Mr George Osborne (Tatton, Conservative)

I beg to move amendment No. 179, in

clause 9, page 5, line 3, at end insert—

'(2A) Regulations under subsection (2) may prescribe a supplementary contribution of nil.'.

Mr David Amess (Southend West, Conservative)

With this it will be convenient to discuss amendment No. 125, in

clause 9, page 5, line 13, leave out from 'date' to end of line 17.

Mr George Osborne (Tatton, Conservative)

I shall deal first with amendment No. 125, which is the less important of the two and would omit subsection (5)(b). The clause establishes the eligibility for the supplementary contribution, which will be linked to receipt of child tax credit. That is spelt out in subsection (5)(a) which states that the condition is

''that a person was, or persons were, entitled to child tax credit in respect of the child for the child benefit commencement date''.

I do not understand the point of the second condition and amendment No. 125 is a probing amendment. The second condition seems to be that the household does not exceed the income threshold for child tax credit, or that a member of the household was receiving either income support or income-based jobseeker's allowance. Perhaps the Minister could explain why that is necessary; perhaps I am missing something obvious. If the household income does not exceed the income threshold for child tax credit, surely the household is in receipt of that benefit, thus satisfying the condition in subsection 5(a).

Amendment No. 179 is more fundamental. Although I do not propose to press it to a vote, I tabled it in an attempt to debate means-testing and the means-tested supplementary contribution. My amendment says that the supplementary contribution could be zero. The Minister boasts that one of the

great virtues of child trust funds is that this is both a universal and progressive policy. She calls it progressive universalism, which will definitely go in my lexicon of new Labour phrases.

Mr Andrew Love (Edmonton, Labour/Co-operative)

It is good, isn't it?

Mr George Osborne (Tatton, Conservative)

Yes. It could go the other way round and become universal progressivism. Whatever it means, it is contradictory and we have a means-tested welfare benefit.

The advantages of a means-tested supplementary contribution are obvious—no doubt the Minister will put those with greater force and passion than I. A strong argument could be made for directing a little bit extra into the child trust funds of the third of children from the poorer families who are receiving child tax credit. That sum is £250 at birth, and perhaps an extra £50 at seven years old. We debated that earlier. However, even on the Government's estimates, that supplement will not add up to a huge amount over the course of a child trust fund. It is clear, if one considers table 3.1 of the White Paper, that better-off children receiving a £250 initial contribution will have £456 at the end of their 18 years, whereas after the same period, with the £500 supplementary contribution, a child will have £911. There is a £455 difference. I am not saying that that is not a tidy sum of money, but it is likely to be completely swamped by the difference between accounts where parents and relatives have contributed to the funds and those where they have not.

Even if a relative or a family is putting £10 a month in a child trust fund, it will be worth £3,941, which is far more than the £456 or the £911. Indeed, if parents contribute the maximum amount, which many will, the child will have £35,000 when they are 18. The supplementary contribution will not make a huge difference or level the playing field. As I argued on Second Reading, that is likely to mean that this measure will increase wealth inequality in our society. Although I do not have a philosophical objection to that, perhaps many Labour MPs do. They should be under no illusion: as a result of this policy, children from better-off families will have much larger sums at 18 than those from less well-off families. The means-tested supplementary contribution would have to be much greater than £250 to overcome that.

Mr David Laws (Yeovil, Liberal Democrat)

Did the hon. Gentleman say that he has no objection to Government policies that increase the inequality of wealth in society?

Mr George Osborne (Tatton, Conservative)

Yes; nor have the Government, otherwise they would not have introduced them.

In return for the questionable benefits of the supplementary contribution, there are all the disadvantages of means-testing, which are familiar to everyone. First, there are the anomalies. The child from a family whose income is £13,230 receives the voucher for £250, whereas the child from a family with an income of £13,231—£1 above the child tax credit—receives zero. Such anomalies are inherent in means-testing. This is not a means-tested benefit with a taper of any kind, but a straightforward policy with a single cut-off point. There is the confusion and intrusion that arise from the means-testing web, which again we are

all familiar with as constituency MPs. Indeed, there are added complications, because, according to the Treasury document, the supplementary contribution will be paid only when someone's child tax credit award is finalised at the end of the tax year in which the child is born. I would argue that it is an intrinsic problem with tax credits, but it is certainly an intrinsic problem with linking the award to a tax credit.

The Treasury document makes it clear that

''A CTC award can only be finalised after the end of the relevant tax year when the parent(s) can provide evidence of their income in that year. The additional endowment will be paid once the CTC award has been finalised. For most households the position will be finalised in the months immediately following the end of the tax year but for some this could be up to 18 months after the child first becomes eligible for a CTF account; for example because the parents are self employed and it takes longer for them to confirm their income in a particular tax year.''

In other words, if a child is born on 7 April, the parents will have to wait for up to a year for the supplementary contribution and, I assume, will lose the interest that they could have earned on that contribution over the year. The Minister said in an earlier debate that a month was quite important in the scheme of this policy; yet this device will deprive people of the benefits of a supplementary contribution for up to a year. I wonder whether table 3.1 takes that into account and whether the £911 is over 18 years or over 17 years, as it may be in some cases.

Then there is the philosophical objection to means-testing, which I shall not explore at great length. Nevertheless, we shall be exposing a third of children to means-testing at birth and telling them that they are poorer than the two-thirds of children who do not receive the supplementary contribution. In case Labour Members think that that is a Tory point, it was a point made to me by the Child Poverty Action Group and other parts of the poverty lobby. They said that when child trust funds are discussed in classrooms everyone will see whose parents are rich and whose are poor, whose parents got the supplementary contribution and whose did not, whose parents are making additional contributions into their child trust fund and whose are not. Certainly the CPAG was concerned that child trust funds could add to the stigma of poverty, and means-testing makes that worse, for limited financial gains.

A back-of-the-envelope sum says that if all children got an equal sum of money—in other words, if there was no supplementary contribution—and the pot of money stayed the same, every child would get a voucher for above £333. Therefore, the supplementary payout that we are talking about is not £250 but £166 more than if there was no supplementary contribution, so it is even less of a benefit than we are led to believe. The point of the amendment is to question whether a means-tested society that will now literally extend from cradle to grave is a price worth paying for an extra payment of £166.

Ms Ruth Kelly (Financial Secretary, HM Treasury; Bolton West, Labour)

The hon. Gentleman made a number of points in his contribution, some of which—dare I say it?—argue contradictory cases. First, he argues that the additional endowment to poorer children will not

be sufficient to make up for a lack of parental contribution. On the other hand, he argues that it is not right to give them the additional contribution, because the children could be stigmatised as a result. Let me break it down into the different segments.

Mr George Osborne (Tatton, Conservative)

Before the Minister attempts to deconstruct my argument, I should tell her that it entirely follows. Given that it is a limited benefit, the Government are paying a high price for it because of the stigma associated with means-testing. If the means-tested supplement were much larger, the Government would have a stronger case.

Ms Ruth Kelly (Financial Secretary, HM Treasury; Bolton West, Labour)

Obviously the hon. Gentleman will have to wait and see what the level of supplementary contributions is in due course, but we have already said that the endowments at the age of seven will be means-tested.

It falls to me to say that I have discovered the table to which I believe my friend Gavin Kelly was referring when he spoke at the seminar that the hon. Member for Tatton is so keen on quoting. There is a table in the document entitled ''Savings and Assets for All'' that demonstrates the impact of a £250 endowment and a £500 endowment at birth, plus supplementary top-ups of £50 and £100 over the course of the development of that policy. If the hon. Gentleman so wishes, I can provide him with the page references, and I am sure that he will be able to find it during the course of my contribution.

In response to the hon. Gentleman's argument that somehow the endowment will be swamped by additional parental contributions, I have never suggested that there would not be some parents who chose to put in a full £1,200 a year contribution on behalf of their children; but I would argue that the majority of parents would not do so. That is because there are already very significant tax breaks in the system that are there for children. Parents can gift children money, and provided that the income is not greater than £100 a year, they will not be taxed. There are tax breaks among ISAs and in other areas, and there is no evidence that parents are systematically knocking up against the limits of those tax-advantage vehicles on behalf of their children.

There is no reason to suspect that a large proportion of parents will take advantage of the £1,200 tax advantage in the child trust fund to make maximum contributions on their children's behalf. Of course, a small minority of parents might choose to do so.

Mr George Osborne (Tatton, Conservative)

The Minister has accused me of a contradictory argument; she is trying to knock down my argument by saying that her policy will not be a great success and that parents will not be putting in lots of money to their child trust funds. On the figures that I gave, even if someone makes a contribution of £10 a month it soon racks up—I have not got the exact figure in front of me—to a child trust fund of £4,000. If they make a contribution up to £1,200, and I am surprised that she does not want to see more people

putting in more money, that sum builds up to about £35,000 at the age of 18.

Ms Ruth Kelly (Financial Secretary, HM Treasury; Bolton West, Labour)

I am surprised that the hon. Gentleman is assuming in the development of his argument that the majority of parents will make that sort of contribution. On behalf of the Government, I would not suggest that somehow it would not be a success if the majority of parents fail to make the full contribution each year on behalf of their child.

As a core aspect of the policy, we would like to see a savings habit develop. A very small contribution might develop a savings habit, contribute towards the build-up of an asset that the child can draw down at the age of 18 and encourage an increase in financial awareness and education. I do not foresee most parents choosing to take advantage of the full tax benefit. It is not my intention to any degree whatever.

Mr Michael Weir (Angus, Scottish National Party)

Is there not a contradiction there? The Minister previously argued that the child trust fund is a vehicle for grandparents in particular also to contribute to their grandchildren and that the big benefit of the child trust fund over other funds is that it cannot be accessed until the age of 16 in Scotland or 18. That is the important difference, and because of that she is being contradictory to an extent. If the contributions are to be paid in specifically because the child cannot access that fund, it is a big incentive, particularly for grandparents.

Ms Ruth Kelly (Financial Secretary, HM Treasury; Bolton West, Labour)

My argument has been that even a modest contribution to a child's trust fund, if made on a regular basis, would have a significant impact on the value of the asset that the child can draw down at the age of 18. The examples in our document illustrate that £5 a month with no additional top-ups—if they are to be envisaged—for a child from a poorer background would amount to over £2,600. It is not the case that for this policy to be successful every child has to be in a family that can take full advantage of those tax breaks. I do not dispute that there will always be some families who would like to, and are prepared to, make contributions.

By far the main cost of this policy for the Government is not the value of the tax break, but the value of the endowment. For children from poorer families, we are explicitly recognising that they are less likely to come from families that will be in a financial position to make substantial contributions to the fund. As I have said before, we intend to make a further means-tested top-up at the age of seven to compensate again for the fact that parents are less likely to be in a position to make additional top-ups.

As for how children will react in the classroom, it is highly unlikely that teachers will use statements from individual children to illustrate the workings of the policy. That would probably be a breach of financial privacy. I am sure that financial education will be taught in a generic fashion using a model of the child trust fund or using the concepts that are implicit in the fund, so that people better understand their own statement in the privacy of the home.

If children were to compare the value of their child trust fund, it would be far more likely that they would feel stigmatised about the fact that the total of the

fund did not match that of other children than about the fact that they received a higher level of Government endowment. They would need to be sophisticated to be able to differentiate the difference between the two, and I am sure that they would be interested in the total value of the funds that have accumulated, as opposed to the breakdown of where the contributions came from.

Mr David Laws (Yeovil, Liberal Democrat)

Is the Minister saying that children will have to wait for this stigma effect until later on their lives, when they will see the effects of not having had the second-tier contributions?

Ms Ruth Kelly (Financial Secretary, HM Treasury; Bolton West, Labour)

No, that is a red herring. People are interested in seeing the value of their fund build up. Their financial education will increase, and they will become aware of the opportunities that such an asset provides for their future. I very much hope that, as well as family and friends making payments, they will be encouraged and incentivised to make payments on their own behalf.

The hon. Member for Tatton raised a point about the link with child tax credit. The reason why child tax credit has been chosen is that there is no additional means test involved in linking the fund with that. There will be an automatic link between qualifying for the child tax credit and the additional endowment being paid in. No additional paperwork will be required from parents. It would be much more complicated to think of a different system for administering the higher level of the top-up.

The hon. Gentleman also asked a specific question about the income threshold in the child tax credit. I apologise if I have misinterpreted his point, but to benefit from the higher top-up—the full endowment—children need to be in families who are in receipt of the full child tax credit, and who qualify under the income threshold of £13,230. If they meet that income threshold, children will also be entitled to qualify for other benefits such as free school meals and so on.

Mr George Osborne (Tatton, Conservative)

Before the Minister finishes her remarks, will she address my point that, since it could take a year, or 18 months in some cases, for a child tax credit award to be finalised, many children might not receive their supplementary contribution until they are one or one and a half years old? Does she accept that as a result they might have forgone gains that that money would have otherwise accrued in their child trust fund?

Ms Ruth Kelly (Financial Secretary, HM Treasury; Bolton West, Labour)

Children's families will be assessed individually at different times during the tax year for child tax credit, and they will receive the endowment at different points. I accept that there is no easy way of compensating them for the fact that theoretically they could have received that entitlement sooner. The fact that they are receiving a higher endowment is, in itself, recognition of their financial need. I would argue that our policy of progressive universalism, which the hon. Gentleman mocks, targets money on those families that need it most. In fact, our current estimate is that 40 per cent. of all children will benefit from the higher endowment. That is a point that is worth fighting for, and I urge the hon. Gentleman to withdraw the amendment.

Mr George Osborne (Tatton, Conservative)

I am not sure that the Minister fully convinced me that the supplement payable to poorer families more than compensates the stigma associated with the means test.

Mr David Laws (Yeovil, Liberal Democrat)

Do the Conservatives propose that there should be no means-tested top-up, or that the top-up should be bigger than the Government proposes?

Mr George Osborne (Tatton, Conservative)

The Conservative party, unlike the Liberal Democrat party, has accepted the Bill in its entirety. As I said when I spoke to the amendment, I am merely probing the Government. The difference between the hon. Gentleman and me is that our party might actually be in Government, so we have to be slightly more careful about what we say in Committee.

I made it clear at the beginning that this was a probing amendment to enable us to have this debate. I was glad for the clarifications about the child tax credit and how it will work. As the Minister said, some children may not receive the supplementary contribution for up to a year and a half after they are born, so it is a bit of a lottery as to when, during a year, a child is born. That affects the size of the child trust fund at the end of 18 years, but there we go. I did not quite get an answer; perhaps I will table a written question to learn whether the £911 assumes 18 full years of payments. I suspect that it does so to inflate the figure, and that the amount would drop below £900 in reality. However, having made those points, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mr George Osborne (Tatton, Conservative)

I beg to move amendment No. 173, in

page 5, line 9, after '(5)', insert

'or the condition in subsection (9)'.

Mr David Amess (Southend West, Conservative)

With this it will be convenient to discuss the following amendments:

No. 174, in

page 5, line 10, leave out first 'That' and insert

'The condition in this subsection'.

No. 175, in

page 5, line 10, after second 'that', insert 'the child benefit commencement date fell on or after 6th April 2003 and'.

No. 176, in

page 5, line 41, leave out subsection (9) and insert—

'(9) The condition in this subsection is that—

(a) the child benefit commencement date fell before 6th April 2003,

(b) a person was, or persons were, entitled to a benefit specified in subsection (9A) in respect of the child on any date in the tax year beginning with 6th April 2002, and

(c) that either the specified income of the person or persons for that tax year did not exceed the specified income threshold or the person, or either of the persons, was entitled to a specified social security benefit for that date.

(9A) Those benefits are—

(a) income support,

(b) income-based jobseeker's allowance,

(c) children's tax credit,

(d) working families' tax credit, and

(e) disabled person's tax credit.

(9B) In subsection (9)(c) ''the specified income'', ''the specified income threshold'' and ''a specified social security benefit'' have the meanings given by regulations.

(9C) In making regulations under subsection (9B) the Treasury shall, as far as practicable, secure that the terms in that subsection are interpreted so as to provide that the condition in subsection (9) shall be satisfied in relation to levels of income, income threshold and entitlement similar to those enabling the condition in subsection (5) to be satisfied, taking account of any change in the value of money.'.

Mr George Osborne (Tatton, Conservative)

We are still on the clause that tries to establish eligibility for the supplementary contribution. My amendments Nos. 173, 174, 175 and particularly 176 are an attempt to tackle another of the anomalies thrown up by the system.

As we know, every child born after 31 August 2002 will get a child trust fund, and those in receipt of the child tax credit will get the supplementary contribution. However, of course, the child tax credit was introduced only on 5 April 2003—everyone in the House remembers that because the Government made such a hash of the introduction of tax credits in 2003. There is the question of how the funds will work for children born between 1 September 2002 and 5 April 2003, and how they will be assessed for the supplementary contribution.

According to the Bill, that will be determined by the family's entitlement to child tax credit in 2003–04. That is spelled out in the explanatory notes. In other words, it does not matter whether the family's circumstances have changed—whether they are better of in 2003–04 than in 2002–03 or, indeed, worse off. I confess to the Committee that this is a guess, but I suspect that many families are likely to be better off in the year after the birth of a child than in the year of the birth, because they will not have lost the income that will come from maternity leave. That means that fewer of the group of children born between 1 September 2002 and 5 April 2003 will get supplementary contributions than if the income had been assessed in the year that they were born.

Amendment No. 176 proposes a different test for the group of children born between 1 September 2002 and 6 April 2003. It suggests that those children will get a supplementary contribution if, during the year that they were born—that is, 2002–03—their families were in receipt of either

''income support . . . income-based jobseeker's allowance . . . children's tax credit . . . working families' tax credit''

or ''disabled person's tax credit'' and their income did not exceed an amount specified by regulation. We could take that amount as £13,230. It seems fairer to judge these children, like all other children, by their family's income in the year in which they were born. As I said, I am guessing—perhaps this was not intended by the Government—but I suspect that the measure may actually deprive children who otherwise would have received the supplementary contribution, as the family's income in the year a child is born tends to be lower than its income in the year after the child is born.

Ms Ruth Kelly (Financial Secretary, HM Treasury; Bolton West, Labour)

The hon. Gentleman refers to the transitional group of children born between September

2002 and April 2005. The Bill is designed to provide that as many children as possible qualify for the supplementary top-up and that they are not excluded simply because child tax credit was introduced after child trust fund eligibility began in September 2002.

Children in families who claim child tax credits in 2003–04 will be treated as qualifying when child benefit was first paid for the child in 2002–03. If child tax credit could not be claimed but the parents were claiming other benefits such as jobseeker's allowance, the Bill ensures that the relevant benefits are used as a proxy for child tax credit. In other words, officials have developed this system to ensure that as few children as possible miss out on the higher rate of endowment. In fact, it could be considered to err on the side of generosity, in that, as the hon. Gentleman would imagine, there may be some children in families who might not have received the additional endowment if child tax credit existed from September 2002 but who will receive it under our proposal.

Of course, it is possible to make the other argument. The hon. Gentleman said that the income might rise, whereas in fact it often falls. We may dispute that. It is not easy in any particular circumstance to predict what will happen to the income of a family after the birth of a child, but, in trying to draw up the proposals, I was determined that as few children as possible would miss out and that the maximum number of children would benefit from the higher rate of endowment.

If the child was born before April 2003 and the family receives child tax credit in the tax year 2003–04, we will assume that they would have done so in the six months from September 2002. I emphasise that families who fall into the transitional category do not have to provide any additional paperwork to the Inland Revenue. The calculations will be made for them, and they will benefit from the higher rate of endowment. I believe that the proposals act to the benefit of children and, as such, they should be supported by the Committee.

Mr George Osborne (Tatton, Conservative)

I am not entirely convinced by the Minister's arguments. As I said, I am happy to be convinced by hard evidence. I suspect that the income of a family tends to be less in the year in which a child is born, because they often forgo the mother's full income, at least for part of the year. However, the Minister assures me that that is not the case. It would be interesting to see some hard evidence. If my position, based entirely on anecdotal experience, is right and people's income actually is lower in the year in which the child is born, the cohort of children born between 1 September 2002 and April 2003 will lose out under the device set up by the Government.

However, the Minister says that she errs on the side of generosity; that would be a first for the Treasury. I suppose that we will only have the proof of the pudding in the eating. Since I do not have hard evidence to deploy to knock down her arguments, but have only a hunch or ''intuition''—to use Mr. Kelly's phrase—I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 9 ordered to stand part of the Bill.