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Lord Skelmersdale: I thought that we started with family credit.
Lord Higgins: A number of unexpected developments have occurred during this debate, starting with the announcement of the noble Lord, Lord Goodhart, that it was not the function of his party to correct the Government. I am sure that that view will not prevail for long. I find myself very much in agreement with everything he said, as I did with very nearly everything he said at Second Reading. I look forward to his support in the course of subsequent debates.
I pick up first the point made by my noble friend Lady Carnegy. It is crucial that the scheme should be honest. The description in the Bill and its title are not honest. They are misleading. I gave the reasons earlier, in particular the presentation of something as a tax cut when it is in reality an increase in public expenditure. As the noble Lord, Lord Peston, pointed out, it is possible very often--not always--to define something as a tax or expenditure change. The important point is consistency. For that reason I quoted the publication of the Office for National Statistics, UK National Accounts Concepts, Sources and Methods, which came down very clearly on this side of the Chamber and not the Government's side in defining whether this was or was not a tax credit. I believe that to be an important point. At the margin these matters may be rather arbitrary but it is important that the definitions given in the document to which I have referred should be adhered to. I shall turn to a number of the noble Lord's other points in a moment.
I agree very much with the noble Baroness, Lady Turner. I do not say for one moment that it is unfortunate that the Government have decided to help the particular group of people affected by the Bill. But there are much simpler ways of doing so than the unbelievably convoluted method chosen by the Government. If there were no disadvantages I would wholly agree with her. The reality is that there are very substantial disadvantages. I enumerated a few earlier. No doubt we shall discuss many other reasons why the system proposed by the Government is not sensible.
The Minister was anxious to say that this was not simply a re-badging exercise. If it were just a re-badging exercise all the arguments about semantics would still hold but it would perhaps not be a matter of enormous significance. But, alas, the noble Baroness is correct: this is not a simple re-badging exercise. The Bill seeks to put into law a far less efficient and more objectionable method. I agree therefore with the Minister that it is not a re-badging exercise; it is more than that. What is more, it is objectionable. We shall wish to pursue the matter.
The noble Lord, Lord Peston, asked a very straight question to which he received absolutely no answer from the Minister. I believe that the answer that he should have received was no. He had misunderstood the way in which the Government's proposed scheme is to operate. I hope that he will consider whether the point should be pursued at later stages. Perhaps the Minister can reply to her noble friend. The answer to the question posed by the noble Lord, Lord Peston, is no.
I turn next to a particular point raised by the Minister. I thought at first that it was a slip of the tongue, but I believe on reflection that the Minister was reading a passage stating, "This will enable people to keep more of every pound they earn". It does not do that at all. Perhaps the Minister will admit that she was wrong to say that. What it does is to give people extra money on top of what they earn. As the Child Poverty Action Group rightly points out, it is a straight wage subsidy.
Lord Peston: Perhaps the noble Lord will give way. There is no difference. Essentially, if a person goes out to work--it is some time since I had the pleasure of doing that--what matters is what he takes home. What does the person end up with as a result of going to work? As I understand it, a person will end up with more. I believe that to be the beginning and end of it. Other than the noble Lord's desire to be very precise in semantics--which we can also argue about--the substance is exactly as I and the Minister have described it. Now if one goes out to work one's net position is better than it would otherwise have been.
Baroness Hollis of Heigham: Perhaps I may help the noble Lord still further and provide information on the matter. At the moment, if one is on family credit, housing benefit and council tax benefit and one is perhaps within the PAYE system, for every pound one earns there is a deduction. One's other benefits are taken away at different rates. Under the system that we inherited from the previous administration 5,000 people paid 100 per cent MDRs. For every pound they earned they were not a penny better off. Every penny was clawed back in NICs or tax but in particular in housing benefit, council tax benefit and the loss of family credit.
Under the previous administration 130,000 people suffered a 90 per cent. withdrawal rate; 300,000 people suffered an 80 per cent. withdrawal rate; and 750,000 people suffered a 70 per cent. withdrawal rate. If this applied to the better off there would be protests against the disincentive to further effort, entrepreneurship and all the rest of it. Yet people who are poorly paid are expected to seek to improve their hours and working
conditions but suffer deduction rates at this level. Under this Government the 750,000 people inherited from the previous administration who suffer a deduction of over 70 per cent. on every pound that they earn will fall by one third. As a result, about 500,000 people will take home more and keep more at the end of the day. I would have thought that noble Lords all around the Chamber would have welcomed that.
Lord Higgins : We will come to the taper when we discuss later amendments. If the Government simply wanted people to keep more of what they earned, they would have reduced tax rates.
Baroness Hollis of Heigham: I am sure the noble Lord knows perfectly well that the interplay of tax rates and NICs rates, with housing benefit, council tax benefit and family credit, produces a marginal tax rate at the worst extreme of 100 per cent.
Lord Higgins: We can return to the issue of the taper and marginal tax rates later. The noble Baroness is saying that at the moment they would keep more of what they are earning. They are in fact getting a straight wave subsidy which is added to it, which may or may not be as much as the tax which is being deducted and, as I understand it, could be more; otherwise there would be no point in the exercise. We can return to the issue later, but I maintain my position.
The noble Baroness spoke of whether there are advantages or disadvantages to the system she is proposing and whether or not it will be possible to introduce a real tax credit scheme. To some extent she revealed her feelings on the matter when she pointed out that if it were a real tax credit scheme, then it would not appear in the pay packet in the way she described.
Baroness Hollis of Heigham: I did not say that it would be a real tax credit if only it was paid through PAYE. I said that it seemed that the Opposition were arguing that if only it were paid through PAYE, then it would be a real tax credit. I pointed out that although that may seem an attractive proposition, it cannot be easily achieved.
Lord Higgins: If it could be done as a real tax credit scheme, as originally intended, meaning that it would not appear in the pay packet in the way the Government wish, would the noble Baroness be in favour of that? I am not clear about their position. I suspect that those who are enthusiastic about the pay packet argument are less enthusiastic about a real tax credit scheme. I understand that the 26-week system has not been considered by the Government, but it may be possible to introduce a real tax credit scheme. We can discuss these matters later. But the position of the noble Baroness is not precisely that set out by the Government. It is a little unclear.
Baroness Hollis of Heigham: I take issue with the noble Lord attributing views to me that I do not hold and have not expressed. Clearly, it would be attractive
if this could be seen as an addition to people's wages and be paid through PAYE. The two big obstacles are that PAYE is cumulative and that it affects people who are not in the tax system. It would therefore particularly disadvantage the low-paid. That is why I stated that businesses and the consultative group had agreed with the Inland Revenue that PAYE was not the appropriate vehicle and that, therefore, we are doing it this way. It is still being done through the pay packet by the Inland Revenue but as a separate item rather than through PAYE.
Lord Higgins: The noble Baroness has just made the point: she is saying that if it were through PAYE, it would not then appear on the pay slip as she described it, and to that extent she would regard it as a disadvantage. It is the contrary reason, with respect.
One has some suspicion that because the Government are wedded to the idea of it being done through the pay packet, although as far as the self-employed and couples are concerned that principle is undermined, they are less enthusiastic than they ought to have been, in my view, about it being a genuine PAYE tax credit scheme. The position is not clear.
The proposal of the Chancellor of the Exchequer in the Red Book at paragraph 5.13 is that it will all be integrated and the pay slip at that point will not appear in the form which the noble Baroness is enthusiastic about. Once the major reform comes through, it will be a genuine tax credit scheme, as far as one can gather from the Budget Statement. Can the noble Baroness say whether she thinks that is right?
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