Child Poverty Action Group (Hansard, 19 May 1976)

§ Mr. Healey

I explained to the Child Poverty Action Group that the effect of the Budget on the poverty trap will be very limited in practice. In theory the Budget might appear to widen the trap, because the increases in Family Income Supplement (FIS) will be more than the increases in tax allowances. In practice, however, no one getting a £6 rise will lose FIS in consequence, compared with 571W his entitlement a year earlier, because the increases in the FIS income limits will in all cases be more than £6.

This is reflected in the following statement, which the Treasury issued to the Press after my meeting with the CPAG.

CHANCELLOR'S MEETING WITH THE CHILD POVERTY ACTION GROUP, 12th MAY. The Chancellor met representatives of the Child Poverty Action Group at the Treasury today. He first thanked them for publicly withdrawing the suggestion they made last year that benefit rates in November 1975 would be lower in real terms than in April 1975. He also thanked them for the generous praise they had given the Government in their post-Budget memorandum, "Moving in the Right Direction". The CPAG again congratulated the Government on its success in reducing inflation, angling the second phase of pay policy in favour of the lower paid, concentrating the benefit of tax concessions on family men, and cancelling the expected increase in the price of school dinners. Pensions 2. The Chancellor pointed out that the Government had already made massive increases in the real value of pensions. Between the last Conservative uprating in October 1973 and the last Labour one in November 1975, the single pension had increased by no less than 15 per cent. in real terms, and the married pension by 13.7 per cent. The next uprating, in November 1976, would give a further boost: pensions would be going up by 15 per cent. but prices by much less. 3. The Chancellor explained that, contrary to some recent reports, the Government had fully maintained its commitment to pensioners, despite great pressure for public expenditure savings. That commitment was to introduce the £10/£16 pension and thereafter to increase it in line with earnings or prices, whichever rose faster. The £10/£16 pension had been introduced in record time, in July 1974; and the November 1976 uprating would ensure that the increase in pensions since then more than matched the increase in either earnings or prices. 4. The CPAG, had asked the Government to do still more, and in effect to increase pensions as if the rate of inflation had not been reduced. However, the Chancellor pointed out that no one gained more than pensioners from the reduction in the rate of inflation. This reduction had only been made possible by the sacrifices of the working population. Those in work had also borne the substantial cost of the real increase in pensions: while real pensions had gone up by 15 per cent., average real take home pay per head had risen only about 1 per cent. Had there been no real increase in pensions at all, real take home pay could now have been about 2 per cent. higher. In these circumstances, it would be unfair to go still further beyond the Government's commitment to pensioners, since this could only be at the expense of placing further burdens on workers. 572W Overlap between taxes and benefits 5. The Chancellor acknowledged the concern of the CPAG and others that the overlap between the tax and benefit systems had widened. However, he pointed out that many of their criticisms took the benefits for granted, and criticised the tax. The reality was quite the reverse. The tax burden was determined by the Government's expenditure commitments, and the need to contain the public sector borrowing requirement. Benefits mitigated that burden for low income families in work. 6. The practical effect was that benefits now outweighed taxes and national insurance contributions for families with low incomes, to points well above the tax threshold. For a family with 2 young children, for example, the point at which they passed from net receipt of benefit to net payment of tax had risen from roughly the same level as the tax threshold in April 1972 to a point a third above the threshold in November 1975. The fall in the tax threshold could not, therefore, be taken to measure an increase in the burden on low income families. 7. The Chancellor recognised that the overlap between taxes and benefits could in theory give rise to "poverty trap" problems. But he explained that steps had been taken to prevent the poverty trap from having effect in practice. Awards of the main means tested benefits for people in work now ran for 12 months regardless of changes in income —so that they were not reduced by a pay rise. By the time the 12 months entitlements ran out, the entitlement levels for the benefits would have been raised. The increase in family income supplement this July, for example. would be enough to cover £6 rises. The CPA G's pre-Budget proposals 8. The Chancellor explained that if he had accepted the CPAG's recommendations for massive increases in child tax allowances and family allowances, the cost would not only have been enormous: it would also have gone largely to families which are by no stretch of the imagination poor. Of the 7½million families in the country, for example, broadly half were likely to have incomes above £4.000 this year. By contrast, the number caught —even in theory —by the overlap between benefits and taxes was less than 100,000. Much as he sympathised therefore, with the CPAG's case for massive increases in family benefits, he had to recognise that they would not be at all cost-effective in relieving poverty. Yet the burden they would place on the public sector borrowing requirement would be quite insupportable. 9. The CPAG recognised that many of their more ambitious proposals were out of the question in current circumstances. They acknowledged, for example, that their expensive proposal to pay unemployment benefit for as long as unemployment lasts would benefit large numbers of people with incomes well clear of the poverty line, and could not command priority. They did, however, ask the Government to consider the case for paving the higher rate of supplementary benefit to those of the long term unemployed who had 573W been dependent on this benefit for at least two years. The Chancellor said he would look into this again when resources permitted, against the background of the public sector's other commitments, and the need to ensure the right balance between help for the unemployed and incentives for those in work. But he could hold out no hope of being able to finance a change unless offsetting savings could be found, possibly on other social security benefits.