Labour Affairs Magazine

Parliament Notes (Part 1)

by Dick Barry

On 15 September MPs debated the draft Tax Credits Regulations which when effected will cut the income of millions of working households. Introducing the debate Damian Hinds said it was the first of five pillars of supporting working Britain. In the interests of space some interjections have been omitted.

Tax Credits (The First of the Five Pillars of Ignorance)

The Exchequer Secretary to the Treasury (Damian Hinds):

I beg to move,

That the draft Tax Credits (Income Thresholds and Determination of Rates) (Amendment) Regulations 2015, which were laid before this House on 7 September, be approved.

The aspects of tax credits we are voting on today are amendable by statutory instruments, as laid down in primary legislation in 2002 by the then Labour Government. These and other aspects of welfare reform have of course been debated at length in the Budget debate, as well as in departmental questions and elsewhere. The underlying issues will also be debated in the Welfare Reform and Work Bill. In a response to a request from the right hon. Member for Birkenhead (Frank Field), the Government have brought the vote on the statutory instrument measures to the Floor of the House to allow all hon. Members the opportunity to vote. Reforming tax credits and other benefits forms the first of five pillars of the Government’s approach to supporting working Britain. The second is the increase in the personal tax allowance; the third is the national living wage, the fourth is the major extensions to child care provision; and fifth is the overall sound economic management that is delivering growth in the number and quality of jobs, earnings and living standards.

Stephen Timms (East Ham) (Lab):

A couple with two children, in which one works as a senior schools admission official earning £26,000 a year, will be more than £2,500 worse off next year because of the measure the Minister is proposing. Does he recognise that it will wreck the solvency of that working family? What does he think they should do?

Damian Hinds:

It is important we see these changes in the overall context. I outlined some of the additional elements that are relevant. I certainly accept that they do not all come into play at exactly the same time, but in the course of time they do and by 2017-18 eight out of 10 households will be better off.

Lady Hermon:

I am most grateful to the Minister for allowing me to intervene at this early stage. A number of my constituents in Northern Ireland feel extremely aggrieved about the change to the income thresholds for eligibility for tax credits. Before I could support the measure, I have to urge the Minister to give some guarantees on how the Government plan to mitigate its worst effects for families throughout the United Kingdom—not just in Northern Ireland.

Damian Hinds:

I have been talking about some of the other elements, but these are matters on which the hon. Lady has a long track record of campaigning. Northern Ireland has a particular situation with regard to welfare reform and I hope all parties will come together to get through that. Discretionary payments are designed for housing issues in particular and were increased substantially in the summer Budget. It is possible that local authorities can use some of those funds to help out people who find themselves in particular difficulty, but I am of course very happy to meet her to go through this in more detail.

The regulations make three changes to the tax credit system. First, they reduce the working tax credit threshold from £6,420 to £3,850 and the child tax credit threshold from £16,105 to £12,125. Secondly, they increase the taper rate from 41% to 48%, meaning that when a claimant’s earnings reach the new tax credit income threshold, their award will be gradually removed by 48p in the pound, rather than the current 41p, ensuring that state taxpayer help is focused on those who need it most. For recipients of housing benefit, the interaction between the two systems of support means the overall change in the withdrawal rate will be 2p, not 7p. Thirdly, the regulations reduce the income rise disregard from £5,000 to £2,500, taking it back to its level between 2003 and 2006 and matching the rate of the income fall disregard. Following the introduction of real-time information, Her Majesty’s Revenue and Customs has much more up-to-date information on claimants’ earnings, so there is no good reason to have such a high disregard figure. These three changes form part of a wider set of welfare reforms, most of which are currently under consideration in the Welfare Reform and Work Bill.

Chris Leslie (Nottingham East) (Lab/Co-op):

The Minister knows that this is a serious matter, and Members on both sides are concerned about the work incentives and making sure we do not unfairly penalise people who want to get back into work. My hon. Friend the Member for Bishop Auckland (Helen Goodman) was right about the rapid increase in the marginal deduction rate to 93% from next April. He needs to address that specific point. How is it not a penalty to work?

Damian Hinds:

For people in receipt of housing benefit, the change in the marginal withdrawal rate will be 2p in the pound. The changes do not reduce the incentive to work, and, as the hon. Gentleman knows, equally important are the incentive, ability and support to work more hours once in work and the fact that there are now more jobs offering more hours. Our reforms to child care are another key part of our support for people who want to increase their hours.

The context to these changes is that, despite making great progress towards balancing the budget, we still ran a deficit of 4.9% last year and are expected to have the second-highest deficit in the G7 in 2015. We need to eliminate the deficit and start cutting the national debt in order to build up our resilience to global economic shocks.

Mr Alan Mak (Havant) (Con):

Will the Minister confirm that when tax credits were introduced, they cost the Government £1.1 billion a year and this year will cost £30 billion, which is unsustainable, and that these reforms are necessary to balance the country’s books?

Damian Hinds:

My hon. Friend is right about the rapid escalation in the cost of tax credits—it trebled in real terms up to 2010—and that we are in the business of getting the country back into balance, because when we lose control of the economy, the people who lose out the most are those on the lowest incomes and in the toughest circumstances.

The burden of eliminating the deficit has meant a bigger tax contribution from those on higher incomes and now calls for further reductions in departmental spending while protecting our national health service. A further £5 billion comes from addressing tax imbalances and £12 billion from the welfare budget. That is the mandate on which we were elected. With near record employment, rising wages and stronger business confidence, now is the time to put the welfare system on a more sustainable, long-term footing, moving our country to a higher wage, lower tax, less welfare-reliant economy.

Alex Cunningham (Stockton North) (Lab):

I am grateful to the Minister. He talks about an environment in which wages are rising. Wages are rising in some areas, but public sector workers have seen a tremendous reduction in their income capacity, and many of them will be affected massively by what the Government want to do. The Government need to think more about public sector workers, whose wages are not going up.

Damian Hinds:

The hon. Gentleman is absolutely right to note the hard work done by public sector employees. There are pay restraints going on in the public sector—I do not deny that for a moment—but wages are growing at 2.8% in real terms this year, which is pretty broadly based across the country, while output per head is growing more in the north than the south. For too long, low pay has been addressed in this country not by genuine reform and driving productivity, but by subsidising it through the tax credit system. In the decade to 2010, tax credit expenditure more than trebled in real terms. The changes introduced in this order will build on the last Parliament’s reforms and return real-terms tax credit spending to its 2007-08 levels—a decade into the Labour party’s tenure in government. It is not a stand-alone measure, but part of what my right hon. Friend the Chancellor called a “new contract” with working Britain. It says to businesses, “You will have to pay higher wages, but you will get lower business taxes and a stable economy”; it says to people, “You can get higher pay and lower tax, but with less benefit top-up”; and it says to the country, “We are going to spend less and live within our means”. These regulations are an important part of that, and I commend them to the House.

Dr Eilidh Whiteford (Banff and Buchan) (SNP):

Let there be no mistake: this statutory instrument will mean drastic cuts in the incomes of families with parents in low-paid work. Across the UK, about 7.5 million children live in about 4 million families that are in receipt of tax credits, and the vast majority of those families are in work. The key impact of the measure will be to reduce the incomes of more than 3 million working families by an average of more than £1,000 a year. We have a very short time today to debate a statutory instrument that will, at a stroke, make dramatic cuts to the incomes and life chances of millions of our citizens, and it deserves a lot more scrutiny then we are giving it today.

The Government have tried to argue this afternoon that their changes to benefits and tax credits are part of a plan to encourage people into work, but this measure overwhelmingly affects people who are already in work. Far from providing incentives for parents to enter the workforce, it actively reduces work incentives and makes it harder than ever for parents in low-paid work to support their families.

This is a hugely regressive measure. Our poorest working families are set to lose a dramatic proportion of their income. If we pass the regulations today, tax credits will start to be withdrawn from any family earning more than £3,850 a year rather than from those earning more than £6,420 a year, as is currently the case. More than half a million families earning less than £6,420 a year will lose out disproportionately because of these cuts to work allowances. That is a massive reduction in the amount that families can earn before tax credits start be withdrawn Combined with the lower level at which universal credit will be withdrawn it means that, for example, a single parent earning £6,410 a year—roughly 20 hours’ work a week on the minimum wage—will lose 48p in tax credits for every pound they earn above the new threshold, which will leave them about £1,200 worse off a year.

One hundred pounds a month probably does not sound like a lot to Conservative Members—[Interruption.] It might not be a lot to them, but for those on low incomes a drop in income of that magnitude will almost certainly mean very difficult choices about very basic things, such as the quality and quantity of the food they eat and how to heat their home. Many poorer families already struggle with heating costs in winter, especially in my part of the world, but it is not only people’s health that is affected by living in cold and damp conditions. This is also about whether children have an adequately heated place to study and do their homework and the long-term consequences if they do not.

I recognise that disadvantage takes many forms, and we have heard a lot of rhetoric lately about social mobility, but the harsh fact is that income poverty is the single biggest driver of long-term disparities in children’s outcomes. Children who grow up in income-poor households are likely to have poorer health throughout their lives. They attain fewer qualifications at school, end up in lower-paid jobs and die younger than their peer group.

Maria Caulfield (Lewes) (Con):

The hon. Lady says that income-poor families have much poorer physical and mental health as well as educational attainment, but is that the case? The fact is that someone on benefits or welfare has poorer outcomes, so the route out is by gaining work and earning a decent wage.

Dr Whiteford:

The hon. Lady is making a ridiculous argument and once again trying to pretend that there are people on welfare and people in work whereas in reality—as illustrated by the tax credit system—many thousands and millions of working people are dependent on benefits because of low pay. That is the key issue in this debate. The Government are attacking low-paid workers, just as they have over the last Parliament, while giving tax breaks to the wealthiest people in our society. The deep cuts to the incomes of the poorest families that the Government are trying to enact today will only exacerbate the inequalities we already have in our society and push opportunities even further out of the reach of those who already lag behind.

The most bizarre claim that has been made for the Government’s austerity measures is that they will encourage people to work harder. I think that we should reject the rather insidious implication that people in low-paid jobs somehow do not work as hard as people in better paid jobs, because that is simply not the case. We must remember that those low-paid jobs are often far more physically demanding, and many people who are set to see their incomes cut under this measure are already working very long hours in exhausting and often pretty unrewarding roles.

In various parts of the country unemployment is still unacceptably high. Whether someone can easily pick up extra hours depends on which part of the country they live in, which sector of the economy they work in and what caring commitments they might have, whether for children or other family members. It is not so straightforward when lots of parents are chasing part-time work between the hours of 9 am and 2.30 pm, when their children are at school. A lot of part-time work needs to be done outwith those hours, when parents have real difficulties accessing childcare.

The charity Gingerbread has today pointed out that some lone parents working full time on the minimum wage with one child will, by 2020, be no better off than non-working lone parents were in 2010. By 2020 many parents working full time will have fallen even further below the minimum income standard than they are at present, but essentially they will be no better off working full time than they would have been had they been out of work five years ago. Where is the work incentive in that? If we really want to incentivise work, we should be increasing work allowances, as my party proposed in the run-up to the general election, not cutting them. That would incentivise work and cut child poverty.

Once again, we have been told today that increases in the minimum wage will compensate for those losses, but the numbers simply do not stack up. Even if the Government proposed raising the minimum wage to the level of the current living wage, which is already £7.85 an hour—well above the Government’s proposed ceiling—the calculation of the living wage is based on not only the cost of living but the assumption that low-paid families are already receiving their full entitlement to tax credits at the current rate.

The Institute for Fiscal Studies, the Resolution Foundation, trade unions and others have all pointed out that the proposed increases in the minimum wage, and indeed the increases in the personal tax allowance, will not make up for the loss of tax credits. The crucial point is that if we cut tax credits in the way the Government are proposing today, the minimum wage would have to rise substantially further, to around £11 an hour, just to keep incomes standing still in real terms.

The bottom line is set out clearly in the OBR’s estimates, which indicate that the higher minimum wage is likely to increase earnings by around £4 billion in total by 2020, compared with social security cuts of £12 billion in the same period, a large portion of which will come out of tax credits. The figures just do not add up. No matter how they repackage their minimum wage and tax changes, the Government are giving a little with one hand but taking a whole lot more with the other.

At the same time as the Government are slashing the incomes of the lowest paid families, the wealthiest families are set to benefit from huge inheritance tax breaks on properties worth over £1 million. For me, that exposes their perverse priorities on families. It is not so much robbing Peter to pay Paul as robbing Peter to pay Rupert and Sebastian.

My colleagues and I were elected on a commitment to fight the austerity agenda being recklessly pursued by this Tory Government. Almost half of all families in Scotland will lose out as a result of these measures, pushing into reverse much of the progress we have made in recent years to reduce child poverty. Around 346,000 children in Scotland will be impacted by these cuts, and the Child Poverty Action Group estimates that 100,000 more children in Scotland will be living in poverty by 2020 as a direct result of the UK Government’s changes to tax and benefits.

The Scottish Government are attempting to mitigate the worst excesses of austerity, providing over £300 million between last year and next, but we need to remember that the people affected by cuts to tax credits are in many cases the same people already disproportionately affected by the freeze in child benefit, the freeze in housing benefit, as the hon. Member for Hornsey and Wood Green (Catherine West) noted, pay freezes and other austerity measures. Once again, other public services and the voluntary sector will be picking up the pieces from the collateral damage of the UK Government’s ideological crusade.

Finally, I want to address the removal of child tax credits for a third or subsequent child. This is just a further blow to poor families already struggling. This measure, along with the introduction of the two-child policy in the Welfare Reform and Work Bill, will push more families with children into poverty, pushing them further behind in health and education, potentially for the rest of their lives. Only about one in six of the families receiving tax credits in Scotland has more than two children. Larger families are a rarity nowadays. By contrast, the majority—more than half the poorest families in Scotland—have only one child. In Scotland, it is in the more affluent areas that people tend to have more children, but across every income group our birth rate is unsustainably low. We need to be supporting family life and encouraging people to have more children if we are to dodge the demographic problems coming up on the inside lane. We should not be putting barriers in the way of those prepared to contribute to our society by doing the essential job of raising the next generation.

This Government have got it very badly wrong. Cutting the incomes of working families will only make it harder to tackle the embedded inequalities that already blight the life chances of too many children. Work should be a route out of poverty for families, but here in the UK it really is not. This statutory instrument pushes that aspiration even further out of reach. That is why my colleagues and I will oppose it and continue to press for the power to make these decisions in Scotland, for Scotland, in the interests of our people and in line with our commitment to building a fairer society.

The draft Regulations were carried by 325 votes to 290. Lady Hermon, who expressed concern about the effects of the cuts on her constituents in North Down, voted with the Government. Previously in this Parliament she has voted with the Government on the Second Readings of the Welfare Reform Bill and the Trade Union Bill. Odd behaviour for someone who resigned from the Ulster Unionist party in 2009 because she opposed the link-up with the Conservative Party. Explaining her resignation she said, “At the present time, I can’t see myself standing under a Conservative banner…”

Of the 290 votes against, there were 221 (of 232) Labour, 48 (of 56) SNP, 7 (of 8) Liberal Democrat, 3 (of 3) Plaid Cymru, 1 (of 1) Green, 7 (of 8) DUP, 2 (of 3) SDLP, and 1 (of 2) Ulster Unionist member.