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Tax Credits Up-rating Regulations 201

My Lords, I shall also speak to the draft Guardian’s Allowance Up-rating Order 2011, and the draft Guardian’s Allowance (Northern Ireland) Up-rating Order 2011. In my view, the regulations and orders are compatible with the European Convention on Human Rights. The Government inherited an exceptional fiscal challenge. It is important to sketch out the background to these important statutory instruments and to put them into proper context. The state is borrowing one pound in every four that it spends, and just paying the interest on the nation’s debt costs £43 billion—around £120 million a day. The unprecedented scale of the deficit has meant that the Government had to make tough choices in the June 2010 Budget and in the spending review about how taxpayers’ money is allocated. We believe that fairness starts by taking the right decisions to tackle the deficit so that future generations are not burdened with unsustainable debts, meaning higher taxes and diminished public services. Tackling the deficit in a fair and responsible way means that those that can contribute do and those who are less able to do so are supported. Analysis shows that after combining the impact of tax, tax credit and benefit and public service spending changes announced by this Government, the top 20 per cent of households will make the greatest contribution towards reducing the deficit as a percentage of their income and benefits in kind from public services. That is a statement that was true after the Budget and spending round as of last year, which encompassed the measures we are talking about, but of course it remains true and confirmed in the numbers that came out with the Budget today. The regulations and orders before the Committee put into effect a number of reforms to tax credits, announced in the June 2010 Budget and the spending review. These changes will ensure that we tackle the deficit in a way that is fair and ensures that tax credits are targeted at those who need them most. Tax credit elements which were previously uprated by the retail prices index will be uprated this year by the consumer prices index, apart from the basic and 30-hour elements of working tax credit, which will be frozen. The rate of guardian’s allowance will also be uprated by CPI. However, significant above-indexation increases to the child tax credit will help those households with children. Under the current system, tax credits are available to families earning up to £58,000. If households have an increase in income up to £25,000 in a year, they can earn up to £83,000 and still benefit from tax credits. This means that people in the top income decile are eligible, which is unjustifiable within the current economic climate. Reforms to tax credits included within these regulations and orders mean that support for higher income households will be reduced by increasing the rate at which tax credits are withdrawn, while reducing the threshold at which tax credits are paid. Households will also no longer experience an increase in household income of up to £25,000 without their tax credit eligibility changing. Under the current system, around nine out of 10 families with children are eligible for tax credits. Once the tax credit changes have been introduced in April this year, seven out of 10 families will still be eligible for tax credits. Spending on tax credits has increased from £18 billion in 2003-04 to an estimated £30 billion in 2010-11. The system of tax credits under the previous Government was not only unsustainable in fiscal terms; it was also unrealistic in terms of meeting its stated policy objectives. From 2004, progress on relative poverty stalled. However, the previous Government continued to pump money into the tax credit system. They spent more than £150 billion on tax credits since 2003. Although a large proportion of tax credit spending was directed at children, the Institute for Fiscal Studies has estimated that meeting the 2020 child poverty target would require an extra £19 billion of welfare transfers. The previous Government had a static view of poverty, believing that it could be reduced, or even eradicated, by directing money at it. The way that child poverty is currently measured means that, perversely, reducing the income tax paid by millions of lower earners, or providing additional support to low-income pensioners, could push up the poverty line. This would increase the number of children calculated as being in poverty. We want to take a long-term, strategic view to tackling poverty, which is about more than just welfare transfers. This is not about moving families and children above an arbitrary line—where one day they are in poverty and the next they are not—but is about transforming their life chances. The Prime Minister asked Frank Field and Graham Allen to undertake reviews on poverty and life chances. Findings from both reviews have fed into the child poverty strategy, which will be published shortly. While awaiting the conclusions of these reviews, the Government have used some of the savings from withdrawing child benefit from families with a higher rate taxpayer to fund significant above-indexation increases in the child tax credit over the next two years. This means that the child tax credit will increase by £255 in 2011, benefiting 2.4 million of the poorest families. This increase is better targeted at low-income families and will ensure that the spending review will have no measurable impact on child poverty in the next two years. As well as targeting financial support at low-income households, the spending review introduced a new fairness premium, which will fundamentally change the prospects of the poorest children by offering real opportunities to raise them out of poverty for the long term. The fairness premium is worth over £7.2 billion over the spending review period and will include a £2.5 billion premium to support the educational development of the poorest pupils. It also protects cash funding for Sure Start to support the poorest in early years and at every stage of their education. Despite the last Government’s spending on tax credits, working-age poverty actually increased under Labour, as there are now more working-age adults in poverty than there were in 1997. The current welfare state too often traps people in dependency. Almost 2 million children are living in workless households. The spending review announced radical plans to reform the welfare state. The new universal credit, which will be introduced over two Parliaments, will replace the current complex system of means-tested working-age benefits with a single, streamlined payment. The universal credit, which will cut through the complexity of the existing benefits system, will ensure that work pays. In that context, I commend these regulations and orders to the Committee.