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Social Security Benefits Up-rating Order 2011

My Lords, this has been an interesting debate, as one would hope and expect. I thank noble Lords for their valued contributions. I should probably declare an interest in that I am due a winter fuel payment this year, although I did not get it. The DWP says that it paid everyone and I find that I am the only person who did not get their winter fuel payment. The uprating order and the GMP increase order both legislate for increases to benefits and pensions to be paid from April, thus protecting their value at a difficult time. My overview of what the noble Lord, Lord McKenzie, said is that the party opposite was perfectly happy with the CPI in the short term and would agree with the UK Office for National Statistics on the issue if the CPI was to include housing costs in the slightly longer term. On that basis, I suspect that there is rather less between us than might appear at first instance. We are very interested in the changes that will potentially be made to the CPI if housing costs are incorporated, which is being looked at. However, as the noble Lord, Lord Lea, hinted, it is likely that that would be done not by including the changes in mortgage interest rates but by the actual changes in house values. A lot of points were raised in the debate and I will do my best to answer as many as I can. An important point about substitution was raised by the noble Lord, Lord McKenzie, the noble Baroness, Lady Lister, and my noble friend Lord German, who pointed out that people will buy everything at the bottom, which is what one expects them to do—that was the sentiment. However, that is not what happens with this index, which it is important to emphasise. If in a given range of the cheapest items—or best value goods, whatever they are called—and one of them goes up but the rest stay the same, people will substitute the one that has increased in price with the ones that remained stable. The relative movement in those goods, rather than their absolute value at any one time, is what counts. It is really important to understand that when looking at how the substitution effect actually works. We could probably all bore each other by quoting lots of different experts—and I think we have, so I will bother doing so—but the noble Lord, Lord McKenzie, made the point that we abandoned the policy of the CPI when it came to it. I repeat what I said in my opening remarks: we announced the RPI for the basic state pension for the year at the same time as we announced the move to the CPI, so there has been no reversal or change. That was what the policy was. On the point raised by the noble Lord, Lord McKenzie, on the triple guarantee, in the current environment the earnings factor does not make much immediate difference, but over time it will make a substantial difference and pensioners will benefit from it. As I said in my opening remarks, the 1.5 per cent increase from the previous year was not reversed. Picking up on some of the noble Lord’s other points, I think that he knows almost better than I do that, when it comes to mortgage interest for people of working age, benefit recipients and working people on low incomes can also get support for mortgage interest payments. The noble Lord asked what assessment had been made of the changes that we have introduced to non-dependent deductions. The equality impact assessment on those changes has been published on the DWP website. A question was also asked about indexation rights for public service pensions. Those have been index-linked on the same RPI basis up to this point, and in future the indexation will be made on the new basis, which is CPI. The noble Lord, Lord McKenzie, and the noble Baroness, Lady Lister, also homed in on was the effect on poorer households, which is the big question here. We now have 5.8 million adults of working age living in relative poverty. As I have argued, the idea is that using the CPI will ensure that typical changes remain in line with real experience. Where we need to go in this area—a much more important point—is in the structure of the benefits system so that we strike the right balance between the welfare system as a safety net and one that sends out a clear message that work is valuable and that, if you can work, you should work. We are modelling the big impact that will be made by introducing the universal credit. We estimate that 350,000 fewer children and 600,000 fewer adults will be expected to live in poverty—on the normal definition of 60 per cent of median household income. Some two-thirds of that effect will be because of better take-up. My noble friend Lord Kirkwood asked whether we would chase underpayments as hard as overpayments, but that is exactly how that effect will happen in practice. A lot of the effect will come from take-up by people who simply do not take up what they are entitled to. I think that comparing the minimum income standard with one particular benefit rate is dangerous; one has to take the whole package of benefits that people have in practice. However, I acknowledge, with the noble Baroness, Lady Lister, that there is a shortfall compared to the minimum income standard. There is then a fall against median earnings—60 per cent of median earnings is what we are targeting for poverty—and then there is a fall further to benefits. However, the least fall is for pensioners. The noble Baroness, Lady Lister, made some points about child benefit. Some of the savings from withdrawing child benefit from families with a higher rate taxpayer will be used to fund above-indexation increases in child tax credit. That was designed to shift support to low-income families with children. In terms of the amounts recycled, £1.2 billion of welfare savings will go back into child tax credits in 2011-12 and £1.8 billion in the following year. The noble Lord, Lord Beecham, asked about the exclusion of council tax changes from the CPI. Within the CPI, council tax is looked at as a tax, which is the fundamental reason that it is excluded from that basket. The main difference between CPI and RPI—60 per cent of the difference—is the formula effect. Staying with council tax benefits, I note that the cost of administering the system is just short of £1 billion—it was estimated to be £986 million in 2010. The changes that we are making include an element of discretionary housing payment, which is meant to give money to the people who need it most. The noble Lord, Lord German, asked about the RPI. It is impossible to be ruder about the RPI than I have been in explaining why the difference between the RPI and the CPI is less here than elsewhere. The reason one could potentially be rude is that the RPI incorporates something called the ““average of relatives”” as its way of calculating the arithmetic mean—to the extent of 38 per cent of the total. That creates a bounce effect and that is why that particular index has been banned for international comparison. If you wanted to have a posse against the RPI, that is where the suspicions are likely to lie.