---

Baroness Hollis Heigham: On the contrary. That is why the Government are moving on from family credit. The noble Lord is seeking to continue family credit arrangements for 80 per cent of the employers of this country. As this Bill is about not continuing family credit but substituting tax credits, then any amendment which takes 80 per cent of employers out of the system is, by my definition, a wrecking amendment.

Lord Goodhart: Perhaps I might start with the point in relation to taking 80 per cent of employers out of the scheme. That was a point also raised by the noble Baroness, Lady Turner of Camden. Both she and the Minister said that this would substantially undermine the purpose of the Bill. It is surely inaccurate to say that the purpose of the Bill is to increase the burdens on employers. Its purpose, as part of the scheme, is to put more money into the hands of employees who are in relatively low-paid employment. The percentage of employers therefore that we take out of the scheme is wholly irrelevant. One has to consider the percentage of employees who are taken outside the scheme.

It is extraordinarily difficult to see how a proposal which would leave 87 per cent of employees in the scheme can be regarded as substantially undermining the purpose of the Bill. It would mean that seven out of eight employees would remain in a position where they would receive their tax credits through their employer.

The other argument put forward by the noble Baroness, Lady Turner of Camden, that tax credits provide a wage subsidy is one which I suspect would not be endorsed very warmly by the Minister. It is certainly no part of the Government's proposals--as I understand it--that they intend to help small employers by introducing a wage subsidy that would drive down wages. For those of a historical turn of mind, we certainly do not want to go back to anything like the Speenhamland system of outdoor relief.

Baroness Turner of Camden: Does the noble Lord, Lord Goodhart, agree that the system of subsidy, of the kind envisaged in tax credits, could have the effect of increasing the employment opportunities available because more employers with little resources would feel able to employ people?

Lord Goodhart: That is a point I do not believe the Government would welcome. Indeed, one of the arguments the Government put forward is that the working families' tax credit would not have the effect of driving down wages because there is now a wages floor through the minimum wage.

Baroness Hollis of Heigham: I am grateful to the noble Lord, Lord Goodhart, for giving way. My noble friend did not say that this was a wage subsidy to stop wages from being driven down below the minimum wage level. That is precisely why, in Opposition, we would be uneasy about things like earnings top-up

4 May 1999 : Column 565

schemes without the floor of the minimum wage; otherwise, one is a friend of the "sweater". As an anonymous Victorian said, the point here is that it remains marginal for people with additional responsibilities--the lone parent with high childcare costs, married men with several children--to take the risk of coming off benefit and going into work if the pay being offered is perfectly properly at or just above the minimum wage because they do not see any obvious benefit.

As my noble friend said, by having a tax credit we improve that entry wage from effectively around £3.50 an hour to nearer £5 an hour or thereabouts. As a result, we make it attractive to work; it is a work-incentive; and we do that by subsidising the wage of those who would otherwise be somewhat marginal to the labour market.

Lord Goodhart: We have had this argument before. We accept of course that there may be some incentive in the scheme to get people back to work. But we do not think the number is likely to be large. There have been various estimates but the general figure that comes out of the IFS and other sources is running at around 30,000, give or take 10,000 or so either side, additional people coming back into the workforce. The argument of the noble Baroness, Lady Turner of Camden, is that more employment may be created by driving down wages to the minimum level.

Lord Peston: Perhaps I may interrupt the noble Lord for a minute. This is an important point which is not semantic. As I understand the benefit system as it exists at the moment, where one would lose all benefit if one took a job, one would have to be paid a considerable wage to make it worthwhile to take the job. One way of dealing with that is to threaten people, which was an approach often advocated by noble Lords opposite. Many of us do not believe that to be a suitable state of affairs for a civilised society.

The alternative is to arrange the payment of certain sums in such a way that we do not need such an enormous salary because we do not lose out by taking a job. We can bandy words about as to whether or not that is a wage subsidy, but the economic point is that it does not drive wages down; it simply makes a specific wage more acceptable so people do not have to be threatened to take a job. Of their own free will they will now take a job, which I assume all of us would like to see, even though we may disagree on alternative schemes. That is the enormous advantage of this Bill which should not be undermined in any way whatever.

Lord Goodhart: The advantage of the Government's working families' tax credit scheme, as I said at Second Reading, comes not from this Bill, but from the much more generous payments that are to be made under regulations.

Perhaps I may pass on to what the noble Lord, Lord Peston, himself said. He compared the burden to employers of operating the tax credit system with the burden to employers of operating PAYE. He said if they do one, why should they not do the other. I accept that

4 May 1999 : Column 566

a considerable burden is imposed on employers by the PAYE system, but the reason for that is that a deduction at source system is essential if taxes are to be properly collected. It saves the Inland Revenue from having to track down every last employee to collect their taxes from them. There are therefore, from the point of view of public finances, enormous advantages in having a PAYE system. That is simply not true of what is now proposed where it could just as easily be done, in relation to administration costs, through a direct payment to the employee.

The question then arises in relation to the dividing line. By the time we get to 10 or more employees, it is becoming a reasonably substantial business. There are likely to be computer programmes or bookkeeping staff who will be able to take on board the working families' tax credit without serious problems. Indeed, as the noble Baroness said, the average cost per head of paying working families tax credit will go down sharply as the organisation gets larger.

The noble Lord, Lord Monkswell, said that this was something that would involve a major exception to the Government's plans. The fact is that the Government have already indicated that they are prepared to allow two major exceptions to payment through the wage packet. One is by not requiring payment through the wage packet for perfectly good administrative reasons, for the employer who does not pay tax and NICs-- I understood the Minister to say that there are 80,000 of those, so if one in 10 is employing somebody who is entitled to tax credits, it may not be a large figure, but it is not insignificant.

Secondly, and rather more importantly, the Government have, perhaps under pressure from the women's organisations, agreed that couples can choose to have the payment made to the caring partner and that will come direct from the Inland Revenue, not from the employer. I give way to the Minister.

Baroness Hollis of Heigham: The noble Lord is quite right in what he said about the 80,000 employers. However, the sort of employer that we are talking about could perhaps be someone like the noble Lord himself who may, for example, have some cleaning help at home. It is that sort of situation where it would not be appropriate to bring someone within WFTC. The noble Lord also mentioned the additional cost to both staff and employers. There is no evidence to suggest that that will be the case.

Lord Goodhart: I accept that the burden is not an enormous one because the calculating rate will be done by the Inland Revenue. But there are odd details involved. For example, those concerned will have to convert the daily rate into something that is appropriate to the tax period for which they are charging. But, rather more importantly, among smaller employers to a far greater extent than among larger employers, there will be those who will have to apply to the Inland Revenue for payment because the burden of what they pay out through the tax credits will be larger than what they deduct through PAYE and NICs. It is virtually inconceivable that more than a tiny minority of

4 May 1999 : Column 567

employers with 10 or more employees would end up in such a situation. It is much more likely that there will be quite a number of them among those with fewer than 10 employees.

It is said that there is an absolute minimum of work involved. However, without providing a full explanation as regards the figures, the Minister did agree that, in what she described as a "worst-case scenario", the cost would be £135 a year for an employer in that category. Nevertheless, she did not explain the point that I raised on Second Reading and which, therefore, she has had some weeks to look into; namely, how she reconciles that with the figure in the same paragraph of the impact assessment which suggests that the total costs for this group will be £24 million--that is £37 per head. Indeed, if one takes into account the fact that only 10 per cent of employers will be employing someone under the tax credits scheme, that works out at £370. There still seems to be an enormous gap.

I agree that there is a certain internal inconsistency within some of the figures in paragraph 56 of the impact assessment, but no explanation has been given in that respect. I shall give way to the Minister in a moment. Surely, it would have been possible for the noble Baroness to have looked into the figures in the three weeks or so since Second Reading. She could then have explained to the Committee what paragraph 56 really means.

---