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Tax Credits

My Lords, this has been a short debate but one that shows some of the strengths of this House. We have had a good range of people talking about practical difficulties in the system, as well as with great expertise about its more theoretical aspects. I congratulate the noble Lord, Lord Northbrook, on keeping this problem in front of us and on continuing to try to hold the Government to account. He painted a serious picture, which I believe is correct, of continuing inefficiency, overpayments, underpayments, error and fraud in the tax credits system. The noble Baroness, Lady Hollis, spoke with her unique combination of commitment and expertise, and I will certainly develop her argument about the employment and poverty trap and about the effect of housing and other benefits. I do not, however, agree with the thrust of her summary of the very important Institute for Fiscal Studies report, supported by the Joseph Rowntree Foundation, about which I propose to say a little more. The noble Lord, Lord Giddens, also gave us a useful historical sweep, but I cannot agree that tax credits are not a disincentive to work. A careful study of the IFS report would make him think very hard about that. Briefly, he spoke about the Liberal Democrat proposals to re-fix tax credits every six months. I agree that flexibility is fine, and obviously one would like the system to work better. The problem at the moment is that the system seems to be seizing up, and re-fixing tax credits every six months is a short-term practical proposal to help. The noble Viscount, Lord Trenchard, concentrated on administrative costs and reclaiming overpayments, and followed the main thrust of the noble Lord, Lord Northbrook. I notice that he called the Forsyth commission’s report excellent. Is the noble Baroness, Lady Noakes, allowed to agree with that from the Conservative Front Bench, or would it break Mr Osborne’s vow of silence? He seems to have invented a whole new concept. Noble Lords may remember that the Chancellor of the Exchequer used to go into pre-Budget purdah for a few weeks. The new Osborne doctrine seems to be that shadow Chancellors go into pre-election purdah for about four or five years and cannot talk about tax at all. I mentioned the IFS report, The poverty trade-off: work incentives and income redistribution in Britain, which came out earlier this month. I pay tribute yet again to the great work that the Joseph Rowntree Foundation does in supporting valuable public-policy initiatives of this kind. The conclusions were that Labour’s reforms to date have acted to weaken both incentives to be in work at all and incentives for those in work to increase their earnings. It rightly draws particular attention to the fact that housing benefit recipients have some of the weakest work incentives of all. As the noble Baroness, Lady Hollis, pointed out, it is the interaction of that with other benefits that really makes marginal tax rates on poor people very high. The Government must face up to this very serious disincentive to work and let people on housing benefit, particularly, keep more of their earnings as they work more. The IFS report refers to lone parents, whom Labour talk about a great deal, and points out that this group still has the weakest work incentives of the six demographic groups that it considered. It says that the number of lone parents has more than doubled since 1979 and that this should be a key focus for the attention of policy makers. The IFS goes into considerable detail and puts a very powerful case when it states that, "““the reforms that do the most damage to work incentives are the same aggressively means-tested ones that do most to help the poor””." We have to face that increasing the child element of CTC in particular would reduce the incentive to work substantially for large numbers of people. The report points out how a classic increase in means-tested support is very successful in targeting money at the poor, but is very weak for work incentives. In the face of this evidence, I do not see how the noble Lord, Lord Giddens, can argue that work incentives are not weakened. This short debate has focused on operational difficulties, but more on what I would call fundamental design faults in the tax credits system, which, because it is so complicated, makes it operationally very difficult and undoubtedly affects work incentives.