HC Deb 27 February 1978 vol 945 cc202-12

Motion made, and Question proposed, That this House do now adjourn. [Mr. Snape.]

11.30 p.m.

Mr. Peter Doig (Dundee, West)

In this short Adjournment debate I should like to draw attention to the effects of the benefit ceiling rule, particularly as it affects many people who are in receipt of earnings-related supplement. I should like to deal first with how it has affected Mr William Gillan of Dundee.

Mr. Gillan was paid off in the autumn of 1977—not an unusual occurrence for building trade workers. He was entitled to unemployment benefit of £20.90 for himself and his wife, plus an earnings-related supplement of £6.51, making a total of £27.41 per week. His reckonable weekly earnings in the relevant tax year—1975–76—were £31.17, and 85 per cent. of that is £26.49. That was 92p lest than he was entitled to because of the ceiling.

The position, however, is much worse than that, because in November 1977 unemployment benefit was increased by £2.90 per week to compensate for higher prices and inflation. Mr. Gillan's unemployment benefit was increased by £2.90 but, because of the ceiling, his earnings-related supplement was reduced by £2.90, which left him with exactly the same as before ths increase was given. He was no better off at all. In fact, by this time he was losing £3.82 per week from his full entitlement to earnings-related supplement.

I should like to reconsider the position of Mr. Gillan. His reckonable earnings for 1975–76 were his total earnings divided by 50, and not his actual wages when he is working. If someone is unemployed for, say, two months in a reckonable year that is not taken into account at all, so if he is a building worker—and it is common for such workers to have spells of ether idleness or sickness during a year; many of them rarely go a full year without such a spell—the calculation is based on less than a full year's earnings, and therefore when one comes to average out the earnings on this formula his earnings appear to be lower than his wages at that time.

The earnings-related ceiling is based on what happened 18 months prior to the time when Mr. Gillan became unemployed, but during that period inflation increased by 32 per cent. so he has lost all along the line, however one looks at the case. His earnings-related benefit has reduced with every increase in the flat-rate benefit, and by the full amount of such increases as were given in the first place to compensate for rising prices. But there is no compensations for rising prices for Mr. Gillan, because he gets the same amount regardless of the extent of inflation and the increase in prices.

It seems to me that there is something wrong with such a system, so I wrote to the Department about the case and I want to quote two extracts from the reply that I received. The first is: I have to confirm that Mr. Gillan's flat-rate benefit and earnings related supplement is being paid at the correct rate of £26.49 a week. As you have pointed out, Mr. Gillan's benefit is affected by the benefit ceiling rule. This rule provides that the supplement shall be reduced or extinguished when the total of flat-rate benefit and earnings-related supplement would otherwise exceed a 'ceiling' of 85 per cent. of the claimant's reckonable weekly earnings in the relevant income tax year. This 'ceiling' provision has applied to ERS since it was introduced in 1966. Its purpose is to limit benefit to something less than take-home pay and so prevent the over-compensation and disincentives which can arise if benefits exceed pay. I would say that it has certainly succeeded in doing those two things. It has suc- ceeded in making sure that Mr. Gillan is not over-compensated. He is no better off than when he was working, allowing for all the factors that I have listed.

Later, towards the end, the letter says: I do realise that recent rates of inflation, although giving rise to increases in flat rate benefit have meant that the reckonable weekly earnings on which ERS is based are out of date. I can well understand the feelings of those who, like Mr. Gillan, find an expected increase in benefits amounts, in practice, to little or nothing but there are no provisions at present whereby the operation of the benefit ceiling rule may be relaxed in any way. I am bound to add that in our present economic circumstances there is no immediate prospect of a change. I find that last sentence rather difficult to understand, because we have been hearing from the Chancellor of the Exchequer for some time that he has some money to give away. We have heard that he has millions of pounds that he can hand back in order to increase the spending power of the public and to help cure unemployment. I should have thought that this was a deserving case and that it had some claim on any money to be given out in this way.

Having dealt with an individual case, I want to consider quickly the general case. A letter that I received from the Research Division of the Library states that the average earnings in 1975–6 were £53.40, the weekly earnings-related supplement for earnings of that amount were £10.16; and the weekly benefit ceiling—that is, 85 per cent. of earnings—was £47.18. Since November, flat-rate unemployment benefit has been £14.70 for a single man; £9.10 extra in respect of the wife of a married man; £3.50 for the first child; and £3 for each other child. As a general rule, one can say that the earnings-related supplement scheme hits hardest those with the largest families and the lowest earnings.

The letter from the Library sets out a table showing a man on average earnings in 1975–76 is single, or has a wife and up to four children he loses nothing; he gets the full earnings-related supplement. But if he has a fifth child he loses £2.28 of his supplement; if he has six children he loses £5.28; with seven children he loses £8.28, and if he has eight children he loses his entire supplement. Those who are affected most are those with the largest families. That is taking the average wage for the year.

If, as another example, we take a man whose earnings are only £30 a week for 1975–76 and he is subject to the benefit ceiling, we find that if he is single he loses nothing but that if he is married he immediately loses £3.79 of his earnings-related supplement. If he has a child as well, he loses his entire earnings-related supplement. That is wrong. Those who are on low earnings—the figures I have quoted relate to those with very low earnings—lose immediately they become married, and lose the whole lot as soon as they have even one child to support. That is something that needs investigation. It is totally unfair.

How many people are affected in this way? We learn from an answer to a Question on 22nd December 1976 that at that time there were 61,800 unemployed benefit claimants affected by the benefit ceiling. Of a total of 245,000 receiving earnings-related supplement, 25.2 per cent. were affected by the ceiling.

We get some idea of the inflation at that time if we take the figures from the start of the relevant tax year, namely, April 1975, and compare them with the benefits that applied in November, 1977. The flat-rate benefits increased three times and increased overall by 50 per cent. in that short period. Therefore, the inflation rate was quite considerable. Claimants were losing because they were tied to their ceiling. Again, that is something that needs investigation.

If we take a mid point in the tax year of 1975–76—which is called the relevant tax year—and take it up to December 1977, taking the rate of inflation between the two periods, we find that the rate was 32.2 per cent. That is a considerable rate. It means that those in receipt of the earnings-related supplement at that stage lost everything to which I have referred plus 32.2 per cent. while those on the flat-rate benefit were not affected. Those in receipt of the earnings-related supplement were given the money but it was subsequently taken away from them off their supplement.

There is a powerful case to prove that injustice is being done to many on earnings-related supplement. I should like to hear the Government's explanation for allowing that to continue and holding out little hope, according to the letter that I received, for any improvement in the position.

11.43 p.m.

The Under-Secretary of State for Health and Social Security (Mr. Eric Deakins)

I can well understand the reasons that have prompted my hon. Friend the Member for Dundee, West (Mr. Doig) to raise the question of the benefit ceiling rule for earnings-related supplement. My hon. Friend has made a powerful case for some alteration in the present procedures.

My hon. Friend refers to the effect of this rule when flat-rate benefits are uprated, and I should like to make it plain from the outset that I have some sympathy for his constituent and for other claimants who are affected by this rule and who, accordingly, do not receive any increase, or less than the full increase, in their total benefit at upratings. The Government are well aware that the earnings-related scheme is not perfect in all respects, and I welcome the opportunity to explain our views on this matter.

Earnings-related supplements were introduced in October 1966 to supplement flat-rate unemployment and sickness benefit for the six months following the first fortnight of a claim. Their object was to cushion the sharp fall in income which often occurs when people lose their jobs, and to enable men and women to look around for the most suitable job instead of being forced by economic necessity to take the first one that turned up. The amount of the supplement is currently related to earnings on which Class 1 contributions have been paid by the claimant in the income tax year relevant to the claim-normally the last complete income tax year before the calendar year in which the period of unemployment or incapacity began.

The benefit ceiling rule to which my hon. Friend refers has been a feature of the scheme since its introduction in 1966. As he recognises, the rule provides that the amount of supplement payable is reduced or extinguished if the total flat rate benefit, including increases for dependants, and the earnings-related supplement would otherwise exceed 85 per cent. of the figure of gross reckonable weekly earnings in the income tax year relevant to the claim. Flat-rate benefit is not, however, affected by the ceiling, and it is quite possible for the flat-rate benefit on its own to exceed the figure of 85 per cent. of reckonable weekly earnings when earnings are low and the claimant has a large family.

The rule was introduced because the supplement was providing additional benefit related to earnings, on top of existing flat-rate benefits, with their relatively substantial increases for dependants, and it was considered wrong to create a situation in which some sick and unemployed people could get as much, or more, by way of national insurance benefits than they could get by working.

When referring to the rule during the Second Reading debate on the National Insurance Bill which introduced the new scheme, Margaret Herbison, then Minister of Pensions and National Insurance, said: An upper limit of benefit expressed as a percentage of earnings—to secure that claimants generally are not better off when sick or unemployed than they would be at work—is a natural feature of a scheme in which benefits are related to earnings. A maximum of this kind is particularly necessary in a scheme like ours, where the personal rate of benefit can be increased substantially by allowances for dependants. There are in other countries some schemes where no allowance at all is made for dependants. The figure of 85 per cent.—that is 85 per cent. of gross earnings, not of net earnings—takes into account the fact that gross earnings are subject to deductions for PAYE, National Insurance contributions and other expenses which do not arise during unemployment or sickness".—[Official Report, 7th February 1966; Vol. 724, cc. 38–9.) As my hon. Friend quite fairly points out, a benefit ceiling fixed by reference to past earnings has the effect of denying the benefit of upratings to some groups, and he has given some examples. Whenever there is an uprating of the short-term benefits with which earnings-related supplement is payable, the benefit ceiling is applied afresh in any case where the supplement is in payment to ensure that total benefit does not exceed 85 per cent. of the claimant's gross reckonable weekly earnings. As in the case of my hon. Friend's constituent, if the flat-rate increase is less than the amount of earnings-related supplement in payment, the beneficiary will be no better off because his supplement is simply reduced by the amount of the flat-rate increase to maintain the 85 per cent. benefit ceiling.

A certain number of beneficiaries come up against this problem. Figures obtained in May 1976 for unemployment benefit, and in June 1976 for sickness benefit, show that about 45,000 claimants have their earnings-related supplement reduced and that about 48,000 have their supplement extinguished by the rule at any one time. When flat-rate benefits are increased, a beneficiary whose earnings-related supplement is already extinguished will, of course, receive the full uprating increase. So we are concerned with about 45,000 beneficiaries receiving a reduced rate of earnings-related supplement whose flat-rate benefit increase is either extinguished or reduced by the operation of the benefit ceiling. In addition, there will be those receiving an unrestricted rate of supplement who are brought up against the benefit ceiling for the first time by the increase in the flat rate element. On the other hand, it is likely that some of those with a reduced earnings-related supplement will be receiving supplementary benefit, and will receive an increase in their total income at the time of an uprating since supplementary benefit rates go up at the same time as the national insurance benefits.

For example, last November a married man with two children aged 13 and 15 receiving supplementary allowance on top of £30.44 unemployment benefit, including £3.94 earnings related-supplement, would not have received any increase in his national insurance benefit because the amount of the increase—£3.80—was less than the reduced rate of earnings-related supplement in payment. But the supplementary benefit scale rates for this type of family went up at the same time from £33.65 to £38.35—an increase of £4.70. Although the claimants national insurance remained at the same rate, he was able to receive the full benefit of the increase in the supplementary benefit scale rate.

Moreover, the man who has to rely on his national insurance benefit alone and does not get the increase he is expecting because of the benefit ceiling will be receiving a higher rate of benefit than the man on flat-rate or supplementary benefit—and he may well lose his right to earnings-related supplement altogether within a few weeks of the uprating if he is near to the end of the six month period for which the supplement is payable. When a claimant's earnings related supplement ends, he gets the full benefit of the increase in his flat-rate benefit.

It has been said that the benefit ceiling rule is similar to the supplementary benefit wage stop which we have now abolished, but there is an important difference. The supplementary benefit wage stop restricted the rate of supplementary benefit in certain cases so as to ensure that the claimant was not better off out of work than in work, even though this obliged him to live below the supplementary benefit levels.

Similarly the benefit ceiling rule was introduced to prevent the earnings-related supplement creating a situation in which the claimant could get as much, or more, by way of benefit than he could get in work. This rule does not, however, have the effect of forcing the claimant to live below supplementary benefit level. If the flat-rate benefit together with any earnings-related supplement does not cover the claimant's requirements as laid down by Parliament, he is entitled to claim supplementary benefit.

Nevertheless, I can well understand the feelings of the man who does not get the increase he is expecting. We have looked at various solutions to the problem, but I am afraid there is no easy way—short of abolishing the benefit ceiling rule altogether—of adapting the rules to allow all beneficiaries receiving an earnings-related supplement to get the full benefit of an increase in their flat rate benefit without distorting the position for others.

For example, my hon. Friend has suggested that the benefit ceiling should be raised at an uprating so as to at least cover the flat-rate benefit increase. This could be effected by not reapplying the benefit ceiling to existing beneficiaries when benefit rates go up. But this would not only defeat the basis on which the benefit ceiling operates but would be unfair to new beneficiaries claiming benefit after the uprating who would have the increased flat-rate benefit taken into account in full when applying the benefit ceiling rule.

Revaluing the earnings in the relevant income tax year of those receiving earnings related supplements at the time of an uprating so as to take account of the movement in earnings prior to the uprating would have a similar effect.

This brings me to the two main criticisms which are generally made about the way the benefit ceiling operates both of which have a bearing on the numbers affected by the benefit ceiling rule.

The first is that there is a gap of nine months between the end of the relevant tax year and the start of the earnings-related benefit year the following January. The interval of nine months between the end of the tax year and the beginning of the benefit year gives time for employers' records of people's earnings to be transmitted to the Department and a computer record compiled. About 35 million documents are received from employers via Inland Revenue and information has to be extracted and discrepancies resolved, and it takes nine months before our records are completed in order that an accurate and prompt service can be given to claimants.

The law relating to the relevant tax year therefore reflects the practicalities of the situation and I am assured that there is no way in which the time lag of nine months can be reduced. Experience of the system since it was introduced in 1973 shows that it is proving very much more efficient than the previous one which relied on claimants to produce their forms P60 or in default meant expensive and time-consuming inquiries to employers.

Thus, the earnings on which the supplement is based may be anything from nine to 21 months out of date when a period of incapacity or unemployment begins. This means that reckonable earnings often do not fully reflect a man's earnings immediately before the date of claim; and high inflation rates have made the problem more severe. On the other hand, the ceiling of 85 per cent, of gross pay is worth a good deal more now in terms of take-home pay than it was in 1966, and this to some extent has offset the effects of inflation.

The second complaint is that the figure of reckonable weekly earnings is arrived at by dividing the earnings factor—which represents the earnings on which Class 1 contributions have been paid—by 50. A spell off work due to sickness or unemployment can therefore reduce reckonable earnings to well below normal earnings received when in work.

These are matters which we have looked at, but apart from the practical difficulties—and there are some considerable obstacles—any improvement in the amount payable by way of earnings-related supplement could well, in certain circumstances, add to the disincentive problem which arises for some unemployed persons. The great majority of people who are unemployed are substantially worse off out of work. A few, mainly those with large families and those below average earnings, can find that they are better off or nearly as well off on benefit, particularly in the early weeks of unemployment when earnings-related supplement is payable on top of flat-rate benefit. Any increase in the amount of earnings-related supplement payable is bound to add to this problem which has caused a good deal of public concern over the past two years. The problem has been greatly exaggerated. Nevertheless, we must think very carefully before improving the benefits available during this period and, in particular, before making any adjustments to the 85 per cent. ceil- ing which, as I have said, was introduced with the incentives problem specifically in mind.

Any improvements in this area would be costly. For example, abolishing the benefit ceiling rule would cost in the region of £15 million to £20 million a year, although there would be offsetting savings in supplementary benefit. My hon. Friend will appreciate that, at a time when we are having to contain public expenditure, the question of priorities is bound to arise. He mentioned this matter as a strong candidate for priority when public expenditure considerations in the Department permit.

Nevertheless, I have taken careful note of my hon. Friend's views and the examples he quoted to illustrate his point. I shall bear them in mind in any future review. I can assure him that we are not indifferent to the problem he has raised, which affects a number of people

Question put and agreed to.

Adjourned accordingly at three minutes to Twelve o'clock.