Welfare Benefits Up-rating Bill

Lord Newby Excerpts

Tuesday 19th March 2013 Lords Chamber

[Lord McKenzie of Luton]

My Lords, I start by thanking the noble Lord, Lord Low, for his support for the amendments in this group. He made the very important point that we are potentially moving into a period of greater inflation. This point was made last week by the FT, which talked about the risks of stagflation in this country. I also thank the right reverend Prelate the Bishop of Leicester for his support. He posed the key question: how will making these people poorer help the national interest? What we heard from noble Lords who oppose the amendment did not help us on that point.

I say to the Minister and to the noble Lord, Lord Bates, who prayed in aid universal credit, that it would be good to know that universal credit is on track because from everything we hear it is not. Even with universal credit as proposed, we know that something like 1.8 million people will have their benefits from work reduced in comparison to their current position.

I stress that the amendment challenges the locking-in over a three-year period of the restrictions on uprating. Uprating by less than the rate of inflation is a real-terms cut. We should recognise that it is a cut in people’s benefits. The fundamental proposition in the amendment is that these things should be looked at in the normal way on an annual basis by reference to what is happening to prices.

The noble Lord, Lord King, and the Minister said that other countries are cutting benefits. Benefits have been cut in this country, too. Council tax benefit, housing benefit, DLA, ESA and tax credits have been cut by something like £18 billion to date.

[Lord Newby]

Will the noble Lord confirm that no benefits in this country have been cut in cash terms, as they have widely been in the rest of Europe?

[Lord McKenzie of Luton]

Housing benefit is one such benefit. Council tax benefit has been dumped on local authorities with a 10% restriction on funding, which means that people’s support will be cut in cash terms. That is absolutely happening.

I say to the noble Lords, Lord King and Lord Forsyth, that it seemed that the mention of Cyprus was meant to lead us to a conclusion that bears no relation to reality. We are not dealing with a situation here that would take us anywhere close to the situation in Cyprus. We are talking about restrictions on uprating which, on the Government’s own figures, would amount to something like £1.9 billion.

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A child may live in a family with problem debt. One would therefore think that noble Lords would welcome the measures that we are seeking to take to reduce indebtedness and to encourage people to live within their means, with universal credit being paid on a monthly basis so that people get used to being responsible. A child may live in poor housing or in a troubled area, have an unstable family environment or attend a failing school. His parents may not have the skills to get out and get the job that they need, or they may be in poor health. These are a broad range of issues that ought to be reflected in our debates about child poverty. In that context, I believe that in time, primarily through encouraging more people into employment, we will see the child poverty targets in the Child Poverty Act, which this Government signed up to and agreed to, achieved by their set target date of 2020.

[Lord Newby]

My Lords, the whole House can agree on one thing. We all want to support families with children and ensure that children in this country have the opportunity to fulfil their potential. We have been discussing how we attempt to achieve that in the extremely difficult economic times in which we live.

I will spare noble Lords my speaking notes on the economic context, as we have already had a full debate on that. The only point I make in passing, in respect of the Opposition’s policies on deficit reduction, is that they passed legislation saying that by the forthcoming financial year it would be illegal not to have halved the deficit. It is therefore particularly surprising that they seem to have had no plan at the time to do it and have given no indication since of how they might have done it.

However, I must remind noble Lords again of the baseline from which these savings are being made. Tax credit expenditure increased by 340% under the previous Government compared to the benefits they replaced. Eligibility for tax credits was extended to nine out of 10 families with children and tax credits and child benefit accounted for £42 billion this year, which is over 40% of working-age welfare expenditure.

I will give noble Lords one other piece of context. The latest OECD figures show that of all the developed countries the UK, along with Ireland, spends the highest proportion of its national income on family benefits. We are not a country that takes these things lightly or a country that has not given very high priority to supporting families. We believe that that is absolutely a right priority and we support families with children as much as we can in the circumstances. Child benefit and tax credits exist to do that. However, as we have said, we have to focus resources where they are needed most.

A number of noble Lords, including the right reverend Prelate the Bishop of Leicester and the noble Lord, Lord Bates, have mentioned that this Bill is only one of a large number of measures that the Government are taking which affect families with children, in particular poor families with children. The noble Lord, Lord Bates, referred to the pupil premium, which will cost the Government £2.5 billion by next year. This will be worth £900 per disadvantaged child—and that is £900 in hard times. We are extending flexible support for early education. Since 2010, all three and four year-olds have been entitled to 15 hours of free childcare and we are extending this to 260,000 disadvantaged two year-olds from this year. This is immensely important to these families and it will be worth around £2,900 a year for the poorest families who benefit—£2,900 extra per family. We have found these hugely significant sums of money by making reductions elsewhere, because we place such a large priority on the poorest families.

As the noble Lord, Lord Bates, said, we protected the schools budget and the NHS budget. We are spending £1.2 billion on capital expenditure in schools. However, as the noble Lord, Lord Forsyth, has said, one of the most important things we have to do is leave our children and grandchildren with a lack of deficit or a deficit that they can manage. The savings in the Bill attempt to begin to do that.

The first group of amendments would remove child benefit, child tax credit and the lower rate of disabled child addition in universal credit from the Bill. This would remove nearly half the savings from the Bill, which is around £900 million in 2015-16. I should like to make a further point on universal credit, although it has not been the subject of much debate in this group of amendments. I am sure we will be dealing with this important issue in more detail when we debate Amendment 3, to which my noble friend Lady Stowell will respond. Suffice it to say that part of the principle underlying the decisions we have taken on disability and universal credit is the need for simplicity and our desire to target support to the most severely disabled children.

The right reverend Prelate the Bishop of Ripon and Leeds referred to child benefit and expressed his concern that it had been frozen or taken away from the highest earners. What he did not say was that the Government have increased child tax credit by £180—more than inflation—to more than cover, in the first few years, the reduction in child benefit. Taking child benefit and child tax credit together, we have tilted the expenditure away from affluent families and put more of the cash into poorer ones. I think that is a sensible priority and I am surprised that he appears not to agree.

A number of noble Lords have talked about the impact of the Bill on child poverty. As has been pointed out, the Bill is forecast to increase the number of children in absolute poverty by 200,000 and the number in relative poverty by 200,000. For the avoidance of doubt and in answer to the point made by the noble Baroness, Lady Sherlock, my noble friend Lady Stowell wrote to the noble Lord, Lord McKenzie, copied to other noble Lords, on 13 March. Her letter contained the figure about absolute poverty so, far from seeking to avoid mentioning it, we chose to circulate it. I am not saying that absolute poverty is not something we should be extremely concerned about but the term does not mean what most people think of as absolute poverty. The definition of absolute poverty is 60% of the median income in 2010-11 uprated to take account of inflation. The 200,000 children mentioned in respect of absolute poverty are very largely the same as the 200,000 who are mentioned in terms of relative poverty. You certainly cannot add those two numbers together.

At previous stages of the Bill, we have discussed the definition of child poverty and the importance of tackling child poverty. We know that if we focus on the relative income line we get some very odd results. We have pointed out previously that in 2010 300,000 fewer children were said to have moved out of poverty, not because anything changed in their lives but because the rest of society got poorer. The estimate on the impact of this Bill does not take account of policies which would cause child poverty figures to move in the other direction, such as universal credit which is expected to lift up to 250,000 children out of poverty, depending on the effect of the minimum income floor. We take the issues of cash and poverty, as currently defined, very seriously, but we also think that we need a broader definition of child poverty. That is why the Government are currently consulting on a wider definition. As I set out two weeks ago, and repeat today, this Government remain committed to eradicating child poverty. We believe that income will remain an important part of any new measure on child poverty, but focusing our resources on benefits alone is not enough. We have to take action to tackle the root causes of poverty, some of which I have described today.

I also take this opportunity to mention, as an example of what the Government are doing to support children and families in work with children, the announcement made today by the Prime Minister and Deputy Prime Minister concerning increasing eligibility for support to five times as many families as is currently the case through a new tax-free childcare scheme. Families where the parents are in work will be able to claim 20% of their childcare costs—equal to the basic rate of income tax—up to £6,000. The scheme will be phased in from the autumn of 2015. More than 2.5 million hard-working families will be eligible to benefit from these new proposals, compared with existing schemes offered by fewer than 5% of employers. Families on tax credits will be eligible to receive support for 70% of their childcare costs, and we have already committed an additional £200 million in universal credit, helping 100,000 more working families.

Today’s announcement of that further £200 million of additional support in universal credit will provide working families with the equivalent of 85% of their childcare costs where the lone parent or both parents pay income tax. That additional support will improve incentives to work and ensure that it is worth while for low and middle-income parents to work up to full-time hours. It will be phased in from April 2016 when childcare support moves from tax credits to universal credit. Together, these proposals will help to ensure that working families are not held back by the costs of childcare. They will remove disincentives to work for many mothers and provide flexibility and support for businesses to generate employment.

I hope I have been able to provide some reassurance that, although we are taking difficult decisions on welfare, they are necessary decisions. We are prioritising limited resources so that they go to measures that help families with children as well as those who aspire to work hard and get on. I therefore ask the right reverend Prelate to withdraw his amendment.

[The Lord Bishop of Ripon and Leeds]

My Lords, I am grateful to all those who have taken part in this debate and, indeed, to the Minister for his extended response to the discussion. I am grateful to the noble Baroness, Lady Sherlock, for her support and for the information that 200,000 children will be in absolute poverty as a result of the Bill. We have also recently had information from the Trussell Trust about the number of children who are now being fed through food banks.

I thank the noble Lord, Lord Forsyth, for his contribution, but this is not simply a variation on the previous amendment. For one thing, it would cost only half as much at £0.9 billion, rather than the £2 billion to £3 billion which has been mentioned in relation to the whole Bill.

There have been a number of suggestions—not just from me but from a collection of other people—as to how this money could be raised. At an earlier stage in our discussions on the Bill, I made suggestions and the noble Lord, Lord Newby, responded that they were indeed possibilities but not ones that fitted in with the Government’s current priorities. That is a perfectly fair response but it is not fair to say that taxing the winter fuel allowance or dealing differently with things such as free television licences, tax relief on pension contributions, national insurance contributions or employer pension costs and so on are not possible. They are possibilities. I was not quite sure what—

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[Lord McKenzie of Luton]

My Lords, we are debating a different Bill. If the noble Lord wants to debate a proposition about public sector pay, let us have some propositions and we can consider that. The noble Lord knows full well that he is trying to lead the Opposition in a particular direction.

I come back to the point that the amendment of the noble Lord, Lord Kirkwood, is very straightforward. It just says that an automatic 1% uprating would not apply automatically if inflation reached a certain level. That seems entirely unobjectionable and I cannot see why the Government cannot accept it. If the Government do not accept it, they have to say what level of inflation, what level of real decrease in people’s circumstances, they would find acceptable, because that would be the consequence of rejecting the amendment. This is a very modest proposition. I really am surprised at the trouble that the Government are having with accepting it. I would hope at least that the noble Lord’s colleagues would stick with him on this issue as the arguments that we have heard against it are quite spurious.

[Lord Newby]

My Lords, the first amendment in this group in the name of my noble friend Lord Kirkwood would mean that the Bill would apply only if inflation was below 3% for the purposes of uprating in that year.

I shall provide a reminder of what the official inflation forecasts currently show. While inflation is forecast to be above target—that is, 2% in the near term—it will fall back towards the target in the medium term. In the final year of the Bill, the current forecasts show that inflation for the purposes of uprating in that year will be 2.2%. That was the view of the Office for Budget Responsibility at the time of the Autumn Statement. The OBR produces independent and authoritative forecasts for the economy and public finances and we take decisions based on them.

However, the OBR is not alone in forecasting that inflation will fall back to target in the medium term. That is also the view of other major economic forecasters. I refer to the IMF, the OECD and the Bank of England. Indeed, the latest assessment of independent forecasters in February was that UK inflation would be 2.2% in the 12 months to quarter 1 of 2014 and in the 12 months to quarter 1 of 2015. That is an average assessment of people who make their living by doing this job.

The noble Lord, Lord Kirkwood, said that he thought there was a 50% chance of inflation being over 3% in the period covered by the Bill. I remind the House that that means a 50% chance that inflation will be over 3% by September 2014, because that is the last point at which the Bill has an effect in terms of benefit uprating. All I can say to my noble friend, for whom I have the greatest regard, is that his view is just not shared by any reputable international or national body that is making forecasts about inflation.

[Baroness Hollis of Heigham]

In that case, why do the Government have any problem in accepting this amendment?

[Lord Newby]

I am coming on to that. In fact, I will deal with it now. It is relevant to the point that was made by my noble friend Lord Forsyth. The purpose of the Bill, as we have debated about 20 times since Second Reading, is to give some certainty to the Government’s fiscal plans. The reason we are doing that is that a number of international bodies and rating agencies have said that this has a specific and significant impact on the way that they view the UK’s prospects. Entrenching something in a Bill has the effect of giving a degree of certainty, which is immensely useful with regard to the markets.

As my noble friend Lord Forsyth has said, there seems to be a sense that the markets think that we in the UK are in a very good position and that a little tweak here and there in terms of borrowing will make no difference. That is not the way the markets work. It starts off with a little tweak and then the markets feel that something is going wrong. Once that feeling takes hold, the markets can move very quickly.

As we have debated many times in your Lordships’ House, it does not need much of an increase in inflation to make a huge difference to the Government’s finances and the lives of ordinary people.

[Lord McKenzie of Luton]

Can the noble Lord tell me how the markets have moved in response to the Government borrowing £200 billion more than originally planned?

[Lord Newby]

The reason why they have not moved is that the Government have not changed our underlying policy.

The effect of a 1% increase in inflation on someone with a £100,000 mortgage is £1,000. These are big differences and a 1% increase in the interest rate is by no means out of line with the interest rates being paid by a raft of European countries whose borrowing as a percentage of GDP is significantly less than ours. The risk in terms of interest rates is real and present. It is not some airy-fairy possibility that would come into play only if the Government were suddenly to go mad and spend huge amounts of money. It can happen with a relatively small change.

The Government remain committed to low and stable inflation. As we have said umpteen times, it is good for individuals and for business and is a prerequisite for economic prosperity. That is why the Government set the remit for the independent Monetary Policy Committee to target inflation. The Chancellor will set the remit at Budget tomorrow, as usual. I do not know what the remit will be but I know it will not be, to quote my noble friend Lord Kirkwood, to loosen the constraints so that inflation rips. I am confident that the Government’s commitment to low inflation will remain.

My noble friend Lord Kirkwood and the noble Lord, Lord McKenzie, said, “What happens if, contrary to what the Government have said, inflation does rip? Suppose we have a circumstance that we don’t believe is going to happen”. If Governments legislated for every circumstance that they did not believe was going to happen, we would have Bills thousands of pages long. The Government can legislate and act only on the basis of a central assumption of what the future, in respect of the particular area of public policy they are dealing with, is going to be like, and that is what we have done here.

I turn to the issue that many people have faced and in many cases continue to face—real-terms reductions in pay. Inflation risk is something that everyone has to face in everyday life. We have been taking about public servants but let us just talk about them a bit more. Public servants have seen their pay frozen and then increased by 1%. When inflation rose to 5.2% in September 2011, many public servants were in the middle of a pay freeze. The Opposition supported that policy and there was no inflation guarantee within it. This includes, for example, many hard-pressed personal advisers in jobcentres who are on modest incomes and are having to see restraint in their pay in these very tough times. That is the right policy. However, the consequences have been that many out-of-work benefit recipients have seen higher cash—yes, cash—increases in their benefits payments over the past three years than many Jobcentre Plus personal advisers have seen in their salaries.

These are difficult but necessary decisions. We must remember the tough circumstances that many people in work have faced and continue to face across the country as we deal with the effects of the economic crisis. As I have said, we believe that this Bill is necessary to set out a clear and credible plan to make savings from welfare, help reduce the deficit and restore economic recovery. We are taking the tough decisions because it is necessary to give confidence to the markets. Adding to the Bill conditions such as those proposed by my noble friend Lord Kirkwood would diminish the confidence that we require.

I now turn to Amendment 12, in the name of the noble Baroness, Lady Morgan of Drefelin. This amendment would place a duty on the Secretary of State to instruct the Social Security Advisory Committee to commence a review of the level of uprating if inflation reaches 3.2% in any of the relevant periods as defined in the amendment. I hope that during this and previous debates both I and my noble friend Lady Stowell have been able to convey to the House that we understand and share noble Lords’ concerns about measuring the impacts of the Bill and all our reforms on individuals. However, as the noble Baroness slightly suggested in her speech, we believe that the amendment is unnecessary.

Noble Lords will be aware that we already have comprehensive arrangements in place to report on the impacts of government policy. First, we have already published a full account of the impacts of this Bill based on the forecast set out by the OBR. Again, these forecasts are broadly shared by the other main economic forecasters. Noble Lords will be aware that we have also published the child poverty impacts of the Bill. The Government already have a suite of ongoing reporting mechanisms in place and report on the levels of poverty every year in the households below average income series. It is only by looking at poverty issues in the round that we can have a meaningful debate about poverty. Noble Lords will be aware that the Government are currently analysing responses to their consultation on new measures of child poverty, measures that will attempt to capture the wider reality of poverty in the UK today.

Later this year we shall see the first of what will become an annual report from the Social Mobility and Child Poverty Commission, which will report on the Government’s progress towards reducing child poverty, in particular meeting the targets in the Act and implementing the most recent UK strategy. This commission, chaired by Alan Milburn, will report to Parliament and will enable detailed scrutiny of the Government’s work to eradicate child poverty.

Finally, the Government regularly produce an analysis of the cumulative impact of changes on households across the income distribution. This information is published by the Treasury at every Budget and other major fiscal events. This analysis will use updated inflation projections. We believe that it is a better approach than that in the amendment as it looks at the cumulative impacts of all changes rather than artificially isolating just one policy. The publication of cumulative impacts is a coalition initiative and was not produced by the previous Administration.

The Government have taken unprecedented steps to increase transparency and enable effective scrutiny of policy-making by publishing detailed distributional analysis of the impacts of their reforms on households. Our published distributional analysis goes further than that of any previous Government. Having these mechanisms in place means that we are confident that the Government will be able to scrutinise the effects of this Bill and of our whole suite of welfare reforms. I therefore ask the noble Baroness to withdraw her amendment.