PERSONAL RELIEFS

HC Deb 07 May 1985 vol 78 cc725-41

Dr. Oonagh McDonald (Thurrock)

I beg to move amendment No. 7, in page 34, line 2, leave out '£4,255' and insert '£4,475'.

The Second Deputy Chairman of Ways and Means (Sir Paul Dean)

With this it will be convenient to take amendment No. 8, in page 34, line 3, leave out '£2,690' and insert '£2,830'.

Dr. McDonald

The purpose of the amendment becomes clear when one considers the careful way in which the Chancellor presented his statement about age allowances. He said in his Budget statement: I propose to increase the age allowances this year by the same cash amount as the corresponding basic allowances. Thus the single age allowance will rise by £200 and the married age allowance will go up by £300."—[Official Report, 19 March 1985; Vol. 75. c. 801.] On the face of it, that seemed perfectly fair. In fact, however, it was a continuation of what the Government did last year when they widened the gap between the age allowances and the ordinary personal allowances. Until then the gap had never been more than 1 per cent. but it suddenly widened to 7 per cent., working against the over-65s. This was because last year the Government more than indexed the ordinary allowances but merely indexed the age allowances. As a result. 2.4 million pensioners over the age of 65 had to pay an extra £130 million in income tax, although the Government looked after the better off pensioners—those with investment income—through the abolition of the investment income surcharge.

Having read carefully virtually every word of the Minister's response to a similar Opposition amendment last year, I find that the Government produced no good reason whatever for their treatment of pensioners. There is absolutely no justification for making a distinction between increases in personal allowances to pensioners over the age of 65 and increases in ordinary personal allowances—unless there is an implicit justification which the Government would prefer not to state out loud. As the Government choose to believe that unemployment is due at least partly to the unemployment trap, they may regard it as more important to raise the allowances of people in work to ensure that they continue to work and do not chicken out and take unemployment benefit or social security benefit instead. The consequence of following that argument through is that pensioners' tax allowances do not matter much and that it is sufficient to index them. If one failed to do that, pensions would be cut, in so far as they are subject to tax.

This year the Chancellor of the Exchequer tried to cover the Government's tracks by announcing the same cash amount, yet on examination that is not as fair as it seems. This year's Budget increases the single age allowance by 8 per cent., and the married age allowance by 7.6 per cent. Both are higher than the present rate of inflation, but who knows what will happen to inflation by the end of the financial year?

The real point of comparison is between the single person's allowance or the married woman's allowance, which increases by 10 per cent., and the married man's allowance which increases by 9.5 per cent. The Government have raised the age allowances by a little more than the present rate of inflation but not as much as the ordinary allowances. The reason for that is not clear, unless it is, as I suggested earlier, that pensioners do not matter much because they do not affect the unemployment figures. Perhaps the Chief Secretary can suggest a reason for distinguishing between the age allowances in that way—a distinction which was introduced last year and which continues this year, although not to the same extent.

We are suggesting higher amounts than the Government have done in order to go some way towards rectifying the damage done to pensioners in last year's Finance Act. Our amendment seeks to raise the single person's allowance to £2,830 and the married age allowance to £4,475. I am sure that the Chief Secretary will have done his sums carefully, but, before he produces them, I can tell the House that the cost of our proposal is £57 for a married age allowance and £45 for a single age allowance. Those figures are based on the tax ready reckoner statement in the autumn statement 1984. Those are modest costs. In the clause that we shall debate tomorrow, the costs for a full year will be £155 million, which will go to the better off. Today we have made a modest proposal which costs about £1 million, and which will do a little to help pensioners and to make up for last year's bad treatment.

We have a substantial number of pensioners in mind. In the last tax year, 1.25 million single pensioners over the age of 65 and 1.30 million married couples, of whom one of the partners was over 65, paid tax. Forty per cent. of pensioners are affected by taxation and, therefore, our changes would affect a large number of them. We want the Government to be more generous to them than they are disposed to be.

Last year the Government introduced the gap between the two amounts of allowance, and this year they have widened the gap between the age allowances and the ordinary tax allowances. Having introduced this sort of discrimination last year, the Government—although it does not appear so until one begins to examine the implications of the Chancellor of the Exchequer's statement—have widened the gap between pensioners and the rest, and one wonders why. No explanation has been given and we are dying to hear the Chief Secretary's justification for it. Perhaps it is all part of a general attitude which the Government seem to have been developing towards pensioners ever since they came into office.

I have mentioned changes, not directly related to taxation, which show what the Government's attitude to pensioners seems to be. For example, the Government changed the basis on which the state pension was assessed, so that it was no longer related to earnings. If that earnings rule had not been changed, a married couple would be getting £62 a week instead of the current £57 a week. A single pensioner would be getting £38.90 a week instead of the current £35.80. So the Government have already attacked pensioners once by changing the basis on which the state pension increases should be assessed each year.

11 pm

Then there is the threat of the abolition of the state earnings-related pension scheme. We know that the Cabinet has yet to come to a decision about that, and I can understand why there is much in-fighting going on in the Cabinet. After all, on the 1983 figures, at least a million pensioners will be affected. If the Government decided to abolish the SERP scheme straight away, so that nobody benefited from the scheme any more, a million pensioners would be affected and they would lose on average about £2.30 a week.

Therefore, from the Government's past behaviour—the tax changes what were made last year, which are continued in this year's Budget, and all the talk about the abolition of the SERP scheme—we can see that the group about whom the Government care least are the pensioners. The Government would do well to remember that they are large in number, and that many can ill afford the kind of damage that the Government seem to be determined to do to their income.

When we looked at the kinds of thing that the Government might do, on the basis of the estimates of the development of the economy, the level of PSBR and so on that the Government provided, we could see that with better planning and with better intentions the Government could afford to raise the single person's pension by £5 a week and the married person's pension by £8 a week. We have yet to hear what proposals the Government have for pensions this year.

From the Budget statement and the Finance Bill, we can see that the Government plainly do not care about the lot of the pensioners and are determined to enlarge the distinctions between the tax treatment of pensioners and the tax treatment of the rest of the Community. The Finance Bill is designed to continue the damage that the Government started to do to the incomes of pensioners last year. That is why we are seeking to amend the Bill in this way.

Mr. Austin Mitchell

I support my hon. Friend the Member for Thurrock (Dr. McDonald) in the points that she so tellingly made. Her speech placed its main emphasis—as it should, coming from the Opposition—on proper provision for the aged. The amendment proposes to increase the age allowance to compensate for the Chancellor of the Exchequer's vicious treatment of pensioners last year. While, as my hon. Friend said, the married man's allowance has increased from 1979 up to this year by 125 per cent., and the single person's allowance has increased by 124 per cent., the single person's age allowance has increased by only 107 per cent. and the married person's by only 105 per cent. That is not good enough. Special problems and responsibilities fall upon the aged and it has always been considered right that the tax system should provide special help through tax allowances for them. That is provision which we back strongly. We are concerned about the Government's niggardly cheese-paring attitude, which hits those most vulnerable by failing to increase the allowances in the way that is proposed in the amendment.

The Government's attitude prompts the question, "What do the Government have against the aged?" They have ended the dual link that the Labour Government established between pensions, prices and wages, whichever increased the more, and now we have a bubbling, seething morass of rumours about the treatment of the earnings-related element in the pension. However, the Government never have the courage to implement their prejudices and they will draw back ultimately. It should be recognised that the rumours are causing much uncertainty among the elderly and those who are approaching retirement age. We remember the rumours which the Chancellor of the Exchequer eventually had to scotch in the Budget statement about the Government's treatment of the pension funds. Against this background, it is only to be expected that we should ask ourselves what the Government have against the pensioners.

The explanation that enters my head is that the deliberate campaign against pensioners is one way of distracting attention from the fact that on 15 October the Prime Minister will become a pensioner. We shall have then the spectacle of a grey-haired couple in the evening of their lives—a little out of touch with reality but only by 100 years—who have become gentler, all their passion spent. They have nothing else to do apart from wrecking the national economy and plaguing those less well off than themselves. That will be characteristic of their policy up the retirement, which is designed to distract attention from the historic event of pension day for the Prime Minister. That is why the Government have embarked on a deliberate campaign against pensioners.

The Labour party sees it as its responsibility when in office to reverse the Government's policies. The Labour party is the party which provides for pensioners. It has always done so and it will continue to do so. When it takes office it will reverse what the Government have been doing by cheese-paring benefits and tax allowances to which pensioners are entitled as of right in according with social justice and human decency, which are concepts foreign to the Government but sacred to the Opposition.

The Chief Secretary to the Treasury (Mr. Peter Rees)

We have had a brief but interesting debate, which is to a degree a continuation of our debates last year on this subject. I make no complaint about that. It is right that we should return to these important issues. Perhaps the hon. Members for Thurrock (Dr. McDonald) and for Great Grimsby (Mr. Mitchell) drew the wrong conclusions from the facts. They may feel on reflection that some of their remarks were rather highly charged, especially when we go back a little in time.

The hon. Member for Thurrock explained clearly the basis of the amendment. It seeks to index on the basis of the amendment which was introduced on 1 May last year by the hon. Member for Birmingham, Perry Barr (Mr. Rooker). Last year the Government proposed full price protection for the age allowance for the elderly. This year we propose full price protection and more. We are saying that there should be some cash in addition, which is £300 for the married age allowance and £200 for the single age allowance. In cash terms, that will keep them level this year with the ordinary basic allowance but, I concede, not quite in percentage terms.

The hon. Member for Thurrock asked about the theme of the Budget and quoted, not a little selectively, from the speech of my right hon. Friend the Chancellor, who said that the emphasis of the Budget was on jobs and people of working age. That does not mean that we intend to discriminate against other groups. That point was made last year, when my hon. Friend the Minister of State said that positive discrimination in favour of people of working age did not imply discrimination against any other groups.

Lest such a conclusion be drawn, we should examine the facts. Since 1978–79 there has been a £2,180 increase in the married age allowance, compared with a £1,920 increase in the basic married man's allowance. The single age allowance has increased by £1,390, compared with a £1,220 increase in the basic one. I hope that the Committee will not think that that shows discrimination against the elderly. The married age allowance is at its highest point since the war and the single age allowance is at its highest since 1974. That does not show sustained discrimination by the Government against the elderly.

Clause 35 should take 60 per cent. of the over-65s out of charge for tax. I know that the hon. Member for Birmingham Hodge Hill (Mr. Davis) deprecates my giving the figures of people taken out of charge for tax. I know too, that he is a keen student of these matters, but I shall not take up what he said on Second Reading. Clause 35 should ensure that 260,000 of our elderly compatriots are taken out of charge for tax. I do not think that that indicates discrimination or that we have no care for that group.

Mr. Terry Davis

The right hon. and learned Gentleman and I share an interest in these matters. How many of those 260,000 people were taken out of tax last year by the increase in age allowance and are therefore being double counted?

Mr. Rees

I cannot give a precise figure. If it can be ascertained during the debate, I shall give the hon. Gentleman the answer. If not, I shall write to him. I am sure that he will add it to his store of knowledge on this important, if slightly arcane, subject.

There is no obvious reason why the elderly should retain a constant percentage premium over the younger taxpayer. Perhaps I might draw the attention of the hon. Member for Thurrock to the fact that there was no constant figure under Labour. I could take her through successive years to show that the proportion that the age allowance bore to the basic allowance was reduced steadily under Labour. Having winced under the hon. Lady's harsh criticisms about clause 35, I was reassured to find that, in 1976, the basic and age allowances were increased by the same cash sum. All of the strictures which the hon. Lady has advanced against us might, if well founded, be advanced against the Labour Government. I am sure that that point must have escaped her attention, otherwise she would not have developed that theme.

11.15 pm

Mr. Austin Mitchell

Surely the gap was never widened to this extent. The ratio was always more closely maintained under that Government. Even if there was a slight widening, it was never a widening of this degree. The difference between an increase of 107 per cent. in the single person's age allowance and 125 per cent. in the married man's allowance since 1979 is quite considerable.

Mr. Rees

I know that the hon. Gentleman has great enthusiasm for these matters, but let us look at the problem in its true context. My hon. Friend the Member for Braintree (Mr. Newton) moved a similar amendment to that moved by the hon. Member for Thurrock (Dr. McDonald) on that occasion. It is curious that those themes run through our debates. He said that there was no clear water between the basic old-age pension and the age allowance. There is considerable clear water on this occasion—about £23 a week for the married man's age allowance and £15 a week for the single man's age allowance. Further, on that occasion, when the Labour Government were in power, the basic rate was 35 per cent., and now it is 30 per cent. Therefore, if the hon. Gentleman reflects closely, he will see that we have a slightly better record than the previous Administration. However, I do not want to enter into a competitive battle on that point. I only want what we have proposed to be viewed in its true context.

I hope that when Committee members reflect on the extent to which we are proposing that the married and single age allowance should be put up, on the number who will be taken out of charge for tax altogether, and on the fact that this is the highest level for an elderly married man since the war, and for an elderly single person since 1973–74, they will see that all the strictures that have been advanced by the hon. Members for Thurrock and for Great Grimsby are not well founded. I know that the hon. Lady is fair-minded. I hope that now she has had a chance to reflect on my remarks, she will not feel disposed to push her amendment to a Division.

Dr. McDonald

As I listened to what the Chief Secretary had to say, and as he referred back to the Minister of State's speech last year, I found that there was still no answer. To give different percentage increases for the age allowance as opposed to the ordinary allowance is unequal treatment. Such inequality has to be justified. No justification whatsoever has emerged from what the right hon. and learned Gentleman said.

The differences between the age and ordinary allowances have been moving on apace under the Government, particularly since their re-election in 1983. For example, in 1983–84, the figure for the single age allowance as a percentage of the single person's allowance was 132 per cent. As proposed in the 1985 Budget, the figure is 122 per cent. That is a 10 per cent. drop in two years, which is pretty much of a change, and at a pretty fast rate. The married person's allowance is slightly bigger than that. If we take the married age allowance as a percentage of the married person's allowance, in 1983–84, it was 134 per cent. In this Budget, it will be 123 per cent. That enormous change is being made in the value of the age allowance, although it has been raised a little bit above the rate of inflation in the current financial year.

That is unequal treatment. It is a steady and fast rate of change. The Chief Secretary has still not provided any justification for that whatsoever, although the Government declare that they are particularly committed to reducing the burden of taxation, a matter that we can discuss further on clause stand part. Frankly, the right hon. and learned Gentleman has not justified what has been done in this year's Budget. It is still unequal treatment, and will leave many pensioners worse off than they might have been if the Government had chosen to treat ordinary taxpayers and pensioner taxpayers in the same way.

Amendment negatived.

Question proposed, That the clause stand part of the Bill.

Dr. McDonald

In clause 35, the Government appear to be generous in the way in which they have raised the married persons' and single allowances above the rate of inflation—10 per cent. and 9.5 per cent. respectively. The Chief Secretary has said that these allowances now stand at the highest point since world war 2. At first sight it seems as though the Government are being very generous and fair in the tax treatment that they have meted out. However, once again, everything is not as it appears.

For example, up to the Budget, and even in the course of the Budget speech, Ministers made great play of the point that raising the allowances would deal with the poverty and unemployment traps, and that this is the best and most efficient way of treating this problem, and a way designed to help those on average and below average earnings. The Government continue to put up that case, in spite of the fact that it has come under fire and justified criticism.

I shall focus not on the unemployment trap but on the poverty trap, because I want to examine the burden of taxation and how it is distributed. Last December, the latest figures available gave the figure of 270,000 families caught in the poverty trap. That is a five-fold increase since 1979. The various efforts that the Government claim to have made to relieve the poverty trap have made it worse.

Some of the families caught in the poverty trap pay marginal tax rates of between 75 and 100 per cent., and some—a small proportion—pay marginal tax rates of over 100 per cent. Recently, when the Daily Mail, with its usual factual basis, claimed that the Labour party might bring in tax changes that would impose marginal tax rates of 98 per cent. on certain people, there was a great outcry from the Conservative Benches. However, I hardly ever hear any Tory Member complaining about the number of families caught in the poverty trap and few voices complaining about the numbers paying marginal tax rates of 75 per cent. and above. They seem only to begin complaining when those who might face high marginal tax rates because of changes are the very rich. The complaints do not come when we deal with the 270,000 families who, in the nature of the case, because they are able to claim family income supplement, are extremely poor. About such cases there is hardly a peep from the Tory Benches about the poverty trap. Nor is there a serious attempt to get people out of the poverty trap.

Indeed, with the national insurance contribution changes introduced in the Budget, the Government have casually introduced another three poverty traps, although admittedly they do not give rise to marginal tax rates such as the ones that I have just mentioned. However, they mean that many people will pay more tax, or they encourage employers to hold down wages so that their employees are not caught in the poverty trap through increases in taxation because their wages are increased from, say, £55 to £58 a week. The Government have done nothing in this Budget, as in previous Budgets, to reduce the number of families caught in such traps, nor have they seriously considered the problem.

The Government claim that they have assisted people on average and below average earnings, and that they have reduced the amount of tax and national insurance contributions that they must pay. Yet if we take that as a proportion of earnings in 1985–86 as compared with 1978–79, we discover that those on half average earnings, two thirds of average earnings or just on average earnings—I am talking about married couples with part-time working spouses, or married couples with two children and part-time working spouses—for all the Government's alleged efforts, are paying roughly the same tax as a proportion of their earnings as they paid in 1978–79. For all the steam, noise and effort that the Government have allegedly engaged in, the tax changes will make little difference to their tax burden.

In contrast, high-paid households—those on five times average earnings—have enjoyed an average reduction in their tax bills of 14 per cent., while those on 10 time average earnings have enjoyed an increase of 22 per cent. compared with 1978–79.

I listened with great interest to the speech of the Financial Secretary to the Treasury on Monday 29 April, and I came to the conclusion that he either had little grasp of the statistics—I am sure that that is completely unfair—or that he was trying to pull a fast one. He said that the Government were more concerned with the genuine quality of life than were the Opposition, and then went on to say that what really mattered was the increase in real take-home pay, or real wealth, under this Government compared with under the Labour Government. Of course, he is correct to say that take-home pay has been increased for some groups, because gross earnings have been increasing at a much faster rate under this Government—I understand to their dismay—than they did under the Labour Government.

I say that the hon. Gentleman was trying to pull a fast one because he suggested that we should focus only on the real take-home pay of those groups, instead of on the Budget and the Finance Bill, which are designed to deal with the distribution of the tax burden of those income groups. To suggest that all that matters is that people's real take-home pay is increasing—the Opposition certainly do not object to that—is not the point. The distribution of the tax burden is the point. To say that real take-home pay has increased for this, that or the other group is neither here nor there. The Financial Secretary gave the game away by comparing the increasess in real take-home pay for those on twice or five times male average earnings under the Conservative Government, with the increases under the Labour Government. According to a survey of personal earnings in 1982–83, we are talking about 44,000 people earning five times average earnings and 1.5 million people earning twice average earnings.

11.30 pm

The Financial Secretary referred to enormous increases—14 per cent. in the last five or six years for those on twice male average earnings and 28 per cent. under the Conservatives for those on five times male average earnings—for a tiny proportion of the 22 million incomes.

The Financial Secretary to the Treasury (Mr. John Moore)

Knowing that the hon. Lady is as fair as she is statistically accurate, I am sure that she will remind the Committee that I gave the precise comparisons for average earnings, and half average earnings as well as for twice and five times average earnings. In all those cases, including half average earnings, those people have done better.

Dr. McDonald

Exactly. I made that point. I said that the Financial Secretary was leading us up the garden path a little by trying to make us focus on the notion that what mattered was the increase in real take-home pay. Certainly there have been increases for all the income groups to which the hon. Gentleman referred. I do not dispute the figures, but they are not the point. The point is that the increases have been unequally distributed under this Government far more than under the last Labour Government.

A Finance Bill is concerned with the distribution of the tax burden, not simply with recording the increases in real take-home pay for various groups. It is insufficient to say of the increase in real take-home pay for families on low incomes, "They are fine; they are definitely better off." The real take-home pay to which the Financial Secretary referred excluded VAT and other charges which hit such families harder than families on average and above average incomes. Even the net tax cuts of £1.73 for a married couple and £1.15 for a single person will mean that those in receipt of below average earnings will receive less in their wage packets or salary cheques. In fact, the benefits have already started to disappear because prescription and water charges have increased and excise duties and VAT on various items have been imposed or increased. That hits low-income families much harder than families on twice or five times average earnings.

One could say that the Financial Secretary—I am sure that it was unintentional—was also trying to pull the wool over our eyes by merely referring to the increase in real take-home pay. The hon. Gentleman knows that that excludes VAT and the other duties to which I have referred. The Government have hit the living standards of the low paid far harder than they have hit those of other people.

National insurance contributions are not part of the Finance Bill, but they are part of the Budget and therefore I shall deal with them. We are now all coming to the view that tax and national insurance contributions must be taken together.

The much vaunted reductions in national insurance contributions do not help much. A wages council worker earning £69.85 a week—the rate for bar staff—and receiving the full benefit of the reduced 7 per cent. rate will pay 18.8 per cent. of his earnings in tax and national insurance as a single person after October 1985 compared with 17.4 per cent. of the equivalent wage in 1978–79. Some people do not benefit from any of the changes. I am indebted to the Low Pay Unit for that example. It illustrates once again that the changes do little to help the low paid, that the rich continue to benefit from this kind of Budget, and that there has been no change in the Government's policy.

Taxes have risen in real terms by £26 billion, at 1984–85 prices, between 1978–79 and 1985–86. The only people to have benefited by about £3 billion a year are those with well above average earnings. When we first consider the clause, from the point of view of the Opposition and the public, it seems that the Government are being generous. Allowances are being raised well above the rate of inflation, and they are accompanied by changes in the national insurance contributions. It seems that those with below average earnings will benefit. A closer examination shows that once again nothing has been done to relieve the poverty trap. Those on below average earnings are still paying about the same amount of tax and national insurance contributions as they paid in the last year of the Labour Government, and yet the Government continue to condemn the Labour Government for grossly increasing the tax burden.

Before the Government took office, they said that they would cut taxes and everyone would benefit. That is partly why people voted for them in 1979. Since then, people have begun to understand that when the Government talk about tax cuts that means tax cuts not for everyone, but only if one belongs to that small minority whose wages are double or more than double average male earnings. That is the focus of the Government's attention. They might choose to justify it by saying that if they give incentives to that group of people it will revitalise the economy because they are the innovators who will create jobs. The Government have been up to that kind of trick for the past six years. We are still waiting for those rich innovators to invest, innovate and create more jobs. That justification has gone straight out of the window.

The Government have increased the tax burden. Whatever the Financial Secretary chose to say last week, the tax burden has been even more unfairly distributed than it was before. The only beneficiaries are the better off. The low paid are as badly off as ever, despite the apparent initial glories of the clause. When we look at it, it fades away like fairies' gold. It is nothing in the hands of the low paid.

Mr. Austin Mitchell

My hon. Friend the Member for Thurrock (Dr. McDonald) made a telling and powerful argument against the Government on social priorities. As she said, the whole of the Government's strategy was based on the trickle-down theory of economics—if more money is given to the wealthy it trickles down to the poor. As Galbraith put it, if we feed more hay to the horse it trickles down to the road to be eaten by the birds, so the more hay we feed to the horse the better the birds are fed. All that has trickled down from this Government is excuses, distorted statistics and sermons from the Prime Minister. The benefits that have been showered on the wealthy—to the tune of £3,000 million every year to the top 5 per cent. of income earners—have not stimulated economic activity or trickled down to the poor. They have not provided the dynamism that was originally envisaged.

It is interesting that tonight we are debating certain clauses because of a conflict of pressures. We want to debate those clauses to which we take the greatest exception; the Government want to debate clauses on which they wish to congratulate themselves. This clause is one of those on which the Government wish to pat themselves on the back. It is a difficult anatomical feat, but not as difficult as some of the other anatomical feats performed by Government, especially under this Prime Minister. Yet that is hardly reasonable given the social priorities embodied in the proposal on personal allowances. There is an argument whether this is the best use of the limited amount of money that the Government felt able to give away in the Budget. I do not regard an increase in personal allowances as the best use, but it is a personal choice. This Government have placed the burdens of the depression that they have created on the shoulders of those least able to bear them—the poor, the aged and the unemployed. It is about time that they were recompensed for what the Government have done to them, as victims of Thatcherism, by some increase through the tax system so that money is channelled directly to them.

I believe that that is best done through child benefit, which has not been increased to the same degree as allowances. It is likely to increase only in line with inflation. I believe that child benefit is the most effective way of channelling money to those who most need it—the poor and those with large families. That should be the priority. If there was a massive increase in that benefit, it could be combined with a tax of the benefit. There should be a massive increase to allow that money to be used where it is most effective. It would deal more effectively with poverty and the real social problems that the Government have created than the increases in personal allowances. Invevitably such increases give less to the low paid and the less well off. That is implicit in the system. But the Government have been giving more to the better off all along.

Under the Budget a Cabinet Minister earning £827 a week—one wonders why they are paid so much given the extent of the devastation that they have caused in the economy—will receive a weekly reduction in tax and national insurance of £8.87. Congratulations to Cabinet Ministers. The mass of the people, and certainly the less well off, have peanuts and penury.

The very myth that taxes are being reduced is punctured by the telling figures provided in answer to parliamentary questions by the Low Pay Unit. Anyone on a half or two thirds of average earnings, or even on average earnings, is still paying a higher proportion of his income in direct tax and national insurance than he paid in 1978–79. I want to quote the figures to puncture the myth once and for all. After five years of saying that they are reducing the tax burden, the person on average earnings is still paying a higher proportion of his income in direct taxes than he paid in 1978–79.

11.45 pm

In 1978–79, a single person on average earnings paid 31.7 per cent. of income in direct taxes. In 1985–86 the percentage is 32.5. A married couple on half average earnings in 1978–79 paid 16.4 per cent. of income in direct taxes. In 1985–86, they are paying 18.7 per cent., an increase of 14 per cent. The social priorities of the Government involve taking from the poor to give to the rich, sanctifying it with cant and rhetoric about stimulating an economy which visibly they have depressed and ruined. A married couple with two children on two thirds of average earnings in 1978–79 paid 12 per cent. of their income in direct taxes, whereas in 1985–86 they are paying 13.2 per cent. in direct taxes.

Those social priorities, which are absolutely wrong, which the clause does nothing to alleviate and which characterise the Government, have brought the economy to the present pass of a country stale in decline, larded with the vainglorious platitudes of a Prime Minister of a Government who are viciously placing the sacrifices of that decline on the poor and those least able to carry the burden. Those are the priorities represented by the Government.

Mr. Peter Rees

We have had two wide-ranging contributions from the hon. Members for Thurrock (Dr. McDonald) and for Great Grimsby (Mr. Mitchell). They were long on rhetoric and short on facts. Indeed, at times I wondered whether we had been taking part in the same debates and had been looking at the same tax system. However, as the evenings go by in Committee Room 10 upstairs, our views may come together and we may realise that we are focused on the same problems.

The hon. Member for Great Grimsby, with his usual panache——

Mr. Terry Davis

Now answer the debate.

Mr. Rees

That was intended as a compliment. The hon. Member for Birmingham, Hodge Hill (Mr. Davis) should not be so sensitive. He knows that I am prone to distribute my compliments even-handedly between both sides of the Committee. I said that Labour Members had made engaging contributions, but I wondered whether the facts justified their remarks and whether they really had been considering what had happened to the tax system during the period between 1974 and 1979 and between 1979 and the present day.

This clause was chosen for debate. Indeed, it would have been odd had we not chosen to debate on the Floor one of the principal income tax provisions. We should have been subject to criticism by the main mass of hon. Members who will not be privileged to sit upstairs in Committee Room 10 and maybe by the world outside——

Mr. Terry Davis

There are not many sitting here.

Mr. Rees

I am sure that the hon. Gentleman would prefer not to open up that point. I was not proposing to do so, but if he would like a record kept hour by hour. day by day, of those who attend our debates, I am sure that the Clerks would oblige.

I was pointing out that it was right that during our debates on the Floor, when any hon. Member is free to contribute, at least one of the income tax provisions should have been singled out for debate.

I hoped that we might find common ground. I hoped that the hon. Member for Thurrock, with her sharp and informed view, and the hon. Member for Great Grimsby would recognise that the Government have been concentrating considerable resources on raising the basic personal allowances. The advantages of that are plain.

I am sure that the hon. Lady will be reassured to hear that my right hon. Friend the Chancellor of the Exchequer will be devoting £1.5 billion of resources to raising thresholds in 1985–86. In a full year, the cost will be £1.87 billion—a fairly considerable diversion of resources to what I thought were the common objectives of taking as many as possible of our fellow countrymen out of tax and concentrating particularly on the less well-off sectors.

The Opposition say that child benefits have advantages, but they have disadvantages, too. First, they do nothing for the elderly. Very few elderly couples are likely to be able to claim child benefit. We had an interesting debate about concentrating more resources on the elderly, but the Opposition now advance a contrary case and say that we should have concentrated resources on child benefit and not on basic allowances. Child benefits do nothing for single people or for the childless.

We could have an interesting debate on how to tackle these various problems, but I hope that the Committee will recognise the Government's sincerity and determination to concentrate resources where it is felt that the need is greatest.

Mr. Austin Mitchell

On the better off.

Mr. Rees

The hon. Gentleman makes that spurious point and I concede that the rates of tax that we inherited—98 per cent. on investment income and 83 per cent. on earned income—have been considerably alleviated. If one has a steeply progressive system, to the point of lunacy and near confiscation, and one dismantles the structure, considerable advantages will go to those who have been paying confiscatory rates.

However, if one looks fairly and dispassionately at what has happened, one sees that considerable advantages have been concentrated at the other end. I should like the Committee to concentrate on take-home real pay. The Opposition make the extraordinary proposition that that is not what counts. In my excursions round the country I have found that that is precisely what agitates most of our fellow countrymen.

The hon. Member for Great Grimsby singled out a husband on half national earnings, with a wife and two children. The hon. Member looks alarmed, as well he might, but perhaps he will agree that he was carried away by his own rhetoric and ignored what has really happened. Under the Labour Government, the take-home income of that family increased by 4.3 per cent. Let us consider that same family in the period since the 1979 election until this year. Its net income has increased by 12 per cent. By any test that I can formulate, that family has been better off under a Conservative Government than it has been under the Government that the hon. Gentleman supported.

Let us take the same family of a married couple with two children on average earnings and consider how its net income improved under the last Labour Government. It improved by 1 per cent. I do not scorn that; it shows an improvement. Let us consider how that family has done under this Government. Its net income has increased by 13 per cent. I know that the hon. Member for Great Grimsby is a fair person, and I now look forward to his informed comment.

Mr. Austin Mitchell

The statistics that the Opposition were giving are the important ones. The Government who stated that they would reduce the burden of taxation have increased the burden of direct taxation on those with average earnings. That is the only point that we make. It is surely hypocritical to bring in other factors to try to compensate for the real increase in the burden of taxation that has taken place.

Secondly, what the Chief Secretary is saying is directly opposite to what the Chancellor has said. The Chancellor said that earnings are going up too much and that it is our responsibility to pay ourselves less, to be less grasping about take-home pay and to price ourselves back into jobs. Is the Chief Secretary therefore telling the Chancellor of the Exchequer that he is wrong about this?

Mr. Rees

The hon. Gentleman is tempting me to go into a wider field than I think is justified by the clause. I would be delighted to talk about the workings of the labour market, but 1 suspect that, were Ito do so, I would be in some difficulties in staying within the rules of order.

The hon. Gentleman explains what has been happening. Of course real earnings have been going up. Let us take the more general point that he and his hon. Friend the Member for Thurrock made, that the burden of taxation has gone up. But, of course, they have not looked at the composition. They have not realised that two fifths of the increase is due to North sea oil, two fifths to indirect taxes and one fifth perhaps to a degree to national insurance contribution and to rates. We are endeavouring to cap rates, and I therefore hope we shall command the support of the hon. Gentleman in our endeavours. Neither the hon. Gentleman nor his hon. Friend the Member for Thurrock has recommended or even recognised what we have endeavoured to do at the lower end of the national insurance contributions for the employee, again something that I should have thought would command their wholehearted support.

Wherever one turns, therefore, one sees that the Government have been devoting considerable resources to ameliorating the direct tax burden of the less well off members of the community.

The hon. Member for Thurrock went on to say that that ignores VAT. I would only cite, as I often do, but perhaps the Committee will forgive me if I recite it, what a distinguished Minister in this field used to say. I refer. of course, to Lord Barnett. He said—and I commend this again to the Committee—that VAT is nothing like as regressive as we thought. The hon. Member for Hodge Hill, who I know does his homework thoroughly, will recall it, so he would not inflict that point on us because he knows that it is not soundly based. He knows that the range of exemptions and the range of zero rating that were built into the system by Lord Barnett when he introduced VAT in 1972–73 were designed to ensure that there would not be undue burdens on the less well off members of society.

Test it as one will, I assert with utter confidence that the Government's record in relation to the less well off members of the community in respect of direct taxation bears the closest possible scrutiny and, by any test, comes out much better, I am afraid to say, than that of the previous Labour Administration. It may be that in Committee or, indeed, outside Parliament, we shall be told in some detail what a Labour Administration would propose in this regard so that we can compare the kinds of measure that we have introduced and what a Labour Administration would introduce and, to be fair, how they would support them. I do not suggest that the Opposition do that tonight. We shall then be able to take the debate further. Today, however, I am simply concerned to commend clause 35 to the Committee and I am genuinely sorry that there is not more common ground in this area.

12 midnight

I conclude by summarising the reasons why I suggest that the clause should find favour with the whole Committee. First, it crowns what the Government have done since 1979. If the clause commends itself to the Committee today and to the House on Third Reading the basic allowances will have been increased by 20 per cent. in real terms in that period. Set against some difficult economic years, that is a remarkable achievement. Again, as I pointed out in relation to the age allowance, it means that we shall have the highest married man's allowance since the war and the highest single person's allowance since 1973–74. Moreover, I should point out to the hon. Member for Hodge Hill that the increases since 1978–79 will have taken 1¼ million of our fellow countrymen out of charge to tax.

The hon. Member for Thurrock said that there had not been a peep out of the Government about the poverty trap and problems of that kind, but surely taking all those people out of tax altogether is a most significant contribution. The hon. Lady may have other suggestions as to how we can make further advances, but to underpin any further advances we shall expect massive support from the hon. Lady and her right hon. and hon. Friends for our efforts to restrain public expenditure because only then shall we be able to make the kind of advances in this area that will command the hon. Lady's support.

We have concentrated massive resources on increasing the allowances because this takes people out of charge to tax, because it concentrates the greatest proportionate benefit on the lowest sector of taxpayers and, finally, because it takes people out of the poverty trap, although perhaps not so fast as the hon. Member for Thurrock would like.

For all those reasons, whatever other reservations and differences we may have tonight and possibly even on succeeding nights, I hope that we shall find common ground in supporting clause 35 and on that basis I commend it to the Committee.

Dr. McDonald

I do not think that the Chief Secretary has managed to say anything that would encourage us to regard clause 35 as the solution to the problems that I have outlined today and which the Labour party has outlined on many occasions. In some ways, I hardly know where to begin with the right hon. and learned Gentleman's speech. I do not wish to be unkind, but to me it seemed more like a dialogue of the deaf than anything else.

I will begin with the poverty trap. At best, the changes in the Budget will take between 5,000 and 10,000 families out of the poverty trap. Between 1979 and December 1984, the latest date for which figures are available, the number of families in the poverty trap increased fivefold to 250,000, so the effect of the Government's changes in tax allowances and their failure to keep their promises on child benefit has been to increase enormously the number of families in the poverty trap compared with the number caught in the trap under the Labour Government.

The mere fact that only 5,000 to 10,000 families will be taken out of the poverty trap even with clause 35 shows clearly that raising the basic personal allowances is not the way to deal with the problem. If the Chancellor had kept the promises made by his predecessor to raise child benefit in line with increases in personal allowances, far fewer families might now be caught in the poverty trap. If the Chancellor of the Exchequer or the Secretary of State for Social Services announced an enormous increase in child benefit, the number of families caught in the poverty trap would begin to decline sharply. I could say a great deal more on that point in answer to the Chief Secretary's arguments.

I shall instead turn to a further point made by the Chief Secretary. He said that our amendment and comments about clause 35 were contradictory, but they are not. He said that on the one hand we argue for an increase in the age allowance so that pensioners are treated in the same way as those in receipt of ordinary allowances, and on the other we want an increase in child benefit. Obviously, an increase in child benefit would benefit few pensioners, but it would help a small proportion of married couples—there are only 6 million families with dependent children out of 20 million married couples. Therefore, the figure is less than 50 per cent.

We have focused so much attention on child benefit because poverty has affected families with children far more seriously, especially since 1978–79, than families without children or pensioners. That is not to say that there are no poor people to be found in those two groups. However, families with dependent children face the most severe problems of poverty.

If the Government are to concentrate on dealing with poverty, child benefit should be an important part of their programme. During the run-up to the budget and since then we have said that the attack on poverty should take three forms. The Government should increase pensions, increase child benefit, and put the long-term unemployed on the proper rate of supplementary benefit. The latter would cost a small sum—about the size of the sum that we shall debate tomorrow. There are more than 1 million long-term unemployed, that is, those who have been unemployed for more than 12 months. Our attack would, therefore, be three pronged. We refer to child benefit frequently because we know that families with dependent children face the most severe problems of poverty.

Yet, Conservative Members worry about those who, according to the Daily Mail, may face a marginal tax rate of 98 per cent. My hon. Friend the Member for Great Grimsby said that whoever pays that amount of taxation is a high income earner. Such people are few and far between and, probably, pay such a high marginal rate of taxation because they manage their tax affairs incompetently. Whoever pays 98p has an extremely high income.

When we talk about families caught in the poverty trap we are referring to families on extremely low incomes, for whom a further 50p or £1 a week is a matter of importance, and makes the difference between a tin of baked beans and a loaf of bread to feed the kids or nothing. We are not talking about extremely high wage earners who might suddenly find that they are losing 98p on the nth pound. That is why we are shocked and upset when we hear shouts from the Conservative Benches about such a possibility and we do not hear the same horror and disgust being expressed at the notion of families on such low incomes being faced with marginal tax rates of 75 per cent. or more. The number of families faced with those burdens has increased throughout the six years of the Government's period of office. Clause 35 will not do much to alter that position. Increasing child benefit substantially would certainly help to rescue many families from the poverty trap, and that is why we so constantly insist on the importance of that point.

The Chief Secretary, understandably, made some play with my references to VAT and so on. The Chief Secretary—as the Financial Secretary had done the week before—compared the increases in real take-home pay under the present Goverment with those under the last Labour Government, and I did not contradict the statistics which were given in the Financial Secretary's speech last week. What I said was that simply to refer to real take-home pay is not the whole point. It is, of course, entirely to the point if one is talking about the increase in the basic tax allowances. But simply to talk about the increase in the real take-home pay for lower income families is misleading, because it leaves out the other costs which low income families face and which bear more heavily on them. We are, of course, referring to 15 per cent. VAT and not to 8 per cent. Inevitably, the almost doubling of VAT bore heavily on low income families.

I described as a misleading statistical exercise the other charges and alterations in the social security system, such as housing benefit, which make a comparison of real take-home pay in an effort to describe the changes in the living standards of those with below-average earnings under the present Government and those with below-average earnings under the Labour Government. I can understand the Chief Secretary playing little games and referring, in the course of so doing, to Lord Barnett. Nevertheless, the Chief Secretary must face the fact that the bare comparison of the increases in real take-home pay under the two Governments is entirely misleading if one wants to use it to describe the changes in living standards. That is why I referred to that point, although I understand that it does not, of course, fall within clause 35.

None of us wants to oppose the increase in personal tax allowances, but the point that we have to make again and again is that it benefits the better off more than the low paid. It is part of the continuing distortions in the tax system which have occurred since 1979, and which have led to a lightening of the burden of taxation for the better off and little improvement in the burden of taxation on those who are worse off.

We have discussed many statistical examples and I do not want to delay the House, but let us consider the married couple, where there is a part-time working spouse and no dependent children. In 1978–79 their combined tax and national insurance contributions were 15.9 per cent. of their earnings. In 1985–86, following the application of clause 36, they will be 16 per cent.

With 10 times average earnings for the same couple, 65 per cent. of their income would have been taken in 1978–79, and 50.9 per cent. of their income would be taken in tax and national insurance contributions after 1985–86.

That is the inequality and the discrepancy which concerns the Opposition, along with the poverty to which I have referred. We consider the Government's measures entirely insufficient to deal with the unfairness and with the poverty which exists in Britain.

Question put and agreed to.

Clause 35 ordered to stand part of the Bill.