Tax Credits Bill

HL Deb 08 June 1999 vol 601 cc1348-67

6.1 p.m.

Proceedings after Third Reading resumed on Clause 2.

Earl Russell moved Amendment No. 3:

Page 2, line 2, at end insert— ("( ) The Social Security Advisory Committee constituted under section 170 of the Social Security Administration Act 1992 shall he renamed the Social Security and Tax Credits Advisory Committee. ( ) Part XIII of the Social Security Administration Act 1992 shall have effect, in relation to working families' tax credit or disabled person's tax credit, as if references to the Secretary of State were references to the Treasury or the Board, as may be appropriate.")

The noble Earl said: My Lords, in the absence of my noble friend I rise to move Amendment No. 3. I hope that I shall not detain the House too long on this matter since my noble friend has already done a great deal of the spade work. This amendment concerns the Social Security Advisory Committee and ensuring that its advice is available for proposals brought in under the Bill. The amendment comprises three points. The first—on which I shall not detain the House for long since it was the subject of very wide agreement in Committee—is that the advice of that committee is extremely valuable to both the Government and Parliament. Since the matter is similar to the situation in family credit the case for that advice being available is strong.

The second question that arises is: what is the actual effect of this Bill in making sure that the advice of the committee is available on tax credit proposals? The third question is: how should an amendment be drafted to ensure that the advice of the committee is available? I believe that my noble friend has got all three questions right and, hoping to hear the reply of the Minister, I beg to move.

Baroness Hollis of Heigham

My Lords, I hope that I can give the noble Earl the answers and reassurances that he seeks. The amendments that we have tabled are essentially technical—the amendment moved by the noble Earl is put more broadly—to put the position of the Social Security Advisory Committee beyond doubt. They have been grouped because they relate to the same matter.

We discussed the role of the Social Security Advisory Committee at Report stage when I explained the policy of the Government in relation to SSAC and tax credits and our intention to develop a sound and constructive informal relationship between SSAC and the Inland Revenue. It may be helpful if I clarify the position again. We did not intend that SSAC should have a formal role in relation to tax credits, and that is why the amendments that we have tabled put that beyond doubt.

However, the noble Lord, Lord Goodhart, raised a technical point at Report questioning whether inadvertently some part of the requirement to consult with SSAC would transfer to the Board of Inland Revenue. We have looked carefully at the noble Lord's point and want the statutory position to be absolutely clear. As the argument of the noble Lord, Lord Goodhart, suggested, unfortunately the Bill was not drafted as clearly as we would wish; in other words, the noble Lord, Lord Goodhart, was correct. I pay tribute to him. In this, as in several other matters, his expertise has been well brought to bear on a. Bill before your Lordships' House.

Hence, following the noble Lord's questions, echoed today by the noble Earl, Lord Russell, the Government have tabled two amendments which will ensure that SSAC's statutory role to advise the Secretary of State and consider proposals relating to social security remain unchanged. But we do not propose to extend its statutory role to tax credits. However, as I also said at Report and the noble Earl has said this evening—it is a sentiment with which I entirely agree—we very much recognise the valuable experience and expertise of SSAC in the field of social policy. The Inland Revenue has an excellent record for consultation with both business groups and others such as lone parents and disabled people. The Inland Revenue is currently actively discussing with SSAC's secretariat the basis of appropriate informal arrangements to draw on SSAC's special experience which will be mutually acceptable. It wants to ensure that the consultation is as wide and constructive as possible. Obviously, SSAC, with its extensive experience in the field, will potentially be a valuable source of information and views; in other words, the situation is analogous to national insurance contributions after the merger of the Contributions Agency with the Inland Revenue. Discussions here are well advanced and we hope to conclude them shortly.

Discussions on tax credits are at a very early stage but we hope that similar acceptable informal arrangements will be made to allow the Revenue to continue to tap into SSAC's expertise. SSAC has noted the transfer and it is pleased that it will have the opportunity to be consulted.

repeat what I said at Report. When the discussions are concluded—they may take some time given the timetables of both SSAC and the departments concerned—I shall be happy to write to noble Lords to explain the arrangements. Having said that, I hope that these arrangements are acceptable to the House. Having paid right and proper tribute to the noble Lord, Lord Goodhart, for ensuring that we clarify our intentions, I hope that the noble Earl feels able to withdraw the amendment.

Earl Russell

My Lords, I warmly thank the Minister for her very kind words about my noble friend Lord Goodhart, who has done a great deal of valuable work. I also thank her for her remarks on the subject of the amendment. Obviously, as to what the noble Baroness described, these are very early days as yet. It sounds a little like a negotiation for a peace settlement before it has been concluded. I appreciate that the Treasury has great dignity and that this matter must be treated with wariness. I understand why the Government have done this. An informal arrangement may be entirely satisfactory if it works freely and with good will on the part of all parties. This matter deserves a very cautious welcome and we look forward with a great deal of interest to hearing how it develops. We shall continue to monitor it, as I am sure will the Minister. Meanwhile, I thank the Minister warmly for her reply and welcome it on an interim basis. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Higgins moved Amendment No. 4:

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 £9,542.")

The noble Lord said: My Lords, even at this late stage of proceedings on the Bill, this is a probing amendment. I may have been a little over-precise on the figure of £9,542.

I thought that it was worth raising the point because I am increasingly concerned at the curtailment of benefits as a result of the individual having an income or capital at a specific level. The amendment has been provoked by the way in which the working families' tax credit moves up the income scale—we have discussed that on previous occasions—to a quite significant income of £25,000, and in one or two extreme cases up to £35,000. It is a cause for concern because that increases dependency. The way in 'which the taper works has caused some concern. Although it reduces the high marginal rate, it seems also to increase the number of people with pay rates which may reasonably be described as high.

On 5th June in an article in The Times, Mr. Graham Searjeant points out the effect of the working families' tax credit, which will mean a marginal rate of about 70 per cent. He draws various conclusions from that with regard to whether people will seek promotion, to work overtime, and so on. We are concerned at the effect of the working families' tax credit at those levels of income.

Individuals or families are likely to have benefits paid to them at considerably higher levels of income than the levels of income at which other benefits are significantly reduced or withdrawn. At a previous stage, I made a comparison with income support levels. Above the £3,000 to £6,000 level of capital, income support is reduced. There have been many arguments over the years about that limitation, in particular when individuals hang on to their last few savings believing that they give them a degree of security. Annuity and interest rates have plummeted. In general that is to be welcomed. But individuals with capital of £3,000 to £6,000, which may be taxable, will receive little real income from it. If one relates the capital to the income which it is likely to produce, they find their income support levels curtailed at a low level of income whereas the Government will give benefit to people on incomes vastly in excess of that amount.

It is difficult to make precise comparisons between one benefit and another. Undoubtedly they vary a great deal. The income support level is at one end of the spectrum. The working families' tax credit is at the other end and we believe that the Government have gone too far.

We understand that the figure in the amendment is the sum at which disability benefit tends to be reduced if people have a pensions income above a certain level. My noble friend Lord Astor of Hever sought to probe the point in a Parliamentary Question on 26th May at col. 922 of the Official Report. He asked: Is it not the case that, under the Welfare Reform and Pensions Bill, those with incomes of over £10,000 per annum will lose their incapacity benefit, while the Tax Credits Bill will make payments to those with incomes of over £25,000 per annum?

The Minister suggested that in the Welfare Reform and Pensions Bill—no doubt we shall come joyously to it next Thursday—the figure was nearer £16,000 than £9,000 for someone with dependent children, a dependent partner, and so on. Even so, people who are drawing disability benefit will find that at £16,000 they have their benefit withdrawn, despite the fact that they are disabled, whereas those receiving the working families' tax credit will receive benefit at incomes vastly in excess of that amount. In devising the working families' tax credit, the Government have not taken an overall view in relation to a range of benefits and the way in which the tapers operate.

In her answer, the noble Baroness refers to people having an income of nearly £16,000 a year. I understand that this refers to a pension of £16,000. The Minister indicates assent. I am not clear about the situation if someone has a pension of less than £16,000 and therefore does not get caught, but might have an income very much greater than that. No doubt we shall discuss that at Committee stage of the Welfare Reform and Pensions Bill.

In introducing the working families' tax credit at the levels and with the tapers proposed, the Government have not taken into account this factor. Many people who are a great deal poorer than those receiving working families' tax credit or, unlike those receiving working families' tax credit, who may be disabled, find that the system penalises them at a level which does not apply to the working families' tax credit. I accept that one should perhaps go into detail about the precise figure. However, the principle I raise, I hope, is reasonably clear.

Various outside bodies provide the figures. However, so far as concerns the relevant clauses of the Welfare Reform and Pensions Bill, the matter is to be determined by statutory instrument. In answering the Parliamentary Question to which I referred, the noble Baroness gave a figure which does not appear on the face of the other Bill.

It is a general point of principle. The introduction of the working families' tax credit makes the time right to consider the overall situation to ensure that those who are poorer or more disabled than those receiving the working families' tax credit are not penalised.

6.15 p.m.

Earl Russell

My Lords, the subject of tapers is appallingly complicated. It leaves us with a choice between Scylla and Charybdis. Either one creates poverty traps or one lets the benefit go remarkably high up the social scale. Neither Scylla nor Charybdis is desirable. Odysseus had a rather simpler problem than the Minister. He calculated that if he sailed under Scylla he would lose only two sailors; if he sailed under Charybdis he would lose the lot. I do not think that the Minister's choice is nearly that easy. It is not self-evident to me that one of those options is necessarily, as a general rule, better than the other.

I was a little struck by the noble Lord, Lord Higgins, invoking the concept of dependency. If one receives, as people do from time to time, a substantial income tax rebate, and one enjoys that and spends it on something one would not otherwise have afforded, one does not consider that one is suffering from dependency. We are using two very different planning systems here, which is perhaps part of the Government's thinking behind the Bill. I have never seen that more clearly illustrated than I did today.

That said, I can understand why there might be arguments for a cap. I can understand them, but I do not say that I am convinced by them. If there is to be a cap, I believe that the noble Lord's amendment sets it a good deal too low. It is liable to create knock-on problems further down the scale.

Furthermore, I am concerned that the amendment contains no statutory provision for uprating for inflation. We have seen with income support saving limits, for example, what happens when there is no statutory provision. Therefore, I believe that if the amendment were passed considerable problems would be created five years down the line. For that reason, if for no other, I hope that the noble Lord will not press the amendment to a Division.

Baroness Hollis of Heigham

My Lords, the amendment seeks to ensure that neither WFTC nor DPTC can be paid to households with incomes in excess of £9,542. Before we knew the reason behind that figure, we circulated a bottle of wine around the department for anyone who could determine it. We worked through half average incomes, European standards of poverty and many other permutations, including "typos", to see where the figure came from. We are grateful to the noble Lord for explaining it.

However, he explained it by saying that it was the figure at which the 50 per cent taper in IB would kick in. I do not accept any such read-across. But even if that were used, he accepts that he has taken the figure of a single person when with WFTC one is comparing a family credit. There might be a read-across to the lower rate of DPTC, but that would be the only point at which his analogy would be valid.

A family on IB, with a wife and dependent children, and with the appropriate dependency increases, would need an occupational pension of £320 a week, or more than £16,000 a year, to lose all its IB. Roughly speaking—I will reconfirm it—the point at which WFTC would taper out for a family of similar size, but without childcare costs which were being reimbursed, would not be wildly different. Therefore, the point being made by the noble Lord has been taken, because his figure has been based on a singly disabled person and not on the appropriate family household rate. Were he to take a family household rate and exclude the childcare element from WFTC the figures would not be wildly divergent. I shall give him the figures at a later stage.

Lord Higgins

My Lords, perhaps the Minister will allow me to intervene. Some of the figures came from outside groups which have considered the matter in considerable depth. I am not clear where the Minister gets her figures for incapacity benefit.

Baroness Hollis of Heigham

My Lords, they are in the impact assessment of the Bill. A person who has been entitled to the long-term rate of IB of £135 a week would have an addition which would include an adult dependency increase of £39.95—that is for a wife looking after a child—dependency increases of £21.25 and an age addition of £7.05. That person would need an occupational pension of £320 a week, or more than £16,000 a year, to lose all his IB. In other words, the IB case has been made reasonably on the case of a single adult, whereas with WFTC we are dealing with families. Therefore, if one is going to make such an analogy, one must compare it with an IB family in similar circumstances. At that point, the income analogy is with the £16,000 and IB. What I was trying to suggest is that if we were not including any childcare element the figures would not be wildly divergent for WFTC.

I have a second objection to the noble Lord's amendment. It was identified by the noble Earl, Lord Russell. It does not make clear whether the £9,542 refers to gross or net income. If it is net income, which equates to about £11,600 gross for a single earner family, the WFTC caseload would come down from 1.4 million families to 800,000 and the DPTC caseload would come down from 31,000 to 22,000. But it gets worse! If the figure of £9,542 reflects gross income, the drop in caseload would be even greater; down to 7001,000 families who would qualify for WFTC and 19,000 families who would qualify for DPTC.

The noble Earl, Lord Russell, was indicating the point that the amendment would not only deprive between 600,000 and 700,000 people of the support of tax credits, but, worse, it would mean that between 10 and 20 per cent of current family credit and DWA recipients would fail to qualify for WFTC and DPTC. In fact, not only would it not become the more generous work incentive, but it would make it more severe, more punitive, and therefore put more families into hardship than existing family credit and DWA procedures.

The purpose of tax credits is twofold. First, it is to produce work incentives to make work pay so that people see that the entry wage is worth taking.

Secondly, it is designed to support families. We know that the best way of supporting families, particularly small children, is to ensure that one parent is in work. The amendment would increase the number of children in poverty because it would cap the figure for WFTC, if it were gross, below the current figures of family credit. I cannot believe that the noble Lord intended that and I cannot believe that if he were minded to pursue it the House could support him. It would he unreasonable.

I could have advanced many other arguments of a technical nature. However, given the double explanation that, first, the noble Lord has underestimated the IB figure for a similar family and, secondly, the implication that it would not only take money away from moderate earners but from very low income families, too, I hope that the noble Lord will not press his amendment.

Lord Higgins

My Lords, that was one of the more convincing arguments put forward by the Minister. Incidentally, I noticed that she did not refer to some of the other benefits—for example, income support—where the capital allowance figure must be re-examined against the background of WFTC. The amount of income generated by such capital is a pittance and causes serious problems. I know that well from years of constituency experience. However, I understand the arguments made. No doubt we shall return to incapacity benefit in the near future during debates on the other Bill. The figures she has given us today are interesting in a number of respects and, subject to 'what I have said, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Astor of Hever moved Amendment No. 5: After Clause 2, insert the following new clause—

cc1354-6
1. RECIPIENT OF TAX CREDIT 968 words
cc1356-60
2. CALCULATION OF WORKING FAMILIES' TAX CREDIT: MAINTENANCE PAYMENTS 2,442 words
cc1360-7
3. ADDITIONAL PAYMENT OF WORKING FAMILIES' TAX CREDIT TO COUPLES 3,917 words