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Tax Credits Up-rating Regulations 2008

My Lords, I thank the Minister for introducing these orders, which are one of the highlights of the Treasury calendar. They are not in themselves controversial, but as usual they give us an opportunity to raise related issues with the Minister. Let me deal first with the indexation basis of the child benefit and guardian’s allowance orders. These have to be uprated in line with the general level of prices. The figure that has been used, give or take rounding, is 3.9 per cent, which is what the RPI stood at last September. That sounds generous, but the experience of inflation varies with underlying expenditure patterns, and many families, especially those on lower incomes, are experiencing much higher levels of inflation than is reflected in the RPI. Crucially for them, fuel costs are rising at a multiple of RPI and even some basic foodstuffs like bread are rising at a very high rate, so the apparent generosity of an RPI uprating may not help those who most need those benefits. I turn to the tax credit uprating, where things are not so simple. Here we have the Section 41 report, which obliges the Treasury to publish the rates of tax credit that would result if they kept pace with the rate of inflation. Here, the Treasury appears to be using a general inflation rate of 4.1 per cent. RPI was 4.1 per cent last August and also again in January this year. Can the Minister explain why different rates of general inflation have been used for the different orders before us today? I find it confusing. More importantly, can he explain the rationale for the different uprating increases in the different categories of tax credit? Working tax credits are rising by the general inflation rate of 4.1 per cent, while child tax credits are all over the place. The family element gets no rise at all and therefore falls in real terms. Most of the other elements rise by something over 7 per cent, but the child element rises by over 13 per cent. I would be grateful if the Minister could explain those. We need no explanation for the standstill applied to the income rise disregard of £25,000. This hugely costly element of the tax credits scheme—Ministers last year were finally forced to admit that it would cost approximately £850 million a year—was put in place to save the face of the Prime Minister and conceal the fact that the tax credits scheme was a shambles. The fact that it remains at £25,000 is a tacit admission that the scheme remains a shambles. This view is endorsed by the Public Accounts Committee in another place, which reported on tax credits in its eighth report of this Session. It is worth quoting several paragraphs from the summary of that report that pull together the mess that the Prime Minister invented: "““HMRC has paid £65 billion to tax credit claimants since the scheme was introduced in 2003 … The Department overpaid £6 billion in the first three years of the scheme. By the end of March 2007 it had collected £2 billion of this debt and written off £0.7 billion. £3.3 billion of these overpayments remain to be collected. It is unlikely to recover £1.6 billion of the debts.""Although the administrative cost has increased from £406 million in 2003-04 to £587 million in 2006-07, there is little evidence the Department has the scheme under control. Many claimants continue to struggle to understand tax credits and why they are overpaid. There have been many complaints about the process for recovering overpayments and the Ombudsman continues to receive and to uphold a large number of complaints. ""Tax credits continue to suffer from the highest rates of error and fraud in central government. HMRC estimates that claimant error and fraud led to incorrect payments of between £1.04 billion and £1.30 billion in 2004-05. This level of error led the C&AG to qualify his opinion on the HMRC Trust Statement for the fifth year running. The Department still has no targets for reducing error and fraud””." I do not doubt that tax credits have helped the finances of many families, but they cannot be counted a success because they have inflicted misery on too many other families. When are the Government going to look again at the scheme? Does the Minister think that it can ever be counted a success while it has embedded within it an income disregard level which approximates to the value of average full-time earnings in this country? The Minister will no doubt seek to justify the high level of child tax credits in terms of reducing child poverty. He referred to the Government’s targets when he introduced the orders, but he did not say what I am sure he knows—that the Government are failing to achieve their own target of halving child poverty by 2010. Yes, the Government have made some progress but, as the Work and Pensions Select Committee in another place pointed out at paragraph 44 of its second report published earlier this week: "““On current projections, the Government will miss the 2010 target by close to a million children in poverty when measured before housing costs and close to 1.5 million when measured after””." The trouble for the Government is that they simply cannot buy their way to meeting the target. The Institute for Fiscal Studies estimates that it would cost another £3.4 billion in credits or other benefits to meet it. We obviously await next week’s Budget but it does not take a genius to work out that, with one of the largest budget deficits in Europe, the Chancellor has little room for manoeuvre. In any event, although we support the aim of reducing and then eliminating child poverty, we do not believe that state handouts are the right way forward. They may improve the statistics in the short term but they can increase welfare dependency in the long run. Britain already has the highest proportion of children in workless households in Europe and the incentives to work have weakened in recent years. That was the conclusion of the research carried out by the Joseph Rowntree trust and the Institute for Fiscal Studies some 18 months ago. For more than 2 million people, benefit withdrawal rates—not just for tax credits but all the other social security benefits that attach themselves to the poor and/or out of work—are higher than the marginal tax rates of well paid people such as the Minister. For some, the marginal rate is over 90 per cent. We have yet to hear more than rhetoric from the Government about tackling this and focusing on work as the most viable way of avoiding mass poverty. I have one final point for the Minister on tax credits. For social security benefits, the Government’s policies and practices are scrutinised publicly by the Social Security Advisory Committee. We know that its reports are often unwelcome to government, which in turn gives confidence that this body is no mere cipher. When the tax credit system was introduced, the Treasury—then led by the Prime Minister—refused to allow tax credits to be subjected to SSAC scrutiny. Instead, there is a Memorandum of Understanding that effectively gags the SSAC when it considers tax credits. In its 2005-06 report, the SSAC called for a review of the Memorandum of Understanding but its 2006-07 report noted that virtually no progress had been made and that this was of considerable concern to stakeholders. That concern is unsurprising, given the mess that tax credits are in, as I have already mentioned. Will the Minister say whether a proper review will now take place and, further, will he agree that openness and transparency should now be extended to the tax credits work of the SSAC?