New Clause 14 — Assessment of effects of taxation changes on different earnings groups

Orders of the Day – in the House of Commons at 8:45 pm on 25 June 2007.

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'(1) It is the duty of a Minister of the Crown, when proposing changes to personal taxation (whether or not taking effect in a future financial year), to prepare and lay before the House of Commons an assessment of the effects of the proposed changes on different earnings groups.

(2) For the purposes of subsection (1) "different earnings groups" means groups representing each earnings decile; and "effects" includes changes in net disposable income and changes in the relative share of national wealth accounted for by each earnings decile.

(3) If the proposed changes mentioned in subsection (1) appear likely to have an adverse effect on groups in the lowest quintile of earnings, the changes shall not take effect unless they are accompanied by transitional relief measures.

(4) "Transitional relief measures" in subsection (3) means measures designed to ensure that any adverse effects of a kind mentioned in that subsection are phased over such a reasonable period as will avoid abrupt changes in the net disposable income of the relevant earnings group.'.— [Mr. Frank Field.]

Brought up, and read the First time.

Photo of Frank Field Frank Field Labour, Birkenhead

I beg to move, That the clause be read a Second time.

I was a few minutes late because I went to check the letter board, hoping that I would have an answer to the question that I first tabled on 16 April and retabled on 30 April. On three occasions on the Floor of the House, I have asked why I had not received a reply. Perhaps, by leave of the House, I may be able to respond at the end of the debate, by which time I may be able to read the parliamentary answer giving us the information that we require. That information is by what amount our constituents will lose out by the abolition of the 10p standard rate of tax, and how many of them and which groups will be affected.

Let me declare an interest: I favour the abolition of the 10p rate of tax. I believe that most of our constituents think about a headline rate, and that is the standard rate. Any move that brings the standard rate down is welcome to me. Indeed, long before I came to the House, I was advocating the abolition of tax allowances so that we could get the standard rate down even further than it has fallen today and is proposed in the Budget.

It is clear from our postbags around the country that three groups stand to lose from the change, and they may not be covered by the tax credits changes that have already been announced and the child benefit changes that might be announced next year. The first group is lower-income households that will see their tax burden increase as a result of the abolition of the 10p rate, while those on higher incomes see their tax take fall. One person put it in powerful terms in their letter to me by saying that they never thought that they would see a Labour Chancellor of the Exchequer redistributing from poorer to richer households. As to the numbers that are affected, I hope, as I said, to read the parliamentary answer in a moment.

Secondly, a number of voters around the country have said that, although their husbands will benefit from cuts in the standard rate, they will lose income through the abolition of the 10p rate because they are viewed in traditional terms as the minor earners in the household, although most such households would not survive without their two earners. My hon. Friend Rob Marris mentioned the third group—this is the first time we have raised the matter in the House—which is people who have retired early, largely because of ill health, and who do not gain the advantages of the additional tax allowances that people gain once they reach the standard retirement age. It could be argued that the change in the tax rates will be offset in that way.

The new clause therefore says that, before the House of Commons considers measures that affect our constituents' living standards, particularly where we are decreasing them, the Government should give us the information as part of the Budget, so that we know the numbers and the extent to which that cut in income is taking place. We know that the measures before us will affect some people who will lose out in relation to the 10p rate. I am not sure how many, but I am hoping that that will be revealed.

J

The written question he's looking at is here:

http://www.theyworkforyou.com/wrans/?id=2007-06-25e.131114.h

Submitted by Julian Todd

Photo of Stewart Hosie Stewart Hosie Shadow Spokesperson (Women), Shadow Spokesperson (Home Affairs), Shadow Spokesperson (Treasury)

I know that the right hon. Gentleman is expecting a formal answer from the Minister, and I hope that he gets one. The calculations that we have say that 836,000 people in Scotland will suffer because of the change. He might like to consider the UK figure as somewhere between 8 million and 9 million people, which is a huge number. Specifically, 52 per cent. of the workers in Kirkcaldy and Cowdenbeath, who earn less than £17,000 would be worse off. I am sure that that figure may be replicated in similar constituencies around the country.

Photo of Frank Field Frank Field Labour, Birkenhead

That contribution was valuable not only because of the point that was made, but because it gave me a chance to read the parliamentary answer, so I shall read the heart of the mystery into the record before I sit down.

The next part of the new clause is supported on other Benches. Some people try to get ex-leaders of the Liberal party to join their cause; my attempts were more modest, but I hope more effective in engaging the two Liberal Democrats on the Front Bench, the hon. Members for Falmouth and Camborne (Julia Goldsworthy) and for Twickenham (Dr. Cable). We should have a guarantee that, before the proposed measures came into effect with the next Finance Bill, some transitional form of relief would be announced for people who were going to lose money.

After a first reading of the parliamentary answer—I am well aware of what the question was—we know that 31 million taxpayers have benefited from the 10p standard rate of tax, and that some 28 million of them stand to gain as a result of the 20p rate. That means that 3 million people will lose out—31 million minus 28 million—but the written answer may contain further details.

Photo of Frank Field Frank Field Labour, Birkenhead

I will happily give way to my hon. Friend, which will allow me to read the next paragraph.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West 9:00, 25 June 2007

First, I think that my right hon. Friend must deduct pensioners who would gain through increases in personal allowances for pensions from that 3 million. Secondly, a fourth category in addition to the three that he delineated is women aged between 60 and 65 on modest incomes, who will lose out through the abolition of the 10p rate, but who will not gain through the rise in personal tax allowances, because they are not yet 65.

Photo of Frank Field Frank Field Labour, Birkenhead

I willingly add that fourth group who will lose out because of the measure.

The second paragraph of the written answer states that

"four in five households will be better off or see no change in household income".

That means that one in five households will lose out. The person who kindly gave me this answer is right to say that the final number will depend on whether people are claiming tax credits, whether there are changes in the national minimum wage and whether there are changes to child benefits.

The truth is that, as we allow the Finance Bill to proceed tonight, four out of five households will benefit, but one in five will not, and the one in five are among our poorest constituents who work. I think it shameful that the Government have run away from giving us that information since the middle of April. Unless I am wrong and the Chief Secretary has some different news, we are not prepared to introduce transitional relief to protect a group who are doing everything that the Government have asked them to do, which is to work, to work harder and to maintain their families. Those households are the backbone of this country, and I do not believe that we should kick them.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

The Opposition welcome the opportunity to debate the impact of tax changes on different income decile groups. New clause 14 is a constructive contribution to that important debate and we sympathise with the sentiment that underlies it. It is, of course, vital for any Chancellor to carry out a proper and effective empirical assessment of the impact of proposed tax changes, and I shall explain why I believe that that is particularly important in relation to those on low incomes—Mr. Field has already stated many of the reasons.

We understand the arguments in favour of using transitional measures, where appropriate, to ease the hardship that tax rises can cause. However, it is with regret that I say that, although we will not vote against new clause 14, we cannot support it this evening, because we are concerned how it would work in practice were it actually to be written into legislation. For example, we have some concerns about how feasible it is always to assess the changes in the relative share of national wealth. That assessment would not be easy, because it would be difficult to find the data. Unlike the case of income, there is no obligation to report one's wealth to the Inland Revenue.

We also have some concerns about the idea that all tax measures that fall within the scope of the new clause must be phased over a reasonable period, because importing that obligation into statute as a general rule might be too inflexible. As I will discuss—no doubt the Chief Secretary will discuss this, too—the Government could take a number of different measures to mitigate the impact of a tax change, which might involve phasing in a measure or using the benefits system. Indeed, it is important that we debate the use of tax credits in that context.

Furthermore, I fear that the new clause might mean that almost all tax changes would have to be subjected to phased implementation, and while such measures would certainly be justifiable and welcome in some contexts, we hesitate to impose a blanket obligation in all cases. We also believe that the underlying issues raised by the new clause—the importance of moving to greater transparency and objectivity in tax policy—are so important as to merit further detailed consideration before we could make a commitment to a proposal such as this. That is one reason why the shadow Chancellor asked my noble Friend Lord Howe a few months ago to investigate how we might implement some of our independent tax reform commission's proposals for improving the way in which we make and scrutinise tax law.

Photo of Frank Field Frank Field Labour, Birkenhead

At Easter, the hon. Lady could be cast in the role of Pontius Pilate without any difficulties given the hand-washing that is being done. For those of our constituents—she will have some—who will be made worse off by this measure, what changes do the Opposition propose to protect their very modest standard of living?

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

One of the best changes would be a change of Government. I emphasise that we believe that putting pressure on the Treasury to carry out the sort of analysis referred to in the new clause would make a significant contribution not only to improving the quality of our tax law but to enhancing and improving the fairness of future Budgets, and dealing with some of the grave concerns that the right hon. Gentleman raises. We believe that the sort of analysis provided for in the clause would help to ground Budget decisions on empirical evidence and reduce the opportunity to use them for cynical political tricks.

As we have stated repeatedly in the Budget debate, on Second Reading and in Committee, we are concerned about the impact of the Chancellor's Budget on those on low incomes. As the right hon. Member for Birkenhead pointed out today, and as the shadow Chancellor pointed out in his speech in the Budget debate, the abolition of the 10p band amounts to a shift in the tax burden from those on middle incomes to those on low incomes.

We have heard that one in five households will be worse off as a result of the Budget—5.3 million families—and many of those will be people on low incomes hit hard by the loss of the 10p band. Some of the people worst hit by the changes will be those on wages of between £5,225 and £18,000. The right hon. Gentleman is right that I have many of those in my constituency who are concerned about the changes—cleaners, nurses, shop assistants and catering workers, not millionaire executives.

In giving evidence to the Treasury Committee in March, Robert Chote of the Institute for Fiscal Studies set out a number of groups of people who will lose out, several of which have been mentioned this evening, but it is worth going through them in turn. According to Mr. Chote, 2.2 million of those losing out are single working people with no children who are not getting the working tax credit because they earn more than £12,500 but less than £18,000, or because they work fewer than 30 hours, or because they are too young. He states that 1.2 million are two-earner couples with no children. They may not qualify for the working tax credit or they may fail to take it up. They may also be in the position where the two earners both lose under the income tax and national insurance changes, but there is only one gain from the tax credit, which is assessed per household. A couple both earning £7,445 would suffer the maximum loss of £446.

Mr. Chote states that 400,000 are one-earner couples without children, most of them because they will be in an income range of about £17,000 to £18,5000 where they are not compensated by tax credits. There are 700,000 two-earner couples with children who lose twice from the income tax and national insurance changes, but gain only once from child tax credit or working tax credit.

Rob Marris adverted to the point that 300,000 of these people are tax-paying women between the ages of 60 and 64 who do not get tax credits and are too young to be compensated by the rise in the pensioner tax allowance. A further 500,000 are non-workers who are early retirees or who are on incapacity benefit.

In making an effective assessment of the impact of tax changes on different income decile groups as provided for by new clause 14, it is critical that the Chancellor take into account the wider economic picture. The hardship caused by tax increases is clearly more keenly felt when families feel that their household budget is already under strain. With inflation hitting a 16-year high earlier this year, many families on lower incomes are struggling to make ends meet. Last year, inflation was almost double the EU average, and disposable incomes rose at the slowest rate for nearly a quarter of a century. Two weeks ago, the Office for National Statistics announced that, for the sixth month in a row, regular pay failed to keep pace with inflation and real living standards fell again.

The Council of Mortgage Lenders also recently reported that home owners are suffering the highest mortgage burden for 15 years and that further rate rises could be on the cards. Personal debt now stands at a staggering £1.3 trillion in Britain, and problem debt is worsening by the day. All these factors should be taken into account before the Chancellor imposes tax increases on Britain's hard-working families.

Photo of Stewart Hosie Stewart Hosie Shadow Spokesperson (Women), Shadow Spokesperson (Home Affairs), Shadow Spokesperson (Treasury)

I thank the hon. Lady for reading into the record the entire list of categories of people who are suffering, and for her subsequent comments. I believe that one of the worst factors in this is the fact that the unclaimed working tax credit for those who are entitled to it amounted to about £5 billion last year. She will correct me if I am wrong. Does she agree that that merely exacerbates the problem and makes it far worse than it ought to be, and that it is a failure that is purely in the hands of the Government?

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

The hon. Gentleman makes a strong point, and I shall come to that issue. If the Government are relying on tax credits to soften the blow of the abolition of the 10p band, they must do something to improve the way in which the system works and to raise take-up rates. That is critical if we are not to see the hardship caused by the Budget becoming really significant.

In making changes to tax rates and assessing their impact on different income groups, the Chancellor should bear in mind the pattern of poverty in 21st century Britain. According to the Institute for Fiscal Studies, poverty among adults without dependent children—a group significantly affected by the tax changes in the Budget—is now at its highest point since records began in 1961. That group now makes up one third of the total of Britain's poor.

A number of deeply worrying points emerged from the most recent Department for Work and Pensions figures on poverty, covering the period between 2004-05 and 2005-06. These were analysed by the IFS and show that relative poverty and income inequality actually got worse last year. The number of people in relative poverty rose from 12.1 million to 12.8 million.

A range of measures demonstrates the recent increase in inequality of income. The most commonly used measurement, the Gini coefficient, tells us that income inequality has increased in total during the Chancellor's 10 years at No. 11 Downing street. The DWP figures also show that the number of people living in absolute poverty rose by 400,000 to 7.4 million—12.6 per cent. of the population—last year. There are more people in deep poverty now than when the Chancellor entered Downing street. There are 600,000 more people on less than 40 per cent. of median income now than there were in 1997, and the poor are getting poorer. Recent Government data show that the real incomes of the poorest 20 per cent. actually fell last year.

Many people—not just those on this side of the House—have expressed concern about this state of affairs and about the impact of the Budget on tackling poverty. The right hon. Member for Birkenhead today repeated his concerns about the impact of the Budget on those on low incomes, but he was not alone among his Labour colleagues in expressing anxiety. As Lynne Jones acknowledged, the Budget neglected poorer people who have no children. Mr. Robinson has pointed out that the Budget is hurting many people whom the Government never set out to hurt, and Mr. Milburn admitted in the Budget debate last year that, under Labour,

"poverty has become more entrenched."—[ Hansard, 28 March 2006; Vol. 444, c. 710.]

Turning to the point raised by Stewart Hosie, in assessing the impact of tax changes on different decile groups, it is critical to look at the marginal rates of taxation that they face, as they have a significant impact on incentives to work and to emerge from benefit dependency. Mike Warburton of Grant Thornton said after the Budget:

"Families on low incomes will really lose out because they will pay a marginal rate of tax at 70 per cent. starting from an earlier point."

With the abolition of the 10p band and the increase in the tax credit withdrawal rate, the Budget leaves many low-income families with marginal tax rates of even more than 70 per cent., as their benefits are withdrawn with each extra pound they earn. Of course, such rates make it much harder to escape the poverty trap.

In conducting an assessment of this issue in relation to different income groups, the Chancellor must take into account the interaction with the tax credit system. To return to the point made in an intervention by the right hon. Member for Birkenhead, one of the ways in which we can help those who are hit hard by the Budget is to get the tax credit system to work effectively, and to reform it so that we grapple with the chaos that has characterised it over the past couple of years. As Francesca Largerberg of the Institute of Chartered Accountants said after the Budget:

"It is now seemingly necessary for those with incomes between £5,225 and £18,605 to get to grips with the tax credit system and claim in order to negate their losses."

Both the Chancellor and the Chief Secretary have defended the abolition of the 10p band on the ground that tax credits will compensate some of the families affected. As I have set out, however, not everyone qualifies for tax credits, and as we heard from the hon. Member for Dundee, East, not everyone claims them. As Ms Largerberg went on to explain:

"Tax credits may in some cases claw back lost income but they are often difficult to claim and some lower earners may not be eligible".

The figures for the uptake of working tax credit among childless households—as we have established, a group significantly affected by the loss of the 10p band—are as low as 25 per cent. of the total entitlement and only 19 per cent. of eligible claimants. If the effect of a tax increase is to push more people into the tax credit system, one must assess the way in which the system is working to analyse properly the impact of the change proposed. The latest available figures show a depressing picture. Of 5 million payments made, more than 2 million were overpaid and almost 1 million were underpaid, which means that more than half the payments in the system were wrong. At least £200 million has been lost through fraud. The tax credit website had to be taken offline because of wholesale attack by fraudsters.

As the Chief Secretary will be well aware, every MP has had constituents coming to advice surgeries to explain their desperate problems with huge bills for overpayment that they simply cannot afford to meet. The former Secretary of State for Work and Pensions, Mr. Blunkett said:

"The tax credit system is a shambles—such a shambles that I've had to help out one of my constituents financially, only the second time that I ever have done this, and the first was for a child. I don't know if I will get the money back. I suppose it is a foolish thing to do, and it has to be on the pain of death that they don't tell people. But what else can you do when the tax credit system is such a total mess?"

Sir John Bourn, the Comptroller and Auditor General, said:

"People have been helped, but why do that in a way which causes such misery? And we've spent far more than necessary because we've had to write off the hundreds of millions of pounds we simply can't get back."

The right hon. Member for Birkenhead has said:

"Tax credits are clearly the bluntest of anti-poverty weapons and are the equivalent of attempting delicate key hole surgery with a hacksaw."

To conclude, it is regrettable that the Chancellor has taken so long to answer the questions tabled by the right hon. Member for Birkenhead regarding how his Budget has impacted on different groups. That is further proof that the kind of serious and thoughtful assessment of the impact of tax rises on different income deciles envisaged by new clause 14 was very far from the Chancellor's mind in preparing his Budget. He was so desperate to grab the headlines with his basic rate tax cut con that he was prepared to do anything to achieve it, even if that meant hardship for people grappling with poverty, low incomes, falling living standards, problem debt and rising interest rates. Because he wanted to pull a fast one during the Budget debate, the 10p band had to go.

Of all the critical comment that followed the Budget debate, that of a former Member of this House, Michael Portillo, writing in The Sunday Times about the closing seconds of the Chancellor's Budget speech, summed up the position most effectively:

"30 seconds of theatre...had made poorer all those on low incomes who pay tax only or mainly at 10 per cent. Some will be compensated with tax credits, but not all. The chancellor cannot explain why he once thought that the lowest earners needed protection...but now has changed his mind. Those at the bottom of the pile have been sacrificed for the sake of a quick laugh. Politics, it seems, is but a game played with people's lives. It is astonishing that a chancellor who has worked with some success to redistribute income has, in his last budget, penalised the poorest but rewarded higher rate taxpayers."

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West 9:15, 25 June 2007

We need to put this very important debate in context. Mrs. Villiers did that a bit, although somewhat grudgingly, and she gave some useful figures. However, it needs to be put in the context of what the Government have done in 10 years to address poverty. On pensioner poverty, they have introduced the winter fuel allowance, the minimum income guarantee and the pension credit. Pensioner poverty has come down a lot. There are problems with take-up and so on, but the Government have addressed the situation of older people.

Photo of David Taylor David Taylor Labour, North West Leicestershire

Has my hon. Friend seen the report by the Chartered Institute of Taxation which calls for tax reform for older people on low incomes, not least because face-to-face advice in tax offices and inquiry centres is being withdrawn, home visits to the elderly and disabled are disappearing, and paper forms are disappearing in favour of the telephone and the internet, which many older people find difficult to use? How can they get their tax right in the fluid situation that we are discussing? Does he accept that there is a problem?

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

While I do not want to go too far down that path, I agree that there may be difficulties for some pensioners, although one has to be careful not to aggregate all pensioners together. For example, almost 90 per cent. of pensioners over the age of 85 have a bank account, despite all the talk about the Department for Work and Pensions and the Post Office card account. However, one has to make special arrangements for vulnerable pensioners, and the Government have tried to do that.

In terms of family poverty, we have had tax credits, and child benefit has gone up substantially, especially for the first child. The minimum wage has done a lot to address poverty and family poverty in particular. Above all, we have 2.5 million more jobs.

The point that has not been made about new clause 14 is that the proposals would take effect from April 2008. They are not in this Finance Bill. That gives us a chance to pause for reflection and to consider the figures that have been mentioned. It is vital that we get more clarity from the Government on those. According to table A1 on page 208 of the Red Book, the drop from 22 to 20 per cent. in the basic rate of income tax will cost the Treasury £8 billion in 2008-09, the first year it is due to come in. However, the cost to the taxpayer of abolishing the starting rate of 10p in the £1 in tax year 2008-09 will be £7.3 billion.

I am not an accountant, but my reckoning is that every hon. Member will benefit from that. We are all higher-rate taxpayers, and they are much less than 10 per cent. of the working population in this country. We can all declare an interest in the 10, 20 and 22 per cent. rate, but intuitively the change says to me that there is a shift in the wrong direction, which is why I want more figures. Depending on those figures, my right hon. Friend Mr. Field may have a point about transitional relief, but it is difficult for him—he has not suggested otherwise—and the rest of us to know about transitional relief until we know what we are transitioning from. We have not yet got clarity on the figures.

I happen to think that we will get those figures well before next April, which is when the transition is due to take place, and we can have a look at them then. For that reason, I would not support my right hon. Friend were he to press the new clause to a vote, although I understand the spirit of it. I am confident—perhaps naively—that we will get the figures. I urge the Government to produce more figures, and I hope that my right hon. Friend the Chief Secretary will do so. Depending on those, the Government might need to reconsider the matter. That is my initial reaction to the debate in the press, the Chamber and Parliament on the effect of abolishing the starting rate and the corresponding cut in the basic rate of income tax.

It may well be that when the Government have had another look at the issue and we have fuller figures, those of us—I count myself as one of them—who are loyal Back-Bench MPs by and large, but who are uneasy about the direction of the change, may have our fears stilled. At the moment, however, without that information, we still have those fears.

Photo of Julia Goldsworthy Julia Goldsworthy Shadow Chief Secretary To the Treasury, Treasury

The loyalty of Rob Marris is being stretched so far that he is having to justify his intention to vote against the new clause on the basis that we need more information and we have another nine months in which to get it, but that is a weak argument. These tax changes were the centrepiece of the Chancellor's last Budget. Does it matter when they will be implemented? In the closing sentence of the Budget, the Chancellor said that

"to reward work, to ensure working families are better off and to make the tax system fairer, I will from next April cut the basic rate of income tax from 22p to 20p".

From the debates on Second Reading, in Committee and now on Report, it is clear that, for many people in work and families, the Budget will not make the tax system fairer. People paying a higher rate of tax will benefit, and we are not sure why that will make the tax system fairer.

If the information had been made available at the point at which the Chancellor made that announcement— in the Red Book, which also gave details of how the decisions would interact with each other—everyone would have been able to make a fair assessment. The reality is that after the Chancellor sat down no one had any idea how the cut in the basic rate of taxation would be funded until, after leafing as rapidly as they could through the Red Book, they discovered that it was through the abolition of the 10p rate, a decision referred to by the Chancellor with the words:

"With the other decisions I have made today, we are able to hold to our pledge made at the election not to raise the basic rate of income tax."—[ Hansard, 21 March 2007; Vol. 458, c. 828.]

It is ludicrous that such comments can be made, but it is so difficult to find the information about how that will be funded, let alone the impact that it will have on many households.

Other hon. Members have spoken about the groups of people who will be affected. In particular, they have mentioned those on very low incomes, those who work part time—perhaps many of them will be women—couples with no children and a particular group of pensioners. Another group is those aged under 25 who are on low incomes, because they do not qualify for working tax credits. For those people, the tax system will not reward their work, ensure that they are better off or become fairer for them. On the surface the changes look attractive, but there is a lot going on underneath and it is not clear how it will all interact.

Mrs. Villiers made some good points about the statistics and bombarded the House with useful information. This is outrageous, and Mr. Field is being very reasonable in his new clause. All he is saying is that we should be upfront about matters. The differential impact on different groups of taxpayers should be made clear at the point at which the announcements are made. Tribute must be paid to the right hon. Gentleman for teasing out much of the information in the Budget debate and during the progress of the Bill.

If the Minister is not prepared to accept the new clause, I wonder whether he would consider an alternative way of pursuing the matter. The Statistics and Registration Service Bill will come back before us in the near future, and perhaps the national statistician might be able to call in the issue and for the information to be made available as a national statistic.

We have a sense of the impact that the changes will have, and much of that is thanks to the work of the Institute for Fiscal Studies, whose response to the Budget provided a lot of information. I do not see any reason why the Treasury could not undertake that work in advance and publish at the same time as the Budget. Some very compelling arguments have been made. It is crucial that the information is made available at the time that the changes are announced, instead of when they are implemented.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury 9:30, 25 June 2007

I welcome this debate, and all hon. Members will understand the motivation and thinking behind the new clause moved with characteristic conviction by my right hon. Friend Mr. Field. However, I hope that I can persuade the House that the proposal is impractical and that, if we are to assess the impact of personal tax changes on a group of taxpayers, we need to do so over a period longer than that covered by a single Budget.

It is worth reflecting on what this year's Budget package will achieve. There will be a significant simplification of the income tax system, which my right hon. Friend has welcomed, and the reduction in the basic rate to 20p. A further 200,000 children will be taken out of poverty, on top of the 600,000 helped in that way by previous measures. More than 500,000 pensioners will be taken out of tax entirely, and the biggest proportionate gains from the Budget tax package will go to those in the lowest two deciles of income.

That latter fact is something that I want to emphasise, especially in light of the observations made by my hon. Friend Rob Marris, and it is made clear in the analysis presented by the Institute for Fiscal Studies to which a number of speakers have referred. That analysis is still available on the IFS website, and I was checking it out earlier today. It is a very striking attribute of the Budget that the biggest proportionate gains go to the households on the lowest incomes.

Photo of Julia Goldsworthy Julia Goldsworthy Shadow Chief Secretary To the Treasury, Treasury

Does that take into account people claiming their entitlement to tax credits? One problem is that some people are too young to claim tax credits, and another is that many people simply do not do so.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

In fact, the analysis does take that into account. I refer the hon. Lady to the slide in the Budget analysis on the IFS website that sets out the relevant figures. The slide shows two bars for each decile—one on the assumption of 100 per cent. take-up, and the other on the assumption of 33 per cent. take-up of tax credits by childless families. The statement that I have made about where the biggest proportionate gains fall applies in both those cases.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

I understand that Treasury officials acknowledged to the Treasury Committee that their figures were based on the assumption that the take-up of working tax credits would amount to only 25 per cent. That does not give one a lot of confidence in the system's effectiveness.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

That depends on the figures to which the hon. Lady is referring. I am not sure which they are, but later in my remarks I will deal with the take-up of tax credits. That is an important matter, but the take-up of tax credit for family income support is much greater than under any previous system that we have had in the UK.

Photo of Stewart Hosie Stewart Hosie Shadow Spokesperson (Women), Shadow Spokesperson (Home Affairs), Shadow Spokesperson (Treasury)

At this early stage in his remarks, will the Chief Secretary confirm that the take-up of family tax credits is at around 80 per cent. but that, according to the most recent report, unclaimed working tax credits amounted to £5 billion last year? Does he agree that the take-up rate for working tax credits was about 60 per cent?

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

I can confirm that the take-up of tax credits among the lowest-income families is well above 90 per cent. I do not know the basis for the figure quoted by the hon. Gentleman, but the take-up is very high among those who need the greatest support. It is certainly much higher than that achieved under any previous system of family income support.

Overall, the fiscally neutral Budget represents a £2.5 billion reduction in personal tax—that is, tax plus tax credits. The director of the IFS said:

"To reform the system in a useful way within tight financial constraints and with only modest gains and losses should be a cause for congratulation."

It is important that the House recognise the significance of the achievements secured by the Budget package.

This Budget builds on the progress made in earlier Budgets. There has been some discussion, rightly and fairly, of the position of pensioners. This year, the Government are spending in real terms about £11.5 billion more on pensioners than if we had left the system as it was in 1997, and nearly half that extra spending—more than £5 billion—is going to the least well-off third of pensioners. On average, they are £2,300 a year or £44 a week better off. Other groups in the taxpayer population referred to in the debate have benefited from other changes. We need to make a full assessment of the effects on people of changes introduced over a period rather than insisting on the basis of one year's tax changes that there should be transitional protection.

The Budget package forms the next stage in a programme to offer more support for work, for families and for pensioners. It includes eight separate reforms and the House will have the opportunity to debate each as they are put into legislation over the next two years. When the package is fully implemented, 6 million families with children will be better off and the gain to work will rise by £50 a year for many, up to £350 a year for some, helping to work make pay. The package reduces and simplifies personal taxation within a fiscally neutral Budget, protecting and boosting the incomes of vulnerable groups, with the number of losers minimised. I am not saying that there are none, but the number has effectively been minimised.

The new clause would require transitional relief measures so that any adverse effects of personal tax measures are phased in over a period. That would not be the right thing to do for two reasons. The first is complexity—I know that my right hon. Friend the Member for Birkenhead is sensitive about that point. Income tax is paid by more than 30 million people —I think my right hon. Friend said 31 million. Transitional, and thus temporary, changes would add significant complexity to a system that is central to Government finances and to the maintenance of strong public services.

The impact of the proposal would depend on the form taken by the transitional measures. My right hon. Friend and I had a brief conversation about one model, which is, if I understood it rightly, that taxpayers could choose whether they were taxed on the basis of the new system or the old. I think he realised that would be an extremely complex system to administer and that it would impose a large burden on employers as well as on Revenue and Customs. In debating the new clause, I am in some difficulty, because I am not sure what kind of transitional measures we are talking about. The only ones I can think of, which my right hon. Friend and I briefly discussed, would be impractical. Indeed, it would be impossible to implement such a dual system in time for next year.

Photo of Frank Field Frank Field Labour, Birkenhead

My right hon. Friend says that he is in some difficulty because he does not understand the nature of transitional relief, but we are still waiting for him to give us a proper breakdown of who benefits and who loses. His difficulties are nowhere near as great as ours in trying to understand the Government's position.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

The point I was making is that I do not think that there are any practical transitional measures that we could adopt. If the House were to legislate, there would have to be transitional relief measures. We would need to have some idea that a practical package were available for us to implement and I do not think there is one.

I apologise to my right hon. Friend for the fact that it has taken so long to answer his question about numbers. I am pleased and relieved that he has the information, which I hope is helpful. Other analysis is available, including that undertaken by the Institute for Fiscal Studies, to which reference has been made.

My right hon. Friend is particularly well informed about pensions, so he will recognise that one of the major reasons why the UK has such a complex pension system is that it contains so many transitional measures to maintain old arrangements phased out in the past. It would be a mistake to introduce similar arrangements in the tax system.

The elements of the personal tax package in the Budget were designed to ensure that, overall, low income groups were effectively protected, and the IFS analysis confirms that they have been. For example, a single-earner couple without children—to pick up on one of the points that was made earlier—on half median earnings receiving working tax credit will be £175 a year better off as a result of the Budget. That is right in the middle of the band that was mentioned. A lone parent, with one child, working full time at the minimum wage will be £335 a year better off. If we all agree—I think that on the whole we do—that it is right to prioritise the reduction and ultimately the eradication of child poverty, we need to prioritise households with children in Budget measures. That is what the package in the Budget does.

I hope that I have managed to persuade the House that it would not be right automatically to require transitional measures for any changes that left a particular group of taxpayers disadvantaged, however slightly—which is what the new clause would do. As far as I can see, where losses accrue to some as a result of the changes, they are small.

Photo of Julia Goldsworthy Julia Goldsworthy Shadow Chief Secretary To the Treasury, Treasury

I am listening carefully to what the right hon. Gentleman is saying about transitional arrangements, but is he able to say whether the Treasury will undertake to publish information at the time of the Budget on the effect of the measures on individuals, as well as information on how their incomes may have changed over time? That would enable us to see clearly, in one place, the impact of Budget measures on different income groups.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

Information has already been published. I point the hon. Lady to the IFS analysis for the sort of detail that she is asking for. That shows that the biggest proportionate gains from the package will be enjoyed by households in the lowest two income deciles. That is an important feature of the package.

I hope that I have persuaded the House that it would not be right to agree to the new clause. I understand the concerns expressed by my right hon. Friend the Member for Birkenhead and others across the House, but they are effectively addressed by the tax credit changes that are part of the package as well. I hope that he feels that it would not be right to press the new clause to a vote, but, if he does press it, I will certainly ask my hon. Friends not to support it.

Photo of Frank Field Frank Field Labour, Birkenhead

I thank my right hon. Friend for those comments. The thrust of his remarks was that we have not put forward a workable scheme for transitional relief, but it was only seconds before I came into the Chamber that we got the crudest information on the numbers who would be gainers and the numbers—the 3 million—who would be losers, so it is a bit rich of him to say that we might have persuaded him had we come up with a workable scheme. For some reason or other, the information was not available. We could have looked at those data and come up with a workable scheme.

I want to make two comments: one to my side and one to the Opposition. What the Chief Secretary said was significant. He said that households in the lowest two deciles are the big gainers from the Budget. Since Lord Lawson introduced personal taxation, we have never been primarily concerned with household income; we have been concerned with individual income. On this side of the House, we were particularly keen on that, because we wished to see a transfer from wallet to purse wherever possible. If the Bill goes through as it stands, it will reverse the tradition that we started. It will move moneys from low-paid women's purses into the wallets of higher-paid husbands. For that reason alone, people on this side of the House ought to be disturbed. I am sorry that there are not more women Members present to support that group in the debate and then in the Lobby.

Had it not been for the speech made by Mrs. Villiers, I would have said that my right hon. Friend the Chief Secretary took the biscuit. We were told by the official Opposition that while the new clause addressed a serious problem, they would not vote on the matter. The hon. Lady said that we could rely on the tax credit system to compensate people who will lose out—we do not know who they are, but we know that there will be 3 million of them. The official Opposition have rightly secured debates and asked questions on tax credits. This evening, the hon. Lady said that one in two payments were wrong. However, although the tax credit system works so badly, she thinks that the lowest paid of our tax-paying constituents will be protected.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury 9:45, 25 June 2007

The right hon. Gentleman must have misunderstood the point that I made. As I made clear in my speech, I strongly believe that the tax credit system will not solve all the problems produced by the Budget changes. However, a range of measures could be used to relieve hardship resulting from tax changes. We should not just phase in changes because there are other options to be considered.

Photo of Frank Field Frank Field Labour, Birkenhead

There clearly are. People will draw their own conclusions from the contributions made in the debate.

I did not think that the answers given from the Treasury Bench were adequate. My right hon. Friend the Chief Secretary is probably the most gifted member of the Treasury team and he knows that his performance was below par. I hope that many hon. Members will join us in the Lobby.

Question put, That the clause be read a Second time:—

The House divided: Ayes 67, Noes 269.

Division number 151 Orders of the Day — New Clause 14 — Assessment of effects of taxation changes on different earnings groups

Aye: 67 MPs

No: 269 MPs

Aye: A-Z by last name

Tellers

No: A-Z by last name

Tellers

Question accordingly negatived.