Tax Credits Bill

HL Deb 26 April 1999 vol 600 cc53-81

5.50 p.m.

House again in Committee on Clause 1.

[Amendments Nos.2 and 3 not moved.]

Clause 1 agreed to.

Clause 2 [Transfer of functions relating to tax credits]:

Lord Swinfen moved Amendment No.4:

Page 1, line 10, at beginning insert ("Subject to subsection (1A) below, ")

The noble Lord said: This amendment is a paving amendment for Amendment No.9, to which I shall also speak.

This is a probing amendment. Its aim is to obtain a statement from the Government which clarifies and explains the treatment of maintenance payments for working families tax credit and disabled persons tax credit purposes. A statement is needed, because WFTC replaces family credit. WFTC is, like family credit, a means-tested payment designed to help people into work and to subsidise families on low and modest incomes.

Both family credit and WFTC are income-related. The amount of credit any family receives depends on the normal earnings of the family and any other income that they might be receiving. Income for both purposes means a family's net income after income tax and national insurance contributions have been deducted. Certain types of income are, however, ignored. Child benefit is ignored; and, for family credit, the first £15 a week of any maintenance payment is also ignored.

During debate in Committee in the other place on Clause 1 of the Bill, the Paymaster General indicated that for WFTC purposes there would be a 100 per cent. disregard for maintenance payments. That was the first indication that the Government proposed more favourable treatment for maintenance payments than is given for family credit. An explanation is clearly required. As a result, it appears that some families will receive a much greater credit than other families with the same income. The implications appear to be that a lone parent would be significantly better off than a widow in similar circumstances; and, secondly, that a lone parent would also be significantly better off than a single-earner married couple in otherwise similar circumstances even though there would also be a second adult in the household. I certainly want to see lone parents properly looked after. However, it is unclear why they should be treated preferentially.

If the Government believe that earned income that is used for the maintenance of children should be disregarded for the purposes of working families tax credit, it is difficult to see why a more generous rule should apply where the income is earned by a providing parent who is separated from the parent with whom the children are living than is the case when the income is earned by the parent with whom the children are living.

Will all maintenance payments be disregarded, or only those paid as a result of CSA intervention? Neither the income tax rules nor the family credit rules draw a distinction between CSA payments and other payments.

The proposed treatment of maintenance payments will also affect families' entitlement to the so-called passport benefits. If family credit rules are followed, entitlement to these will depend on whether a family receives working families tax credit. Unless, therefore, the rules have changed, families headed by a lone parent in receipt of maintenance payments will be entitled to these benefits, whereas a family headed by a married couple with less income coming in each week will not. Will the Minister, in replying, give an assurance that anomalies of that kind will not be allowed to arise? I beg to move.

Lord Astor of Hever

I support these amendments. As my noble friend said, the Paymaster General told Standing Committee D that the Government were proposing to disregard all maintenance payments because that followed the income tax treatment.

Both WFTC and DPTC are based on a family's income after tax has been taken off. If maintenance payments are exempt from income tax and deducted from the family's net-of-tax income, the same payments are deducted twice. Parents who benefit from this treatment will end up with more WFTC than those who do not; namely, families where both parents are living together.

There would seem to be an unanswerable case for saying that the cost of maintenance—whether it be the cost to a couple living together or a single parent—should be disregarded in calculating WFTC and DPTC either for all families or for none. This matter is complicated. I should be grateful for clarification from the Minister as to why there is this difference.

Baroness Hollis of Heigham

In replying, I shall also respond to the grouped amendment, Amendment No.9.

These two amendments anticipate a good deal of the debate on Amendment No.28. I wish now that we had grouped them together: many of the questions quite properly raised by the noble Lord, Lord Astor, reflect rather more on Amendment No.28 than they do on these amendments. I may therefore stray into Amendment No.28 territory, given that I have been invited to do so.

The purpose of these amendments is to provide that the disregard of maintenance payments should not result in a lone parent receiving more WFTC than a couple. I believe that the Committee will agree with that description of the amendment.

I must confess that I am rather sorry at the reasoning behind the amendment. Although it is expressed in entirely reasonable terms, I am somewhat concerned by it. I shall attempt to explain. The amendment centres on the treatment of maintenance payments within WFTC. Given the welcome statement by the Paymaster General in February, the Government have decided that, for the purposes of calculating income for WFTC, no account will be taken of maintenance payments received by the claimant. At present, after the first £15, it is deducted from family credit, with the usual taper as presently exists.

We see this change to allowing a lone parent what is effectively a 100 per cent. disregard for maintenance as providing a significant contribution to tackling child poverty. It will mean that those lone parents who claim WFTC will keep all the maintenance that they receive, which can then be used directly for the child or children rather than having it tapered off after the first £15.

Why is that so desirable? First, the change will provide a clean break from the benefits system at the start of the new tax credits; secondly—this is an administrative argument—it will make child support within WFTC simple and easy to administer; most importantly, it will help us to address child poverty. One child in three in this country lives in relative poverty. Of those children, 1.8 million, 80 per cent, who fail to receive any maintenance from the non-resident parent—usually the father—are in workless families. If, as a result, maintenance flows and the mother goes into work, anything over £15 is tapered away quite sharply, with the rest of the family credit deductions.

By allowing 100 per cent. disregard, first, we make a serious contribution to tackling child poverty. Even if a lone parent is in work, if she earns such low wages that she has to draw on WFTC, she is not generously paid. By allowing her to keep all this money, we are making a contribution to trampolining her and her children out of poverty, we hope for life.

Secondly, it is a real work incentive. It becomes like child benefit. You can go into work, carrying it with you, knowing that, provided your former partner pays reliably and regularly, you can be assured of that income, which will be a steady floor, irrespective of what may happen to your earnings and, as a result, irrespective of what may happen to WFTC.

The third argument, which I hope Members of the Committee will accept, is that it has long been the case that father' organisations have complained about paying maintenance, which they say goes not to their children but to the Treasury—that the old Child Support Act was Treasury support, not child support. Our proposal has been welcomed not just by women's groups but also by men's groups. Decent fathers who pay reliably and properly, as they should, and as so many of them tell us they want to do, will see that the maintenance will go directly to the benefit of the child. The children, in turn, will see that the responsibility of a non-resident father continues even when the marriage breaks down. The children will continue to enjoy something of the same living standards, although not as generous as they would enjoy if both parents were still together.

The scheme is simple to administer and represents a clean break between a benefits system and being in work. It is to the direct benefit of the lone parent going into work; it is a direct attack on child poverty; and it sends messages to fathers and to their children, particularly boy children, that this is the way that responsible men behave: that they continue with their financial responsibilities, even though the relationship may have broken up. I say "men"; I hope Members will forgive the gender point. Most non-resident parents are men.

When that money is clawed back by the Treasury, men often use the excuse: "Why should I pay? It is Treasury support, not child support". We believe that our proposal has been warmly welcomed by men's groups as well as by women's groups.

The amendment suggests that the question of maintenance does not arise within an intact family or a widowed family—the example given by the noble Lord, Lord Swinfen—because, by definition, if a woman is a widow she will not receive maintenance because the spouse is not there, or, if, there is an intact family, maintenance will not flow, and, if that is the case, a lone parent who should be receiving support for her child should not enjoy it either. I believe that, on reflection, Members will not want to support such a position. It is ungenerous and sends wrong signals to men, to children and to lone parents wishing to go into work.

We are committed to tackling child poverty at every opportunity. Children of lone parents are likely to be financially worse off than children with two parents. The family has the same household expenses as a couple. In addition, she—in something like 97 per cent. of cases it is a woman—will have to cope with the pressures of bringing up her children alone, without the active help of a partner and her partner's family. When she works, as a woman she is likely to receive only 70 per cent of the equivalent male rate. She may find that her children are damaged, if they have come out of a difficult relationship break-up, and she needs extra support for them. All the research shows that after a break-up women lone parents have on average only two-thirds of the income of men and their income falls after a break-up. After a marriage split-up, the income of most men improves compared to when the couple were living together.

If the amendment were to be accepted, it would subvert and undermine all the messages we want to send with regard to child support, tackling child poverty, work incentives, having fathers support their children, and so on. Worse still, the amendment would put lone parents in a worse position than they are currently in for family credit, where there is already a £15 disregard for maintenance payments, which, by definition, cannot apply when someone is a widow or is in an intact family. I accept that the amendment: is a probing amendment, but its effect would be to make poor lone parents and their children poorer than they currently are on family credit.

The noble Lord, Lord Swinfen, asked me what type of maintenance was to be disregarded and whether it was just CSA maintenance. No, the disregard will apply not just to CSA maintenance but also to maintenance arranged through the courts and to voluntary maintenance.

It is not a mirror-opposite situation that there should also be a disregard on the father's income. That is the substance of Amendment No.28. That would represent a subsidy from the Treasury to the father of more than half his maintenance payment. Instead of the Treasury taking it from the father to offset against the mother's benefits, we would be subsidising him to pay her the maintenance she should have. In terms of cost and of social policy, that would be unacceptable.

Only one parent with care in three receives regular child maintenance. One of the objects of reforming the Child Support Act, which I hope will command the support of the House, should the measure come in the forthcoming parliamentary Session, is to ensure that men pay, women co-operate and children benefit. That would not be the case if the amendment were to be accepted. The effect of the amendment would be to make lone parents even poorer and subvert our other objectives of tackling child poverty and providing work incentives. I hope that the Committee will not wish to pursue this matter any further.

A minor but perhaps relevant point is that the amendment would not work as currently drafted as it refers to a paragraph in the family credit regulations which does not exist. The substantive points are the ones that matter. The amendment discriminates, is unjust to lone parents, will damage their children, will send out the wrong signals to men and will subvert work incentives. For all those reasons, and for many more that I could offer the Committee, I hope that the amendment will not be pursued.

Lord Swinfen

I did not say that I would pursue the amendment this afternoon, but I may do so later. The noble Baroness has obviously taken a lot of trouble with her reply, which took a long time to give. It will take me some time to digest it. I shall read her reply carefully. It is possible that I may feel it necessary to come back to the matter at a later stage—whether in the same form or a different form I do not know. I can then have the pleasure of hearing another long peroration from the noble Baroness! In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Swinfen moved Amendment No.5:

Page 1, line 10, at beginning insert ("Subject to subsection (1B) below")

The noble Lord said: Amendment No.5 is another probing amendment and is a paving amendment to Amendment No.10, to which I also speak. The purpose of the amendment is to seek an explanation of the differences between the levels of credit for the working families' tax credit and the disabled person's tax credit.

The two credits have different origins, in family credit and disability working allowance respectively. These benefits were introduced at different times and for different purposes and it is not surprising, therefore, that there are differences between them. However, now that they are being improved and brought together as tax credits, it is possible to compare and contrast them.

While one might reasonably expect the levels of DPTC to be higher than those for WFTC, it is difficult to see any logical explanation for the wide variety of differences. For example, the proposed level of the basic tax credit for a single person for DPTC is £54.30, only £2 more than for WFTC. There is an argument for saying that the credit should be at the same level in each case and that a disabled person should have a significantly higher credit than someone who is not disabled. But it is not easy to see the argument for having a very small difference between the two credits, particularly since, by contrast, at £16,000 the savings disregard under the disabled person's tax credit is double, or very significantly higher than, that under the working families' tax credit.

However, it is in the treatment of a couple that the two credits are particularly different. The second purpose of the new subsection therefore seeks an explanation of the treatment of couples under the working families' tax credit. This question was raised but not answered in the debate in the other place on Third Reading. It was raised by the noble Lord, Lord McNair, and also by myself at Second Reading, but again was not answered. Under both the working families' tax credit and the disabled person's tax credit, in the case of a couple the income of the parents is aggregated in determining the net income to be deducted from the total credit otherwise payable. Equally, the savings of the parents are aggregated in determining whether the credits fall to be abated or not paid at all. The DPTC then continues to take account of the second adult in the family by giving a couple a higher basic tax credit at a proposed rate of £84.55 as compared with £54.30 for a single person, but there is no similar higher basic tax credit proposed for a couple under WFTC. In other words, WFTC takes account of both parents where it is to their disadvantage but ignores the second adult where to take both parents into account would be to their advantage. This illogicality of the treatment of couples under WFTC is clearly unfair. Yet the Chancellor claims that one of his major aims in taxation is fairness.

Moreover, it also works against one of the Government's main purposes in introducing WFTC which is to reduce the number of children living in poverty. At any given level of net income, a family of four (two adults and two children) will be poorer than a family of three (one adult and two children). Yet under WFTC the credit available to the former will certainly be no greater than that available to the latter and may well be less, without taking account of the treatment of maintenance payments which is also advantageous for a lone parent, as I mentioned when dealing with the previous amendment.

The other major difference between the two credits, which I also raised at Second Reading, is in the treatment of a disabled child. Under the disabled person's tax credit a credit of £21.90 is to be given in respect of a disabled child in addition to the normal age-related child credit. There is no such disabled child credit under the working families' tax credit. Surely, the additional cost that parents may incur in looking after a disabled child will be just as great if they are not themselves disabled as if one of them is disabled. The entitlement to the disabled child's credit should turn on the disability of the child alone, not that of his parents. The logic of this argument is accepted in the childcare tax credit which, in the case of both WFTC and DPTC, is given for a disabled child up to a higher age than in the case of other children. Why not, therefore, in the case of the disabled child's credit? I beg to move.

6.15 p.m.

Lord Rix

Before this amendment is supported by the noble Lord, Lord Astor of Hever, for the first time since I entered your Lordships' House I find myself in the unique position of putting a question to the noble Lord, Lord Swinfen, in regard to Amendment No.10. Does the noble Lord agree that there is a longstanding tradition of recognising the special needs of disabled people by giving preferential treatment in all possible circumstances? Does it not seem inappropriate to rule that out in the context of tax credits as appears to be the case in Amendment No.10?

Lord Swinfen

I ask the Government: what is the logicality of either not making the two credits similar or making a very much greater difference?

Lord Astor of Hever

I support these amendments. With regard to the difference in the level of WFTC and DPTC, it is reasonable to expect the level of DPTC to be higher than that for WFTC, but the discrepancy in the rules governing the treatment of couples within both credits requires explanation. The failure of WFTC to take any account of the cost that results from the second adult in the household means that married couples end up poorer than single-parent households with the same gross income. This does not happen where the DPTC rules apply. Surely, second adults should be treated in the same way for both credits, particularly as we are told repeatedly that the Government support marriage and want to reduce the number of children in poverty. As my noble friend said, under DPTC the credit is given for a disabled child in addition to the normal child credit. No such disabled child's credit is available under WFTC when the extra cost involved will be the same. Can the Minister explain these differences between WFTC and DPTC?

Lord Desai

Before my noble friend replies, perhaps I may make one point in response to the noble Lord, Lord Swinfen. The noble Lord spoke about fairness. I am puzzled. I would have thought that parents, one of whom was disabled, who raised a disabled child, would have much higher cost than two able-bodied parents (if I may use that incorrect term) who raised a disabled child. It seems to me fairer to recognise that extra cost. I do not see how that is unfair.

Lord Swinfen

One is concerned with the cost of the disability which will remain the same whether or not the parents are disabled. One is talking about the cost of the disability in the form of aids, equipment, possible adaptations to the house, and matters of that kind.

Baroness Hollis of Hefigham

Perhaps I may respond to Amendment No.5 and with it Amendment No.10. The amendments seek to ensure that a working family receiving WFTC is never worse off than a comparable family receiving DPTC. It appears that the amendments are intended to probe the reasons for the differences between the two tax credits. These differences are not new; they exist between family credit and DWA in the same way. Given that we are building on the two existing benefits as we move into tax credits, the differences lie in the basic tax credit, the disabled child's tax credit and the amount of savings that a family can have. In all other respects families will be treated the same.

The main differences is in the generosity of the basic tax credit which is higher for DPTC, as it was for DWA, to reflect, as the noble Lord, Lord Rix, said, the additional support that disabled people need and the lower wages that they are likely to be able to command. I am disappointed that the noble Lord, Lord Swinfen, who has fought so gallantly in this Chamber on behalf of disabled people, should seek to challenge the fact that disabled people need greater support through DWA, which is being carried through into the tax credit, than non-disabled people. He knows better than anyone in this Chamber that on average the income of disabled people is only about 70 per cent that of non-disabled people and that they also have higher living costs. The last research I saw several years ago indicated a figure of about £60 a week for diet, transport, laundry and so on.

Lord Swinfen

Why, therefore, is the basic tax credit for a disabled person under DPTC £54.30 for a single person as opposed to £52.30 for a single person under WFTC? Two pounds is not a great deal to pay for the additional costs of disability.

Baroness Hollis of Heigham

The point is that for the single allowance the lower level of a DPTC could be for a single individual; it does not have to include being married or having children. Like DWA, it relates to the disability rather than the family circumstances. The clearer analogy is with DPTC where there is a couple with children on WFTC. That is the direct analogy. In that situation a couple earning £200 a week, working over 30 hours, with two children under eleven, would on average be £29 better off by virtue of the tax credit system than the couple on WFTC. That is a contribution towards the cost of their disability.

The noble Lord, Lord Swinfen, has previously quite properly argued—and I have been happy to join him in that—disabled people should have that recognition of the extra costs of their disability. We know that DLA covers certain costs of disabled persons who need care, attendance and supervision, but many other disabled people have lower levels of costs related to diet, transport or laundry, but which are not related to the existing DLA tests. The DWA recognised that distinction and that is why it is carried forward into these proposals.

The second point on which I have been pressed is the additional credit for the costs of caring for a disabled child. That is the result of lobbying, particularly by the disability organisations, in the run-up to its introduction in 1991 by the previous Government, which conceded its propriety. Under family credit arrangements no such distinction is made. Again, we are building on the two existing benefits, into tax credits which run in parallel. It is a proper point for us to reflect upon.

The higher savings limit was introduced following pressure from the Social Security Advisory Committee and criticisms made by noble Lords during debates on the Bill to introduce DWA. I recall that the noble Lord, Lord Swinfen, joined my noble friend Lord Carter and myself in arguing the same point.

The concern was that disabled people may need to have extra savings to pay for adaptations to the home and special equipment and services, and therefore they needed a higher savings limit of £16,000 rather than the £8,000 which would normally apply to couples.

We believe that disabled people should have extra support of this kind. Is the noble Lord, Lord Swinfen, arguing that we should deliberately cut the standard of living for disabled people by reducing the tax credit down to the level of WFTC, which would mean that they would be £30 worse off as a result of the amendment; or is he arguing the reverse, that WFTC should float up to DPTC? Does he have Front Bench support, as he appears to have, for the additional expenditure of a further £1.5 billion on public expenditure over and above what DPTC already costs? Which of those paths is the noble Lord, Lord Swinfen, asking noble Lords to follow?

I hope that following this explanation the noble Lord will be able to withdraw his amendment.

Lord Swinfen

I hope that the noble Baroness knows me well enough to know that I am not arguing for a reduction for disabled people. She joined me, when the last administration was in power, in defeating that administration and improving the position of disabled people over a number of years, and that is now my aim.

I am delighted that the noble Baroness will reflect on the position of the disabled child, and I look forward to her bringing forward an amendment to improve the position at the next stage of the Bill.

I will read what the noble Baroness has said.

Baroness Hollis of Heigham

I made no such commitment; I said that I would simply reflect on those points. The noble Lord should not infer anything beyond that.

Lord Swinfen

I am making no inference, I am looking forward. One can always indulge in wishful thinking. I am sure that the noble Baroness has done that; it may have been for just a slightly larger Easter egg next year, but it is wishful thinking. One can look forward where there is no guarantee.

It may be that I shall bring forward an amendment to address the point. I will read what the noble Baroness has said, but in the meantime I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

The noble Lord, Lord Swinfen, moved Amendment No.6:

Page 1, line 10, at beginning insert ("Subject to subsetion (1C) below")

The noble Lord said: This is another probing amendment and is a paving amendment to Amendment No.11.

The aim of the amendment is to seek an explanation from the Government as to how the WFTC and the DPTC will apply to families with comparatively small amounts of capital, perhaps as a result of receiving a redundancy payment.

Ministers have stated unequivocally on a number of occasions that when WFTC comes into operation every working family will have a guaranteed income of £200 a week, and that no income tax will be paid until earnings reach £235 a week.

In his Budget speech the Chancellor stated that every family would be guaranteed a minimum income. That provision will be introduced in October, not at the previously announced rate of £190 but at £200 a week—more than £10,000 a year—and no income tax will be paid until earnings reach £235. That statement was repeated at paragraph 4.48 in the Budget Red Book, which spoke not of "more than £10,000 a year" but of earnings of less than £235 a week—over £12,000 a year—saying that no income tax would be paid from October this year. That was repeated in the Treasury Budget day press release, which referred to a minimum income guarantee of £200 a week for every family with a full-time earner. It was further repeated by the Paymaster General in her speech on the Third Reading of the Bill in the other place.

I wonder whether those promises will be kept, as it seems unlikely that these figures will become a reality for families because, using the powers being transferred to the Treasury by Clause 2, the Treasury will have the power to introduce WFTC by way of amendments to the Family Credit Regulations. Under these regulations a family would receive no family credit if it had savings of £8,000, and family credit is progressively reduced if those savings are £3,000 or more. I beg to move.

Lord Astor of Hever

I rise to support the amendments. With regard to clarifying how WFTC and DPTC will apply to families with small amounts of capital, the Revenue states that the credit will be progressively withdrawn if savings, including those of a parent and children, are between £3,000 and £8,000. The DPTC position is similar except for the "couple" point, where it is £16,000.

As my noble friend stated, if that is the case, it will not be correct therefore that every family with a full-time earner will have a minimum income of £200 per week or that no income tax will be paid until earnings exceed £235.

If it is the intention that every family should have a minimum income of £200, WFTC will have to be paid in full, whether or not the family has savings. If that is not the Government's intention, Ministers should retract what they have said about every family having a minimum income, as some families may already be making plans based on the Minister's statement in another place. Can the Minister please clarify the position in her reply?

Baroness Hollis of Heigham

I was a little baffled by the amendment in the first place, but I am now entirely baffled because, if I may gently say so, the points made bear no relation to the amendment.

Amendments Nos.6 and 11 seek to ensure that tax credits do not begin to be restricted, that is withdrawn on the taper, until the applicant has gross taxable income of £235 per week. Currently, the threshold for withdrawal is set at a net weekly income of £90. There is no mention of savings. This would be a massive increase in the generosity of the tax credit system—it is hard to estimate—possibly in the region of a further £1 billion. Perhaps there is some misunderstanding. The two speeches by the noble Lords bore no relationship to the purport of the amendment tabled. Perhaps the amendment is based on a misunderstanding of the figure of £235 per week cited by the Chancellor in his Budget Statement and in the Red Book, and the aim of the amendment was to probe the figures.

The Chancellor announced in his Budget Statement that the minimum income guarantee under the WFTC for every family with children and with full time earnings would increase from October 1999 to £200 per week. He also said—as Members of the Committee quoted—that no such family earning less than £235 per week would pay any net income tax from October 1999. In both cases the numbers refer to a family and not to an individual in these specific circumstances.

These are the reference points for the Chancellor's package of measures to make work pay and reduce the burden of taxation on low paid families. They illustrate, for a typical family, how Budget measures might change their minimum income and the point at which net tax would be payable. They allow the comparison to be made from year to year. The minimum income guarantee for October 1999 has gone up from £190 last year to £200 this year as a result of the measures in this year's Budget. Similarly, the balance point at which tax credits match tax due for the typical reference family has gone up from £220 cited in last year's Budget to £235 in this.

The reference family is not special. It is a family with a full time earner, working more than 30 hours a week, and with a child under 11. The minimum income guarantee assumes that the earner works full time at the minimum wage and includes child benefit. The balance point for tax and tax credit is based on the details of this family, giving the appropriate reliefs and applying the appropriate tax rates.

If that is what noble Lords sought to find out, as opposed to what the amendment provides, I hope that I have answered the question. In that case I hope the noble Lord will agree that there is no point in building such reference points into the legislation. Even if they could be made to work. the amendments would apply those reference points indiscriminately—for example, to families who work less than full time hours. That would give a perverse incentive to people to reduce their hours knowing that the tax credits would take the strain.

The amendment is rather a mess. It is an expensive mess as it stands because the taper would not kick in until the income of £235 as opposed to the £90, depending on the assumptions being made. The noble Lord says that it is a probing amendment. If his concerns were about the connections with the Red Book, I hope that I have also addressed those.

6.30 p.m.

Lord Swinfen

The noble Baroness has probably addressed the points I sought to elucidate. I shall read what she said and reserve my right, if necessary, to return to the subject at a later stage of the Bill. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos.7 to 11 not moved.]

Lord Higgins moved Amendment No.12:

Page 2, line 2, at end insert— ("( ) The Treasury. in making regulations under any functions transferred to it under subsection (1) above, shall ensure that payments of the tax credit are not made to individuals who have an income, or to couples who have a joint income, in excess of the income at which the higher rate of tax would be payable by an individual. ")

The noble Lord said: The amendment raises an important point of principle. One of our main complaints against the changes proposed by the Government is that they will increase dependency on the welfare state. The Government's intention, we understand, is that that should be reduced rather than increased. The effect of the proposals is that people who, by normal standards, would be regarded as fairly well off will benefit. I may not be popular in proposing the amendment. We suggest that the figure should be capped. However, one cannot consider the issue without also having regard to the taper and the effect on other income groups.

In reply to a Question for Written Answer in July 1998, Ms Dawn Primarolo stated that some families with incomes over £38,000 would receive support. She stated that a family with two children and maximum eligible childcare costs of £150 would still be receiving some working families' tax credit with family incomes of £31,000. However, the highest possible level of income would be supplemented by the working families' tax credit depending on the number and age of the children of the family. For example, if the family had five children under 11, rather than two, it will receive some working families' tax credit with family incomes around £38,000. Members of the Committee may feel that someone with five children requires an income of £38,000. Be that as it may, the effect of the Government's proposals will bring people into benefit (or tax credit if the Minister prefers that expression) at that level of income. That seems a remarkable situation.

Perhaps the Minister can tell us how many people who would not otherwise depend on welfare she expects to be brought into welfare benefit as a result of the Government's proposals.

The increased cost of the working families' tax credit is £1.5 billion. Some of that will go to individuals and couples with higher incomes. The amendment suggests capping at the level where people begin to pay the higher rate of income tax. It does not seem appropriate that they should receive such benefit.

I have suggested that we should consider the issue in relation to scales elsewhere. The Institute for Fiscal Studies has done some fairly elaborate analyses of the effect. Taking 10 quartiles, it is suggested that those in the group I described still receive some increase in the average percentage change in their disposable income. But that does not apply in the same way throughout the scale, Those in the lowest quartile, the poorest people, receive a lesser percentage change. Those in the next quartile receive significantly more. From then on the figure declines. Perhaps we may have some indication why the proposals do not help those at the very bottom end and, after a large increase, the figure declines somewhat.

There is a number of issues we wish to examine. I have not always agreed with Professor Patrick Minford in the past. I recall one of my colleagues on the Treasury committee saying that his views gave monetarism a bad name. Monetarism is now so unfashionable that perhaps I should not be so unkind to Professor Minford. In other respects, he has made some important contributions.

Lord McIntosh of Haringey

I cannot resist intervening. After years of opposing Labour economic policies, Professor Minford has now come round to the view that our economic forecasts are, if anything, a little pessimistic rather than optimistic.

Lord Higgins

We could have a long debate on the accuracy of economic forecasts. I believe that he has expressed that view. Perhaps I was right in my original remarks. He gave evidence to the Select Committee on Social Security that in trying to deal with the unemployment trap by bringing some 750,000 people into higher marginal rates of tax—between 50 and 60 per cent—the Government have worsened the poverty trap. Perhaps the Minister will comment on that. It appears that at the top end of the high tax rate scale there has been a reduction. However, there has been a increase in the number of people paying more than 60 per cent and we are concerned about the increase in dependency. As one works up the income scale of the Government's proposals, the overall effect is curious, to say the least. Therefore, on grounds of reducing dependency, cutting public expenditure and making the system more rational, there is a strong case for considering the amendment.

The Child Poverty Action Group, quoting the Institute of Fiscal Studies, points out that as regards the increase in net income with working families' tax credit, a family receiving £75 a week does not benefit. I referred to that point in an earlier debate and it seemed to puzzle the Minister. At £100 a week, they receive £8.05; at £150 a week, they receive significantly more at £15.55; at £200, they receive £23.05; and at the top of the scale, £250 a week, it is only £3.15.

The basic pattern introduced by the Government's proposals is strange and difficult to justify. No doubt the Minister will attempt to do so.

Lord Desai

Before the Minister replies, perhaps I may help the noble Lord on one issue. There is a curious pattern in that when one tries to alter incomes, the lowest decile always receives less than the next two further up the scale. I fell foul of that some years ago when I proposed a basis income scheme, as I have done many times. Whatever I proposed did the maximum damage to single people in the lowest decile. I then discovered that the lowest decile includes many anomalous people; some are locked into it and cannot be helped through any tax credit scheme. Therefore, it is always difficult to reach those in that decile through tax credits and so forth which are paid through the income scheme.

That is the pattern which we are again witnessing. Those in the lowest decile are difficult to help if one works through earned income, employment and so forth. One has to help such people in other ways. It is a standard result of almost every Budget I have known.

Lord Goodhart

I have considerable sympathy with what was said by the noble Lord, Lord Higgins. It is anomalous that means-tested benefits will go as far up the scale as £31,000 for a family with two children and £38,000 for a family with five children.

Furthermore, there is a problem with the proposal of a cap. It means that for an extra £10 of income over the cap one loses more than £10 in benefits. Therefore, one has the anomaly of the marginal tax rates of more than 100 per cent. The Government ought to re-examine the taper and consider whether something could be done with it. For example, above the upper earnings for national insurance contributions the marginal rates fall by the 10 per cent that one is paying by way of NICs. Perhaps that opens up a greater level of taxable capacity and the Government might consider a slightly higher level of taper past the upper earnings limit. That might have the effect of reducing the startling upper level at which the means-tested benefits continue to be paid.

6.45 p.m.

Baroness Carnegy of Lour

I, too, believe that the Government should consider the amendment. I raised the point on Second Reading, but together with others the Minister was unable to reply. I spoke in terms of a sense of unfairness which might be felt by a not at all well off widow paying tax on a small pension. She might consider that a benefit is going to parents with an income of £38,000 because they have a certain number of children.

After reflection, I still believe that that will be a perception. Although when the tax credit is paid through the wage packet it may not be seen so easily as a benefit, most not particularly well off widows will know some people who are receiving the tax credit directly and will see it as a benefit, despite the Government's hopes.

Cannot something be done in another way for such people? I am picturing the mother with five children doing her weekly shopping in a supermarket on an income of £38,000. I can see that it is not an enormous combined income, but surely this is not the way to deal with such people. The point of the tax credit system is to encourage people to see that work pays. Nobody needs encouragement to see that work pays if they are earning together, or singly, £38,000 a year. The whole purpose of the tax credit goes to people on such an income and I believe that they should be helped through the tax system and not by this means. I believe that the Government should look seriously at that.

Baroness Hollis of Heigham

I do not believe that Amendment No.12 would work. Therefore, even if I agreed with its basic premise, which I do not, I am afraid that I would have to ask the Committee to resist it.

The amendment appears to refer simply to limiting the opportunity to pay applicants WFTC, which implies that everyone above the higher rate threshold would remain entitled to an award but could not be paid. This seems a rather odd approach to take.

The amendment also attempts to link the award—and the award is based on a snapshot of current circumstances—to a ceiling which can be set only by reference to circumstances—for instance, the applicants' tax allowances—which cannot be finally known until after the tax year ends. So this could in practice mean that the Inland Revenue would need to hold back payment until after the year end, when the figure can finally be worked out and, in fact, until after the submission of the applicant's tax return. At this time, the applicant's circumstances may have changed.

The amendment aims to set a limit which, unfortunately, is not a single set figure but will differ from person to person, depending on a number of factors. There is no single higher rate limit which can be used in the way in which the amendment envisages; particularly in the way that it is intended to apply it to couples. It must be remembered that some would be eligible only for WFTC and the childcare element. It is that element which takes the figures up into the higher limit because both parties are working. Any change in the relative income of either one would then affect the payment to be made through the tax system.

Not only would the amendment not work; it would introduce a cliff edge that would be undesirable and harsh. For instance, a family with three children, two under 11 years and one over 11, claiming the WFTC and getting maximum help with childcare costs whose net income was £1 below the basic rate limit would receive £12.20 through WFTC. So the proposed amendment would, if we used the basic rate limit instead, make them £11.20 worse off for that extra £1 of net income. That would seem a pretty severe incentive to earn that extra money.

I see and understand that there is some concern about money going to those on higher incomes. But the combination of rates, threshold and the taper addressed that point. The WFTC will spread further up the income scale, particularly where the family has more than two children, or four or five children, as in the examples given, where there is a joint income of more than £30,000 and the family is paying for childcare. Indeed, we want that to happen to help more low and middle income families. But—and it is important to remember this—the WFTC tailors the amount available to their circumstances and the threshold and the tapers together make sure that the amount which they can receive reduces gradually as they earn more. It avoids the problem of producing a situation in which it is no longer an advantage to earn more.

Within social policy, where one is dealing with tapers, one has a choice. One may have a very sharp taper with very high deduction rates as the money is clawed back. That has been the case in the past with family credit which had a deduction taper rate of 70p in the pound. Therefore, that may produce tax rates of 100 per cent when that is related to housing benefit and so on. Alternatively, one may have a much shallower taper and a more gentle clawback of a tax credit or, as in the past, family credit. In this case, that is 55p in the pound. Therefore, it makes it more advantageous to work. But, by definition, because the taper is shallow, it goes much higher up the income scale before it is withdrawn. There is a straight choice between those two and there is no right answer. One tries to make an appropriate judgment.

However, the higher earning taxpayer would receive the credit because there is a large number of children and a high childcare bill. In a two-earner family with four or five children, one person may be earning £20,000 and the other £15,000. As both are in work, they are entitled to childcare credit. They would have a joint income of more than £30,000 but neither would be a higher rate taxpayer. Indeed, we estimate that only 5,000 people who earn more than £500 per week or £25,000 per year will be entitled to the WFTC. Those people will receive quite small sums.

Therefore, it may be possible for those who have joint earnings of £30,000 plus to qualify for the second element; namely, the childcare credit. That goes right up the income span. It will be extremely rare that one of two parties is already a higher rate earner.

The amendment will not work and we should not wish to see the system which it envisages imported into tax credits. Moreover, the number of people affected is very small indeed. In the light of that, I hope that the noble Lord will feel able to withdraw his amendment.

Lord Skelmersdale

Before my noble friend decides what to do with the amendment, perhaps I may seek further clarification. Perhaps the noble Baroness will write to me on my second question.

First, what caused the Government to choose 55p in the pound withdrawal rates as opposed to 70p under family credit? Secondly, what would be the effect of going up the income scale, if they had chosen a percentage of 62.5p or 60p? Obviously, the noble Baroness cannot answer that off the top of her head but it may be helpful to have a note on that before the next stage of the Bill.

Baroness Carnegy of Lour

Will the Minister say something about my remarks? She may not have anticipated them in the light of the amendment. However, I wonder why the Government believe it to be necessary to apply this system to people who in no way will need persuading that work pays better than unemployment.

Lord Higgins

I am trying to understand the points the noble Baroness made about the taper. These are never simple matters and I often wonder whether we should have a blackboard. Having failed to get one in the Commons for many years, I doubt whether I shall succeed in the Lords.

First, how many more people does the Minister expect to come within the welfare net as a result of the changes being made both in relation to WFTC and child benefit? Secondly, does the Minister expect that carrying benefits that far up the scale will encourage anyone to work who was not previously working? It seems unlikely that someone will suddenly enter the workforce earning £38,000 per year. Perhaps that is a false point.

Thirdly, I should like to be better informed about the taper for subsequent stages of the Bill. Will more people be paying marginal tax rates of 60 per cent than are doing so at present? Fourthly, is it the case, as Professor Minford suggests, that this worsens overall, rather than improves, the poverty trap? Therefore, there are a number of issues on which we should seek clarification at this stage so that we can review the position on Report and Third Reading.

Also, will some people see their marginal tax rates increase from the position at which they are at present? Finally—again, this anticipates a matter which may arise later—is the fact that we go this far up the scale one of the main reasons that we have a passport problem? I still find it rather surprising that the Government did not announce immediately that the passports which obtained to various benefits such as prescription charges and so on would be continued. I was thinking about why that was so. Is it because it would mean that people paying higher rates of income tax would receive passported benefits? Is that one reason for problems in that regard?

Baroness Hollis of Heigham

I shall do my best to answer those questions. The noble Lord, Lord Skelmersdale, asked why we had opted for MDR rates of 55p. That relates to one of the questions raised by the noble Lord, Lord Higgins. There is a balance of judgment. We are trying to make a decision on how we want the taper to be. We are trying to work out how far up the income scale one should properly go, with the implications for public expenditure, set against the problem of withdrawal rates.

We face two problems which were mentioned on Second Reading. The first is the unemployment trap which relates to getting people off benefit and into work. The second is that once they are in work we need to make it worth them working longer hours for higher pay so that they may seek to climb up the ladder.

I can say from my experience that we know that couples on family credit dip down because they are already in work but may come up again quite quickly. Because of pay rates for men, they quickly climb out of family credit. But lone parents stay on family credit arid at the same levels of family credit for long periods of their working life. In part, because they are relatively unskilled and because of childcare problems, women cannot work the extra hours and even if they worked to earn extra money, they would not keep very much of it. Therefore, they make a judgment that it is better to work for less, and family credit takes the strain. Therefore, they stay as they are.

In other words, they face the second trap which is the poverty trap. Having found work, it is not worth them coming off those benefits because the taper rate is so high that they have to work a lot more and earn a lot more before they have sprung free altogether of the poverty trap. That is a basic dilemma which is common to all governments in relation to DSS. It is not at all a partisan point.

One then must ask how one can reduce the combined effect of the tapers so that people's tax rates remain sufficiently appropriate to retain the incentive to go off benefit into work and once in work to climb out of dependency on longer-term benefits such as family credit. We went for the figure of 55p because, frankly, we thought that the balance was about right. Had it been 62.5p or 70p, as the noble Lord suggested, yes, we would have had people coming off benefit much sooner and there probably would have been reductions in public expenditure. However, for people climbing up, there would have been very high MDRs (marginal deduction rates). That would have meant that instead of being able to say to most people, "You will have a deduction rate of no higher than 60 to 70 per cent", very many more people would have had deduction rates of 80 to 90 per cent or 90 per cent plus. So, it is a question of balance. There is not a right answer but in the absence, at present, of any changes to housing benefit, council tax benefit and the like, we felt that that would be the appropriate fulcrum point.

If noble Lords agree, perhaps I may add to that point or even cite the figures I gave earlier. The implication is that, whereas in the past some 750,000 people were having marginal deduction rates of over 70 per cent., that has now been reduced to under 250,000 people. The noble Lord, Lord Higgins, is quite right that the consequence is that the number below the 70 per cent. rate is increased; that is, between 60 and 70 per cent. or between 50 and 60 per cent. Statistically, that is an inevitable consequence of what we are doing. If I have further information about the implications of a different taper, I shall write to the noble Lord. There may be research on this point with which I am unfamiliar. However, that is our basic thinking.

The noble Baroness, Lady Carnegy, asked why we need to do it for people on higher earnings knowing that they do not need the incentive to go into work; they are already well paid. Perhaps I may ask Members of the Committee to step back. What sort of family will receive tax credit at £30,000 plus? We are not talking of the man in work and the woman at home, a single high earner. By definition, they would not then be receiving the childcare tax credit, which is what takes people up the income scale. Who, therefore, will receive that? It will relate to a combined family income of over £30,000. That is the only way they will receive the child credit which, of course, therefore means that the woman is in work and has children at home being cared for by other people. That is why somebody with a family income of over £30,000 may be eligible for the working families' tax credit. In that case it is her income contributing towards his to take them to an income level of over £30,000.

That means, in practice, that apart from the 5,000 people I talked of who receive over £500 a week, that is over £25,000 a year, he is more likely to be in the £20,000 to £25,000 band. She is likely to be in a band somewhere over £5,000 to come within the 16-hour rule and therefore to count for childcare purposes.

I believe that the question raised by the noble Baroness assumes a single earner and, therefore, effectively somebody coming up to higher rate bands. If we did not have a generous childcare credit, the childcare costs of a couple both in work, and at that top point having possibly four or five children, would be so high that it would not be worth the woman working. We would then be in a situation where he might be on an income of £20,000 to £25,000 and receiving WFTC and she would be at home and not receiving childcare credit. Therefore, that would not take them into the higher earning levels we have been discussing. I see the noble Baroness would like to intervene.

Baroness Carnegy of Lour

I understand that point and am grateful to the Minister. However, I still wonder whether this is the right way to do it for that sort of family. Why not do it through the tax system because that sort of family does not require to be persuaded of the matters about which the Government are trying to persuade other people, such as work paying. If, say, the wife, in the example given by the Minister, was in a fairly low paid job, she may decide not to work. They have the freedom to do that. It seems to me that that should all be brought about through the tax system rather than through this system. That was really my question.

Baroness Hollis of Heigham

That is a deeper point about what the tax system should be carrying in terms of whether children are built into the tax allowance. Given that they are not—the noble Baroness will forgive me if she does not tempt me at this hour into a wider debate about the role of the tax system on this aspect—what we are doing is a perfectly decent and fair way of ensuring that, where a couple have a considerable number of children, three plus, and she wishes to work, she can afford to do so. That is the effect of how the system works, otherwise her childcare costs would outweigh any benefit.

One other point worth remembering is that even with childcare tax credit, at least 30 per cent of the costs will continue to be borne by the families. It is not 100 per cent reimbursement; the reimbursement arises because of the large number of children, the cost of childcare and the fact that the figure of £30,000 is based on two earners. So, in practice, we shall not be talking about very many higher rate taxpayers, which, of course, would be an individual. One can see how the model would not work.

The noble Lord, Lord Higgins, asked me how many extra people would come in. We expect WFTC to aid a further 400,000 families. He asked whether this was the reason, because of the taper, for the passport problem. Yes, I believe it is perfectly fair to say that that indeed is the issue. The Government will be coming back with their position. Again, it is an honourable problem to have, but that is one of the consequences. I hope that I have answered the queries raised by Members of the Committee.

Lord Rix

Before the noble Lord, Lord Higgins, responds, he asked for a blackboard to receive suitable communications. I hope that the gesticulations by the Minister sufficed. I can only say that from the rear, I imagined that I was in the Albert Hall listening to Mahler's third. It was a most pleasurable experience!

Lord Higgins

I prefer the adagio to the fifth! We can certainly agree that this is not a partisan issue at the level at which it is now being debated. The partisan issue is whether or not more people are born into the dependency net and whether, in that respect, the Government have hit the right balance between the opposing elements of the taper. I have to say, quite sincerely, that I was lost in admiration for the way in which the noble Baroness managed to explain that without any notes. I could not possibly aspire to that. What she said was extremely helpful. We will need to consider it and, more particularly, in the absence of a blackboard, to read it before we come to Report stage.

I also accept the technical deficiencies she mentioned as far as concerns linking it to the top rate of income tax. However, I have some considerable doubts about whether, at the income levels we are discussing—that is, the upper end—it will either encourage people into work as clearly they are already in work, or whether it will encourage them to work harder. I would have thought that it is the least arguable: that, if you are in that kind of income bracket and suddenly find that you come into family credit and working families' tax credit, you do not work rather less and perhaps play rather more golf than you otherwise would. However, we agree that these are all stereotypes.

Nonetheless, these are difficult problems. There are some doubts as to whether the Government have really got it at exactly the right point. One must always worry when the poverty trap is actually being made worse which, for the reason the Minister has mentioned, it looks as though we are doing. We shall study carefully what she has said and consider whether there is a point where one could suggest a somewhat different taper with rather less increase in the number of people who are dependent on welfare payments. Subject to that, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

On Question, Whether Clause 2 shall be agreed to?

Lord Goodhart

Perhaps I may start by clarifying—for the benefit of the noble Lord, Lord Skelmersdale, if for nobody else—our position on Clause 1 because it has a bearing on our views on Clause 2. The noble Lord, Lord Higgins, was absolutely right, as I said when giving him my support on Clause 1, that the working families' tax credit is not a tax credit it is a benefit. However, what it is called is not the point that really matters. That is why we do not seriously object to Clause 1 referring to it as a tax credit.

The problem here is that the Government are making actual administrative changes to make the working families' tax credit look more like a tax credit when those changes are in fact inappropriate and have real disadvantages. One of those inappropriate changes which has disadvantages is the transfer of responsibility for family credit from the DSS to the Inland Revenue. That is why we object to Clause 2.

The culture of the Inland Revenue is entirely different from that of the Department of Social Security. The Inland Revenue is concerned with ensuring that everyone pays at least what they are due to pay in taxation. It does not seek to investigate whether or not everyone claims all the reliefs to which they are entitled. By contrast, the job of the DSS is to ensure that everyone receives the benefits to which 'they are entitled, though no more than that. That may involve the prevention of fraud, but it also involves checking that the people seeking help obtain the correct help to which they are entitled. That is why the way in which claims are dealt with is much more investigative and much less confrontational than the way in which the Inland Revenue deals with tax issues.

The Inland Revenue has no experience of doing casework with poor or relatively poor people. In many cases those people do not have enough income to be taxable, and in many more cases for those on relatively low incomes the tax liabilities are paid entirely through PAYE and the Inland Revenue has no direct contact with the taxpayers.

When we come to these two tax credits, the claims procedure will have to be—and is, in the draft regulations—based on very much the same sort of practice as in the case of other means-tested benefits such as income support. But that relates not only to the claims procedure; it relates also to the procedure for making decisions on claims and the procedure for revising those decisions when they have been made, which again have no equivalent in the Inland Revenue's procedure on taxation.

Those procedures have to be the same for tax credits as for other means-tested benefits. But the procedure is completely different from anything done by the Inland Revenue. That is recognised by the fact that it is still proposed that appeals from decisions will have to go to the new unified tribunals under the social security Acts and not, at any rate for the time being—I hope never—to the commissioners of income tax who deal with entirely different matters.

Many of the regulations at present apply both to family credit and to other types of benefit. For example, the Social Security (Claims and Payments) Regulations 1987, some 38 pages long, lay down the basis on which claims are made and they apply to family credit as they apply to other kinds of benefit. Those regulations, with certain consequential amendments, will continue to apply in basically the same form. It is desirable that rules about claims should be, as far as possible, the same in relation to all these means-tested benefits in order to avoid confusion when somebody switches from income support to family tax credits. But from now on, when changes need to be made, they will have to be agreed by two departments and presumably enacted by two separate statutory instruments. In fact, I wondered who drafted the draft regulations we have now seen to bring the working families tax credit into operation. Were they drafted by the Treasury or, as I suspect—perhaps the noble Baroness can tell us one way or the other—were they drafted in Richmond House'?

One ends up with a situation where one is shedding one type of benefit off the DSS into the Inland Revenue when the work regularly done by the Inland Re venue is entirely different from the work regularly done by the DSS. Why not leave the administration of these tax credits where they belong; that is, with the Department of Social Security?

7.15 p.m.

Lord Higgins

My Lords, I am glad to see that, contrary to his earlier remarks, the noble Lord, Lord Goodhart, is now anxious to improve the Government's position on these issues. I agree with everything; he said.

In this Parliament, now almost half-way through, we have seen an increasing tendency for the Treasury to take over the Department of Social Security. One of the reasons why we are stuck with what is a very unsatisfactory mechanism for the working families' tax credit is that rather than saying, "We failed to make it a proper tax credit system", the Government are saying, "It is now our flagship; we must go ahead regardless".

The noble Lord, Lord Goodhart, drew attention to an important problem. There is a real difference in culture between the Inland Revenue and the Department of Social Security. We know that that is the case because the Inland Revenue, as the noble Lord rightly said, hitherto has been concerned with collecting money rather than giving it away. The two functions put one into a different frame of mind. It is true either way that the taxpayer has an interest; nonetheless, the attitude is very different.

It is also strange that, the Inland Revenue having finally pushed through a system of self-assessment which transfers massive burdens from the Revenue to the taxpayers, a burden is now to be switched over from the Department of Social Security to the Inland Revenue who will do all the calculations for those who are to receive the benefit. So we have the self-assessment argument going one way and the benefit argument going in the opposite direction. Many people will now deal with the Inland Revenue who were not previously affected by it and it will be interesting to see how they cope with the extra information of a quite different kind with which they will now have to deal.

What also gives me considerable cause for concern is the extent to which the Inland Revenue will be able to switch a lot of people over and add other people to the present Department of Social Security staff in an expeditious manner. In relation to cash flow, for instance, the department is asked to do things very quickly, and that is not something which even in simple cases the Revenue has been good at. The delay in the Revenue deciding what one's ultimate tax liability is is often measured in years and sometimes numbers of years rather than a month or something of that order. Bearing in mind that we have had problems with computers elsewhere, can the Minister say to what extent she believes that the present computer structure in the Inland Revenue is able to cope with these issues? That is a particular cause for concern when one considers the massive problems that arose in the Department of Social Security computer structure.

For all those reasons I share the concerns expressed by the noble Lord, Lord Goodhart. This is a major change and largely an unnecessary one. We would have been better to stay with the previous structure. If the Government wish to allocate more funds to it, as we said earlier, that is all to the good. But changing the structure in the way they have will cause considerable problems and not result in any improvement in the service which the taxpayer and those in receipt of benefits receive.

Baroness Carnegy of Lour

Perhaps I may add a further point which looks forward to later clauses in the Bill. I ask Members of the Committee to forgive me for mentioning this now, but I shall not be able to be present for the second day of Committee because I shall be taking part in the last stages of the election campaign for the Scots Parliament.

The fact that all this will be done through the Inland Revenue seems to me to have led the Government to allow it to treat employers (as set out in Clause 8) as if they were taxpayers. Indeed, it has placed that kind of responsibility upon them. According to Clause 8, the powers to obtain information as a result of the system are to be found under Section 20 of the Taxes Management Act 1970. That applies equally to the penalties set out under Clause 9, and indeed continues right through to Clause 12.

This is a ferocious way to be treating employers. I know that we have not yet reached that stage, but it seems to me that it is a consequence of conducting the whole operation through the Revenue. In fact, it is rather an unfortunate consequence from the point of view of employers.

Lord Swinfen

Up until now it has been the Department of Social Security which has worked out what benefits should be paid to people; indeed, it has fought their corner against the Treasury. However, with all this being passed over to the Treasury, which is used to cutting every payment, who will work out the correct level of the tax credits? It will be the Treasury. The Treasury will be fighting itself—in other words, left hand against right hand. As I understand it, the Secretary of State for Social Security will not be fighting on people's behalf: it will be someone from the Treasury trying to justify it within the Treasury, but the Treasury is used to cutting down every single outgoing government penny.

Lord Skelmersdale

For the avoidance of doubt I should just like to say that I agreed with the noble Lord, Lord Goodhart, on Second Reading on this exact point; and I agree with him now.

Baroness Hollis of Heigham

I was not expecting a full-blown Second Reading debate. Nevertheless, I shall try to respond. The thrust of the speech made by the noble Lord, Lord Goodhart, which was supported by the noble Lord, Lord Higgins, and others, appears to be that because the working families' tax credit is, after all, a benefit it should therefore continue to be run by the DSS. That seems to me to be the argument.

We have made it very clear that this is built on family credit. I quote Martin Taylor again: I recommend family credit should be replaced with a tax credit. To facilitate its introduction the credit should, in the first instance, be modelled on family credit". That is precisely our position. Therefore, why is it that we are moving away from family credit into a tax credit?

I know that I am repeating myself in this respect, but I hope that Members of the Committee will forgive me. First, family credit is too easily perceived as income support and not as wage support. It is perceived as something that is paid at home; in other words, it is seen as closer to income support than to the sort of activities that we are engaged in jointly with the Department for Education and Employment. I have in mind measures to add to the attractiveness of the New Deal by giving employers subsidies to employ people, introducing pilot schemes, and so on. We are seeking to move this area of support from being at home and, therefore, brigaded with income support, to being seen as part of work support.

Secondly, family credit has a relatively low take-up compared to other benefits—for example, 69 per cent. per couple and 79 per cent. for lone parents. Through a pay packet we expect a much higher rate of take-up by definition. Thirdly, family credit remains vulnerable to fraud. as do income support and other benefits. However, I believe that most people will accept that the Inland Revenue has a more effective track record in tackling fraud.

Fourthly, the current family credit has a system of a childcare disregard, which means that those who have the greatest need of it—that is, those who are on maximum family credit—are unable to get any access to it. However, by virtue of having a tax credit, we can produce, if you like, an additional credit for childcare. That brings us back to some of our debates earlier as regards how far that goes up the income scale.

Finally, and most importantly, family credit is part of an extension of DSS measures. But the future will see the greater integration of taxation and the former benefits system. We have already referred to things like children's tax credits which are envisaged in the future. So we expect these measures to develop. It is therefore appropriate that this, which is the very first benefit to become a credit and which is therefore being built on the existing benefits structure, should nonetheless be the first to go over to the Inland Revenue.

I was asked who drafted the regulations. I can tell the Committee that they were drafted by the Solicitor for the Inland Revenue. I was also asked whether computers would be affected. I can tell noble Lords that the answer is no, and that computers will remain the same. I should emphasise that staff in the current family credit and DWA units will go over to the Inland Revenue. Therefore, the fear expressed by the noble Lord, Lord Swinfen, that there will no longer be a champion to fight people's corner, should not arise. I give way to the noble Lord.

Lord Swinfen

I am grateful to the Minister for giving way. Can the noble Baroness tell us whether there will be a Minister to champion these people? In other words, will there be a Minister in Cabinet to fight the corner for those people who need tax credits when the Budget is being prepared? As I understand it, there will only be the Chancellor of the Exchequer and he will not do it because his task is to spend as little money as possible.

Some years ago I asked about the experience outside the Treasury of those in the top half dozen layers of the Treasury. I found out that very few had served anywhere but the Treasury; they had no experience outside the Treasury. Some had had experience in one or two other ministries but very few had any experience of the big wide world outside. It seems to me that the Treasury is a big white tower, and those within it never go outside. It seems to have a veto on everything. I have a feeling that there ought to be a Minister to fight in Cabinet for those who need tax credits.

Baroness Hollis of Heigham

I find this all very odd. The noble Lord, Lord Swinfen, addressed his remarks in the context of the Chancellor of the Exchequer's Budgets. The latter have raised child benefit to levels unprecedented in terms of the real increase for children—for example, from next April it will be £15 for the first child and £10 for the second child. We are also speaking about a Chancellor of the Exchequer who has underwritten a minimum income guarantee for pensioners and disabled people alike which, again, is unprecedented.

Lord Swinfen

The Minister will realise that Chancellors of the Exchequer come and go, as. indeed, do governments. We are trying to put legislation in place which may well be there for many years and for many parliaments.

Baroness Hollis of Heigham

It is perfectly true that in the foreseeable future—indeed, I hope that it will be a long-distant future—there may be a Conservative government who do not protect the interests of disabled people or poor people in work. I would regret that very much. From what he said, I am sure that the noble Lord would also regret such a catastrophe. However, in the meantime we have a Labour Government and a Labour Chancellor of the Exchequer who are committed to ensuring that public expenditure is used appropriately to encourage people into work and bring them out of isolation into the mainstream of life.

We are committed to tackling deprived communities; and, indeed, to investing in health and education. We do not want to spend on economic and social failure, as was the case over the past 20 years, whereby we would spend more and more on social security but people would remain poor and inequality would widen. Instead, we are determined that money should be spent on investing in people as regards their talent, skills and opportunities. We want to help them into work and to ensure that the public services they need, like education and health, are there to sustain them.

If the noble Lord wishes to take the matter further, I suggest he studies the interviews that the Chancellor of the Exchequer gave to the Guardian newspaper over the weekend. He made it very clear that the commitment of this Government is to use public expenditure wisely so as to invest in people, their talents and opportunities and to ensure that the necessary public services are there to support them. I am delighted to say that, rather belatedly, Mr. Peter Lilley seems to be coming round to something of the same position.

In conclusion, the point pressed by the noble Lords, Lord Goodhart and Lord Higgins, was whether there would be a difference in culture as a result of going across to the Inland Revenue. In other words, they thought that there would be no one in the Revenue to fight the corner of those most in need. I repeat: the same skilled and experienced staff of the family credit and the DWA units will be moving across to the Inland Revenue. Therefore, in terms of that approach, there will be no difference in culture within government. However, if one were to ask about the difference in culture for the applicant—that is to say, the unemployed lone parent or the workless household—I hope to heaven there will be a difference in culture because for too long lone parents and workless families have been deprived of access to work. They have been marginalised out of the mainstream of work. They, and above all. their children have suffered poverty which too often has been unnecessary. Too often people wondered whether it was worth their while to work. By getting this Bill through this Chamber and through Parliament I hope we shall achieve that different culture that some Members of the Committee have today deplored.

7.30 p.m.

Lord Higgins

Before the noble Lord, Lord Goodhart, replies, I hope I may make two quick points. First, as regards the point about culture, I believe the noble Baroness is being rather optimistic in thinking that if DSS staff suddenly transfer to the Treasury they will not be affected by the Treasury culture, however open-minded they may be. I remember a government conference centre at Ditchley Park where the food was terrible and the heating was non-existent. I believe that I was the Minister of State at the Treasury at the time. When the estimate was presented to me I wrote on it that we should spend more money on Wilton Park—I am sorry; I did not mean to refer to Ditchley Park—and within almost 30 seconds (this was absolutely pure "Yes, Minister") my private secretary told me that the Permanent Secretary wished to have a word with me. He told me that no Treasury Minister had ever proposed an increase in public expenditure. Therefore I believe there is a difference in culture in the Treasury.

On a more serious note, the noble Baroness has said that the computer records will be switched from one department to another. However, a quite different method of working will need to be employed in this regard unless the amounts due to each individual are paid directly to employers who pass that money on. However, that is a matter we can discuss later.

Lord Skelmersdale

Before the noble Lord, Lord Goodhart, responds on what, when all is said and done, constitutes a wrecking amendment—I admire the forbearance of the Minister in not pointing that out to us—I wish to make the following comments. The Minister appears to have said that the trouble with family credit is that it is not seen as a work benefit; it has too low a take-up because it is not generous enough and it is not paid through the wage packet. However, as I pointed out earlier, one could still have family credit and not administer it through the Revenue. Then at least we would not sail blind, as the Government are determined to do. There will come a point in the not too distant future when questions will be put to the noble Baroness or her successor with regard to the take-up of the WFTC. When does she think that point will arrive and when can we be given some sensible answers to show that the Government have been extremely silly?

Baroness Hollis of Heigham

I hope that the noble Lord can always count on sensible answers from this side of the Chamber. However, I cannot predict when it will be sensible for noble Lords on the Opposition Benches to table such a question. However, I shall try to take the noble Lord's point seriously. We shall pay this money—as family credit is paid now—from October. It will be paid through the pay packet from April 2000. I believe that probably a year will have to pass before one can appraise the results. Normally quarterly statistics are published, and there is no reason to believe they will not be published. Certainly, I am confident that my colleagues in the Inland Revenue and in the Treasury—that is the Paymaster General and her colleagues—would be as concerned as myself if there should be any problem of delivery or decline in take-up. However, I am confident that because this measure is associated with the pay packet, problems of take-up, fraud and other problems that we have experienced in the past will begin to diminish. That process may take more than the first year of full running to assess; it may take a couple of years. However, if the trends are not going in the right direction, the noble Lord will be quite correct to hold us to account.

Lord Goodhart

Family credit has been a rather successful benefit until now. The take-up is high. The crucial figure is not so much the proportion of eligible people who take it up but the proportion of the funds that are taken up if everyone applies. That proportion is about 85 per cent which suggests that most people who would be entitled to substantial sums of money if they applied for family credit are doing so.

The noble Baroness said that there must be a culture which encourages people to take up the working families' tax credit. I agree with that. However, the take-up of that money may be considerably higher. That will arise primarily because the benefits will be substantially more generous than apply under the current rules of family credit. I find it difficult to imagine that the switch of responsibility for this measure from the DSS to the Inland Revenue will increase the level of take-up. I believe that the culture is important in this regard. The noble Lord, Lord Swinfen, put his finger on the matter; namely, it is not just a question of transferring the measure from one department to another, but of transferring it from a department whose job it is to pay money to people who need it to a department whose job it is to collect money from those who have to pay in order to keep the mills of government rolling.

There is a difference in culture at all levels. It is particularly important that there is a difference in culture at the higher levels. I acknowledge that the present Chancellor of the Exchequer has considerably increased certain benefits and in particular has provided generous increases with regard to the changeover from family credit to the working families' tax credit. However, it is by no means certain that that will continue. It is not just a matter of the working families' tax credit coming under the control of the Revenue. When one is considering the appropriate level of expenditure on social security, one has to be able to balance one benefit against another. It may be appropriate at some time to say, "The Treasury has told us that there is only so much money available". The Treasury, of course, always determines any increase in the amount of money that is available for social security.

However, the DSS is at least in a good position to say it considers that in a particular year the extra money is needed for income support rather than tax credits. I believe that that ability on the part of the DSS will be lost. That seems to me entirely the wrong procedure. I do not think it can be justified by saying that the Inland Revenue will be tougher on fraud than the DSS. I believe that both departments should be equally tough. I am seriously concerned by this measure. However, I doubt whether the noble Baroness will be surprised to hear me say that I do not propose to divide the Committee on this occasion.

Clause 2 agreed to.

Lord McIntosh of Haringey

I beg to move that the House do now resume. In doing so I suggest that the Committee stage should not start again before 8.35 p.m.

Moved accordingly, and, on Question, Motion agreed to.

House resumed.