Tax Credits

David Davis Excerpts

Thursday 29th October 2015 Commons Chamber

[Frank Field]

Well, indeed. Our plea is to have made available the range of analysis that has traditionally accompanied any Budget statement that any Member of this House, however long he or she has served, has come to expect.

The Work and Pensions Committee has emphasised a fourth factor, which is that there may be some wage push as a result of the introduction of the national living wage. Will that be taken into account in the Government’s analysis? I am slightly sceptical about the extent of that wage push—again, it is one of the problems of having been a Member of this House for some time. When I was initiating the Low Pay Unit’s campaign for a statutory minimum wage, the official trade union position was to oppose it on the ground that there would be a mega-bill as we re-established differentials. However, when we look at the impact of the statutory minimum wage, we see a great deal of bunching of wages, and not the big increases that some people feared and expected.

[Mr David Davis (Haltemprice and Howden) (Con)]

Will my right hon. Friend give way?

[Frank Field]

Yes, I give way to my right hon. Friend.

[Mr Davis]

I can call him my right hon. Friend, because we have known each other for 40 years. On the data the Government provide, because this is an incredibly complicated area, there are elements of data that are important but that would not normally be provided. One of them is the marginal withdrawal rate of any scheme that the Government put into effect. Government spokesmen have previously said that people can work their way out of poverty, but it looks as though some of the effects of the national living wage will result in a 93% withdrawal rate, which will mean that people cannot work their way out of poverty. Will he add that to his list of data for the Government to provide?

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[Frank Field]

I was waiting for those on the Treasury Bench to point out the difficulties involved with all such moves. It is important to say that we are not in the hole; the Government are in the hole. We are trying to make suggestions about how to get out of the hole. It is no use the Government turning round to us and saying, “Did you not realise that this would have this effect and that effect?” I know we will not get that from the Exchequer Secretary, but a suitable sense of humility from the Government would be welcome.

[Mr David Davis]

Does that point not reinforce the requirement for the changes to be made not with another yes/no measure such as a statutory instrument, but through primary legislation?

[Frank Field]

There would of course be a tendency for any Chancellor to say, “I’m going to make the Lords agree to my new SI.” If it was an SI that this House cheered on its way down to the other place, that might be wise. If it is an SI on which there was still deep disagreement, particularly among Conservative Members, I think it would be very unwise not to bring forward the proposal in primary legislation.

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[Stephen McPartland]

That is a possible solution and I am sure that the Treasury is looking into it. I would like to work with the Treasury on how the mitigation could work, and I hope that it will listen.

[Mr David Davis]

Give him a job!

[Stephen McPartland]

I would like to point out that I do not want a job.

Getting back to the people who are on £11,000 a year or thereabouts and who will be particularly punished by the policy as it stands, I am pleased that the Chancellor is now listening. Although I do not agree with what the House of Lords did, I accept that it has brought us to this position. I want the debate to focus not on constitutional issues but on the loss of income for people who have no ability to make it up elsewhere. How can we help those people?

I have talked about the increase in the personal income tax allowance from £11,000 to £12,500, which will cost about £9 billion. The Government spend over £700 billion a year, yet it seems as though if we cannot find this £4.4 billion it will be the end of life as we know it. We all know that that is not the case. There is a way in which the effects can be mitigated.

How do we reform tax credits without punishing those who are trying to do the right thing—those who get up, go to work and try to move their families forward? Some £3 billion of the £4.4 billion saving is down to the change in thresholds that I spoke about—the initial £1,200 cut. It is an incredibly broad instrument that will punish people whether they earn just over £6,420 or £19,000 and it must be mitigated and changed. We have to find a way around that initial £1,200 cut. It is too much and it goes too far.

There is talk of a discretionary hardship fund. I would certainly welcome that for people who are struggling in one way or another. There has been a lot of talk about national insurance. I would like people not to pay any tax on the first £11,000 or £12,000 of their income, but that will not be looked at fully because it would be incredibly expensive. For me, this debate is about how we can help these families.

Basic macroeconomics suggests to me that if we take £4.4 billion off the people who earn the lowest incomes, that is £4.4 billion that will be taken straight out of the economy, because it will be taken out of the pockets of people who would have spent it right away. Every pound that is taken off those people is a pound that is taken out of the shops in their local economies. It just does not make sense.

I do want to work with the Treasury. I can be a prodigal son and be returned to the fold, I am sure.

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[Mr David Davis (Haltemprice and Howden) (Con)]

It is a privilege to speak in this debate. I am one of its co-sponsors, but the entire credit for the idea belongs to the right hon. Member for Birkenhead (Frank Field). He rightly identified the need for a cross-party, less partisan and, as it turns out, non-binding debate to allow everyone properly to explore these issues in the national interest without being fettered by feelings of joining one side or the other in the playground of politics.

The result has, I think, been good. I think this has been the best debate so far of a number on this subject. It falls on us all to be honest about it. This policy was a mistake. One can only think that, because I am sure that nobody in any party would intend deliberately to impoverish the working poor with dependent families—I am afraid I do differentiate in this context.

[Neil Gray]

Will the right hon. Gentleman give way?

[Mr Davis]

Not for the moment.

The problem was compounded by the method employed—the measure was introduced by statutory instrument, and is therefore unamendable—and by a lack of sufficient information. As four or five Members have already pointed out today, there was no proper impact statement. Had the measure been introduced in primary legislation and thus been amendable, and had the Government provided proper information, the measure would not have gone to the House of Lords in its current form; it would have been reformed in this House, and that is what should have happened.

I subscribe to the Government’s wish to balance the books by 2020, which I consider to be an eminently sensible and responsible aim. However, I also subscribe to the view that we need to protect the poor at all costs. The question is, how do we identify what this policy does? I wanted to find some examples that would enable us to assess both sides of the argument—not just the attack, but the Government’s line as well—and I thank the Chancellor’s Parliamentary Private Secretary, my hon. Friend the Member for Kingswood (Chris Skidmore), for being so helpful in that regard. I put some of the points that he made in defence of the policy to the House of Commons Library, and I shall now give a couple of examples that the Library supplied to illustrate its impact.

The worst-case example that I could find was that of a working single parent with two children, who, without the mitigating effects, could be £2,000 a year worse off in virtually every year until 2020. That is an unbelievable sum to take from a family who are already poor. If the family were eligible for mitigation, in particular housing benefit, the sum could be reduced to roughly £700—the fine detail is unreliable—but, again, it would be lost in virtually every one of the next four or five years,

The great battle over the 10% rate when Labour was in power involved sums that were a quarter of that amount. The great battles over the poll tax, which I remember only too well, involved sums of that size. The impact on a family who are already on the poverty line, by definition, is unspeakable and unthinkable. I grew up in a rather poorer era, and I remember children being hungry on Fridays when the bills were just a bit too big, or it was cold and the heating costs were too high.

[Guto Bebb]

My right hon. Friend touched on the issue of housing benefits mitigating some of the tax credit changes. Is that not another problem with the policy? Someone living in rented accommodation and receiving housing benefit would receive mitigation under the current system, but someone who had bought their own property would not.

[Mr Davis]

Exactly—and before anyone suggests that a person who owns his or her house is better off, let me say that many people in that category have fallen into it and got out of it later. The idea that someone earning less than £20,000 a year, and with two children to support, should lose £2,000 is simply untenable.

The right hon. Member for Birkenhead suggested that there were four possible strategies, but in my view there are three. The first possibility is that we shift the burden elsewhere. The right hon. Gentleman proposed that we should shift it up the income scale, and Lord Lawson said the same during the debate in the House of Lords. I shall not elaborate on that possibility, because I think that there are better ways.

The second strategy is to find savings elsewhere. Here I strongly disagreed with the right hon. Member for Birkenhead, who almost encouraged the Chancellor to go hunting for the pensioner pound. It will not be today’s pensioner pound; it will be tomorrow’s. I think it would be very unwise to remove the tax benefits of investing in pensions and undermine what we have left of our private pension scheme. I am protected, because virtually all my pension is paid for now; it is the next generation that will have to worry.

[Frank Field]

I thought that my argument would appeal more to Conservative Members, because it was a free-market argument. When Governments have guaranteed a minimum, it is not our business to put our sticky fingers into other people’s lives and tell them how they should save or not save. Once there is a minimum pension agreement for everyone, how and when people save should not be a question for the House.

[Mr Davis]

I shall not go too far down that road. Let me simply say that middle-class pensioners are now paying one of the highest effective income tax rates in the country. People who have saved a lot for their pensions and gone above the lifetime allowance must pay 55%. I think we ought to be a bit careful, because if we let the Treasury get at that deferred income, it will take as much as it can.

The third option, which I think is probably the winner—although not by itself; it would have to be modified—is to stage the cuts. I believe that the right hon. Member for Birkenhead lit upon this strategy as well. The cuts would be staged to match movements in the minimum wage and the living wage so that people would not lose.

The Government’s figures for 2020 seem broadly to balance, although they are not perfect. We shall have to work through the mitigation carefully, and that is where the impact statement comes in. Those figures do two things. They protect the working poor, but they also achieve the deficit reduction, which is vital. If we hit the deficit reduction target by 2020—this point was made by my hon. Friend the Member for Stevenage (Stephen McPartland)—each saving of £4 billion a year is not critical. It represents less than 1% of the economy. The really critical issue is how the financial markets see the position. The financial markets do not care about the trajectory from here to 2020; the fact that we get there is good enough. We do not need to worry about the £4 billion a year in between, but we do need to worry about the final outcome. My argument, therefore, is that we should cut the tax credits in step with the minimum wage and the living wage.

The criterion is what is important here. The criterion that the Government must meet is that there should be no losses for the least well off in any of the three intervening years. The poorest, the working poor and their dependants cannot afford to lose one pound. I was never a great fan of the minimum wage, but I was persuaded that it was worthwhile.

[Drew Hendry (Inverness, Nairn, Badenoch and Strathspey) (SNP)]

Will the right hon. Gentleman give way?

[Mr Davis]

I am afraid not. I have already taken two interventions, and if I take another, I shall lose time.

One of the things that persuaded me that the minimum wage was worth while was the information in social data that it cut crime. We must not lose sight of the social impact of changes such as this: the distress caused to families, the breaking up of families, and the pushing of families towards food banks and, worse, towards loan sharks and petty crime. We have to think about those things, because there is a cost to them as well.

The Institute for Fiscal Studies told the Work and Pensions Committee, which is chaired by the right hon. Member for Birkenhead, that the Government could hit the 2020 target on a staged route. That is what we should aim for. We can achieve the fiscal target, while still remaining faithful to Conservative “one nation” aims. That, after all, has been the leitmotiv of the last few months for us. If we do that, the Chancellor will have good reason to be proud of his achievement.