New Clause 1 — Recipients of children's tax credit prior to April 2003

Part of Orders of the Day — Tax Credits Bill – in the House of Commons at 2:02 pm on 7th February 2002.

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Photo of Steve Webb Steve Webb Shadow Secretary of State for Work and Pensions 2:02 pm, 7th February 2002

It is my pleasure to speak to new clause 1. We also support new clause 4. I shall not comment on new clauses 7 and 8—they will be discussed by the Conservative Members who tabled them—other than to note that they raise important issues and we are sympathetic to their intention. We look forward to hearing more about them in due course.

During our deliberations in the Standing Committee, a certain amount of ping-pong took place between the two sides. We wanted to give the Paymaster General the opportunity to set out her thinking on the rates and structure of the tax credits, but she declined to do so. Lest the hon. Lady be under any misapprehension, new clause 1 is different altogether. It does not relate to new claimants of the tax credit who start to become entitled—for example, due to the birth of a child—after April 2003; it relates to the rules that will govern the existing recipients of that tax credit.

The new clause would mean that people receiving tax credits before April 2003 were not cash losers due to the transition. They would be able to continue with the same cash receipt of tax credit for as long as they still had a dependent child, or a qualifying young person.

Obviously, the Chancellor will have to make decisions about the rates and thresholds of the tax credit in his Budget statement. We are not trying to pre-empt that. The acceptance of the new clause would not prejudge any of those decisions. It is really a statement of the principle that people who currently receive the tax credit should not be cash losers—whatever the Chancellor's decision as to the rates and thresholds.

I shall give the House an example, as otherwise we might assume that—in a rare lapse—the Liberal Democrats were defending the rich while the Conservatives were talking about the social fund. The families that I am talking about are not necessarily filthy rich.

I take the example, which I believe to be a good one, of a couple, both of whom work full-time—one on the typical salary for a nurse, one on the typical salary for a teacher. At present they receive the full child tax credit of £520. It seems almost inconceivable that, assessed on their joint income, they would receive anything other than zero. If a family of that sort received child tax credit, so would Back-Bench Members of Parliament. If, having decided to introduce a taper that withdraws child tax credit from higher earners, we include Back-Bench Members of Parliament among those who receive it, there is not much point in having a taper. Therefore, without going into details on the exact rates and thresholds that the Chancellor will choose, there is bound to be a doubt in the minds of families such as the nurse married to the teacher that they may be about to lose some, or all, of the £520 a year that they currently receive.

More than one or two families are in that position. If the thresholds remain the same, 900,000 families could lose all of their tax credit, and another 500,000 could lose some of it. The purpose of the new clause is to tell them, "You may be reassured. Although you might not get an increase, we offer you our assurance as a House today that, whatever rates and thresholds the Chancellor introduces, you will not be cash losers."

One might ask, why should not those families be cash losers? If a new system is introduced that is less generous to people in those circumstances, why should they not lose? We must remember that the children's tax credit was the successor to the married couples tax allowance, so we had a year when that allowance was abolished and nothing took its place, and we shall have had at least two years of the children's tax credit, now payable at £520 a year. It is reasonable to suppose that families have got used to budgeting on the basis of that income, and £520 is quite a serious sum of money. All that we are asking the House to agree is that such families may continue to receive that amount at that cash level. It would not be inflation-proofed, but they would be protected from a windfall loss of up to £520.

Unless the Chancellor wants to create 1.4 million losers, he will have to spend some money on that issue anyway—perhaps by raising the threshold or changing the taper. We are not prejudging that decision, but we are proposing a relatively cheap solution, as is our wont, because the only group that we are protecting consists of existing recipients, who gradually fade out of the system. An existing recipient with a 16-year-old child and nothing else gets the money for one year, and that is it.

If we were arguing that the Government should be raising the threshold so that new recipients in the same circumstances received the full tax credit, that increased cost would roll on indefinitely in the system. Our proposal is a transitional measure, not one for new claimants, because arguably a new family—the nurse married to the teacher who then has the first baby—has never budgeted on the basis of that sum of money and has never got used to having it, so that family's not having it through a new system is defensible. However, taking the money away from people who have got used to having it is far less defensible. Ours is a very modest proposal, to protect existing recipients and to make a statement of principle that there should be no cash losers, without prejudice to any decision that the Chancellor might take about raising thresholds.

I shall briefly address new clause 4. Here there are interesting parallels between the Tax Credits Bill and the State Pension Credit Bill. In the case of the latter Bill, which is passing through another place, the Government have decided that any gains that are given to people through the credit should not be taken from them by means of tapers on housing benefit and council tax benefit, but the Government have not offered us those assurances in the case of tax credits—quite the contrary.

There is some suggestion that a person who gets tax credits through the Tax Credits Bill will then potentially have some or most of them taken away as a result of the tapers on housing benefit and council tax benefit. Several London Members, who served on the Committee with us, expressed concern that because, in view of high rents, people can be on housing benefit while having relatively high incomes, those people could lose 65p—perhaps 85p—in the pound of the money that the Government want to give them.

If the purpose of the Bill is to reward work, to encourage people to work and to teach that work pays, it is dishonest to give them money through the pay packet so that they get a high take-home pay figure and then allow the local authority to come along and take 85 per cent. of it from them. That seems counter-productive in terms of the Government's objectives. We therefore consider that new clause 4 is helpful to the Government—just as we have been in tabling many of our amendments—by enabling those whom they intend to benefit from the tax credits to keep the money, instead of having to give it to someone else.