dependency. On that he was supported by the noble Lord, Lord Goodhart. My noble friend Lady Lockwood responded to many of these points. The problem seems to me to be real but not a party one. During the 1980s there was an increase in dependency on means-tested benefit for two reasons: first, the huge increase in housing benefit because the previous Government chose to deregulate rents; secondly--and this we fully supported--the increase in means-tested disability benefit. The problem then comes that if benefits are tapered because they are means tested, there is continuously the dilemma that the noble Lord, Lord Goodhart, spelled out to your Lordships' House. If there is a shallow taper, people are kept on benefits longer. If there is a steeper withdrawal rate, a steeper taper, there are very high deduction rates, beyond 90 per cent. or even 100 per cent. There is no right answer. Any government, any administration, are balancing the shallowness of the taper and therefore increased dependency on those benefits and a very high withdrawal rate and therefore strong disincentives to increase the earnings at work.
The distinction we made at the time, which is why we were unhappy, particularly with the extension of family credit--the earnings top-up quoted by the noble Lord, Lord Skelmersdale--is that we support and continue to support a top-up to low earnings where the person earning is at some relative disadvantage in the labour market. For instance, they may have a large number of children, may be disabled or as a lone parent may have high childcare costs. Any one of those factors might
keep that individual out of the labour market. The labour market does not reflect the at-home domestic costs; the wage is paid irrespective of whether the man has three children, one or none. Therefore, in our view it was perfectly right--we supported it throughout--to introduce family credit or in-work benefits provided they were underpinned by a minimum wage. We objected then and continue to object to using a wage subsidy, to subsidise not the employee who is at a disadvantage in the labour market, but the employer who is paying a sweated wage.It is still the case today that the median wage of a lone parent--the average wage of a lone parent--is below the new minimum wage of £3.43. Indeed, the statistics show that over a three-month period, of 24,000 lone parents going from IS to family credit, around two-thirds were being paid below the new minimum wage. Therefore family credit was effectively acting as a subsidy to poorly paying employers and sweated employers rather than, as we believe it should, helping those who are more marginal to the labour market to enjoy the same opportunities for work as the rest of us expect to enjoy.
Of course, by definition, given that we are producing a support for those on low pay who have added labour market costs, we will inevitably have the problem that those who come down from the higher rates of MDRs, or withdrawal rates, will "bunch" the 60 per cent. rate; that is true. Nonetheless, under WFTC, lone parents and low earning couples will all be better off than by being on family credit. So even though there will still be high withdrawal rates--I agree that 60 or 70 per cent. is high--it is infinitely better than the current withdrawal rates of 80 or 90 per cent. and higher. At the moment 115,000 have withdrawal rates of over 90 per cent. under family credit. Under WFTC that will come down to 15,000 so we will be significantly improving the position.
The second bundle of arguments raised concerned the issue for employees of "purse-to-wallet". The noble Lord, Lord Higgins, seemed to think that we should not be allowing the couples to whom it is to be paid to have a choice, because it will cause a dispute and that would be unfortunate. But that was the argument by which Gladstone, many years ago, would not give married women the vote. It was said that if she disagreed with her husband there would be a dispute and therefore it was not given to married women. That seemed to privilege single women, but as single women included people like prostitutes, lone parents and so forth, they could not be given the vote either. As a result, women failed to get the vote for the next 40 years on exactly the same argument as that being applied by the noble Lord, Lord Higgins. I do not know if he wishes to support that position.
But I have greater faith in marriage. Some of the same commentators today--for example, the noble Baroness, Lady Knight--on the one hand were saying that we should be supporting marriage, but on the other hand were so worried about the misappropriation of money within marriage, the violence within marriage, the unreasonable behaviour of men within marriage that
I was sometimes a little baffled to understand why they should want to support marriage at all. It was an extraordinary and disproportionate set of arguments.We are saying that lone parents in work will receive the benefit through their wage packet. Where couples are both earners, it will be paid through the wage packet to the higher earner. If there is a couple in which one person is at home and one is not, they will have a choice as to whom it is paid. We hope, for the most part, it will go to the man, because the crucial point for our purposes is the entry wage at which he goes into work. If they choose for the woman to be paid, that will be their choice. If there is any dispute between them, the presumption will be in favour of the parent who cares for the child. That is the protection for those situations where a woman and her children might otherwise be at risk.
Lord Goodhart: My Lords, I am grateful to the noble Baroness for allowing me to intervene. Can she assure me that if there is a dispute that provision in relation to the fall-back default will be included in regulations? It does not appear to be in draft regulations at present. Will she confirm that it will not be dealt with, as appears to be proposed in the Inland Revenue memorandum, by the Inland Revenue simply disregarding its own regulations?
Baroness Hollis of Heigham: My Lords, as I understand it, it will be dealt with under the general responsibilities of the Board of Inland Revenue's responsibility for the care and management of this procedure. It has already been described to that effect by my honourable friend the Paymaster General in the other place, and therefore the words in Hansard are to be taken to convey the same weight.
Lord Goodhart: My Lords, as it says in the memorandum that it will accept the application even though technically it would not be effective, it will be disregarding its own rules.
Baroness Hollis of Heigham: My Lords, it will accept the application within the broader framework of its overriding responsibility for care and management. That is the position of the Inland Revenue. That is the position which validates its overriding responsibility.
To put this in context, just over 1 per cent. of family credit forms are returned now because they are not completed with both signatures, and in almost all cases that is an oversight as to the two people not signing. The number of disputes from the experience of family credit where the same rights apply is absolutely minimal; indeed, the officials could barely remember a case. I doubt therefore that this will be the problem that people perceive it to be.
Nonetheless, I was pressed as to whether lone parents should have a choice as to whether the working families' tax credit should, as with family credit, be paid at home or whether it should be paid through the wage packet. We are unapologetic that this is meant to be a support for wages in the same
way as outlined by Sir Norman Fowler. We accept that. We know that on average people's wage on going into work is only two-thirds of the median wage for that job that they will require four, five or six years down the line.The research in the 1996 report by Shaw--Moving Off Income Support: Barriers and Bridges--indicates that the problem is not childcare, loss of individual benefits, the hassle of moving into work or the insecurity of work; it is the low level of entry wages. Just to remind ourselves, the average hourly wage for a man is almost £7, but his entry wage is only just over £4.50. The same applies to women. A woman's average hourly wage is at or about the minimum wage level of around £3.50 or £3.60. It is that point-of-entry wage which determines people's calculations of the "better off by". That is why the benefit needs to be brigaded with the wage so that it is seen as a work support benefit and not an income support benefit, which is what it will continue to be perceived to be if it is paid at home.
I was asked questions about childcare costs and why we went for the figure of £200 million rather than the £4 billion that the IFS calculated. As your Lordships recognise, the IFS figure was calculated on everybody having maximum childcare and all of it going through to registered childcare. At the moment around only 5 per cent. of families on family credit take advantage of the childcare disregard, and the total comes to between £30 million and £40 million. We felt that by multiplying that figure six-fold it would probably be broadly right. All our research shows that the majority of people going into work still prefer informal arrangements with relatives, family and friends. We expect that to continue. But we also expect there to be an increase not only in the demand for and supply of registered childminders for younger children, but for support for children over the age of eight. We believe that figure to be about right; if it is not, we shall obviously need to come back and adjust it. That seemed to be a more realistic view of the world than some of the assumptions lying behind the IFS.
I was pressed by the noble Lord, Lord Skelmersdale, and others, about the disincentive for the two-parent family--the second partner would drop out of work because it is a means-tested benefit. One has to recognise that that is a problem with any household-based means-tested benefit such as family credit. But then we had complaints from the other side also that the single adult working family who was not eligible for the childcare tax credit was equally being penalised. On the one hand the noble Lord, Lord Skelmersdale, complains that the two-earner couple will be penalised and the woman will drop out of work; and on the other that the single-earner couple will be penalised. The Opposition cannot have it both ways, though they may try.
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