Part of Orders of the Day — Child Support Bill – in the House of Commons at 5:30 pm on 22nd May 1995.

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Photo of Stephen Timms Stephen Timms , Newham North East 5:30 pm, 22nd May 1995

In supporting the case made by my hon. Friend the Member for Glasgow, Garscadden (Mr. Dewar) for a child support advisory committee, I wish to concentrate on one aspect of the system that has been created—the formula by which maintenance assessments from absent parents are calculated, and especially the protected income provisions.

I am grateful for work that has been carried out by Christopher Allen of the London Business School, which he has shown me. He has considered the maintenance formula system as part of the taxation system and drawn some conclusions about it, many of which are striking. I wish to draw them to the attention of the House.

The protected income provisions in the formula are intended to ensure that an absent parent is better off working than on income support. The formula assessment compares the maintenance demand with that protected income figure and, if necessary, the maintenance assessment is reduced to allow the absent parent to retain their protected income level.

The protected income provisions were made considerably more generous in February 1994, the last time that the attempt was made to repair that system. Since then, the arrangements have allowed for £30 earned income in excess of income support levels, plus 15 per cent. of a new partner's income. The provisions have undoubtedly had some impact because, as the figures provided in the parliamentary answer to which my hon. Friend the Member for Garscadden referred show, about 10 and a half per cent. of full maintenance assessments for non-benefit cases are now assessed at a zero contribution. That is considerably more than was the case when the social security statistics were published, the date to which those apply being June 1994.

Paradoxically, that increased generosity has considerably worsened the poverty trap for those people who earn slightly more than the protected income threshold, because the post-maintenance income of people earning between £30 and £60 above the exempt income level will be reduced to the protected income level. That represents a 100 per cent. marginal tax rate on their income. Remarkably, the figures in the written answer show that about one third—32.8 per cent.—of the non-benefit cases with which the agency is dealing fall in that category.

I can explain how that system works. The research paper 94/20, which the House of Commons Library produced last year before the changes were made last February, states: If paying the proposed maintenance would reduce the absent parent and any new family to a level of income below the protected income, the child maintenance payable is decreased so that the absent parent is left with the protected level of income. Conversely, if the absent parent's income increases because of additional overtime payments or other such factors, the child maintenance payable is increased. The marginal increase in income—all 100 per cent.—is taken away by the formula. That is an extraordinary system, and, taken together with the benefit system, it means that absent parents are no better off, and may be worse off, if they take a better job or work additional overtime.

I wonder how that position has arisen. It was suggested earlier that the Treasury had intervened in some aspects of the system. The Treasury certainly has not intervened in the formula. The arrangements that have been reached appear to be entirely contrary to the Government's normal taxation policies.

A large proportion of maintenance assessments—one third of them—fall within the range. If we take 100 per cent. of the marginal income increases of people on relatively low and modest incomes, the system becomes insupportable. I have no confidence that we will not be here in a year's time trying to do yet another desperate repair job on a system that is breaking down. For that reason I strongly believe that we need the monitoring arrangements described by my hon. Friend the Member for Garscadden. We need a committee that can investigate what is going on and that can propose changes to create a sustainable and supportable system. We have not yet achieved such a system.

I shall say a few words about those who fall beyond the £30 to £60 band. The effect of the protected income system are clearly the most aggressive aspects of the maintenance system, but even without those provisions the system is extremely regressive. Up to the payment in full of the maintenance allowance, the marginal rate on take-home income is 50 per cent. If we take into account national insurance contributions and the 25 per cent. income tax level, the overall marginal tax plus maintenance rate over that range is 77 per cent. The absent parent will keep only 23 per cent. of additional earnings. The position might be acceptable if the money represented a transfer of money to improve the children's welfare, but, as we have heard, it does not. That is one specific example, but it is by no means the only one.

The system towards which we are moving still contains severe anomalies and insupportable elements that will require further attention. The changes that are proposed in the Bill are helpful, but as I understand it, they increase the scope of protected and exempt income and push the problems that I have been describing up the income scale. There will still be a large proportion of agency cases who suffer 100 per cent. marginal payment rates in maintenance plus tax. That problem and others like it require the monitoring arrangements proposed by my hon. Friend.