§ Motion made, and Question proposed, That this House do now adjourn.—[Mr. Walter Harrison.]
§ 4.24 p.m.
§ Mr. George Cunningham (Islington, South and Finsbury)
The subject I want to raise in this debate is that of students' grants, and more particularly the so-called parental contribution to students' grants—that is, the deduction from the grant made according to the income of the parents of the student. More particularly still, the point I am raising is the discrimination which exists in assessing parential income between parents who pay rent for the home in which they live and parents who have a loan for buying a house and who are permitted to deduct from their relevant income the amount of any interest they are paying on that loan.
Before coming precisely to that point, I should like to put to the Minister some anomalies which exist in the arrangements as they are now in order to try to persuade him that the system he is operating, and is generally defending, is one which has many anomalies in it of what I would regard as an unsustainable nature. It is high time that the whole system was looked at in order to try to bring into it a higher degree of consistency and logical defensibility.
The so-called parental contribution is related to the income of the parents. If 1001 the income of the parents is above a certain threshold, the parent is expected to contribute a certain amount of the excess towards the student grant. The first anomaly to which I want to draw attention is that the scale for that contribution is inverted according to what one would think the natural way of doing it. The threshold of residual income in the coming academic year is, I think, £3,800. If parents' residual income is £3,800, some parental contribution is required. If the residual income is between £3,800 and £5,200, the parental contribution is 20 per cent. of any excess over £3,800. Then we come to a tranche between £5,200 and £7,300 of residual income where the parental contribution becomes only 10 per cent. Above £7,300, the parental contribution of any excess is only 8⅓ per cent.
I am sure that the Minister will agree that on the face of it that is a curious thing in that the person who is at the lower end of the scale is expected to contribute a larger proportion of his excess over the threshold than a person who is at the upper end of the residual income scale. That has not always been the case. In at least the 1971–72 academic year—I think it was the practice generally up to a few years ago—the parental contribution was expressed as a fixed sum, which was small, plus a fixed percentage of the excess of income and that percentage did not vary once the initial threshold was passed. The effect of that anomaly is, of course, that proportionately the systems bears harder upon the person at the lower end of the residual income scale, provided he is above the initial threshold, than it does on the person at the upper end of the residual income scale.
For example, if we have two lots of parents roughly on average earnings, but Family B has £100 more than Family A, Family B will have to contribute £20 out of that excess to the parental contribution. But if we have two other families which have roughly £7,000 a year of residual income, and again one has £100 more than the other, the difference in parental contribution between the two families will be only about £10, or even only £8 if they have a slightly higher income. That curiosity needs to be looked into.
1002 Secondly, we have the oddity that if there are parents who have two children at college or university, and in respect of the first child the parent is required to make a parental contribution of, let us say, £500, that £500 of assumed expenditure is not deductible in assessing the parental contribution appropriate for the grant given to the second child when he goes to college or university. I would have thought that that was one of the most obvious deductible items to introduce into the system.
Instead, there is a fixed sum deducted. If there are two children receiving grant, next year it will be £95. So, if the parent is contributing £500, he has only £95 allowed as his assumed contribution in respect of the first child. It is even more odd, because, if the parent is contributing to the first child only £50 parental contribution, nevertheless he gets a deduction on his residual income of £95. I do not know who dreamed up that kind of arrangement, but it is hardly defensible.
Then we have the fact that life insurance premiums are deductible, and deductible, I might say, in full, and not as to 50 per cent. of the premiums which is the rule for tax purposes. But why should life insurance premiums be deductible at all, especially life insurance premiums to an endowment insurance scheme? In pure life insurance, the premiums will be so small that it does not really matter what we do. But an endowment insurance scheme can have premiums at a very high level, and such premiums constitute, in effect, savings. They belong not to current revenue activities but to capital activities. Why should they be deductible?
Once again that feature of the system benefits the better off who can afford to have high premiums to that kind of disguised savings scheme, as against the person on average earnings who cannot afford to do so. It means that if a person takes out an endowment insurance scheme and has, say, premiums of £1,000 a year, in addition to getting the tax relief he would have a parental contribution effect which would mean that the real cost to him was considerably less than the notional cost.
I might also point out that, although the Department says that it tries to keep 1003 these arrangements in line with tax practice, the limit for insurance premiums is one sixth of income in the case of the tax system but 15 per cent. of income, which is not quite the same thing, in the case of parental contribution.
Finally, in the way of anomalies, I am not sure whether the mortgage interest which is deductible is limited to the interest on a loan of £25,000—the limitation which applies in the case of tax relief. As I read the relevant regulations, that is far from clear, because it says on page 28 of the regulations that what is deductible isthe amount of any sums paid as interest (including interest on a mortgage) in respect of which relief is given under the Income Tax Acts…As I read that, it is doubtful whether the interest which has to be deducted is limited to the interest on £25,000 such as applies in the case of the tax system.
It is after pointing out that the system is shot through with that kind of anomaly that I come to the anomaly to which I wish to draw special attention, namely, that in assessing residual income, a deduction is made for interest on a house loan but no deduction is made for rent.
I have been concerned with this subject for about five years, as far as I can see from my files. Over many years, Ministers have drawn a distinction between rent and mortgage interest and suggested that if we were to permit rent to be deducted, there would arise an irrestible campaign to have capital repayments on a mortgage also deductible. I do not think that there is anything in that argument. It is absolute rubbish.
Rent and interest payments are conceptually as near identical as two different things can be. Neither has any element of saving or of debt amortisation in it. Both are current payments for current usage. Both are current payments for current usage of housing facilities. They are identical, whether we are talking about council rents or private rents. I do not think that if we made the change that I propose the Minister would be under any logically defensible pressure to make repayments of capital deductible as well. Also, the Minister's notion that capital repayments are not deductible is wrong—and I shall come to that later.
1004 I know that the Minister and his predecessors have relied on the Anderson Report of 1958 which considered this matter and which advised the Government of that time against any change in the then arrangements. My answer to that is that it is our duty to look at the arrangements to see whether they are logically defensible, and not look at the recommendations of a Government Committee.
The fact is that we have changed many of the arrangements as they were at the time of the Anderson Report. For ex ample, insurance premiums are now deductible up to 15 per cent. of income and not up to 10 per cent. as was the case at the time of Anderson, and which Anderson recommended should be continued.
Secondly, the system was never terribly close to the tax practices. The whole of insurance premiums are deductible, and not only half as applies in tax. There was a similar arrangement, although not identical, operating to that 50 per cent. rule at the time of the Anderson Report.
The main reason why I would argue against Anderson is that it is a sloppy bit of thinking, if, indeed, one can call it thinking. When the report addressed itself to this subject, this was the mighty advice that it gave, and I quote from paragraph 208:We have considered whether rents should also be taken into account, but we have concluded that there is not sufficient reason to make an exception in this respect to the general principle stated in paragraph 203.That principle was that one should stick as closely as possible to the tax arrangements.
I do not find that a particularly overwhelming or persuasive argument. I do not find it very logical. Therefore, whatever else the Minister does, he should take the Anderson Report and chuck it out the window. It is not persuasive enough and the material is not there to lead us to overturn our own conclusions.
At the time of the Anderson Report all interest was deductible for tax purposes, whatever the purpose of the borrowing. Therefore all interest was deductible for the purposes of assessing the parental contribution.
1005 There has now been a major change in that only interest paid on house loans is deductible for tax purposes. It may have been justifiable not to permit rent to be deducted at that time and to permit mortgage interest to be deducted, not because it was mortgage interest but because all interest was deductible for tax purposes.
The situation now is very different. The proper way to look at this is by agreeing that we now have two different forms of housing payment. Therefore why should one be deductible while the other is not?
The financial effects of the system as it operates now can be put in this way. Let us assume that there are two neighbours, Mr. A and Mr. B, each paying £600 in rent, which is not unusual these days, at least in London. One of them—Mr. B—decided to buy a house on a loan of £8,000 so that he will be paying interest of about £800.
He will find his parental contributions reduced by £160 a year, or more than £3 a week—that is, assuming that both Mr. A and Mr. B are on the low income scale but above the threshold. The actual cost to Mr. B of his £800 of interest will be only £376. In addition to the tax relief on it, he will have £160 knocked off the effect of his parental contribution.
But if Mr. B and his advisers have their wits about them, they can do rather better than that. What they will do is to take out the mortgage on the so-called endowment insurance method. Instead of paying off the capital bit by bit every month, they will pay off no capital during the life of the scheme but will invest in an endowment insurance policy. When that policy matures at the end of the period, the proceeds will be used to pay off the loan.
In that case, if the interest is £800 and the endowment insurance costs £200 a year, total outgoings of £1,000 per year, the effect upon parental contribution will be not £160 but £200. The actual cost to Mr. B in taking on the extra £1,000 of expenditure will be only £470 because of the combined effect of parental contribution and tax relief.
1006 By that means capital repayments are deductible, in effect, so long as the person concerned has his wits about him enough to undertake the operation on the endowment insurance method, because in that case he has deducted not only the interest payments but also the premiums on the insurance policy in total, 100 per cent., provided that they do not exceed 15 per cent. of his income, which they will not. Both the interest and the effective amortisation of the debt are deductible.
Therefore, this system is unsustainable, not only because of that last anomaly, but because basically rent and interest, event if we were only talking of interest, are the same thing. It is current payment or current usage of the same kind of facilities—namely, housing. The present arrangements are particularly hard on council tenants and private tenants on average earnings because of the curious inverted scale to which I referred earlier. The arrangements are also discriminatory even to people not on average earnings but higher up the scale as between all kinds of tenants and all levels of people who are buying their own homes.
I am certain that if the case for and against the present arrangements were fully exposed in the House, with somebody here to listen, there would be a majority in the House who would agree roughly with the case I am putting forward. I suggest to the Minister that it is now time for the whole matter to be reviewed I believe that the Government—whether it be the present Government or the next one—will lose on this matter. The anomaly will have to be removed, and I know that that would be the majority view of the House.
The request I put to the Minister is that Department of Education and Science and Treasury Ministers should have consultations with myself and other Members in the House who are concerned about this matter, so that we can draw up the case for and against the proposals with a view to making the system that we apply more logically defensible than it is now. We should remove this anomaly, which causes a great deal of concern to those who suffer from it and who know the system well enough to realise that it is discriminatory between them and others in essentially identical circumstances.
§ 4.44 p.m.
§ The Minister of State, Department of Education and Science (Mr. Gordon Oakes)
I wish to thank my hon. Friend the Member for Islington, South and Finsbury (Mr. Cunningham) for raising this matter. I assure him that, far from there being nobody in the House to listen to him, there was you, Mr. Deputy Speaker, and myself as Minister responsible for higher education. My hon. Friend made a very persuasive case in the limited time available to him for an Adjournment debate.
Let me try to deal with the regressive effect at the lower end of the scale, and let me take up the point about parents who have two children at university. That is a little outside the subject of rent, and perhaps he will allow me to write to him on that aspect. The main question is whether rent should be deductible in the same way as is mortgage interest. Let me take a few minutes to describe how the system has arisen.
The mandatory student awards system rests on the principle that students should be enabled to attend their courses without hardship, but that the cost of their personal maintenance should be shared between public funds, the students themselves, and, if appropriate, their parents or spouse, according to their ability to pay. Contributions front parents are set at levels that they can reasonably be expected to be able to afford. As a measure of this, for the 1978–79 academic year no contribution at all will be expected where the parents' residual income—that is, the gross income less specified allowances—is £3,800 a year or less. This corresponds to gross pay of around £80 a week.
The awards arrangements, as my hon. Friend is well aware, are administered by local education authorities under regulations made by my right hon. Friend. Clearly, where administration is entrusted to more than 100 local authorities, the regulations must be detailed and precise to ensure uniformity of treatment; and they must also be as straightforward and simple as is consistent with reasonable equity of treatment, otherwise administration becomes unwieldy, costly and inefficient. The regulations must also be demonstrably fair to students and their parents, whatever their personal circumstances. In practice, it is a question of 1008 achieving a balance between what is equitable and what is administratively practicable.
One way in which these two often conflicting objectives have been reconciled is by basing the computation of parents' income, for the purpose of assessing their contribution to the grant, on income tax principles and practice. Thus, the gross income which is the starting point of the assessment is the parents' gross income computed as for tax purposes. Deductions from the gross income to arrive at residual income, on which parental contributions are levied, are allowed only in respect of items which can be allowed for income tax relief. It is for this reason that mortgage interest payments are offset against gross income but rent is not.
The arrangement whereby the assessment of parents' income for awards purposes follows income tax practice is of long standing. It was recommended by the independent Anderson Committee, which my hon. Friend mentioned, in its report in 1960, which forms the basis of the present grants system, but it had been in operation long before that. Over the years, it has been found to provide a logical, consistent and equitable basis for assessing contributions for parents with a wide range of personal circumstances. There is, admittedly, an element of rough justice—that is inevitable when one is trying to maintain a system which is capable of reasonably efficient administration. Nevertheless, the present arrangement has provided the basis for a fair assessment for the vast majority of parents. Over the years, successive Governments have been urged to modify the system to allow for various items not at present covered, or to change it altogether. They have looked at these suggestions, but have concluded that any alternative would be likely to produce more anomalies, not fewer, and to be less fair to parents, not more.
I have a good deal of sympathy with my hon. Friend's contention that rent, like mortgage interest, should be allowable against gross income in assessing parental contributions. We aim to make the system as fair as possible, and I appreciate the argument that there is an element of unfairness here. The fact is, however, that if we were to depart from income tax practice, especially in such a major 1009 respect, we could endanger the system which, as I have said, has been found over many years to produce fair results for most parents. We know from experience that one departure from an established principle leads to others. If we were to accept rent payments as allowable against gross income, we would soon be urged to allow owner-occupiers the cost of repairs and maintenance. As my hon. Friend knows, rent often includes an element for repair and maintenance, as well as mere interest costs. Indeed, in many instances it includes a contribution towards rates as well and therefore the simple income tax system has appeared to be much more administratively convenient and, on the whole, fair.
My hon. Friend rightly said that the full amount of insurance premiums up to a specified limit are deducted, whereas only a proportion is allowed for tax purposes. In other matters of detail, there are minor differences. Some items are allowed for award purposes under slightly different conditions, but these are differences of minor detail only and are nothing like the major departure that he is urging. It is in departing from tax practice with regard to the range of allowable items where the difficulties and dangers lie. I understand that the tax principle is followed on the £25,000 limit. The conditions that apply to income tax would apply to the contribution for a student grant.
So much for the difficulties and dangers involved in moving away from present 1010 arrangements. I would not suggest that these arrangements, in so far as they do not provide for rent to be allowed against income, are wholly unreasonable. I have said, and I repeat, that I have some sympathy with my hon. Friend's argument. I have pointed out that rent and mortgage interest are not exactly parallel. My hon. Friend has not taken that point, but it is often put to me in arguments by other hon. Members and certainly by people outside the House.
My hon. Friend has made clear that, as I said, successive Governments have looked at this system. It is an old system which, in the light of what my hon. Friend said, deserves looking at again in view not only of the anomaly of rent but of the other anomalies that he has pointed out. I say that because, in addition to student grants, we have considered, and will again be considering, the question of post-statutory school grants for the 16- to 19-year-olds. Should they follow student grants or should a new pattern be adopted? In view of what my hon. Friend said today, I think that matter must be looked at.
Therefore, I think that, without giving any commitment—my hon. Friend will agree that I cannot make a commitment now because other Ministers are involved—we should look at some of the compelling arguments that he has put before the House today.
§ Question put and agreed to.
§ Adjourned accordingly at nine minutes to Five o'clock.