Poverty and Unemployment Traps (Hansard, 1 December 1987)

§ Lord Sandys
My Lords, I beg leave to ask the Question standing in my name on the Order Paper.

§ The Parliamentary Under-Secretary of State, Department of Health and Social Security (Lord Skelmersdale)
My Lords, one of the central aims of the social security reforms is to improve work incentives. By replacing family income supplement with the more generous family credit we shall help to tackle the unemployment trap by improving the net return from work. By assessing benefit entitlement on the basis of net income we shall end the worst effects of the poverty trap. Lower rates of taxation sharpen incentives, and we are committed to reducing them, but only when it is prudent to do so.

§ Lord Sandys
My Lords, I thank my noble friend for that Answer and congratulate the Government on that very important state of affairs, but can he say how it has been achieved?

§ Lord Skelmersdale
My Lords, over and above the success of the Government in recent years in achieving lower rates of tax and rising real earnings, the assessment of entitlement on the basis of net instead of gross income ends the absurd situation where loss of benefits combined with tax contributions leave someone worse off as gross pay rises. Seventy thousand families are presently in that position, but they will not be after April of next year.

§ Lord Barnett
My Lords, is there not a powerful case made out to deal with this serious problem by using whatever moneys are available to raise the tax threshold rather than to cut the basic rate?

§ Lord Skelmersdale
My Lords, no. As I understand the position, the changing of tax makes a very marginal difference to marginal tax rates. Should tax go to 25 per cent., the number of families on a rate of 80 per cent. and over would fall only from 445,000 to 932 420,000. The number of families in the 70 per cent. bracket would actually rise.

§ Lord Peston
My Lords, is it not well established that apart from raising the tax threshold as a sensible way to operate in this area, the best way of all is actually to raise child benefit in order to deal with poverty and other traps rather than lower it?

§ Lord Skelmersdale
My Lords, the effect of losing some 30 pence is in fact minimal. Even if child benefit had been uprated, the effect on the numbers receiving income-related benefits would be marginal. Perhaps 10,000 fewer families would receive family credit and a further 5,000 or so fewer families might receive housing benefit. I suggest that this would hardly have a major impact on the numbers facing relatively high rates of benefit withdrawal.

§ Lord Harmar-Nicholls
My Lords, is my noble friend aware that following the Question, most people would conclude that the Government are moving in the direction which is generally desired. They have raised the threshold, they have lowered taxes and they have increased child benefits. So all these suggestions seem to be already in train—and the best of luck on that journey.

§ Lord Skelmersdale
My Lords, I am extremely grateful to my noble friend. He is quite right. The numbers in the 90 per cent. to 100 per cent. marginal tax rates bracket have in fact fallen from 120,000 to 70,000.

§ Baroness Jeger
My Lords, is it not a fact that after next April there will be some families receiving family credit and housing benefit who will in fact lose 98p in benefit for every pound they earn? Surely that is something of a poverty trap? Is it not also the case that as people start paying national insurance at 5 per cent. when they earn as little as £41 per week, they are better off to stay at home, collect £40 in benefit, get their national insurance dues credited and not have to pay fares to work? Surely that is a poverty trap.

§ Lord Skelmersdale
My Lords, I suggest to the noble Baroness that the very few families that are in the bracket to which she refers would in fact be very much worse off under the current system whereby it would actually cost them 9p in the pound to go to work.

§ Lord Banks
My Lords, does the noble Lord agree that the steeper tapers which are to be used in connection with housing benefit will accentuate the poverty trap by increasing the rate of withdrawal and that the child benefit freeze will broaden the poverty trap by including more families in means-tested benefits?

§ Lord Skelmersdale
My Lords, as regards child benefit I have already answered a supplementary question on that fact. As regards the tapers, whether the housing benefit taper or the family credit taper, we are actually talking about people who by going into employment, earn a considerable amount of 933 money because until that point occurs the taper is not effective. Therefore we are talking about the richer end of the market, as it were. I do not think this question is directed particularly to that end of the market.

§ Lord Kilmarnock
My Lords, would not the noble Lord agree that the only way of eliminating the marginal tax rates of more than 100 per cent. to which he has referred is by introducing an integrated tax benefit system?

§ Lord Skelmersdale
My Lords, I am well aware that this has been the policy of the Social Democratic Party for some time. Perhaps at first look it is rather tempting. I must resist the temptation because serious issues clearly arise on how such merged systems could retain the contributory principle. They might imply quite unacceptable increases in public expenditure and in the burden of taxation on earnings.
Furthermore, there could also be serious implications for work incentives. It is not obvious that such systems could respond quickly and adequately to changes in needs. The policy requires a lot more thought before it can be accepted generally.

§ Baroness Seear
My Lords, the Minister surely is aware that this was Liberal Party policy long before it became the policy of the SDP. Does not the Minister also agree it was much discussed and studied on his own Benches where there are still some very strong supporters of this policy?

§ Lord Skelmersdale
Indeed, my Lords. Whether it comes from the Liberal Party or the Social Democratic Party, I note that we are actually talking about uniformity of the tax and benefits system which does not seem to arise politically. Having said that, I am well aware that my noble friend Lord Trafford, for example, and the noble Baroness's honourable friend, Dr. David Owen, were in consultation on this matter as long as 20 years ago.

Lord Winstanley
My Lords, is not the noble Lord aware that as far back as the time when the Chancellor of the Exchequer was Mr. Barber this integrated system was announced as Conservative Party policy? The then Chancellor decided that was not the time at which he could introduce it.

§ The Lord President of the Council (Viscount Whitelaw)
My Lords, however all that may be I am sure the House feels that it really is time to pass on to other questions.