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Why is that? What are those fallacies that the Dynamic Benefits model overlooks, as does some of the LSE lecture? First, it assumes that people respond directly and only to financial incentives. If work does not pay enough, people will not work and vice versa. However, that pulls labour out of its cultural context. DWP research shows that many men will work for below the rate that they could get on benefit because of the dignity, sociability, worth, status and hope of promotion that work affords. It is also seen as setting a good model for their children. Equally, the research shows that, when the previous Tory Administration reduced the family credit line from 24 hours to 16 hours, at which you could claim tax credits-a policy that I supported-lone parents did not work longer hours because it was worth more but reduced their hours, because they had a target income and were balancing other considerations such as childcare, health, leisure and so on. In other words, they were not motivated by the assumptions of strict economic rationality on which the noble Lord has focused.

My second objection to the model is that it assumes that there is only a supply-side problem of incentives-that 600,000 more people would move into work if only it paid enough. But where is the work? It may be available in the service industries, where work generates a flurry of other work, but not in manufacturing. It is a demand-side as much as a supply-side problem if we sectoralise our economy, as I think most economists would surely agree.

Thirdly, the model ignores the alternative approaches. It is not just about tweaking MDRs and tapers; it is not just about holding all those balls in balance, which is what politics is about. It is about thinking outside the box and exploring such things as risk-sharing with the employer, which is what tax credits do. It is about thinking about the minimum wage, which could make a huge difference. It is about looking at regional economic premiums. They are all possible ways to address further a problem that in its simplest form has existed since 1948.



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I hope that this rudimentary, module-101-economics model of male behaviour-that you work only for more money and that, if the money is not there, you do not work-will not go on to infuse the noble Lord's thinking about responses to child poverty, because it has been exposed as a dead end for more than 25 years. I am very happy to send him the book.

Lord Kirkwood of Kirkhope: My Lords, I, too, think that this is an interesting amendment, but I agree that it is out of place. If we are going to pick and choose what to put in the Bill for consideration by the commission being set up to advise the Secretary of State, I do not want it to be all Milton Friedman. That is not because I do not like Mr Milton Friedman's work very much-although I do not-but because it would not be fair. If we are inviting the commission to consider a comprehensive set of proposals, I do not mind if this is one of them, because I concede that it is an issue that you cannot avoid in benefits systems-the iron triangle, the wooden square or whatever it is we are dealing with is inevitable. However, none of it is new; it has been around since 1979. Even before that, it was a problem for everyone.

I was pleased to see the IFS work that led to the £19 billion estimate, but no one to whom I have spoken recently is thinking about income transfer as an exclusive means to deal with the problem-I would not advise any of our people to do that. It is nevertheless important work, because it demonstrates the length of the journey that has to be undertaken.

There are some important spatial dimensions to all this. Let us take a labour market in a place such as Merthyr Tydfil-everyone chooses the example of Merthyr Tydfil, and the people there hate them for choosing it, because it stigmatises them, and I am not anti-Welsh at all. Downtown Glasgow will do-the noble Lord, Lord Martin, is not here, so I will not provoke him into another of his powerful speeches. If we compare the labour market in Reading to a very different situation where jobs are very hard to come by, there are dynamic changes. I have not read the 800 pages of Dynamic Benefits-I have got to page 24-but it is interesting and I encourage people to read it, slowly and over a period, because I am sure that it will pay dividends.

The noble Lord, Lord Freud, has offered some genuinely interesting thoughts to the Committee. The benefits system has always been family-based. He seems to come from a more taxation-based approach. That is perfectly understandable, because that is his professional knowledge and experience, but you cannot escape the fact that more than one person is often involved in a family and second earners must be considered, so the disincentive effect is not as straightforward as some of his mathematical calculations and formulae would suggest. I encourage him to continue to argue the case and I am cast-iron certain that, if the commission does its job, it will be required to consider such issues in the way that he suggests. However, if the Government concede this amendment, a lot of other amendments will flow very quickly from my pen and the pens of others to change the balance. Obviously, it is a probing amendment and I am being a little facetious, but I do not think that we want to put this into the

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Bill. It is a fascinating discussion and we will need to tackle the issue in various different ways in the next Parliament, but it should not be in the Bill. I thank the noble Lord for his amendment, which is interesting, but we do not support it.

Lord McKenzie of Luton: My Lords, I thank the noble Lord, Lord Freud, for his interesting amendment and the interesting but short debate that has followed it. I was thinking of resting my case on the basis of the contributions of the previous two speakers, but I feel that I should put something more specific on the record from the Government's point of view.

Amendment 38 would require the Secretary of State to consider the appropriate interrelationship in the benefits and tax credits system between the levels of benefit, the earnings break-even point and the rate at which benefits are withdrawn-as we know, now dubbed the iron triangle of benefit reform. In recent days and weeks, we have learnt a lot about the iron triangle, although, as the noble Lord, Lord Kirkwood, said, it has been around for a considerable time. Doubtless, we will continue to debate it-it is entirely appropriate that we should. Whether it is an appropriate addition to Clause 8 is a completely different matter.

The issues of ensuring appropriate work incentives and making work pay are of course very important and I contend that this Government have done a lot in recent times to address both issues. Clearly, these issues will also be a priority for the child poverty strategy. Tackling in-work poverty and promoting parental employment is crucial both as a means of reducing poverty and because work has positive impacts on families and children over and above the effect of increased household income. Therefore, I am confident that the strategies produced under the Bill will carefully consider ways of supporting more parents into work that pays and of enabling parents to progress in work. Indeed, Clause 8(5)(a) specifies that the strategy must consider measures relating to,

The interrelationship between the levels of benefit, the earnings break-even point and the rate at which benefits are withdrawn does not relate to the approach to tackling child poverty alone. It is about the wider structure of the tax and benefits system and the balance between levels of support and work incentives-an issue that goes much wider than the strategies to be produced under the Bill. There already exist processes for such considerations to be made through annual Pre-Budget Reports and Budgets-they are, I am bound to say, generally within the financial privilege of the other place-and specifying a requirement such as this in Clause 8 of the Bill is not at all appropriate.

The iron triangle argument referred to by the noble Lord-my noble friend Lady Hollis made this point-uses a simplified economic model of the tax and benefits system to derive the common assumption that the generosity of the benefits system and the rate at which benefits are withdrawn determine the point at which benefit entitlement ceases. While it is undoubtedly true in a highly specified model of the benefits system, in practice there are many ways in which we can avoid the trade-off that this implies-that is, that you have

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to reduce benefits to increase work incentives. If that is the noble Lord's proposition, we need to be clear about it.

For example, in our benefits and tax credits system, out-of-work benefits are withdrawn when a customer works more than 16 hours a week; for parents, the in-work benefits guarantee a minimum income, which is usually substantially higher than out-of-work benefits income; and the way in which in-work support is withdrawn varies with income, with a mixed system of universal and targeted benefits and tax credits. This allows us to maximise work incentives while focusing support on those least able to manage on their own, including providing help to all families with children.

We are all aware that any Government have to make trade-offs between the levels of support provided to families and the cost of the support system. The Government believe that support for children living in poverty should be a government priority; that is why we have made a commitment to ending child poverty. The iron triangle does not show, as the noble Lord implied at Second Reading and today, that spending additional money on the benefits system is ineffective; rather, it shows that, if we want to maintain work incentives and provide sufficient support for the poorer people in our society, this will be more expensive in the short to medium term than maintaining work incentives in a system that provides minimal or no support for those who are not in work. We do not want to accept a system that provides no support for those who are not in work and therefore cannot sufficiently protect children from the negative effects of poverty.

The noble Lord referred to marginal deduction rates and what those would imply. It is important to note that issues around marginal deduction rates apply only to the group for whom the target is set. Our child poverty target applies to children and their families. This is a group for whom we believe sufficient financial support is crucial, both in terms of social justice and for the good of society as those children become adults. For this group it is right that families relatively far up the income scale can benefit from the system, which is why we designed a tax credits system that benefits those on middle incomes as well as the very poor. In addition, these consequences apply only if tax and benefits rates are the same for everyone. In reality, different people have different needs and the system can be designed to respond to this. Indeed, our system recognises that the balance of work incentives and support needs to be different in different circumstances. For example, there are some groups, such as the longer-term unemployed, for whom good work incentives are a crucial element of any support system. There are some people, such as those with severe disabilities, whom we do not expect to move into work. Also, there are some groups, such as families with children, whom we think it is particularly important to protect from the negative effects of poverty.

Therefore, while it is important that any system is designed with marginal deduction rates in mind, it is also important to realise that the empirical evidence shows that people do not always respond to financial incentives to work in a way that economic models would predict, as my noble friend Lady Hollis said.

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This is particularly unsurprising for parents given the range of factors, apart from money, that affect their decisions about work. A recent DWP study revealed that some parents chose to live on lower incomes because they wanted one parent to remain as a full-time carer for their children.

The noble Lord asserted that our current approach does not take into account the dynamic analysis. Again, as my noble friend stressed, this is not the case. The system already takes into account the dynamics. It is for this reason that we have tapers to withdrawal rates for benefits such as housing benefit. I am sure that we could have a substantial debate around this and it would be good if we found time to do that. However, I do not believe that it is appropriate to put this in the Bill in the terms proposed by the noble Lord and, on that basis, I hope that he will withdraw the amendment.

4.15 pm

Lord Freud: I thank the Minister, the noble Baroness, Lady Hollis, and the noble Lord, Lord Kirkwood, for their responses. The interesting thing about this area is that the assumption has been exactly the one that the noble Baroness, Lady Hollis, made: people at these income levels are not particularly responsive to financial and economic stimuli. It is rather recently that economists have started to find and argue that the Laffer curve works just as much at the lower-income levels as it has proved to work at the higher levels.

Baroness Hollis of Heigham: My Lords, I am not saying that it does not matter; I am saying that it is not the sole consideration. The economic iron triangle assumed that this was the sole incentive to join the labour market.

Lord Freud: I thank the noble Baroness, Lady Hollis. Of course, I was not implying that the only thing that influences people is economics, but it is a pretty significant influence in many cases. The Laffer curve has been found to have a significant influence at lower levels, as we see with people not wanting to go into work if the gain is marginal, perhaps not surprisingly. There is a point to raising this issue in this context. As the noble Baroness, Lady Hollis, says, getting these things right is what politics is all about. The whole point of this Bill is to set in stone a statutory target. It is to freeze politics; it is to take away the politics over a decade because you have frozen one side of the triangle as a target. That is the reason for bringing in the other two sides. If you are going to freeze one in political terms, why not freeze the other two, or look at their context? That is the point.

At the moment, the system tries to fix little aspects of withdrawal rates. The curve of the marginal rate of withdrawal goes up and down depending on who you are or what group the Minister thinks needs encouraging in a particular way at any one time. The result is that we have ended up with an absurdly complicated welfare system. It is now so complicated that the main element that drives people, apart from financial matters, is sheer fear. There is a fear of taking the risk of leaving the benefits system because it is so fiendishly complicated to re-establish yourself in it if the risk, or attempt to take a job, does not work. People cannot work out

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what the results of changes may be, so we have created a very conservative, risk-averse population at the low-income levels. That is the real cost of the complexity and of not having a clean and simple basis for benefits.

I argue that the reason why one does not need to distinguish between a more general support system, which this represents, and child poverty, which the Bill is about, is that, in practice, we are looking at a large number of households, not just the children. We have discussed this in the past. To the extent that we are looking at a large number of households, if you skew the system for them and not for everyone else, you will end up with a system that is not optimised. That is why I have tabled this amendment.

Lord McKenzie of Luton: I do not want to prolong the discussion because we need to finish today, but is the noble Lord saying on the basis of his analysis that he does not think it right to have, for example, the 60 per cent median income target?

Lord Freud: I thank the Minister for the question. As he knows, the actual figures are subject to-what is the word?-huge variation, depending on various assumptions about equivalisation, measurement and so on. Personally, I would not stick on any one particular and absolute figure, although I accept the argument that we need a figure. We have accepted 60 per cent, as we have discussed in earlier amendments, but if we need to move it around in order to protect particular groups of children, it need not be totally sacrosanct. That is my view. With that response, I beg leave to withdraw the amendment.

Amendment 38 withdrawn.

Amendment 39

Moved by Lord Freud

39: Clause 8, page 4, line 25, at end insert-

"( ) In preparing a UK strategy, the Secretary of State must consider, in particular, the needs of-

(a) children in families with one or more members in prison,

(b) children in families with one or more disabled members,

(c) looked-after children,

(d) black and minority ethnic children, and

(e) homeless children."

Lord Freud: My Lords, I am conscious that in this amendment I am moving well away from the area of financial targets and deep into what the Minister would no doubt classify as socio-economic disadvantage. These are children who technically may not fall within the definition of poverty but who are disadvantaged. In fact, if we reach the target in 2020, many of these children would still be at severe risk even if they were not poor, according to the rather narrow definition used for the targets. I have expressed my concern more than once that, by setting targets to achieve one set of objectives, we will undermine other objectives that are equally important; indeed, they may be more important.

I particularly want to use this group of amendments to discuss the issues surrounding children in care. As noble Lords will know, the outcomes for such children are relatively poor and in this country we are hesitant

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about putting children into care, possibly as a direct result. We have half the number of children in care as countries such as France and Denmark. I am indebted to the noble Earl, Lord Listowel, for pointing me towards a research paper by Professor Donald Forrester of the University of Bedfordshire entitled "Is the Care System Failing Children?". Published in the Political Quarterly, April to June 2008, it addresses the central issue about the performance of our system. It concludes that, on balance, the reason why the system has poor results is that many children are deeply damaged by the time they enter it rather than that the system inflicts the damage. If that conclusion is true, it raises big question marks about our intervention strategy. Professor Forrester concludes:

"More important is a commitment to provide quality services for families with the most serious problems in society, including public care when that is what children need. It is only when there is the political will to make such a profound change that we are likely to begin to make lasting differences to the lives of these most vulnerable children and their families. It is the failure to appreciate both the nature and the scale of the task that is the true tragedy of the current government proposals".

Professor Forrester is referring to the Care Matters: Time for Change White Paper, which was then current, but I suspect that he would feel rather the same about this Bill with its broad-brush approach to intransigent problems. My amendment would ensure that the Government's focus remained on the most vulnerable children in our society. I beg to move.

Baroness Thomas of Winchester: My Lords, I, too, have an amendment at this point of the Bill, which I shall move shortly, and it is more flexible than this one. Although all the groups listed here should be considered, the amendment tabled by the noble Lord does not cover all children and families who are most at risk of poverty, according to the households below average income statistics. Current HBAI data tell us that the at-risk groups include large families, families with a disabled child or adult, lone-parent households, families with young children and some BME groups. Not all these at-risk groups are covered in this amendment, but there is a strong case for having better data on children in families where one or more members are in prison, as there is a strong association between parental imprisonment and adverse outcomes for children. A recent Barnardo's report found that prisoners' families are vulnerable to financial instability, poverty, debt and potential housing problems. However, any data would have to be collected at the earliest possible opportunity so that the needs of children could be addressed.

Lord McKenzie of Luton: My Lords, Amendments 39 and 58 seek to ensure that both the UK strategy and the annual progress reports give particular consideration to some specified groups of children considered to be particularly vulnerable to suffering from poverty.

I understand the contention made by the noble Lord that, without particular safeguards written into the Bill, some of the most vulnerable children in society might be left behind. It is not the Government's intention to prioritise action on those children who are easier to lift out of poverty in order to meet the targets. That would be a self-defeating approach, as it

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would not be possible to meet the four poverty targets in the Bill while failing to tackle poverty for the most disadvantaged children. Furthermore, as the noble Lord anticipated, we would be failing to comply with the duty in Clause 8(2)(b) to ensure as far as possible that children in the UK do not experience socio-economic disadvantage. I make it clear that our goal is to eradicate poverty for all children. The framework established in the Bill supports that.

Identifying and defining every group of children that experiences a high risk of poverty is extremely difficult and in some cases may not be possible with current data. Including in the Bill a list of disadvantaged groups would therefore risk capturing some groups while leaving out others. The duties to meet the targets and on tackling socio-economic disadvantage will drive action to tackle child poverty among all children. This very much includes the most vulnerable. With the assurance that I have just provided, I hope that the noble Lord will not press his amendment.

Amendment 79 would include looked-after children and homeless children in Clause 24(3), which sets out certain circumstances in which children are to be considered as living in poverty. Clause 24(3) is not intended to be an exhaustive list of all children to be covered by local actions; indeed, it is specifically stated that Clause 24(3) does not limit the broader definitions in Clause 24(2). Consequently, there is no need to add looked-after children and homeless children in this subsection. It is true that some looked-after children and homeless children are not captured by the definitions of poverty that are used to define the child poverty targets in Part 1 of the Bill.

4.29 pm

Sitting suspended for a Division in the House.

4.39 pm

Lord McKenzie of Luton: My Lords, I was referring to the fact that some looked-after children and homeless children are not captured by the definitions of poverty that we use to define child poverty targets in Part 1, for the reasons that we have discussed. However, only a very small minority of vulnerable children are not covered by the definition; 84 per cent of children in care or looked-after children are placed with foster carers, adopted or placed with their parents and so reside in private households that are covered by the measure. Moreover, the amendment is relevant not to Part 1 but to the child poverty strategy in Part 2, which will cover any child who lives in socio-economic disadvantage. As living in care or being homeless are both causes and consequences of deprivation and poverty, local authorities would unquestionably consider these children when fulfilling their duties under the Bill.


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