HL Deb 23 November 1995 vol 567 cc419-39

3.31 p.m.

Lord Mackay of Ardbrecknish rose to move, That this House take note of the Earnings Top-up Draft Rulesfor a new in-work benefit for people without dependent children.

The noble Lord said: My Lords, this is an unusual occasion. We are here to debate the first ever pilot of a social security scheme in this country. It has been held for the last 50 years that social security changes have to be introduced on a national basis or not at all. That has meant that some good ideas have not been introduced. And some proposals have been introduced which would perhaps have benefited from piloting. It is time we broke out of this mould, and in July we published our plans for doing so in the Green Paper Piloting Change in Social Security—helping people into work.

That set out our plans to pilot a new in-work benefit—earnings top-up designed to assist into work people without dependent children. Because the scheme will be operated for a limited period, it will be introduced on an extra-statutory basis. But it is important that those participating in the scheme should be absolutely clear what its rules are. We have therefore laid before your Lordships' House a draft of the rules under which the scheme will operate. Of course, if it is eventually decided to implement earnings top-up nationwide, then we shall return to Parliament with the necessary legislation.

Earnings top-up is a benefit for people in work. In that respect it is like family credit. But unlike family credit it is for people without children.

It has been accepted for 25 years that families with children needed extra help to enable them to compete in the labour market on equal terms and to remove any disincentives to work which might arise from low earnings relative to out-of-work benefits. The family credit scheme has proved extraordinarily successful in a number of ways—helping unemployed people and lone parents to move into work and enabling other families to stay in work by helping them over a bad patch. The Government now believe it is time to see whether the same principle works for those without children.

When we look at the characteristics of unemployed people we find that 60 per cent. of them—1.35 million out of 2.32 million—are people without dependent children. Of course, the majority are not lower-wage earners within the scope of income-related benefits; and many others move back into work very quickly. But there are others who face disincentives to move into work. The income they could command in work is not enough to provide an incentive to work.

The nature of jobs is changing fast. For example, comparing the same parts of the economic cycle between 1979 and 1990, female employment increased by 17 per cent.; part-time employment increased by 34 per cent.; and overall employment increased by 6 per cent. The demand for unskilled labour has reduced through mechanisation and improved methods of working; and in consequence the price the market puts on unskilled labour has reduced.

Our policies have responded to these changes. As a result, our record on unemployment, including long-term unemployment, is better than the EC average. Our non-wage labour costs—those costs an employer has to pay for but which do not find their way into the employee's wage packet—are lower than most EC countries, the United States and Australia. The UK is the only G7 country where non-wage labour costs take a lower proportion of all costs now than they did in 1970.

We have introduced measures to stimulate employment and to break down barriers which deter unemployed people from taking work. Last year's Budget unveiled a range of innovative measures to this end: from April 1996, unemployed people moving into work will receive housing benefit at the full rate for an extra four weeks; employers taking on long-term unemployed people can apply for a national insurance holiday for a year; faster family credit aims to remove the gap between the end of income support and the first family credit payment; and, finally, from October 1996, the pilot of earnings top-up itself.

Earnings top-up is aimed at an estimated 20,000 people in eight areas of the country. Advice and claim forms will be available at the jobcentre or local Benefits Agency office. They will also be able to phone for a claim form using a locally advertised number. Having claimed and received an award, payment will continue for 26 weeks irrespective of any other changes in income. At the end of 26 weeks, they will automatically receive an invitation to renew their claim.

It will assist single people whose income from work is up to £125 a week and couples whose income from work is up to £164. It will give them an income boost averaging something like £19 for single people aged 25 and over and £24 for couples. The gain could be up to a maximum of £54 for a couple and about half that for a single person.

Your Lordships may wonder why we should pilot the scheme. To introduce a scheme like this nationally would cost over £500 million, based on the higher rate of the two models proposed. It would be an unacceptable risk of taxpayers' money to do that without testing it first in a pilot scheme. We do not know categorically that increasing in-work income will be as effective a work incentive for single people and couples without children as it is for families with children. But research by the Policy Studies Institute clearly showed that family credit helps people with children to move into work and to stay there. That is in its paper Families Work and Benefits 1993. The Centre for Labour Market Studies also found that the amount of in-work income has a positive effect on the decision to take up work, and that the influence is strongest for married men. That is to be found in the document Long-term Unemployment and Labour Market Flexibility 1993.

But there is no previous experience or research which tells us clearly whether people without children will respond to the stimulus in the same way. That is why we need to pilot earnings top-up before we commit resources on a very large scale. It is also the reason why we are piloting two different rates of benefit: to examine whether it is the fact of cash supplement itself or the amount received which has the greater effect on work.

Because piloting an in-work benefit is a new venture we thought it right to set out our proposals in detail. The consultation produced a high standard of response, including comments right at the beginning of the consultation period from the noble Earl, Lord Russell, for which we were grateful. I thank all those who contributed to the consultation. A summary of the points made has been placed in the Library.

The aspect of our proposals which attracted the greatest comment was the feasibility of payment through the wage packet. Both employer and employee representatives expressed concern about it. During the consultation period the Benefits Agency was also busy holding discussions with employers and payroll experts. In the light of that study and the representations received, we have decided not to pursue payment through the wage packet for the present. I am sure that that decision will be welcomed by all who were concerned on that point.

The consultation document set out the basis for the selection of the eight pilot areas in which the scheme will operate. My right honourable friend announced on 6th November what the final selection would be. They include areas in North Wales, central Scotland (Perth, Dumbarton, Stirling), Newcastle, Sunderland, South Yorkshire and the south coast. The areas chosen reflect different types of labour market—major urban areas, large towns, rural areas and seaside towns.

The selected areas have both a high rate of unemployment and a high proportion of vacancies. They are areas where we expect earnings top-up to be successful. They have been chosen to maximise the chance of obtaining a clear result. We are now in the process of tendering for the research which will 'enable us to evaluate those results.

A number of respondents to the consultation exercise, including the noble Earl, Lord Russell, emphasised the importance and difficulty of the evaluation exercise. We acknowledge that it will not be an easy task. We propose to collect a great deal of information about the labour market in the pilot areas—before, during and after the pilot. We shall be able to compare that with what happens to employment in the four matched control areas. We will also know a great deal about the individuals who claim the benefit. From the research we expect that it will be possible to evaluate the effects of earnings top-up and extrapolate the findings nationally.

Perhaps I may now turn to the rules of the scheme. They are based to a large degree on those already operating for family credit. Obviously there are changes in recognition of the absence of dependent children and relating to the limited geographical areas. But at least half of the draft rules are identical to the equivalent family credit provisions.

The rules provide for what will happen when workers move into, out of or between pilot areas. They are provisions with no precedent in social security.

We also propose to pay a lower benefit rate for under-25s, as is the case in income support but not in family credit. That is because younger workers, especially those without children, have a lower pattern of household costs than older workers—quite often living at home with their parents or in shared accommodation with friends. Young workers can also more easily be better off in work because their income from out-of-work benefit income is also lower than older workers.

A further difference from family credit is that earnings top-up will be time limited for certain self-employed people. There will be an upper limit of four 26-week awards for self-employed workers whose net earnings are continuously below £20 a week. We have decided to impose that limit because continuous, very low earnings cast doubts on whether employment is truly remunerative. We do not wish to discourage self-employment—far from it—but it is not the role of a social security scheme to prop up failing businesses indefinitely.

The final published version of the rules, and any future amendments, will be placed in the parliamentary Libraries. The Social Security Advisory Committee will also be informed.

The aim of earnings top-up is to help people with low earning power to move into work, or, if they are already in work, to establish themselves there. That is better for them and better for the country. We are piloting the scheme at a cost of £25 million in a full year to see whether it will fulfil those objectives without adverse consequences. We are breaking new ground, and I hope that the House will join me in wishing the scheme well.

Moved, That this House take note of the Earnings Top-up Draft Rules for a new in-work benefit for people without dependent children.—(Lord Mackay of Ardbrecknish.)

3.43 p.m.

Lord Skelmersdale

My Lords, having listened to my noble friend today, I find it very easy to imagine myself in his position, although not in quite so exalted a role. Many is the time that I have stood where he will be in a few minutes' time, responding not to the views of three noble Lords, like today, but to just one—that of the party immediately opposite. No alternative Opposition view would manifest itself on those occasions. Equally, no friendly voice would give cheer from behind. Those which did come from that quarter, on the rare occasions that they did, would be more likely to resemble a serrated knife being slowly and painfully driven into my kidneys with the sole objective of eviscerating my argument.

I hope that, today, my noble friend will find things just a little different. After all, the party opposite has been enjoined by their Leader in another place to think the unthinkable so far as concerns social security matters. We are eagerly awaiting the Opposition's official reaction to the Government's doing just that, as was shown by the Green Paper to which my noble friend referred. However, I hope that we will not hear the argument that the Government are perpetuating low wages, as we heard when family credit was introduced and indeed subsequently. I know of no proof of that happening.

I have been unemployed twice in my life. I know as well as anyone how demoralising it is for the individual and how wasteful it is in economic terms to the country in general and the taxpayer in particular. I, too, have seen the effects of people going straight from school into the dependency culture about which we hear so much—although, as we heard during Question Time today, it is less easy now. I have seen the effects of marginal rates, of combined tax and national insurance depressing the labour market.

I am encouraged by—and, I am glad to say, I played a small part in it—the modern system of in-work benefits. Family credit—a much more generous top-up benefit for people with children than its predecessor—is now paid to 591,000 people, though it is true to say that its uptake is not as great as, on paper, it could be. However, we should remember that many of those who do not take advantage of it are already in work.

When I arrived on the social security scene in 1987, the planning was over, the legislation passed and implementation was still to come. A few months later I was much more involved in the creation of the disabled working allowance, which was a logical progression of the same train of thought. I am encouraged by the 5,000 take-up. I know that that sounds small, but it represents 5,000 disabled people who would not be in work without the scheme.

But the idea of trialling any scheme, let alone one of in-work benefits, was unthinkable. In that respect, the Government have acted, whereas the Opposition are now for the third time—or is it the fourth?—back at the drawing board. It seems to me that their social security policy is, once again, in limbo. Having said that, this scheme is not as dramatic as it has been or will be painted. What it is, though, is an honest experiment to seek a new way of getting more people off benefit and into work.

Of course, the scheme is the most recent in a long line of initiatives for achieving that objective. My noble friend the Minister mentioned some of them and, of course, there is training for work. For example, there are Jobclubs; the job interview guarantee; work trials; jobplan workshops; Restart courses; the jobfinders' grant; the Workstart Employment Subsidy Scheme (which is another pilot programme); and community action, which provides part-time work in the community for people who have been unemployed for 12 months or more.

The vast preponderance of people do not need those schemes at all. One-half of the people who became unemployed in September will be back in work by Christmas, and two-thirds of them by March. In my view, a modern social security system should not spend too much time worrying about them. It is on those who are unemployed for longer than six months that all, or most, of our efforts should be concentrated—unless, of course, those who have been unemployed for less than six months have very limited savings and very little to live on in which case the state, as the great insurance company, should step in and support them, as it should if they are on very low wages.

I have long believed that for the first six months of unemployment the jobseekers' allowance (as we must now learn to call it) should not normally be paid. Instead, it should be index linked. In that I am an unrepentant radical. Of course, I realise that that idea has a tremendous knock-on effect. It would mean the destruction of the National Insurance Fund and, therefore, break a fundamental Beveridge principle. Today is not the day to say what else I would do in the field of state support, but that would only be a part of it. Why should Mr. Chris Smith and his cohorts in the Labour Party be the only section of the community to think the unthinkable?

That brings me back to the subject of today's debate. There is a section—probably a fairly small one—of potential job seekers who are better off on benefit than in work. They are single people who would work if their economic circumstances were shifted marginally in their favour. Any scheme which seeks to move them into work should have the blessing of the whole nation. If it works, it will have done all of us a great favour.

I have learnt from my noble friend that, in the eight trial areas, two rates of benefit are to be tested over a three-year period. The money being paid to claimants in the scheme at its finish in three years' time will be continued for another two years. We know that by that time the Government expect 20,000 people will have been attracted by it. No one could call that exactly earth shattering when one considers that nationally unemployment has fallen by five times that amount each and every month on average for the past six months, and when one also considers that 251,000 more people were in work in June 1995 compared with the same month in 1994.

In view of the recent reduction in the rate of growth of the economy, that is a creditable record indeed for government policies. I am no historian but I wonder when last a Labour government could boast lower unemployment than our other major European competitors. That said, it is not only our right but our duty to investigate the scheme a little further. I wish to ask my noble friend three questions.

First, what estimates have the Government made of the take-up of this new scheme were it to go on what the film industry would call general release; in other words, countrywide, and by definition with no trial? That would help us to put it into a proper perspective. Secondly, have the eight areas been selected to fall into either scheme A or scheme B in a rational way? I note of course what my noble friend said about the Green Paper. For example, were they based on the cost of living in a particular area as revealed by the General Household Survey? We know that the Jobcentres in the selected areas have revealed a particularly low take-up of lower paid jobs by single people in those places compared with the rest of the country. When one thinks of the value of the top-up, I think the first question is particularly pertinent.

In that connection, what persuaded the Government that scheme A was sufficiently distinct from scheme B and would result in a differential take-up in the two areas? I really am surprised—if I have understood the schemes correctly—that an extra £2 a week for those under 24 and £1 for couples would make a statistically valid difference in the take-up of the scheme. Whatever the answers to these questions, I wish this brave, innovative scheme—which to my recollection is the first social security scheme ever to be piloted by governments of any persuasion—a fair wind and I congratulate the Government on introducing it.

3.52 p.m.

Earl Russell

My Lords, the Minister may remember when he made his social security uprating Statement last year that I said it looked like an airfield after a bad raid: all pilots and no planes. The Minister, if I could read his face correctly, thought that I was being a little ungenerous. It seems perhaps today that I was—but I can only say I was not aware of it at the time—because here we have one of the pilots, to carry on the image I used then, equipped with a plane and ready for take-off. I welcome that warmly.

I offer my general support for what the Government are trying to do. Within the limits laid down by the general outlines of government policy, I think this is a good scheme and I welcome it; indeed I am glad to see it. It is rapidly becoming an all-party consensus that what we need to look at in social security are ways of making it easier for people to get off benefit and into work. We have here what is the real mark of an all-party consensus—that all of us claim to have been there first. It is entirely within the spirit of that game that I join in too and ask whether anyone can advance any higher bid than 2nd July 1990.

Of course this problem is caused partly by the steep tapers of the withdrawal of benefit as people come into work and partly by the declining levels of wages in some areas because of deregulation in the labour market and because of part-time work. Therefore we have a double pressure to make it hard to get back into work: the withdrawal of benefit and the lowness of the wages. It is necessary to address both of those in some ways jointly and in some ways severally. I am also extremely glad to see that this is being extended to the childless. I have never quite understood the logic by which in the old family credit system the childless, and even more the single, were being treated almost as second-class citizens. The whole of the hardship rules as we have them at present tend to discriminate against the single and the effects of that may at times be unfortunate and unfair. Therefore I am glad to see this helping hand—the hand up rather than a hand-out, as the Prime Minister would put it—being extended to the single and to childless couples as well as to those with children. That, I think, is a real step forward.

I would say to the Minister that when he spoke of an incentive to return to work he was identifying a part of the problem. However, I believe it was only a part of the problem. Sometimes it is a matter of incentive but sometimes it is a matter of sheer, stark financial impossibility. The classic case of that of course is fares, but over the centuries the classic case has been being unable to afford shoes. I have no doubt that that on occasion still happens. There are capital expense associated with the return to work and occasionally it may be those rather than the overall rate which are the obstacle.

I was grateful for the opportunity to reply to the consultation. I hope I may for a moment usurp the Minister to reply to the noble Lord, Lord Skelmersdale. The choice of the areas for the pilot was one of the central questions put in the consultation paper. I endeavoured to address the job of making them roughly equal in terms of access and transport to work. I think that my suggestions have been in some parts taken. I am sure that there were other people making other suggestions and that there is at least as much an element of rationality in those as one can expect in these things. The only complaint I have to make about the selection of areas for the pilot is that the name of Wimborne, Dorset is misspelt; it should be spelt like the neighbouring village of Cranborne.

Of course I have a few reservations about some of the items in these rules. These are in the main where I have reservations about the general outlines of social security policy, with all of which I am sure the Minister is perfectly familiar. If I touch on these it is lest my silence be taken for consent rather than because I want to reopen a series of old debates.

Regulation 7(4), in the light of last Monday's debate on the Address, is one we might think a little about. That is the one which provides that only one person in each household may benefit from earnings top-up. That actually is an anti-marriage rule; it penalises married couples. In the light of the debate in which the noble and learned Lord the Lord Chancellor will take part over the next few weeks, I wonder whether that might possibly be considered again. Regulation 10(1) on the fixed 26-week period is of course exactly the same as the family credit. We have dwelt recently on some of the problems arising from that as regards family credit. They will arise here too. The Minister is familiar with my arguments and I shall not repeat them further.

Regulation 14(1) will, I believe, cause certain problems, or at least it represents a line in government thinking which to my knowledge is causing problems. That is the one which deals with child benefit. I understand, of course, why they have decided to rule in this context that only one person may be held to have the custody of the child, because in the case of separated couples if they both share the custody they are both ineligible for earnings top-up. However, in general, I think that the administrative assumption that there is only one parent with care after a divorce is not always factually accurate. It is not always desirable on grounds of public policy. It is not always accurate to assume that the child benefit after separation is paid to only one parent. There is a procedure for sharing it, which at present can be stopped if the woman decides to veto it, and her consent may, on occasion, be unreasonably withheld.

That is a matter I ask the Minister to discuss with his noble and learned clansman before the progress of the divorce Bill. It is an issue that we may possibly address in an amendment during the progress of that Bill. It is a complicated matter and it needs some further thought.

The Minister will not be at all surprised to hear that I deplore the exclusion of students. I shall not dwell on the arguments for that either, but I believe that one of the effects of this benefit will be that it will tend to depress the general level of wages. Therefore, if students are receiving a wage—and many of them cannot do their academic work without receiving a wage—and that wage is depressed and they do not receive the compensation for its depression that everyone else receives, their disadvantage may be increased.

That brings me to the effect of these rules on wages, which is my central area of doubt. I am not generally exceptionally optimistic about human nature, but I believe that human nature does not change as it crosses the employer/employee divide. The same strengths and weaknesses exist on both sides of that divide. I am not certain that the rules meet that maxim.

Rule 34(1) has detailed procedures for dealing with an applicant who voluntarily reduces his hours of work in order to attract more earnings top-up. I can see why. I am rather more perturbed about rule 34(4) which provides for those who provide services for other people without taking payment to be treated as if they did so for wages. That means that every young man who mows a pensioner's lawn may find himself being deprived of earnings top-up as a result. I hope that the rules will not be interpreted in that way. However, human nature being what it is, guidance to those who interpret them on the ground will need to make it very clear that they should not be interpreted in that way.

By comparison with that suspicion, there is no attempt to address the possibility that employers might reduce wages because the people they employ are gaining a subsidy from the DSS. If one thing is possible, so is the other. I do not know whether either will occur frequently, but it would be very foolish idealism to deny that it was possible that employers may lower wages to make up for earnings top-up.

In relation to a question which was addressed in the consultation paper, I should like to know how the Government propose to monitor whether employers will lower wages. If they do, the Government will be taking on an open-ended financial commitment which may become more and more expensive with the years that pass. I cannot help thinking that earnings top-up, much though I welcome it, would fit much more logically side by side with a minimum wage than it fits into the Government's present policy. That is a considerable area of anxiety.

I should like to ask a few questions about how the pilot scheme is to be monitored. What are to be the criteria of success? Will they be simply the number of people who are placed back in work? Will they also include the effect on Crown revenues? If so, will that be confined to income tax and national insurance, or will some attempt be made to monitor the effect, because people who earn more will spend more, and that generates more revenue? Will there be any attempt to monitor the ripple effect of increased employment generating increased spending generating more employment? How is it to be decided what marks whether the scheme is successful?

Finally, if the House will bear with me for a few moments I should like to say a few words about my party's views and make one or two private suggestions about the general problem of the interface between work and benefits. These rules address only one part of that; a great deal needs to be addressed in other ways.

The Minister knows that we are in favour of an income support disregard. Mr. Frank Field—and I hope that the noble Baroness will confirm that his views are not Official Opposition policy—has expressed a degree of fear about fraud which makes the Daily Mail look calm. It seems to me that, rather than an expensive general attack on means testing, a great deal of this problem would be met much more practically by creating an income support disregard so that people on benefit can do a £5 job painting a neighbour's door without having to lose benefit pound for pound after the first £5. That lack of an income support disregard is an invitation to fraud.

The Minister knows the views of these Benches on the child care disregard and on gentler tapers for housing benefit. We on these Benches agree with the Institute of Fiscal Studies on raising the entry point to income tax rather than creating a new bottom rate. I should like to ask the Minister one or two more questions about the interface between tax and benefits.

First, it occurs to me that one of the reasons why the tax kick-in is so steep is that it is the present policy that benefit is taxable. If benefit were not taxable you could earn your £3,500 personal allowance before the tax kicked in. That by itself would do a great deal to ease the transition to work and avoid poverty traps. I should be grateful to the Minister if he would consult his right honourable friend at the Treasury and get some answers to that question. I should be interested to know what the effects would be.

I should also like to ask the Minister to consult the Inland Revenue about the coding for those who come back into work from benefit. If the Inland Revenue has no information on you when you come into work, it gives you an emergency notice of coding, which means that you pay tax at the full rate. For somebody coming off benefit with no capital, the fact that you get the tax back afterwards is no consolation. It ought to be possible to address that problem. Would it be possible, for example, for the Minister's department to give the equivalent of the P45 to people who come off benefit after a long spell, explaining that these people have not been earning during the period in question and that the Inland Revenue can take note of that fact?

Can the Minister tell us any more about two proposals the Chancellor has made, both of which I have welcomed? One is to extend housing benefit for the first four weeks back into work and the other is the jobfinder's grant. Because the Government, like us, understand that that is not the whole story, those are also welcome measures and I should like to know what is happening to them.

4.8 p.m.

Baroness Hollis of Heigham

My Lords, we all agree that, as the noble Earl, Lord Russell, said, we share a problem in respect of the move from welfare to work. If this country were today enjoying full employment or something approximating to it, or if that employment were adequately paid, there would not be a problem because those needing benefit would be few, the incentive to work would be considerable, and social security costs would be modest. Instead, let us remind ourselves, there are something like 2.5 million registered unemployed at this time. One million of them have been unemployed for more than a year and a quarter of a million for more than four years. Something like 60 per cent. of young black men in London are out of work. A million people in this country earn less than £2.50 an hour, and something like 300,000 earn less than £1.50 an hour. It is precisely because so many are out of work and so many who are in work are badly paid—some do not receive a living wage—and because the cost of securing them on social security is so high that we need to address the issue. But let us be in no doubt. We need to address the issue today as a statement of failure of the Government's economic and employment policies.

It is right that we should address the problem. However, the basis of the Government's approach—the ethics as well as the economics—belongs to the alien world of planet Portillo rather than our own. The Government seem to have been arguing over the spring and summer that people are not working, first, because they are work shy (hence the need for a punitive jobseeker's allowance and the Government's obsession with benefit sanctions); secondly, that if they are working or claiming benefit they are fiddling (hence the Government's obsession with fraud); or thirdly—there may be a little more credibility in this argument—that the benefit structure produces an employment trap which discourages people because it is not worth working (hence we have family credit). The remainder of us live in a rather different world. We know that people want to work but cannot do so for one obvious reason. Jobs, especially for unskilled men, simply do not exist. That is fact. That is why people are unemployed. It is not because they are fiddling; it is not because they are work shy; it is not because of the benefit trap. It is because the Government's economic policies have produced long-term unemployment, especially among unskilled men.

We also know that, following the abolition of the wages councils, many people in work receive indecently low pay because of the lack of a minimum wage. I refer to £1.50 or £2 an hour for a cook or a carer in a residential home. That is not decent; we should recognise that. Nor is it true, as the document repeatedly insists and as the Minister suggested, that by letting wages free fall, in some sense people will price themselves into work and more jobs will follow. The evidence does not indicate that at any stage. It suggests the contrary. Cutting wages does not produce more jobs. It merely means that the same people are paid less for the jobs they do.

There are two pieces of evidence. Since the wages councils were abolished, wage rates in those industries have fallen by up to 25 per cent. and at the same time there has been a loss of 18,000 jobs. Similarly, over the past four years according to government statistics there has been an increase of something like 75 per cent. in people claiming family credit, but the cost has risen 300 per cent. In other words, the same people are receiving more money. Why? It is because family credit is taking the strain of falling wages. That is the truth. It has allowed more families to take low paid jobs but they have needed to take those low paid jobs precisely because low pay has not produced more work. The long-term and only answer—it is certainly the Labour Party's position—is to invest in our infrastructure, in our industry, to build for economic growth and to ensure that there is a trained and skilled workforce to respond to those opportunities.

Having said that, on these Benches and, I am sure, on the Opposition Benches more generally, we accept that there is a selective place for in-work benefits to help back into work those groups which, because they have become detached from the labour market—for example, the long-term unemployed—are unattractive to employers. We believe that it is sensible to encourage employers to re-employ the long-term unemployed.

There is a second role for in-work benefits; for example, to assist those who need a higher income than the job offers because they have considerable family responsibilities. In order to get off benefit, they need a higher wage than a single person. That is the role of family credit. It is obviously sensible and appropriate.

Equally, we believe that in-work benefit is humane and decent when it helps a disabled person contributing perhaps, although not necessarily, lower productivity but facing more expensive costs or more intermittent work patterns to stay in work. That has been the role of the disability working allowance, and we support it. For example, the person who has caring responsibilities and is therefore a part-time worker needs to top up that work with benefit. For that group of people an in-work benefit is a sane, decent and humane strategy and entirely appropriate.

However, there are two conditions. First, as the noble Earl, Lord Russell, said, in-work benefit should be accompanied by a wages floor, or a minimum wage, so that the employer does not pass on his wage costs to us, the taxpayer. Otherwise the Government will stand accused of being the friend of the "sweater", the ally of the bad employer. Secondly, we have always said that in-work benefit should be targeted at those groups which have specific problems in the labour market. The Government today go well beyond that. They say that in-work benefits should be available for everyone without the protection to the taxpayer of a wages floor. Therefore we have some unease, as does the noble Earl, Lord Russell.

However, there are many aspects of the scheme that we truly welcome. First, I am especially gratified to see the honest attempt to come to terms with research information. One of the most pleasing aspects is the continuing reference to research evidence which has been fed into the DSS. It is one of the more impressive usages of research by the department over the past few years. Too often research evidence is ignored because it is inconvenient. It is rather nice to see policy being built upon it, and we welcome that approach.

Secondly, we agree that the scheme is an honest attempt to tackle what we agree is unacceptable: that single people, or a childless couple, face either very low pay or long periods of dependency. However, we doubt whether this scheme is the right way forward.

We welcome the innovation of pilot schemes. It is absolutely right that one should test such schemes and seek to learn from that experience. A sad aspect regarding social security is that it had to be all or nothing. We could never achieve that feedback. The innovation is to be welcomed and the Government are to be congratulated.

We also welcome one fact in the small print which intrigues me. If, in the course of the pilot scheme, a couple without children have a child, they can move from the earnings top-up to family credit, which is more generous, within the six-month period. When we sought to make a similar provision regarding the Child Support Agency, we were told that it was absolutely impossible to do anything until the six months were up. If family credit were determined at one level of maintenance and the partner withdrew that level of maintenance, the family still had to proceed on the original, artificially high assumptions. If the earnings top-up in the family credit can be adjusted in the course of the six-month trial period, I hope that that flexibility can be extended to other areas of social policy.

Finally, we welcome the announcement by the Government—it is a question I would have asked the Minister; I am pleased that he responded to the point—that payment will not be made through the wage packet. If it were just an administrative device, it might be less of a problem. But there is a real fear that the employer would have to take upon himself the task of inquiring into circumstances in an invasive way which we would find unacceptable.

I repeat this point. In the absence of there being any evidence that an earnings top-up will create additional new jobs—family credit has not done so—and in the absence of any wages floor to protect the position of the taxpayer, we are apprehensive about the route that the Government are travelling.

I turn now to some questions. The first is one which the Minister has to some extent answered but perhaps he could clarify my thinking on it. What would the total cost of the scheme be? He mentioned £500 million a year, with £25 million a year for this scheme, making £75 million over three years. In other words, that would be £1.5 billion over the same period of three years if the scheme were applied nationwide. We reached that figure by multiplying for the population across the country as a whole.

Secondly, will the Minister confirm that throughout the Government's reports they assume in their examples a gross wage of £2.65 per hour for a single person over the age of 25? Most of the modelling is based on that, although in the Government's other document on the expenditure plans for 1995–96 and 1997–98 their notional wage for the same age group is £3.50 an hour. Will the Minister confirm that every person over 25 will indeed receive £3.50 an hour? That would float them off the need for any in-work benefit at all on the Government's figures.

Thirdly, emphasising the point made by the noble Earl, I ask the Minister whether he can say what checks or monitoring there will be that employers will act responsibly and not cut wages? Will every employee of a company which has low-paid workers—perhaps in warehousing or whatever—married, with or without children, single, young or older, be eligible for and be able to claim in-work benefit? Will all employees know that?

We know that under the family credit scheme there appears to have been very little sensitiveness from the employer as to the effect on wages. The employer does not necessarily know whether the worker has children. However, now the employer will know that everyone in the company is entitled to and eligible for a top-up benefit: either the earnings top-up or the family credit. In that case, it will be an open invitation to the less scrupulous employer to drop wages where he will, knowing that either the earnings top-up or the family credit will take the strain. How will we know that the employer is not doing that? What will the Government do to stop employers doing it? What sanctions will be attached to it? As a condition of the earnings top-ups, will the Government consider ensuring that there is some element of training or education attached to such low-paid jobs so that we do not continue to subsidise what would or could become low-paid and degraded labour?

Fourthly, to revisit a subject which we have debated many times, why are the Government so insistent that the increase in costs and in top-up divides at the age of 25? Why is it age-based rather than household-based? Everyone in the Chamber knows that one's costs do not increase at the age of 26, nor are they less at 24. What matters is whether one is in a household with all the additional costs of housing, cleaning, council tax and the like. Surely that should determine the levels of the top-up benefit.

Fifthly, I wish to ask the Minister a question which bothered many of us when we were discussing the Jobseekers Bill. It is the 24-hour rule, about which I shall remind the House. Under JSA, if a person works for more than 24 hours, for whatever pay and even if it is below JSA figures, the partner loses eligibility for JSA. We said that that was perverse. Not only is there a means test for JSA but there is also an hours rule. Will the same apply to this benefit? If a partner not only earns more—which would clearly take him out of the top-up—but works for more than 24 hours, as with JSA, would it make the other person ineligible for in-work benefit, whatever the joint income might be?

Finally, I come to the crunch question. What additional extra jobs do the Government forecast will be created by what could be, if it were applied nationwide, a very substantial expenditure? We welcome the proposal with quite a lot of cautions and hesitation because at the moment all it will do is to top up the pay of those currently in work. The justification at the end of the day is this: what additional jobs in the scheme will be created as a result of the benefit?

We wish the pilot scheme well. We believe that there are better and alternative pathways out of poverty, including, for example, the latest ones from the Labour Front Bench. They are for those under 25 and would offer not only a full-time job, but the work option of education and training, a voluntary placement or work in an environmental taskforce. Those are all the amendments for which we on this side pressed to be given through the JSA and which the Government, in our view foolishly, resisted. We welcome this.

Earl Russell

My Lords, I have resisted the strong temptation to refer to the Opposition's proposals on the under-25s. However, since they have introduced them, will the noble Baroness tell the House whether she thinks that people can live on 60 per cent. of the benefit rates for the under-25s?

Baroness Hollis of Heigham

My Lords, I understand. I believe that the noble Earl is referring to the sanctions attached to the proposals. The sanctions attached to the Labour Party's proposals are clear. If a young person, and only a young person, has available to him all four options—a full-time job, education and training, a voluntary placement or the environmental taskforce placement—and if he refuses all four, then, and only then, would the sanction come into play. In other words, if I may complete the argument, if the full-time job at reasonable pay is on offer but is refused, then the sanction would come into play. But it would not do so for the other schemes. I give way to the noble Earl.

Earl Russell

My Lords, I thank the noble Baroness for that information, which I knew. Can she answer the specific question? Does she think that people can live on the reduced benefit?

Baroness Hollis of Heigham

My Lords, that is one way of putting the question. The other way is to ask whether it is reasonable to expect young people not to take advantage of a full-time job at decent pay, or an education opportunity, or a voluntary placement or a placement in an environmental taskforce. I share the view that if those options are available, every young person I know, like my son's friends, would be delighted to have opportunities that are currently not even faintly available to them. In that sense, apart from the aberrant and unusual case, we do not believe that there will be any problem of sanctions being invoked. Youngsters will have opportunities that young people in this country have not had for the past 20 years under this Government.

We wish the Government's scheme well, but at the end of the day such a scheme is necessary precisely because of the failure of the Government's economic policy.

4.27 p.m.

Lord Mackay of Ardbrecknish

My Lords, I knew that this would be an interesting and stimulating debate. Although we have had only a limited number of players—almost the usual ones when it comes to this kind of issue—that has not in any way diminished the interest in the debate. I am delighted to hear that the principle of piloting has been welcomed. The noble Earl tried to claim authorship of the idea and, after all, imitation is the sincerest form of flattery, I believe.

I would have liked to continue in this gentle mode for the rest of my speech, but I cannot resist saying that the imitation in the last part of the noble Baroness's speech is definitely the sincerest form of flattery. Clearly, she listened to my argument that young people should not have the option of being in the dependency culture. I put that argument to your Lordships little more than an hour ago, during Question Time. I am glad to recruit the noble Baroness to the ranks of those of us who believe that youngsters should not have an option. As I said this afternoon, they should continue in full-time education, have a job, go on one of the training places or the other places available. They should not have the option of deciding not to do any of those.

Baroness Hollis of Heigham

My Lords, are we therefore recruiting the Minister in support of the other options in our policy which mark the water between us: for instance, the voluntary sector option that he was vigorous in defeating when we discussed it in this House just a few months ago; the 16-hours rule inhibiting education and training for young people that he was vigorous in defeating in this House three months ago; or the environmental taskforce option that he was vigorous in defeating in this House just a few months ago? Can we welcome him as a willing recruit to those alternative options?

Lord Mackay of Ardbrecknish

My Lords, the noble Baroness ought not to try to push her luck too far. Certainly, I am more than delighted that she has come over to my side on so many issues. I am very pleased to hear it, see it and read it. Indeed I did so with some amazement given the number of verbal lashings that I received from her lips during the passage of the JSA Bill when we discussed these subjects and the fact that some people could be disentitled to benefit. I am glad at least to hear that the noble Earl is consistent in his arguments. But then I am told that the party opposite is now thinking the unthinkable for the third time since the last election on the subject of social security.

I promised myself that I should try not to be controversial this afternoon. However, the noble Baroness tempted me too much—

Lord Graham of Edmonton

You are a failure!

Lord Mackay of Ardbrecknish

My response to the sedentary interruption is that temptation such as that could not possibly be resisted—at least, not by me.

Perhaps I may try to answer the very many questions that I was asked on the subject of the earnings top-up scheme. The scheme is small in terms of proposed expenditure. I believe the noble Baroness's arithmetic is right: the experiment is costing £25 million a year. But were we to apply it nationwide, it would, as I said in my original speech, amount to something like £500 million a year. That is one of the reasons why we think it right to pilot the scheme. The noble Baroness agreed with me, as did the noble Earl. To go nationwide with a scheme of this cost without being sure that it will deliver the goods, so to speak, would not be a sensible use of resources.

I thank my noble friend Lord Skelmersdale for his contribution. He asked me to translate the £500 million into people. We estimate that scheme A, if introduced nationally, could help 85,000 couples and 185,000 single people; and that national scheme B could help 120,000 couples and 430,000 single people.

The noble Baroness asked me about the under-25s. We have been over this argument on a number of occasions. As I explained in my introductory remarks, by and large they have lower financial commitments; they also have lower earnings expectations as a reflection of their position in the labour market. Harking back to previous arguments on this subject, the noble Baroness also made the point about the hours rule for partners. Entitlement will be based on one person working over 16 hours, and on joint household income.

I was asked a large number of questions, and a short while ago I was trying to bring some logic to the subject. Perhaps I may start with questions about how we decided on the pilot areas. The noble Earl asked that, as did my noble friend. As I explained, we tried to select areas where the scheme would have the best chance of success. We designed it on an agreed range of objective criteria, about which we consulted.

The building blocks for the pilot locations are the travel-to-work areas. That is the statistical tool that identifies self-contained labour markets by examining the proportion of people living in an area who also work there, and vice versa. Quite clearly, it would not be a good thing to test a system in an area where a lot of travelling goes on outside it. Of course, an area where there is no travelling outside it can very rarely be found, but an attempt was made to study those areas where there was very little. We also identified areas where, as I said, we predicted the scheme would work. Relatively high unemployment and a relatively high proportion of vacancies were therefore on the shortlist of benchmarks that we used to test the areas. We published a list during consultation in July, and comments were then invited.

A number of factors were then looked at to judge the suitability. They related to the need to find areas within the group that were similar enough to be compared. We wanted to be able to make like-for-like comparisons. That is important if a valid test is to be carried out—for example, labour market types; population densities; size and types of firms in the areas. We also had to bear in mind the operational feasibility of the scheme. These are the kinds of matters that we took into account. We also selected areas that would produce results that could be extrapolated for the national scene. It is only fair to say that the research projects (to which I shall turn in a moment) will provide the answers needed to decide whether to go national. We are not committed to going national, but we shall be very much wiser at the end of the evaluation period. We are committed to testing to see whether the scheme works. That includes seeing whether we have extra jobs. That is the basis on which the pilot selection was carried out.

I do not consider myself an expert in the field of research, but I gather there is little research to inform us directly on matters such as earnings top-up. However, some research studies have been done, and the background they provide will be very useful indeed. The research specifications for this particular project are out to tender. They invite proposals as to how to monitor changes in wage levels and employment. We expect that that will be achieved by a series of labour force surveys in the areas and by longitudinal surveys of the claimants themselves, as well as surveys of employers in the areas. That should provide us with a wealth of information. It should also be possible through the surveys to pick up some information on increases in consumption by recipients of the scheme, which may shed light on the other issues about which the noble Lord was concerned, the "ripple effect" as he called it. If a subtraction sum is done, it will be realised that something like £2½ million will be put into these areas through the scheme. That is not an inconsiderable amount of money.

The noble Earl asked about the interface between the tax and benefit systems. This side of the Budget, I shall say very little on the general question of taxation and taxation policy; but on his specific question about the interface, those leaving unemployment are issued with a P45(U) to take to their new employer. If emergency tax codes are applied, it is not necessarily to a new worker's disadvantage. The lower take-home pay will result in higher in-work benefit assessments. Normally, the new worker will have an estimate of future earnings, and in the top-up, like family credit, a notional tax code will be applied at ordinary, not emergency, rates. I hope that that is helpful.

My noble friend asked about the essential difference between schemes A and B. He is right to say that the average payment in the higher scheme is about £2 more. But averages do not reveal the whole picture. The higher rate scheme, because of its structure, will reach twice as many people as the low rate scheme. Therefore in practice the effects will be quite easy to distinguish. We expect independent researchers to be able to do so quite easily.

The noble Earl asked about some of the work incentive schemes that I have mentioned at this Dispatch Box over almost a year and a half, during which time I have been at the department. As I mentioned, the extension of housing benefit for an extra four weeks will apply from next April. I also mentioned the faster family credit to speed up payment of benefit; the national insurance holiday; and the jobfinder's grant of £200 which is now available nationally for the two-year unemployed. There is also the £5 disregard and the back-to-work bonus which begins to come into play. All these will help. Those of us who debate these issues all agree on the importance of the bridge between being out of work and getting into work and the costs of crossing that bridge. As I explained before, we hope that some of these measures will help the individual to make that cross-over.

The noble Baroness asked me whether the models were based on the gross wage of £2.65 an hour. I can tell her that the models were based on an examination of the full spectrum of wages and the levels were pitched in order to ensure that families with children still receive more money.

The noble Earl asked me a question about one of the rules about the responsibility for a child and who qualifies under it. Child benefit is paid to the person who is primarily responsible for the child. It can only ever be paid to one person. That is how responsibility for a child in earnings top-up and family credit provision is decided. A person in work and receiving child benefit would be able to claim family credit.

Earl Russell

My Lords, I am most grateful to the Minister for allowing me to intervene. I believe that the 1992 regulations allow the division of child benefit between separated parents with shared care. I have corresponded about that with his noble friend Lord Astor. The point I raise concerns the operation of those rules. I believe that it is not altogether satisfactory at present.

Lord Mackay of Ardbrecknish

My Lords, perhaps the noble Earl will forgive me if I first give an explanation in regard to the broad picture. I shall check later on the particular point about which he asked me. Perhaps he will allow me to finish my point.

The other working partner would be able to claim earnings top-up. We would not wish to disqualify from earnings top-up any person who has shared responsibility for the child. That means that the answer to the noble Earl's question—whatever has been the situation on previous rules or however he interprets them—is no; there ought not to be a difficulty on that point. It is either family credit or earnings top-up. There ought not to be somebody, so to speak, caught in the middle.

The noble Earl asked me about Regulation 7(4) and why only one person in a household may claim. That is simply a practical matter. Otherwise, earnings top-up would be taken into account as a resource in assessing someone else's entitlement to earnings top-up itself. I do not feel that it passes any judgment on marriage, cohabitation or anything else.

The noble Baroness suggested that family credit may take the strain of falling wages. Her argument might be more persuasive if family credit recipients remained static on the benefit for long periods. But, in fact, most couples receive family credit for only six months or a year. That rather discounts the idea that the benefit encourages low wages. But so far as concerns earnings top-up, that is one of the issues on which we shall expect the researchers to come up with some answers. That is the situation. Certainly, we have no evidence that employers take family credit into account when they decide on wage rates. We believe that employers will continue to pay what is necessary to recruit the quality, experience and skills that they need.

As I expected, we came toward the territory of the minimum wage versus these in-work benefits. Some, like the noble Baroness and the noble Earl, continue to argue that the minimum wage would be a more effective way of assisting low earners.

Baroness Hollis of Heigham

My Lords, I am sorry to interrupt the noble Lord. We do believe that it is a more effective way of helping low earners. The push of our main argument was that to adopt in-work benefits without a wage floor, a minimum wage, is to ask the taxpayer to pay the Bill for falling wages.

Lord Mackay of Ardbrecknish

My Lords, I believe that I answered the question about falling wages. There is no evidence that family credit acts in that way. We believe that employers pay what is necessary to recruit the kind of workforce that they want. Indeed, in 1994 a study by the Institute of Manpower Studies showed that there was no evidence that the availability of family credit influences wage levels.

Baroness Hollis of Heigham

My Lords, I am sorry to interrupt the noble Lord again and it is kind of him to give way. The point that I am trying to make is that family credit at the moment is payable only to a small proportion of the workforce. The employer will not necessarily know which people are claiming family credit because he does not inquire into their circumstances. But when, as now, possibly every blue-collar member of a small company, whether single, in a couple or with children, would all receive a top-up benefit, then we fear that the situation would be very different. It will depress wages because the employer will know that the taxpayer is taking the strain.

Lord Mackay of Ardbrecknish

My Lords, I believe that I covered that point in some detail by saying that the wage rates and the wage position in the areas involved will be one of the factors that the researchers will be asked to examine. They will be able to make comparisons with the control areas where the pilot exercise is not taking place. I hope the noble Baroness will accept that, although we do not agree with the premise underlying her argument, we shall take steps to put the matter to the test of the researchers.

Let me return to the general argument about either underpinning in-work benefits with a minimum wage or having a minimum wage instead of in-work benefits. A recent report by the Institute of Fiscal Studies said that from tests that were done on the minimum wage: the richest 30% of the population actually [have] a larger net gain than the poorest 30 per cent. This is because … the large majority of those on very low wages are members of a family or household in which other members are earning a higher wage … those people most affected would be young single people living at home with their parents and the wives of working husbands … this means that the effects on poverty and inequality would be small".

I believe that the argument goes a good deal wider than that.

Perhaps I may give your Lordships two or three statistics about three countries. Country A has 68 per cent. of its population of working age in employment; it has 8.2 per cent. unemployment, as measured by the International Labour Organisation; and it has a 1.6 per cent. youth unemployment rate. Your Lordships may feel that that is not a very satisfactory position. But country B has only 60 per cent. of its working age population in work; it has 11.4 per cent. unemployment; and it has 27 per cent. youth unemployment. Country C has only 45 per cent. of its working age population in employment; it has 22.2 per cent. unemployment; and it has 40.6 per cent. youth unemployment, as measured by the International Labour Organisation.

If one were to listen to the Opposition, one would be inclined to think that country C, with the worst record, was Britain and that the Social Chapter and a minimum wage would bring us to country A. But I fear that the noble Earl will spoil my next line.

Earl Russell

My Lords, the Minister is no doubt aware that all that he is saying is that the philosophies of which we complain are international.

Lord Mackay of Ardbrecknish

My Lords, I shall come to that in a moment but perhaps I may just finish my point. In fact, country A is the country without a minimum wage and which has not signed up to the Social Chapter. It is in fact the UK. The other two countries are France and Spain. I noticed that the noble Lord, Lord Desai, seemed well aware of my point almost before I started to make it.

That brings me to my general point, which the noble Earl allows me to make. At one stage in the noble Baroness's speech she told us that all would be well—motherhood and apple pie would be in vogue—if only the Labour Party sat on these Benches, and unemployment would be non-existent. Those were great promises. But the fact is that unemployment is a world-wide problem. Governments of all complexions throughout the world have to tackle it. As I said, citing two of our close neighbours on the Continent, we have a markedly better record than they do; but we can and must do better. All the schemes that I have mentioned, including the earnings top-up, are designed to try to attack the problems of unemployment and to help those people who have low skills and low earning capacity to get into work.

We know from all the surveys—the noble Baroness has told me about it on a number of occasions and we agree absolutely—that once a person gets into work he or she has a far better chance of getting into better and higher paid work than if he remains unemployed. I believe that this pilot will help us judge whether this scheme will be a way to advance that objective.

On Question, Motion agreed to.