Tax Credits

Opposition Day – in the House of Commons at 1:31 pm on 7th June 2006.

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[Relevant document: The Sixth Report of the Treasury Committee, Session 2005-06, HC 811, on the Administration of Tax Credits .]

Photo of Sylvia Heal Sylvia Heal Deputy Speaker

I must inform the House that Mr. Speaker has not chosen either of the amendments tabled to this motion.

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer 1:42 pm, 7th June 2006

I beg to move,

That this House
notes the overpayment, fraud and incompetence in the administration of the tax credit system;
is concerned about the impact of this incompetence on the most vulnerable members of society;
and calls upon the Chancellor of the Exchequer, the author of the tax credit policy, to explain to this House what measures are being undertaken to address these problems.

The incompetent administration of tax credits touches the constituents of every Member of this House. This debate could not be more timely: last week, the Inland Revenue revealed that almost half of the 6 million people in receipt of tax credits were paid the wrong amount. That is a staggering level of error, and an increase on the previous year.

I welcome to the debate the Chairman of the main Treasury Select Committee, and his counterpart on the Treasury Sub-Committee. The Treasury Committee, of course, is made up of Members from all parties. Yesterday, it published a report identifying Government error as a key cause of the overpayments. In its briefing for this debate, the National Association of Citizens Advice Bureaux reminds us that, four years after the introduction of tax credits, it continues to see

"thousands of families who face hardship and genuine confusion as they have been told that they have been overpaid but given no explanation and no warning before payments are suddenly cut".

Yet the Chancellor of the Exchequer still lacks the courage to defend a policy that he designed and implemented. We are told that he is at ECOFIN—the first such meeting that he has attended since December. Two days ago, he was planning to send the Paymaster General. We know that because we have the list of the week's events produced by No. 10 Downing street. It clearly states:

"EU ECOFIN Council meets in Luxembourg — Paymaster General Dawn Primarolo attends."

Then this debate was called and, for some reason, the Chancellor of the Exchequer changed his mind. Is it not strange how the right hon. Gentleman is always around to take the credit if things go well, but always happy to let others take the blame when things go wrong? Not once in the past year has he made a statement, taken part in a debate or even answered a question on tax credits. It is the policy that dares not speak its name, from a Chancellor who dares not open his mouth. Prime Ministers need many qualities, but political cowardice is not one of them.

In the Chancellor's absence, we have the poor new Chief Secretary to the Treasury. He, at least, must know something about the chaos in the tax credits system as he happens to represent the constituency with the largest number of people who are overpaid and the largest number who are underpaid in the entire country. Half of all the hon. Gentleman's constituents in East Ham who claim tax credits receive the wrong amount from the Department that he helps to run.

The Chief Secretary will undoubtedly tell us that the amount being overpaid across the country has fallen a little, to a mere £1.7 billion. When he does so, perhaps he will confirm that the number of people being overpaid has risen, with almost 3 million people getting the wrong award. When he tells us that help is going to the poorest families, will he also confirm that more than 100,000 of the poorest families—those on incomes of less than £5,000—did not receive the level of support to which they were entitled? When he tells us about what he has called in the past couple of days the "improved performance" of the tax credits system, will he explain why the number of people in his constituency being overpaid has doubled in a year? Why did NACAB tell me yesterday that there was no sign of a reduction in the number of families contacting it?

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

In a moment.

The tax credits system is a shambles. The Chief Secretary knows that, as does every MP in this House. The millions of people caught in the system's web know it, too—it is a shining monument to the incompetence of this Government. On that note, I give way to the Chief Secretary.

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

The hon. Gentleman referred to the report published yesterday by the Treasury Committee and to the remarks made in the introduction by Mr. Fallon, who said that tax credits were right in principle. Does he agree with that?

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

Yes, I believe that tax credits are right in principle, but I want a system that works. The present system does not work, and that is why we are having this debate.

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

I am happy to give way to the right hon. Gentleman. I do not know whether he has checked the figures for his constituency produced by the Inland Revenue, but 5,200 people there received the wrong payment.

Photo of John McFall John McFall Chair, Treasury Committee

Does the hon. Gentleman accept that the Treasury Committee is an all-party Committee, and that its report supported the principle of tax credits? The next question is, does he support a flexible system or a fixed system for tax credits?

Photo of John Bercow John Bercow Conservative, Buckingham

My hon. Friend supports a system that works.

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

As my hon. Friend John Bercow suggests, I support a tax credits system that works. Towards the end of my speech, I shall speak specifically about whether the system should be flexible or fixed. I note what the Treasury Committee report says about the variability of low incomes, and its request that the Chancellor keep an open mind about moving to a more fixed system.

Photo of David Taylor David Taylor Labour, North West Leicestershire

The hon. Gentleman has said that his party supports tax credits in principle and that it wants a system that works. However, does he accept that the variability of low incomes is bound to mean that a substantial number of claims will have to be adjusted at the end of the financial year, under any system? I used to be an accountant, and I speak as one used to dealing with complex forms. Does the hon. Gentleman also agree that, to understand the statements that people receive, one needs a post-graduate qualification in encrypted Sanskrit?

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

The hon. Gentleman makes his point extremely well and I had better support his ten-minute Bill now.

Today's debate should focus not just on the mistakes of the past, but the prospects for the future. I have four questions for the Chief Secretary to answer when he responds. They lie at the heart of whether the Chancellor's tax credit system, designed by the Economic Secretary, can ever be made to work in future. First, can the Chief Secretary confirm that the huge annual overpayments—almost £4 billion in two years—are not the result of what the Paymaster General once dismissed as "teething problems", but are now a permanent feature of the tax credit system? He admitted as much last week when he set out the latest emergency reforms to the way in which the credits operate. He said—this is a striking statement—that once the changes are

"fully implemented, we expect them to reduce overpayments in future years by around one third".

So, even if the reforms work as well as he hopes—let us face it, nothing else that the Government have promised on tax credits has worked—two thirds of the overpayments will remain. Almost 2 million people a year will go on receiving the wrong tax credit payment and will face having the money clawed back off them, with all the hardship that we know that brings.

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

I am happy to give way because I have been checking on the figures in the hon. Lady's constituency. In Northampton, North, 1,800 people were underpaid and 3,800 people were overpaid. That is almost half of all the people in her constituency who received tax credits.

Photo of Sally Keeble Sally Keeble Labour, Northampton North

Yes, and quite a lot of them came to see me. I helped them with that, which has given me a good understanding of the tax credit system. [ Interruption. ] It was a special surgery. Does the hon. Gentleman accept that the reduction of one third would follow from the change in the income disregard, but that the other overpayments should also be reduced by the changes to the reporting requirements? That was another really important recommendation made in the pre-Budget report.

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

As I understand it—there is an opportunity for the Chief Secretary to clarify this—the reduction of a third would occur if all the changes, both the reporting requirements and the increase in the disregard, were to take place. The increase in the earnings disregard simply reclassifies overpayments as disregarded income. That is one of the ways in which the Government are dealing with the problem.

As I said, the Chief's Secretary's admission was extraordinary. As the Child Poverty Action Group reminded us last week:

"behind these figures are thousands of families struggling to survive when the overpayments are clawed back".

Not that we need reminding—we see that every week in our constituency surgeries. A disabled young constituent of mine told me that she was

"at the point of despair" because of the clawback of tax credits that were rightfully hers. The chairman of the Inland Revenue wrote to me about the case earlier this year. He said:

"I am sorry to say that when we processed your constituent's claim we missed including her new income details".

How can one possibly miss including the income details when one processes a tax credit claim? That reveals a deep flaw in the system.

The new changes announced by the Government include new obligations on claimants to fill in more forms and to file them more quickly—any bureaucracy's answer to any problem. Why do not the changes also include new obligations on the Treasury? The parliamentary ombudsman recommended a year ago that the Government introduce a statutory test for the recovery of overpayments that gives people a right to appeal to an independent tribunal when they think that the Revenue has got things wrong. That is the same test that exists for other benefits. The parliamentary ombudsman said that the test would

"strike the right balance between the obligations on the part of the administrators and those on the part of the recipients".

NACAB says today that the test would

"build confidence in...the decisions being made".

Why have the Government refused to introduce that statutory test? Why are they instead imposing new obligations on the recipients that are not matched by new obligations on the administrators?

Photo of John Bercow John Bercow Conservative, Buckingham

Surely the impenetrable complexity of the system is such that it is understood only by the Chancellor of the Exchequer, if at all. Is it not distinctly shameful for him to have devised a system that is even more complicated than the Schleswig-Holstein question? At least three people understood that—even if one of them went mad, the second died and the third forgot what the answer to the question was.

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

Believe it or not, I studied the Schleswig-Holstein question at university, but I am not going to go into it. My hon. Friend makes a telling point. It is a remarkable achievement of the Chancellor that he has made the tax affairs of the poorest almost as complex as the tax affairs of the richest.

Photo of Michael Weir Michael Weir Shadow Spokesperson (Work and Pensions), Shadow Spokesperson (Trade and Industry)

I was interested in what the hon. Gentleman said about the new forms. What good is there in changing forms if part of the problem is that the information does not seem to get on to the computer system in the first place? The people who return forms still end up with overpayments or the wrong payments because the information goes missing, does not get put on to the computer or the computer seems unable to recognise it.

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

That is one of the rare issues on which I agree with the hon. Gentleman.

The other question for the Government on overpayments is, why have they not implemented their own promise last year to pause before proceeding to recover an overpayment so that they can work out whether it is the Revenue that has made the mistake? Again, the parliamentary ombudsman recommended that approach. So, too, did NACAB. The Select Committee said in its report yesterday that that was

"crucial, in the interests of natural justice."

However, the Committee also said that it feared that the Government promise had been "sidelined". Why have the Government reneged on that promise? Perhaps the Chief Secretary can explain.

If multi-billion pound overpayments affecting millions of people are to be an annual feature of the tax credit system, the Government need to implement the changes needed to protect the rights of our most vulnerable families. That brings me to the second question—when will the ongoing fiasco of the computer system be resolved? Again, I recently dealt with a case in my constituency of a single parent who repeatedly tried to tell the Inland Revenue that she was being overpaid. She was ignored for months, only for her tax credits suddenly to be suspended altogether two weeks before Christmas. She wrote to me to say that she could not buy her two young children presents because she was struggling to provide them with even the basics. A month later, after Christmas, the Revenue wrote to me admitting that it had got the case wrong because of

"a technical fault we are experiencing with our computer."

That was this year. That was the same computer that the Paymaster General told the House a year ago was "stable and performing...well". Does the Chief Secretary still think that the computer is stable and performing well? Will he repeat that phrase when he gets up to speak?

The Government amendment says that the IT problems affected only

"the early stages of implementation".

If Ministers really think that that is the case, I am afraid that they are living in a fantasy world. Certainly the Select Committee does not agree. It says in its report that IT error remains a "significant" cause of the tax credit mistakes. Do Ministers not realise what is going on in their own Department? The report goes on to talk about the Paymaster General's evidence. It states:

"The factors cited by the Paymaster General...as contributing to the problem of overpayments do not appear to give us a comprehensive account of the reasons why overpayments have arisen".

It continues:

"It is obvious to us that the Paymaster General's account makes no reference to causes which have arisen as a consequence of the Department's own processes—for example official error and IT error".

Photo of Jeremy Wright Jeremy Wright Conservative, Rugby and Kenilworth

Does my hon. Friend agree that the position on information technology is even worse than he has set out? Is he aware that in my constituency I have a case in which a lady was overpaid repeatedly? She told the authority that that was happening and the reply was, "Yes, we know, but the computer won't let us put it right."

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

It is an extraordinary example—one of many. I suspect that every Member could produce similar examples of computer errors.

The Government finally sacked EDS, the company that provided the computer, and announced triumphantly that the company would pay them compensation. However, as yesterday's Select Committee report shows, the deal done by Ministers means that—this is truly incredible—full compensation is paid only if EDS wins other Government contracts. In short, the company that Ministers believe is guilty of messing up the tax credit computer will pay full compensation to taxpayers only if it is given a chance to mess up another Government computer system. Only this Government could negotiate such an incompetent deal, and now they refuse to discuss the details of the deal on the ground of commercial confidentiality. The Select Committee is right—Ministers should be accountable for the mistakes that they make and subject to parliamentary scrutiny on the arrangements into which they enter on our behalf, instead of hiding behind commercial contracts.

Of course, it is not only the computer that has cost the taxpayer millions of pounds, but fraud, which brings me to my third question—what is the true cost of tax credit fraud and what are the Government doing to tackle it? The Government refuse to tell us the true extent of tax credit fraud. According to the Paymaster General, there have been

"persistent attempts by organised criminals to obtain tax credits by using stolen or fictitious identities".

We know that the Government had to abandon their online application system six months ago after systematic abuse. We know, too, that although Ministers say that they are acting tough, there were just 211 prosecutions for tax credit fraud, with only two for organised tax credit fraud, out of 6.5 million applications. However, we do not know when Ministers knew for the first time that systematic fraud was taking place or how much money has been lost. Does the figure run into hundreds of millions of pounds, or even billions?

Ministers were warned about the possibility of fraud before the tax credit system was introduced. Why did the Chancellor ignore the series of security checks that was proposed by Mr. Field when he was Minister for welfare reform? The right hon. Gentleman said earlier this year:

"After I resigned ... the counter-fraud measures were not carried out and now it shows in the figures".

Why were those counter-fraud measures not carried out?

What about stopping fraud in the future? Surely the Select Committee is right when it warns that increasing the earnings disregard to £25,000 creates an incentive for further fraud as people deliberately fluctuate their incomes from year to year, but the Government have done nothing to prevent that from happening. Will the Chief Secretary address that problem today, too?

The Paymaster General promised the House that the Treasury would provide

"more comprehensive information on the level of claimant error and fraud ... in spring 2006."—[ Hansard, 10 January 2006; Vol. 441, c. 551W.]

I know that winter has descended early on the Labour party and it is getting its seasons muddled up, but it is now June. Where is the information that we were promised for the spring?

For the second year running, ministerial incompetence and computer chaos have caused hardship for hundreds of thousands of people and cost the taxpayer billions of pounds, so I ask my final question—is it not time that the Government looked at the design of the tax credit system? The Government say that money has got to the poorest, but after spending more than £15 billion a year, it would be extraordinary if it had not. However, that comes at a price. In the words of Mr. Milburn, a great friend of the Economic Secretary to the Treasury, in the Budget debate in the House:

"poverty has become more entrenched."

The right hon. Gentleman said:

"the number facing marginal tax rates of 60 per cent. or more has increased by nearly 1 million, largely as a consequence of the workings of the tax credit system."

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

I am happy to give way. I do not know whether the hon. Gentleman agrees with the right hon. Member for Darlington.

Photo of Adrian Bailey Adrian Bailey PPS (Rt Hon Hilary Armstrong, Minister of State (Cabinet)), Cabinet Office

I do not, and my constituency is West Bromwich, West, if the hon. Gentleman wants to tell me how many overpayments there have been in my constituency. Something like 8,000 families in my constituency are benefiting from tax credits, but over the past three years, just 37 people have come to my surgery with tax credit problems. Will the hon. Gentleman tell us what comparable reforms he would introduce that would allow families with children on an average income to be £1,500 a year better off, with those who are poorest being £3,500 a year better off? That is the true nature of the issues about which he is talking.

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

As the hon. Gentleman does not know what is going on in his constituency, I can tell him that 3,600 people there were overpaid. He will have to ask them why they did not feel that it was worth their time to go to his constituency surgery.

The right hon. Member for Darlington told us that the tax credit had left us with an

"80-20 society, in which 80 per cent. do OK but 20 per cent. are left behind". —[ Hansard, 28 March 2006; Vol. 444, c. 710-11.]

[Interruption.] It is no good Members saying that he was wrong. Did Mr. Austin say that?

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

There we go. The hon. Gentleman is one of the Chancellor's henchmen and a proponent of what was called the "Kill Mil" operation. No doubt he is getting to work on the Education Secretary as we speak.

The right hon. Member for Darlington is not the only person who has criticised the operation of tax credits. As my right hon. Friend the Leader of the Opposition pointed out during Prime Minister's questions, the right hon. Member for Birkenhead has said:

"using tax credits as an anti-poverty weapon is like attempting keyhole surgery with a hacksaw".

That is Labour's verdict on Labour's record.

At question is not the existence of tax credits—we support tax credits, but want tax credits that work—but the system that the Chancellor chose of annual awards, annual income assessments, annual overpayments and annual clawbacks. That system means that almost half of all families get the wrong tax credit payment.

Perhaps the Economic Secretary to the Treasury has not even read the parliamentary ombudsman's report, but if he did, he would see that she says that there is

"the fundamental question as to whether, for people on modest incomes who have to budget and plan their finances carefully to manage their lives, such inbuilt instability or uncertainty really works."

The Treasury Committee, in its first and perhaps most important recommendation, points to the new evidence that shows that the family incomes of many of the poorest have become more variable and unstable as a result of tax credits. That all-party Committee asks the Chancellor to consider fixing awards over shorter periods than a year, and I ask him again to do so. The time has come to give serious consideration to moving to a tax credit system that is based on shorter, more fixed payments, that brings greater certainty to family incomes and that avoids the hardship of overpayment.

Photo of Jim Devine Jim Devine Labour, Livingston

It is great to hear the hon. Gentleman giving advice, but in his interview in last month's edition of Magill, the well-respected Irish magazine, he said:

"anyone who says that I haven't known adversity hasn't looked at my CV—I worked for John Major when we lost the 1997 election".

He then said that he worked for Mr. Hague when the Conservatives lost in 2001. He went on to say:

"That doesn't say much for the quality of my advice"— so why should we listen to him now?

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

An absolutely devastating intervention. I should refer the hon. Gentleman to the figures on awards in Livingstone, which has pretty much the worst record on errors of anywhere in the country outside East Ham and West Ham. If he wants to toddle off and look at the figures, he can do so.

Examining the design of the tax credit system does not mean scrapping tax credits, but trying to make them work. In a rare admission of error, the Chancellor, too, opened up that possibility at the end of last year when he said that the Government might have to examine fixed payments. However, I doubt that he will do that considering that he designed the flawed system and has presided over its incompetent administration. Today's tax credit system is his creation and no one else's— [Interruption.]

Photo of Sylvia Heal Sylvia Heal Deputy Speaker

Order. Could we have just one debate in the Chamber with one speaker?

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

Thank you, Madam Deputy Speaker.

The Chancellor remains stuck in the past. He is refusing to listen and is the road block to reform. He is too proud to admit that he has got it wrong and too lacking in courage to defend the system in public. It will be up to the next Government to fix the broken tax credit system and give millions of lower-income people the social justice that they deserve.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury 2:09 pm, 7th June 2006

Today's debate gives us the welcome opportunity to reflect immediately on yesterday's report from the Treasury Committee on the administration of tax credits. We will, of course, respond to the report in full in due course. In the mean time, I welcome it as a constructive contribution to the debate, and I hope that it offers the prospect of a new consensus throughout the House on the advantages of the tax credit system.

Mr. Osborne said, in introducing the report, that tax credits are right in principle. I agree. The report rightly drew attention to the wide support among non-Government organisations, such as Citizens Advice, for the tax credit system. It underlined the importance of improving the quality of service provided to tax credit claimants. I agree about that as well.

It is a shame that the speech of the hon. Gentleman did not reflect very much of the now broad agreement on the gains from the tax credit system. He told us that he agreed that tax credits are right in principle, but he did not tell us very much about his agreement. It seemed that he was much more anxious to voice his criticism of the system than to explain why he now supports it.

I remind the House why there is broad agreement about the gains from the tax credit system. Let us consider the progress that we have made since 1997.

Photo of Andrew MacKay Andrew MacKay Senior Parliamentary & Political Advisor To David Cameron

Before the Minister goes any further, will he clarify exactly why the Chancellor of the Exchequer will not reply to the debate? At what point did he decide to go to the ECOFIN meeting? Why, according to the website earlier this week, was the Paymaster General attending?

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

The right hon. Gentleman will be pleased to know that my right hon. Friend is defending our national economic interests in Brussels today, as he has done extremely effectively over the past nine years. I think that the right hon. Gentleman will find that reassuring. As for the way in which we are handling the debate, it is precisely the way in which these debates have been handled in the past.

I remind the House of the changes that have occurred since 1997.

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

No. I will make some progress and then I will gladly give way to those who want to intervene.

Since 1997, there are now over 2 million more people in work, thanks in large part to the tax credit system. In 1997, just 800,000 people received family credit. Today, 6 million people benefit from tax credits. Ninety three per cent. of families on incomes below £10,000 claim their entitlement to child tax credit compared to the initial family credit take-up of just 57 per cent. under the Tories. In 1997-98, fewer than 2.5 million families with children paid no net tax. Under today's tax credit system, there are now 3 million families in that position.

Three enormous gains have been achieved from the introduction of the tax credit system, which is what it was designed to deliver, and which it is succeeding in delivering.

Photo of Charles Walker Charles Walker Conservative, Broxbourne

Undoubtedly the tax credit system has helped many people, but there are many families that suffer huge distress when they receive claims for large sums that they have no means of paying. How is the Minister proposing to reduce this distress on hard-working families who do not deserve to be treated in that way?

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

I shall set out the progress that we are making on that, because I think that it will be acknowledged that it has led to considerable improvements. Before I do so, I am grateful for acknowledgement of the benefits of the system, which I shall set out. First, tax credits have significantly improved incentives to work. In the past, far too many people found that they were better off on benefits than in a job. Tax credits have put that right. That is one of the reasons why so many more people are now in work and why the historic high rate of employment that we have achieved has been maintained for so long. Secondly, the tax credit system has reduced the tax burden on low to middle-income families. An OECD study, published in March, showed that, thanks to tax credits, net tax paid by a couple with one child living on the average manufacturing wage has fallen from more than 17 per cent. in 1997 to less than 10 per cent. now. That is a dramatic reduction in the tax burden for people who are benefiting greatly from the improvements that have been introduced.

Photo of Philip Hollobone Philip Hollobone Conservative, Kettering

I shall read briefly the comments recently of one of my constituents in response to a letter from the Tax Credit Office. My constituent writes:

"I should like to point out that although initially the tax credit payments proved very useful, the situation created by your overpayment has caused me substantial hardship and increased stress. In fact, I wish that I had never applied in the first instance. I feel very let down by the system."

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

I shall describe to the House the improvements that we have made. It is particularly interesting to note that take-up of tax credits has continued to rise.

The most recent figures and data have confirmed that the third big gain has been that tax credits have helped to achieve a big reduction in child poverty—since 1997, the number of children growing up in poverty has fallen by 700,000. That is consistent with our aim of halving child poverty by 2010 and abolishing it by 2020. Tax credits have made a big contribution to that success.

Of course, there have been problems with administration and with IT. It is right that the House should press for those problems to be fixed, and I want to report progress on that. I hope that the debate will reflect a new agreement across the House that tax credits are right in principle and that the focus now needs to be on how we can make the system more effective still. Conservative Members now say that they agree with that, and that is progress, but that is not reflected in the detail of their contributions to the debate. Tax credits are playing a key role in moving people into work, helping people move up the employment ladder while in work and ensuring that it pays to be in a job.

Photo of Jim Cunningham Jim Cunningham PPS (Mr Mike O'Brien, Solicitor General), Law Officers' Department

I am sure that my right hon. Friend recalls that when the Opposition were in Government they opposed tax credits. They opposed the proposal all the way down the line. Does my hon. Friend recall also who it was who introduced the Horizon project that cost billions and cost nearly £50 million to put right? The shadow Chancellor of the Exchequer did not talk about that. I wonder whether he had a hand in that when he was an adviser in John Major's Government.

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

The Conservative party was responsible for that. My hon. Friend is absolutely right that the Conservative party consistently opposed tax credits and consistently opposed the dramatic improvements that we have seen in work incentives, reductions in tax burdens and reductions in child poverty.

I will say a little more about those three key improvements. Tax credits have improved incentives to work. Together with our wider economic stability, they have helped to increase the number of people in work by more than 2 million since the spring of 1997. Since then, long-term unemployment has reduced by 450,000. For example, from this October, a couple with two children moving into full-time work on the national minimum wage will be £41 a week better off for having done so. A lone parent with two children moving into full-time work on the national minimum wage will be £76 a week better off compared with the £54 that that person would have received under the system as it was in 1997. A single person without children moving into full-time work on the national minimum wage will be £58 a week better off compared with the £39 that they would have received under the system as it was in 1997. There have been substantial improvements in the incentives to move into work, and they are one of the main reasons why we have seen such a big increase in the employment rate.

Photo of Shailesh Vara Shailesh Vara Conservative, North West Cambridgeshire

The Minister is keen to emphasise the positive aspects of the system. Will he concede, bearing in mind some of the recipients of tax credit are the poorest in the land and some of the most vulnerable, that he and the system are doing such people no favours by increasing bureaucracy and the responsibility on them to make claims without there being a similar impact on the administrators?

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

There is a big impact on precisely the people to whom the hon. Gentleman refers, and that is for the good. For example, the tax credit system has reduced substantially the tax burden on low to middle-income families, precisely those to which he refers. That tax take of 9.8 per cent. on a single earner couple on £21,000, with two children—the manufacturing average wage—is now, according to OECD studies, the lowest rate of any country in the G7. There has been a huge gain for middle and low-income families. The single earner family with two children can now earn just under two thirds of the average wage before they start to pay any net tax. Thanks to tax credits, the number of families with children paying no net tax will have risen by more than 500,000 to more than 3 million this year. Those improvements should attract wide support from across the House.

Photo of John McFall John McFall Chair, Treasury Committee

I thank my hon. Friend for his remarks on the constructive but critical report of the Treasury Committee. It says clearly that tax credits are right in principle. The core issue is whether we want a flexible system or a fixed system. I would wish to take up that issue if I were to catch the eye of the occupant of the Chair. I have not had a response from the shadow Chief Secretary about the core issue. Where are the Opposition going? Are they fixed or flexible? Will my hon. Friend address that core issue.

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

If I understood him correctly, the shadow Chancellor wants a more flexible inflexible system. However, I look forward to the contribution of my right hon. Friend Mr. McFall, as I agree that this is a very important point indeed.

The third big gain from the system is the fact that tax credits have helped to achieve a significant reduction in child poverty—700,000 children have been lifted out of relative poverty since 1997, compared with a doubling of child poverty in the previous 20 years under the Tory Government. There is recognition across the House that child poverty must be tackled. Previously, the Opposition did not acknowledge that, but they do so today, which is another reason for the broad agreement that, as the Treasury Committee said, the tax credit system is right in principle. Tax credits provide support for 20 million people—a third of the population—and assist 6 million families and just over 10 million children. Take-up is substantially higher than in any previous system of income-related financial support for families in work, and it has risen much faster than it did under previous benefit systems such as family credit. The people most likely to take up their entitlement are the low-income families who stand to benefit the most.

Photo of Anne Milton Anne Milton Conservative, Guildford

The Chief Secretary is talking about statistics, but we are talking about individuals. For anyone listening to our debate, it is individuals who matter. In my Guildford constituency, it is a story of telephone calls that are not answered or returned. Recently, the worst case with which I dealt was one in which someone received an overpayment of £9,000 that they were asked to repay in monthly instalments of £600, which is far beyond their means. Until the Chief Secretary and the Government accept that the problem affects individuals and until they stop citing facts and statistics, we will not make any progress. I should like to ask the Chief Secretary—

Photo of Sylvia Heal Sylvia Heal Deputy Speaker

Order. The hon. Lady has made her point.

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

I am afraid, Madam Deputy Speaker, that I shall continue to cite facts. Individuals are better off in work, instead of being on benefits, as they were in the past. Individuals have a lower tax burden, thanks to the tax credit system, and 700,000 individual children are not growing up in poverty, although they would have done so under the system administered by the Opposition.

Photo of Adrian Bailey Adrian Bailey PPS (Rt Hon Hilary Armstrong, Minister of State (Cabinet)), Cabinet Office

We should talk about individuals. Individuals whom I have met on the doorstep say that tax credit has transformed their personal financial circumstances. If Opposition Members were completely honest, they would have to include that in the equation. However, does my hon. Friend agree that an obvious overpayment factor was built into the system? In itself, that should not mean that a family suffers hardship when their income increases and they have to repay it but, in a small minority of cases, the calculations are wrong, resulting in difficult circumstances. Furthermore, does my hon. Friend not agree that the alternative is a fixed, inflexible system that penalises people far more?

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

My hon. Friend is right on both points. Yesterday, the Treasury Committee made the point that its witnesses have not called for a return to a less flexible system, although some hon. Members have done so.

The statistics published at the end of last month showed continued growth in the number of tax credit recipients. The total number of families who benefit from tax credit rose to 5.9 million in 2004-05, and 305,000 families have benefited from the child care element alone—a 14 per cent. increase on the previous year. A total of 79,000 families benefit from the disabled worker element, which represents an increase of 23 per cent. on 2003-04. Tax credits, as my hon. Friend rightly said, make a vital contribution to the well-being of hard-working families in Britain today. As the Treasury Committee said yesterday, they are right in principle. The challenge is to make sure that the administrative problems that have been raised in our debate are put right.

Photo of David Laws David Laws Shadow Secretary of State for Work and Pensions

So that we can move on to the substance of the debate, can the Chief Secretary tell us how many recommendations made a year ago by the ombudsman have been implemented?

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

We responded positively to the ombudsman's report, and we have not rejected any of its recommendations. The hon. Gentleman will have seen our response, as it has been published.

A good deal of the debate concerns end-of-year adjustments, which were raised by my hon. Friend Mr. Bailey. Let me make the position clear: as family circumstances change, we must reflect those changes in the tax credits that are paid, which is why end-of-year adjustments are integral to a flexible system that responds to people's changing needs. For example, if a couple have a second child or if they suffer a sudden drop in income, the tax credit system should be able respond with extra help straight away. That is the great strength of the flexible system that has been set up, and such a response is only possible if payments can be adjusted during the year and, where necessary, at the end of the year, once any changes in income are known.

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

The Treasury Committee said in its final recommendation:

"We note the Chancellor of the Exchequer's indication that he is keeping an open mind on the possibility of returning to a regime of fixed awards in which entitlement is based on the previous year's income."

Will the Chief Secretary confirm that that is the case?

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

Mr. Laws, in particular, has called for the introduction of a system based on income in a previous period. He is right that the need for adjustments would be removed if we did so, but he and the House must acknowledge the price that would be paid is a loss of flexibility. Interestingly, the report published yesterday included a suggestion, based on work by the Economic and Social Research Council centre for analysis of social exclusion, that, if anything, the system should be more flexible in future.

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

The Chief Secretary told us the views of Mr. Laws, but I asked for the views of the Chancellor of the Exchequer who, we are told,

"is keeping an open mind on the possibility of returning to a regime of fixed awards".

Is that the case?

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

We certainly keep the system under review, but its flexibility is a source of enormous strength and benefit. It can respond straight away to changes in people's circumstances, which is a huge gain.

Photo of Michael Weir Michael Weir Shadow Spokesperson (Work and Pensions), Shadow Spokesperson (Trade and Industry)

I agree that flexibility is essential to the system, but if my constituents try to provide information to officers, it is often not entered into the system or is not entered correctly so it cannot be found if there is a problem. This week, I received a letter from Revenue and Customs saying that it could not retrieve information from the system to tell me whether my constituent had been overpaid, underpaid or paid the correct amount. My constituent is beside herself with worry—there is a problem in the system, as it cannot deal with flexibility.

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

I was pleased to discuss the improvements that we have made in a recent Adjournment debate, when the hon. Gentleman raised his concerns. Procedures are in place to minimise hardship, including reduced recovery rates from continuing tax credit payments for people on low incomes. For people who no longer receive an award, there are 12-month instalment plans, with longer repayments where necessary. Her Majesty's Revenue and Customs considers the case for making additional payments to people who claim hardship as a result of recovery. My right hon. Friend the Paymaster General listened to representations last year about the balance between certainty and flexibility, and responded with changes that reflected those representations.

We do need to improve the quality of service to tax credit customers, as the Treasury Committee stated. That is why we have introduced a series of changes building on experience from the first couple of years of the system. I am grateful, again, to the Treasury Committee for its acknowledgement yesterday:

"We welcome the close attention that the Government continues to pay to improving the design of the regime".

Photo of John McFall John McFall Chair, Treasury Committee

On the point made by the shadow Chancellor—yes, the Chancellor is keeping an open mind, but I have tried to impress upon the Chancellor and other members of the Front-Bench team that if we go back to a fixed system, we can be sure that, as my right hon. Friend Mr. Field said, there will be many, many more complaints from our constituents. The question is flexible or fixed, and I am looking for an answer from the shadow Chancellor. We must be sure that a flexible system works. That is why we need to keep an eye on it.

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

That is why the Liberal Democrat Front-Bench spokesman's predecessor said that

"when people's circumstances change to their detriment, we want a substantial response".—[ Hansard, 10 December 2001; Vol. 376, c. 625.]

The Liberal Democrats had previously favoured flexibility. My right hon. Friend is right about the benefits of that.

Photo of George Mudie George Mudie Labour, Leeds East

As a member of the Select Committee, I appreciate the open mind that my hon. Friend is bringing to the problems that were thrown up. They are not easy problems to resolve, but the fact that they are accepted and that work is going on is welcomed. However, seeing the problems should not distract us from the effect that tax credits have had on our estates. I have seen so many young people waste away on benefits, particularly single parents, who should be in a job but whose lack of skills means that their first job will be a low-paid one, which does not make it worth their while coming off benefits. Tax credits—my hon. Friend mentioned the figure of £50 to £76 a week—have provided the incentive for so many people on my estate to take up work, enter society and be a stakeholder for the first time.

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

My hon. Friend is absolutely right. The dramatic improvement to the incentives to get into a job have been a big gain from the system. I am grateful to him for drawing the attention of the House to the gains in his constituency, and I pay tribute to his work on behalf of his constituents in that respect. That is why the Select Committee said yesterday that we could not go further on certainty without putting flexibility at risk. That was an interesting conclusion, which the House will want to reflect on.

My right hon. Friend announced some important policy changes last November, in particular to address the impact of the annual income rises that have led to the need for adjustment and an increase in the tax credits disregard from £2,500 to £25,000. That crucial change has taken effect from April this year. Together with other changes, those policies will minimise the need for adjustments, yet maintain the flexibility to respond to changes in circumstances.

Photo of Greg Clark Greg Clark Conservative, Tunbridge Wells

On the increased disregard, can the Chief Secretary say what estimates his officials gave Ministers of the cost of that policy change?

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

The overall impact of the package is broadly neutral in cost terms. When one considers the elements of it that cost money and those that gain revenue, the overall impact is broadly neutral.

In our modern labour market, where in any year 3 million people change jobs, flexibility to respond is tremendously important. That is the big benefit of the system as it has been constructed. I welcome the Treasury Committee's comments about that.

Our strategy is to make work pay and to provide real financial support to families through tax credits. There have been problems in the early stages of implementation, but there have also been vital gains. That is why there is growing recognition—across the House, I hope—that tax credits are right in principle.

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

I am grateful to the Chief Secretary for giving way again. I sense that he is winding up. Will he deal with two specific points, which I know the Select Committee considered and Citizens Advice is concerned about? One is the statutory test and the right to appeal to an independent tribunal, which exists for other benefits. The second is the pause that the Government promised before the clawback of overpayments, to give people the right to question the Treasury's decision on that.

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

On the first point, the procedure as we now have it is consistent between the tax credit system and the benefits system as regards the handling of official error. As the hon. Gentleman knows, I have just come from the Department for Work and Pensions, and there is consistency now between those two. On the pause, we have said that we want to accept the ombudsman's recommendation. I can reaffirm that today. Some IT changes will be needed to achieve that, and they may take a little time. We want to take the time, to make sure we get it right. It is our intention to proceed with that, as we have said.

Better incentives for work, a lower tax take from families on low and middle incomes, a big reduction in the number of children growing up in poverty—the system is right not just in principle, but increasingly in practice as well. It is the right system for a progressive welfare state and for a fair and prosperous Britain.

Photo of David Laws David Laws Shadow Secretary of State for Work and Pensions 2:35 pm, 7th June 2006

As the Front-Bench speakers for the Conservative party and for the Government observed, this is a timely moment to consider tax credits and the future of the system. Not only do we have the figures that were published last week on the 2004-05 performance of the tax credit system, but we have the excellent report from the Treasury Committee, which throws a great deal of light on the salient issues that we shall discuss today, many of which were glossed over in the Chief Secretary's response. I hope that the Paymaster General will be able to say more when she sums up.

I welcome the Chief Secretary to his new responsibilities and am glad to see that he is taking a leading role in tax credits policy. Indeed, he seems to have been taking the lead role over the past week as the Government dealt with the implications of last week's figures.

I had not spotted the statistics that the shadow Chancellor drew to our attention, which indicate that in the Chief Secretary's constituency there are greater problems with the tax credit system than anywhere else in the country. I hope that that will ensure that there is a stronger spokesman in the Treasury than there has been in the past for the interests of those who have been failed by the system and who are looking for reforms, rather than complacency, from the Government.

There are two aspects of tax credits that we must debate today. The first group of issues are those on which the Select Committee commented in its excellent report, concerning the practicalities of the tax credit system, with its existing broad design. The parliamentary ombudsman commented on many of those in her report a year ago. The Chief Secretary said that the Government accepted all the ombudsman's recommendations, but he failed to say which had been implemented to date, and he is surely wrong to say that the Government accept all the recommendations. I thought it had already been made clear by the Paymaster General that the Government did not accept the ombudsman's most important recommendation, No. 10, which was to write off the overpayments that have occurred in the past owing to official error. Perhaps the Paymaster General can put on the record later whether the Government's position on that has changed.

Photo of Philip Davies Philip Davies Conservative, Shipley

The hon. Gentleman hits upon something that affects one of my constituents, Susan Webster, who is in a distressing situation. She made Revenue and Customs aware each time her circumstances changed, as HMRC has confirmed to me on its hotline, yet she still had an overpayment of £1,000, which she is expected to pay back. Revenue and Customs refuses to write off that sum. Surely it is wrong, when someone makes HMRC aware of changes in their circumstances at the right time, that they are still expected to pay back a considerable amount of money.

Photo of David Laws David Laws Shadow Secretary of State for Work and Pensions

The hon. Gentleman makes an excellent point. He draws to our attention the fact that the Government have been in denial about the problems of tax credits ever since the system was established, and they have maintained from the beginning—it is picked up in the Treasury Committee's report—that all the problems that people have faced with tax credits have been due to their own incompetence in dealing with the system. In fact, most of the people I have seen in my advice centres in my constituency—I must have seen 250 to 300 over the past two years—have faced problems that were caused in some way by official error. That is what the Government have neither acknowledged nor dealt with in the design of the system.

Photo of Roger Gale Roger Gale Conservative, North Thanet

Does the hon. Gentleman recall the Prime Minister standing at the Dispatch Box at Prime Minister's Question Time and saying that the Government would not seek to reclaim money in any case where the error was shown to be on the part of Her Majesty's Revenue and Customs? Does he agree that the Government are quite simply in breach of that undertaking?

Photo of David Laws David Laws Shadow Secretary of State for Work and Pensions

The hon. Gentleman is quite right that the Prime Minister made a commitment that the Government have not kept. Indeed, it was a commitment that the Chancellor of the Exchequer repeated on GMTV. But our constituents have found themselves in a double lock where they have not only to demonstrate that there was error by HMRC, but to demonstrate by a very strict standard that they could not have been aware of those particular problems.

Photo of David Laws David Laws Shadow Secretary of State for Work and Pensions

I shall make a little progress and then give way.

The Chief Secretary dealt with some of the successes of the tax credit system, and 17 of the 18 lines of the Government's amendment trumpet its successes. Every hon. Member today has acknowledged that for many people, tax credits have made an enormous difference. It would have been almost unbelievable that a Government could spend £15.8 billion in a single year on means-tested benefits without benefiting anybody. The issue is that the design of the tax credits system has been fundamentally flawed, that overpayments are fundamental to the system and that they have driven into poverty many of the people whom the Government have sought to help most, as has been shown by not only the Select Committee's report, but the ombudsman's report, which has been sitting on the shelf for the best part of a year.

The Chief Secretary and the Paymaster General would do well to read the leader article in the Financial Times last week on the day on which the Government published the latest statistics, in which the leader writer said:

"Compassionate governments insulate low-income hard-working families from the ravages of a global market. Enlightened governments seek such protection by rewarding work through their tax and social security systems. Arrogant governments close their ears when these policies are failing."

One of the greatest disappointments in terms of the Government's response over the past year, and to some extent even the Chief Secretary's response today, is that there has been an arrogance and an unwillingness to accept the problems that have been created for many people on the lowest incomes throughout the country.

The problems of the tax credits system, in terms of the loss of public money and the enormous overpayments that have had to be recovered from people on low incomes, are already well known. Many hon. Members today have already spoken, and I am sure others will later, of their own experiences of dealing with the individuals who have had these problems, many of whom have never been significantly in debt before, are baffled by the complexity of the system, and have got into these enormous debts and overpayments through no fault of their own. It is on those practical issues that I seek some reassurance from the Government today.

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

The hon. Gentleman's main proposal is the reintroduction of a much less flexible system, like the old family credit system based on fixed awards. He will have seen what the Treasury Committee said about that yesterday. I quote:

"there seemed to be little support amongst our witnesses for returning to a regime of fixed awards."

Indeed the hon. Gentleman's predecessor in his current post explicitly supported the ability of the system to be flexible in the way that it is. Does that give the hon. Gentleman any pause to reflect on the merits of the proposal that he has been running with for some time now.

Photo of David Laws David Laws Shadow Secretary of State for Work and Pensions

I find the Government's position on this issue rather difficult to fathom. The Chief Secretary has said a number of times that the fixed system would have terrible disadvantages and that it would be some kind of disaster, and that was the line that the Paymaster General used to take. But at the same time they have acknowledged to the shadow Chancellor that they are considering precisely such an option and that they are keeping it under review. I remember being in this House a year ago and hearing the Paymaster General tell us how the alternatives to the then system were ridiculous; that a fixed award system would be ludicrous and that increasing the disregard to the outrageous figure of £10,000 would be enormously expensive. Yet a few months later the disregard went up from £2,500 to £25,000. The Chief Secretary would do well to acknowledge that in paragraph 52 of their report, members of the Select Committee say that they had not sought in this inquiry

"to ask whether the model of tax credits regime which the Government has adopted is the right model."

That is not what the Select Committee has pretended to do. The Committee also took evidence from a series of people, as the Chief Secretary will know, including one-parent families, who want to see a return to fixed awards; the Institute for Fiscal Studies, which believes that that option needs to be looked at seriously; and the Child Poverty Action Group, which has said that it believes that if the existing system cannot be made to work, there should be a major redesign. If the Chief Secretary really believes that the system of fixed awards is so flawed, why do not the Government carry out a public assessment? Why do they not commission some sort of research about other systems in the world? We have this extraordinary debate where it is hinted that a fixed system would be unacceptable, yet the Government simultaneously say that the system is being kept under review.

I noticed today that one of the things that the Chief Secretary is trying to do by continually coming back to the issue of a fixed award system, which was not even an aspect of the Select Committee's report, or one of the recommendations of the ombudsman, is to try to distract attention from the lack of progress on some of the major issues in the ombudsman's report, which came out a year ago. I find it extraordinary that the Chief Secretary is unable to say how many of the ombudsman's recommendations made a full year ago have been implemented. I find it extraordinary that he does not know that the principal recommendation that the ombudsman made has been rejected by the Government. It is extraordinary that the Government do not seem to have taken on board the implications of the existing system for low-income families. It is also extraordinary that, one year after the ombudsman's report, which was the most powerful critique of the impact that the tax credits system was having on some low income families and will probably never be bettered in terms of its insights into the tax credits system and its recommendations for putting it right in its existing form, a cross-party Select Committee with many thoughtful but also instinctively loyal Members of the Government, a majority Labour Committee, should be reporting that

"we are not convinced that the Paymaster General and the Department fully realise the extent to which HMRC needs to re-focus its administrative structures for tax credits around the needs of claimants."

It is astonishing that the Select Committee has gone on to conclude:

"We consider it would be much more helpful if the Department were to focus on the quality of the service it provides to claimants, rather than seeking to attribute the majority of problems with the tax credits regime to error or omission on the part of claimants."

The Select Committee refers to the Paymaster General's statement about a year ago when she attributed virtually every aspect of the overpayments to errors that other people were making, and no aspect of the overpayments to the errors that are being made by the system itself and by the Inland Revenue.

Photo of Mark Francois Mark Francois Shadow Paymaster General

Does the hon. Gentleman agree that if, as the Government claim, the pre-Budget report package is supposed to be essentially revenue neutral, and because the tenfold increase in the disregard is expensive—although the Government will not tell the House how much it costs, even though we know that they know—in logic, the only way to keep the package neutral is that HMRC will have to rule more harshly on those other decisions about who is responsible for overpayments, and that will have a deleterious effect on the low-income families who were supposed to be helped in the first place?

Photo of David Laws David Laws Shadow Secretary of State for Work and Pensions

The hon. Gentleman makes a serious point about the Government's package that was presented in the PBR last year, and the Treasury Committee's report was fairly scathing in setting out the lack of evidence about costings for those changes. I suspect that that is either because the disregard of £25,000 will be much more expensive than the Government expect, or perhaps the Government were never expecting ever to be able to reclaim a lot of those overpayments in any case, and therefore have treated them as written off.

Let us come to the main recommendations of the ombudsman in her report last year, and the main recommendations about overpayments in the Select Committee's report and what I would like the Government to focus on as their first priority. I will touch upon some of the interesting issues that have been raised with regard to fixed awards and some of the comments about means-testing. There are challenges there for all the parties. But the first matter to get right is the system as it is working now.

There are a number of problems in the ombudsman's report that, in fairness to the Government, they have started to try to deal with. Unfortunately, the problems that they seem to have prioritised have been some of the smallest and therefore the easiest to change. The biggest recommendation of all, which would have involved a lot of money, writing off overpayments due to official error, has been disregarded by the Government. But the really critical recommendations that the ombudsman has made concern the way in which overpayments are treated. That was clear from today's briefing by the National Association of Citizens Advice Bureaux, from recommendations 10 to 17 of the Select Committee's report, and from the shadow Chancellor's questions, but it was not clear in the answer from the Chief Secretary. We must move away from the type of system that one-parent families described in the Committee's evidence as a system designed by HMRC that would work with IT rather than with claimants. That is the type of system that the Paymaster General described to me in a letter last June, when she said that it was right that there should be

"a presumption of recovery by means of reducing or stopping further payments" because most overpayments would be due to errors by claimants. In other words, the system as it has always worked from the beginning has been driven by IT and computers, not by any sense of justice.

In light of the responses by the Paymaster General and the Chief Secretary, I am very disappointed that one year on from the recommendations made by the parliamentary ombudsman, the Government seem to have made absolutely no progress on putting in place a pause so that people are able to challenge the overpayments that have been alleged against them. That pause must not only mean that people are not guilty until proven innocent but allow them to understand why the overpayment has occurred. At the moment, the information about that is completely inadequate in most cases.

Photo of Sally Keeble Sally Keeble Labour, Northampton North

This is a very important point that comes back to how one manages the collection of debts, which is what they are in some instances, from people on low incomes. We must ensure that, in the name of having a pause, we do not build another big delay into the system that makes it worse for people who are having difficulties. That is not a flippant point but a serious one about managing income, repayments and debt.

Photo of David Laws David Laws Shadow Secretary of State for Work and Pensions

The hon. Lady makes a legitimate point about the balance between not allowing people to get further into debt and overpayment and giving them a reasonable breathing space to challenge overpayments. I am sure that she accepts that the existing system that presumes that people are guilty until they prove themselves innocent is inadequate and, as the ombudsman puts it, systemic maladministration. It is fundamentally unjust.

What has struck me from my own constituency cases is the complexity of making decisions about many of the cases where overpayments occur. Looking at the system from the top, one might think that one would be dealing either with an overpayment caused by an outright error by the Inland Revenue, where it was obvious to the person that £1 million had turned up in their bank account, or the opposite, where there had been a case of fraud. A huge number of cases are much more complicated, and the tax credits system needs to deal with that. They usually arise when individuals have accurately reported information over a helpline or on paper to the Inland Revenue. Those individuals usually then assume that the Inland Revenue will use that information correctly, but often it does not. It makes errors that it expects people to pick up from extremely complex forms which most people do not understand, and which, in fact, many Members of Parliament probably would not understand.

I can think of an enormous number of cases in my advice centres just over the past few weeks. People have reported that in a particular year they had no income and then have gone into a job, and the tax credits award notice that came back showed them simultaneously working 40 hours and also having no income. People have been on the basic state pension but the award notice has said that they are on pension credit and they have not understood that. People have put in one application for a disabled child with particular mobility components and something else has turned up on the form. Many of these cases are not black and white. The existing system, which applies the double lock whereby someone has somehow to prove not only official error but that they could not have found it by looking through all the forms, is completely inadequate for most of our constituents.

I cannot understand why the Chief Secretary does not accept that the systems of the Department for Work and Pensions and the Inland Revenue are fundamentally different in relation to the assumptions that are made about error and reasonableness. We need a fairer test.

Photo of Jim Cousins Jim Cousins Labour, Newcastle upon Tyne Central

May I draw the hon. Gentleman's attention to the fact that his predecessor as Front-Bench spokesman, Steve Webb, was apparently able as a Member of Parliament to claim tax credits, perfectly properly, by discounting his pension contributions from his income? Does he find, as I do, that most of our constituents do not do that, and that that accounts for a great deal of the overpayment?

Photo of David Laws David Laws Shadow Secretary of State for Work and Pensions

With all due respect to the hon. Gentleman, who is my former colleague on the Treasury Committee, I am sure that he is making a serious point—that one needs to be a professor of social policy and a former fellow of the Institute for Fiscal Studies to understand this system. I was once a Treasury spokesman for my party, and I am now supposed to be the Work and Pensions spokesman, yet I cannot understand some aspects of the forms that the Government send out. They are still not simple enough, and it is still unsatisfactory that there is no statutory test. It is bizarre that the Government have been maintaining several different standards for writing off overpayments over the past couple of years. It is disappointing that none of those issues was addressed by the Chief Secretary. The Treasury Committee's report goes over incredibly important ground that we knew about a year ago following the report by the parliamentary ombudsman.

Photo of Michael Weir Michael Weir Shadow Spokesperson (Work and Pensions), Shadow Spokesperson (Trade and Industry)

I am interested in the hon. Gentleman's remarks about the complexity of the system. I used to be a solicitor, and I find it very difficult to follow. The situation is even worse than he suggests. A constituent of mine recognised that she had been overpaid and continually told the Revenue so, but it would not accept it. Eventually she got a letter from it claiming an overpayment and saying that although she had repeatedly said that she was being overpaid, it was not reasonable for her to accept the payments. What sort of reasonableness are the Revenue working to when they send out such letters?

Photo of David Laws David Laws Shadow Secretary of State for Work and Pensions

The hon. Gentleman is right. Many hon. Members who have had people with tax credit problems coming to see them will recognise such cases, and yet will be entirely uncertain about how the Inland Revenue would deal with them in practice. I have referred cases to the tax credits office where a correct judgment has been made to overturn the overpayments. I have had other cases where there is still fundamental injustice—sometimes involving people with serious disabilities or people with learning difficulties who could not possibly be expected to understand aspects of the form having given the correct information to the Treasury.

Photo of George Mudie George Mudie Labour, Leeds East

I listened with interest to the hon. Gentleman's answer to my hon. Friend Jim Cousins. I went on television to defend the Liberal spokesperson for claiming tax credit despite a wage of about £60,000. This is a good opportunity to put that on the agenda. My personal view is that if a system directed at the poorest and most vulnerable extends to people such as MPs, that clearly pushes a lot of work on to the Revenue that it should not have because we should not be able to claim. The system should be tighter and directed at the most needy.

Photo of David Laws David Laws Shadow Secretary of State for Work and Pensions

The hon. Gentleman makes a sensible point. As he says, people are entitled to claim from a system that the Government have established and on which they have a legitimate claim. He will know that there will be huge sympathy for his viewpoint. It seems bizarre that people who otherwise pay the upper rate of tax can get such benefits. The Government's difficulty with a means-tested system is that if one wants to deny the benefits to such individuals, one has to taper it away more sharply, which raises the disincentive issues mentioned by the shadow Chancellor.

When the Paymaster General winds up, I would like to hear what progress has been made on the crucial recommendations made by the parliamentary ombudsman a year ago, which the Treasury Committee has felt it necessary to come back to in its report. That should not have been necessary. The Government should have been able to progress these issues by now, even if they had decided to make changes that could not have been implemented for some time.

I would also like to follow up the shadow Chancellor's point about fraud. Those matters deserve a much bigger debate than we have today. However, it is clear that the Comptroller and Auditor General was expecting the updated fraud figures this spring. Have provisional figures already been made available to him? When will they be given to the House?

We need to have a wider debate on fixed awards and the balance between flexibility and stability. The Select Committee acknowledged that it did not fully investigate that in the report. It would be enormously beneficial to the House if it could examine some of those issues in future. Even the Government have had to learn to some extent from their experience when the original design of the tax credits system went wrong. The Chief Secretary's claims that a fixed award system would be wrong or damaging sits ill with the Government's statements that they are keeping the matter under review. If they are keeping it under review, it would be interesting to know what they are doing to review it.

Photo of David Laws David Laws Shadow Secretary of State for Work and Pensions

Are the Government simply keeping it in the bottom drawer or doing anything active to discover whether the sort of system that exists in Canada—doubtless Rob Marris is about to brief us on that—should apply in this country?

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

The hon. Gentleman has been generous in giving way. Of course, we acknowledge that there are problems with the system. As a Government Back Bencher, I know where my party is going and I have some idea now of where the Conservatives are going—although they are not entirely clear—but I am beginning to feel like one of the hon. Gentleman's constituents in Yeovil because I do not know what his party stands for. He says that we need more debate here and more debate there—that is good—but his speech, with interventions, has lasted more than 20 minutes and he has not outlined his party's policy. Will he please do so?

Photo of David Laws David Laws Shadow Secretary of State for Work and Pensions

I advise the hon. Gentleman to read the Select Committee report and the parliamentary ombudsman's report and ask the Government why they have not implemented the recommendations, which we support, that should have been implemented as a priority a year ago. I ask the hon. Gentleman to ask the Chief Secretary to consider seriously the case for a fixed award system such as that in Canada. I thought that he would brief us on Canada's excellent experience of a fixed and stable system. The Government should examine that option because stability is as important if not more important than flexibility for families on low incomes.

We all understand that the Government have made, at considerable cost to the public finances, an enormous commitment to trying to reduce child poverty and improve work incentives. They have changed the terms of the political debate, even though there are some major problems with the design of tax credits and the extent to which we can rely on increasing use of means-tested benefits. The Chief Secretary will know about that from his time in the Department for Work and Pensions, dealing with the pension credit.

My major criticism of the Government is not that they have rejected all our proposals for a fixed award system, but that we are sitting here, one year after the parliamentary ombudsman reported and two years after we knew about the problems, and the most important recommendations have not been implemented. I do not like to personalise such matters but it is regrettable that the Chancellor of the Exchequer has not bothered to be here today and that he can find time to change his diary and deal with international issues but cannot find time to tackle an important issue such as this. It is also regrettable that much that the Paymaster General has said in the past couple of years has been complacent and reflected a state of denial. That must lie behind the fact that a year has passed and yet we have made no progress on the key issue. I therefore believe that the Department would benefit from new ministerial responsibilities for tax credits.

I started by quoting from an excellent leading article that appeared in the Financial Times on the day when the tax credit figures were published last week. It concluded that the Chancellor's

"failure to sort out the tax credits mess bodes ill for this government, the Labour party and low income working families."

I hope that Ministers will listen to hon. Members today. If they do not listen to Liberal Democrat Members, I hope that they will listen to the ombudsman and their colleagues on the Select Committee. If they do not, they will pay a high price at the ballot box in losing the votes of precisely those people whom the tax credit system was designed to help.

Photo of John McFall John McFall Chair, Treasury Committee 3:04 pm, 7th June 2006

It is a funny old world when both Opposition parties tell us that we must refer to the Treasury Committee report to find out where we are going. Like my hon. Friend Rob Marris, I am puzzled about where the official Opposition and the Liberal Democrats are going.

The official Opposition proposal for a more flexible inflexible system is something to get one's teeth into. If the Conservative party is a serious party, its members must stand up to the plate on the matter. At Prime Minister's questions, the Leader of the Opposition referred to the Treasury Committee report and was misleading. I looked at the Conservative website's home page today. It states that, as a result of the report, the Opposition would hold a half-day debate and that

"Mr. Osborne was speaking as the cross-party Treasury Select Committee issued a report condemning the tax credit system".

That is wrong, wrong and wrong again.

Our Committee is regularly mentioned in the House. I love hearing the Opposition referring to the noble position that I take on specific issues when it pleases them and I am delighted that the Committee's report forms the backbone of the debate. The official Opposition and the Liberal Democrats have exposed it to the light.

Photo of David Laws David Laws Shadow Secretary of State for Work and Pensions

I believe that we are considering the sub-Committee's report. The Chairman of the sub-Committee launched the report by saying that the tax credit system was not fit for purpose. The right hon. Gentleman is therefore in danger of giving a false impression about the extent of support for the system.

Photo of John McFall John McFall Chair, Treasury Committee

Absolutely not. I am surprised at the hon. Gentleman, who has served on the Treasury Committee. He should know the rules. The sub-Committee is a creature of the main Committee. The sub-Committee does not publish a report by itself. We are considering a Treasury Committee report and the Chairman of that Committee is the right hon. Member for West Dunbartonshire. I am in my place to deal with the comments about the main Committee's report.

Photo of John McFall John McFall Chair, Treasury Committee

No, I do not believe that I should give way in the light of the ignorance that is being displayed about the way in which the Treasury Committee goes about its business.

Photo of John McFall John McFall Chair, Treasury Committee

Given that I have given way to a former member of the Treasury Committee who does not know what he is talking about, I should like to give way to a current member of the Treasury Committee in the hope that she knows what she is talking about.

Photo of Sally Keeble Sally Keeble Labour, Northampton North

The report states:

"We agree that the policy underpinning tax credits of taking people, and especially children, out of poverty is laudable, and that the programme has had considerable success."

It states that the policy is right and has had considerable success. That is a good verdict from a cross-party Committee.

Photo of John McFall John McFall Chair, Treasury Committee

My hon. Friend shows tremendous promise.

The Treasury Committee supports the principle of tax credits. That is clear in our report. Indeed, we stated that we

"are encouraged to hear that they are providing financial assistance to so many people, especially families with children."

We noted further:

"Tax credits have succeeded... in achieving a significantly higher rate of take-up than was the case under previous regimes".

The tax credit system has three overriding objectives. The first is the increase in support for families, the second is the decrease in child poverty figures and the third is providing an adequate incentive to work.

Photo of George Mudie George Mudie Labour, Leeds East

Criticism of the Paymaster General is unfair. The Select Committee report stated:

"We welcome the close attention that the Government continues to pay to improving the design of the regime, as evidenced by the package of reforms announced in the PBR 2005."

That is the part of the Select Committee report that the Opposition parties do not care to quote.

Photo of John McFall John McFall Chair, Treasury Committee

I thank my hon. Friend but he knows that, as Chairman, I am here to provide objectivity and to reflect the comprehensive nature of the report. I have not once been criticised by members of Opposition parties about that.

Photo of David Gauke David Gauke Conservative, South West Hertfordshire

As a member of the Treasury Committee, perhaps I can counterbalance Mr. Mudie. Paragraph 28 states that

"we are not convinced that the Paymaster General and the Department fully realise the extent to which HMRC needs to re-focus its administrative structures for tax credits around the needs of claimants."

The report makes it clear that there is no understanding of the role of official error, of fraud or of the costs of the new package. Those issues also need to be addressed.

Photo of John McFall John McFall Chair, Treasury Committee

The hon. Gentleman anticipates some of the points that I am going to make. His raising that point further underlines my objectivity on this matter.

On increasing support for families, we now have 20 million people getting support, as the Paymaster General said, involving 6 million families and 10 million children. That is an increase on the results of every past policy, and the take-up rate among low earners has been 93 per cent. That is a big improvement compared with the take-up rates of 57 per cent. in the early years of family income supplement, of 62 per cent. for family credit and of 65 per cent. for working families tax credit. That is why the Select Committee has endorsed this policy.

The Select Committee also endorses the child poverty objectives that have resulted in 700,000 children being lifted out of relative poverty, and the measures on creating adequate financial incentives to work. The Chief Secretary to the Treasury mentioned the tax burden. Like him, I look to the survey carried out by the Organisation for Economic Co-operation and Development, which showed that, as a result of the tax credit, there had been a large fall in the tax burden for families. The tax burden on a single-earner couple with no children earning £21,000 has fallen from 17.3 per cent. of gross earnings in 1997 to 9.8 per cent. in 2004. That is the lowest rate for any G7 country, and it is indeed an incentive for people to get into work. The effect of the policy on children is also important, and the Select Committee report notes that the tax credit has helped to ensure that the number of families with children paying no net tax has risen from under 2.5 million to more than 3 million in 2006-07. That is a considerable improvement.

However, I must ask whether everything is going right with the regime, and the answer is most definitely no. That is why the Treasury Committee has sought to address a number of points. Is the regime fit for purpose? Yes, in terms of the majority of people getting tax credits. However, it is not fit for purpose for the minority of people having problems with the tax credit system. That is why the Select Committee visited the tax credit office in Preston, where we looked at the way in which the regime was working in practice. Overpayments were a big issue there.

We examined the problem of overpayments, and the staff gave us three reasons for it. The first is that people's incomes rise from one year to the next. The second is that families overestimate the extent to which their income has fallen. The third is that the provision of payments at the start of a tax year might be based on out-of-date information. Those three reasons combined account for 70 per cent. of the overpayments. I would like to think that the Select Committee has performed a service in identifying those three issues so that they can be tackled. The Select Committee also noted that 30 per cent. of the overpayments were due to delays in reporting changes in a family's circumstances.

The Conservative and Liberal Democrat spokesmen both mentioned the arguments for either fixed or flexible systems, and I would like to say to Mr. Laws that that subject was very much a feature of the Committee's discussions. My right hon. Friend Mr. Field gave oral evidence to the Committee in which he said that he was getting fewer complaints at his surgeries about tax credits now. I have also taken anecdotal evidence on this, and that is certainly a feature of what hon. Members tell me more widely.

If we were to go back to a fixed system, hon. Members would have an increasing number of people coming to see us about the problems involved. I would also like to point out to the Chief Secretary to the Treasury that if we returned to a fixed system, we would not be responding to the demands of a modern labour market. That is important because 3 million people change jobs every year in a modern labour market, and each year more than 200,000 move into new or better jobs, resulting in an increase in their family income by £10,000 a year or more.

Those are the reasons for the overpayments. I cannot stress strongly enough that, if we are to have a flexible system, overpayments will be a feature of it. So how can we manage this in a client-sensitive manner? I might be departing from what the Select Committee has said on this, but my experience is that the benefits of a flexible system are there for everyone in the family.

Photo of Jim Cousins Jim Cousins Labour, Newcastle upon Tyne Central

Will my right hon. Friend comment on paragraph 30 of the report's conclusions and recommendations? The Select Committee makes it clear that, if we are to have a system with the flexibility that he described, it will not be reasonable to expect to achieve staff reductions. In fact, the number of people being employed to achieve a more flexible system is growing, and that pattern is likely to continue. We will not be able to achieve staff reductions if we want to achieve flexibility.

Photo of John McFall John McFall Chair, Treasury Committee

That is a very good point. That issue was raised with us at the tax credit office in Preston. As a result of the demands on the office, extra members of staff were being drafted into that area. When the Minister and others look at the Gershon reviews, and at the demands that have been made on the Department already, they should keep this issue up front. We realise that this cannot be fixed overnight; it will take time. I will mention some of the problems involved as I go through my speech. However, it is an issue that we can all tackle constructively.

I know that the Chancellor has an open mind about this system. The media and others focus on the fact that there have been £2 billion of overpayments this year. That equates in the public's mind to £2 billion of losses, but that is not the case. However, it does give the impression that the system is running less than smoothly. So perhaps the Chancellor will anticipate that reaction and say, "Okay, we'll go back to a fixed system. It will be a surer system." But will it serve the interests of our constituents? I do not think so.

Photo of David Laws David Laws Shadow Secretary of State for Work and Pensions

Does the right hon. Gentleman accept that this is not just an issue of presentational embarrassment for the Government or lost money for the taxpayer? It is also a fact that many of the overpayments are being recovered from people on extremely low incomes, sometimes when the problem has arisen through official error rather than their own. That is an even bigger problem than the fact that the Government have paid out £2 billion more than they intended.

Photo of John McFall John McFall Chair, Treasury Committee

The hon. Gentleman must accept that overpayments are an inherent part of a flexible system. But how can we marry such a system with a client-sensitive system? The Select Committee had that discussion with members of the unions and officials in Preston when we visited the tax credit office there, and that is the important issue for them.

The overpayments were £2.2 billion in 2004-05 and £1.8 billion in 2005-06, and I hope that the Paymaster General will respond to this point when she winds up the debate. A breakdown is needed of those overpayments to determine what the Government's figures are. The figure of £4 billion over two years needs to be broken down.

Photo of Philip Dunne Philip Dunne Conservative, Ludlow

Does the right hon. Gentleman agree that this is not just about the overall amount of money involved? It is also about the number of people involved. He referred to a minority who had received overpayments, but we heard from the shadow Chancellor earlier that, in many constituencies, nearly 50 per cent. of those entitled to payments are either being underpaid or overpaid. I have just worked out that, in my constituency, 47 per cent. are getting the wrong payment. Given the administrative nightmare that is taking place in HMRC, the impact on people's lives of having to deal with this problem is getting them very upset, and we have to spend all our time dealing with that. Solving the problem of administrative incompetence is absolutely critical to getting this matter right.

Photo of John McFall John McFall Chair, Treasury Committee

As I said earlier, overpayments are an integral part of the system, but it is necessary to distinguish between individuals who can make an adequate response to the tax credit office about overpayments and those—perhaps people on low incomes and in distress—who cannot. However, I agree with the hon. Gentleman's second point.

Photo of Michael Weir Michael Weir Shadow Spokesperson (Work and Pensions), Shadow Spokesperson (Trade and Industry)

I understand what the right hon. Gentleman is saying, but does he not accept that, as many other Members have pointed out, some people who recognise that they have been overpaid find it difficult to persuade Her Majesty's Revenue and Customs that they have been overpaid? That prevents the problem from being sorted out earlier.

Photo of John McFall John McFall Chair, Treasury Committee

I realise that, and if Members give me an opportunity I shall say more about it shortly.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

My right hon. Friend is doing a great job in drawing out what I perceive as a consensus, evidenced by the last two interventions. The consensus on both sides of the House seems to be that tax credits are a good thing and are doing a great deal to alleviate poverty, and that there are administrative teething problems. The only difference now seems to concern the magnitude of the problems, and how far the Government have gone towards addressing them. The overpayment figures for two years that my right hon. Friend has given show that they are moving in the right direction. If the Opposition would be a little more flexible, we could have consensus on that. There are problems, which are being fixed. It will take more effort to fix them further.

Photo of John McFall John McFall Chair, Treasury Committee

The Paymaster General dealt with a number of those problems in the pre-Budget report, and I am sure that she will discuss them later.

End-of-year adjustments feature in any flexible system. The only way in which to eliminate overpayments is to have a fixed system in which eligibility is based on the previous year's income and circumstances, and I certainly do not want to go down that road.

The Treasury Committee said that there should be a shift in the culture of HMRC if the tax credits system was to be a success. HMRC conducted a review of the merger of the two departments, which the Select Committee recommended to the Government. As has been pointed out, there are two entirely different cultures, and the client-centred culture has not been predominant. That must be addressed, and I hope that David Varney, HMRC's chief executive, and his colleagues will read the report with that constructive criticism in mind.

I should like the Paymaster General to think about what the Committee said about official error. The Committee believes that it has been a cause of overpayments in a significant number of cases, and that the Government should publish a complete analysis of incidences. There are also the errors caused by the IT system, which a number of Members have mentioned. Constituents have come to me about it. After our visit to Preston, the reason is obvious to us. When a client telephones a civil servant who then consults a computer, not all the information on the client will be on that computer. If decisions are being made on the basis of incomplete information, we can be sure that the system will be made worse. The IT problem must be addressed as a matter of urgency.

When we visited Preston, we learned that only about 25 per cent. of claims went straight through the automated system with no need for manual intervention. About 80 per cent. of new claims required intervention, and it was required by about 30 to 35 per cent. of claims for renewal. The Public and Commercial Services Union told us that the Government initially intended the "rapid data capture" process—the conversion of written information from application forms into electronic data—to handle about 90 per cent. of claims without further need for human intervention. My hon. Friend Jim Cousins mentioned staff numbers, and those figures make his point. There is an urgent need to keep staff at the tax credit office.

A recurring theme was the IT system's lack of flexibility, and the difficulty of correcting a mistake once it had been entered into the system. Staff may—as they told us—accept that the information is wrong, but may still be unable to correct the error.

The Committee also referred to fraud, error and organised crime. When the Paymaster General appeared before the Committee, I personally interrogated her on issues relating to staff from the Department of Work and Pensions and from Network Rail. HMRC has closed the e-portal and it feels that the fraud issue can be addressed, but there is still a problem over national insurance numbers. Vigilance is needed.

Photo of George Mudie George Mudie Labour, Leeds East

Perhaps it is wrong to raise this when my right hon. Friend is talking about fraud, but I think we should record the problems that the Committee had with Electronic Data Systems. We were not able to confirm that we could discuss the matter with the Minister, because we were bound by a settlement. The Public Accounts Committee has raised the issue, and it has been raised by us. I think it should be put on record that the settlement with EDS is insupportable—that it is quite wrong, requires investigation, and should never be replicated.

Photo of John McFall John McFall Chair, Treasury Committee

My hon. Friend makes a good point. I remind the Paymaster General that David Varney, the HMRC chief executive, contacted us and offered us a confidential briefing. However, that would naturally have meant that we could not open our mouths at any future date. As politicians and public representatives, we were not prepared to enter into any such negotiation.

There is a credibility problem. There is, perhaps, a perception of impropriety. There may have been no impropriety, but the position is far from satisfactory, and my hon. Friend Mr. Mudie has done us a service by referring to it.

The Committee welcomed the increase in disregard from £2,500 to £25,000, but the Government say that they expect the increase to reduce the current level of overpayments by a third. That suggests that the remaining two thirds of overpayments arise as a result of changes in claimants' circumstances other than increases in income. Consequently, over the next few years—although the tax credits regime may see a decrease in the number of overpayments—levels are likely to continue to be high. At the same time, claimants' problems may well become increasingly complex as their case histories within the regime lengthen. I should like the Paymaster General to examine that issue, as well the important issues of the pause and the referral to an independent tribunal for appeal. We have mentioned both those issues.

Photo of Sally Keeble Sally Keeble Labour, Northampton North

On the independent tribunal appeal, does my right hon. Friend agree that it is important that we see the report first, as the Treasury Committee suggests, so that we can determine the practicality of having an independent appeal system, which is what we recommended?

Photo of John McFall John McFall Chair, Treasury Committee

I agree and hope that the Paymaster General continues to talk to the Committee while she considers the pause. We said that we were concerned by the apparent lack of urgency on the part of the Government and the Paymaster General in seeking to implement the pause before recovery of overpayment, given that automatic recovery of overpayments is contrary to natural justice. We recommend that the Government reassess the priority that they have assigned to implementing the pause. I hope that she refers to that.

In deciding whether to write off an overpayment, HMRC should not apply a stringently objective reasonableness test, but take account of things such as a claimant's circumstances and the clarity of award notices. I know that the Paymaster General has considered that.

Photo of Michael Wills Michael Wills Labour, North Swindon

Does my right hon. Friend agree that one of the important innovations that the Paymaster General and her team introduced was the hardship team, which examined individual circumstances and could vary the amount of repayment? Does he share my concern that the hardship team was disbanded at the start of this financial year and no date has been set for it to be re-established? Does he share my hope that the Paymaster General will address that?

Photo of John McFall John McFall Chair, Treasury Committee

I agree entirely. I do not know the particular circumstances of the case, but I am willing to take my hon. Friend's word on it. However, as I said, we have to distinguish between those who have been overpaid and can pay the money back adequately, and those low-income families who are experiencing hardship and are in distress. As he says, a hardship team is essential in determining that, and I hope that the Paymaster General considers the issue.

I think that I have exhausted all possible interventions and finish on three things mentioned earlier. First, on the support for families, more families are getting the credit. Secondly, we are making progress on child poverty targets. Thirdly, on incentives to work, my hon. Friend the Member for Leeds, East mentioned young people who are unemployed. I am a former school teacher. When I first took up teaching, a lot of the kids whom I taught in the area where I lived went on not to work, but to unemployment. I would meet some of them five, 10 years later. They would be with their wife or kids, pushing a pram, and I would dread asking, "What are you doing?" I was reluctant to do that. Now I can walk down my high street and ask people what they are doing with more confidence and more authority because more people are in work.

We need a flexible system that responds to people's needs and provides incentives to work, especially for young people, because we must remember that unemployment is the single most important determinant of poverty. If we can have such a system, warts and all, it deserves our support. However, we will keep our critical eye on the Paymaster General over the next few months. We will not let up and will work as a team to ensure that we get the system right.

Photo of Roger Gale Roger Gale Conservative, North Thanet 3:32 pm, 7th June 2006

I am saddened that the Paymaster General is alone on the Front Bench. In the time that I have dealt with her on such issues, and on the two occasions when I have found it necessary to go to the Treasury to meet her to discuss them, I have found her and her civil servants extremely courteous. The fact of the matter is, however, that a ghost is missing from the banquet—it is the author of this shambles, the Chancellor of the Exchequer. It is conspicuous that over the three years of malfunction of the system that he introduced he has not taken part in one of these debates. Like the Duke of Plaza-Toro, he has led his troops from behind. Frankly, that level of political timidity in somebody who—at least once—aspired to be the Prime Minister of the United Kingdom is very unbecoming indeed.

My hon. Friend Anne Milton correctly said that the debate is about people, and it is— [Interruption.]

Photo of Alan Haselhurst Alan Haselhurst Deputy Speaker and Chairman of Ways and Means

Order. I am sorry to interrupt the hon. Gentleman, but we do not want a sedentary interchange. It is extremely disruptive.

Photo of Roger Gale Roger Gale Conservative, North Thanet

I want to deal with the people issues. Some correspondence fortuitously landed on my desk this morning. It was from a constituent and pretty much encapsulates much of the argument. He enclosed a letter from HM Revenue and Customs, which was sent to him on 17 May. It said:

"On 25 June 2004, an amendment was made to your award as you had informed us that" your wife's

"correct income was £7500.00. Unfortunately due to a system error" your income

"of £23930.00 was not taken into consideration and you were awarded a higher entitlement than normal.

Two award notices dated 25-06-2004 were issued to you, one referring to your 2003-2004 award and the other referring to your 2004-2005 award. They both stated that you were now entitled to £5695.85 tax credits...In our view"— the Treasury view—

"it was reasonable for you to have known that due to the increased level of your joint household income this increased entitlement was incorrect...Although this overpayment was caused by a mistake on our behalf, we do not believe it was reasonable for you to think this increased entitlement was correct. I consider that you should have been aware that your payments were wrong, therefore the decision to recover both overpayments is correct."

In other words, "Game, set and match; we're right and you're wrong."

My constituent replied:

"In your last letter in which you changed your mind about how the overpayment occurred and we pointed out errors so you 'reconsider'. We find this wholly unreasonable and yet again you have made a glaring mistake in stating"— my constituent—

"received Tax Credits via his employer totalling £1,393.74...In fact we received no tax credits via my employer as the enclosed wage slips will verify.

You state it was reasonable for us to know we should not be entitled to the overpayment, may we enquire why? We supplied all the information, you made the errors, you stated our award may change...You accept the errors, You make more errors in stating tax credits paid via employer...You change your mind over the reasons for overpayment and we are meant to believe you when you state we should have been responsible."

The Revenue and Customs has batteries of civil servants and an unbelievably expensive information technology system paid for by United Kingdom taxpayers, yet it cannot get its sums right. However, it expects our constituents to work out—presumably on the back of an envelope, without the help of the civil servants and the computer—sums that the Treasury cannot itself get right, and to take responsibility for the Treasury's errors.

The Prime Minister stood at the Dispatch Box at a Prime Minister's Question Time and told the House, in terms, that the Treasury would not seek to reclaim money that was paid as a result of a fault of the Treasury. Ever since that statement was made, the Treasury has wriggled and weasled. It has sought to claim, in one form or another, that all the problems—problems that have been referred to every Member of Parliament—are the fault not of the Treasury or of Revenue and Customs, but of the man who cannot work out complex sums on the back of an envelope, who, in this instance, is my constituent.

J

This woeful tale of tax credit overpayment mirrors my own (except for the amounts of income/award). Stock responses from HM Revenue & Customs, that frequently failed to answer questions asked of them, but maintaining our lack of reasonableness in not seeing the error (when in fact I made conact with them within a few days of realising award had been made in error). I am currently following the complaints proceedure, but after reading your debate wonder if it is worthwhile. I should like to know what if a 'hidden' COP exists and gives the HM Revnue & Custom's exact definition of 'reasonableness' it appears to bear little resemblence to the definition that the real world would ascribe to it

Also why pay Ombudsmen to be ignored. It is not just the tax system that fails the confidence of the public, but a Government with a totalitarian attitude when it comes to allowing their systems to be challanged and injustices redressed.

Submitted by Jeannette Richardson

Photo of Philip Dunne Philip Dunne Conservative, Ludlow

All Members could give similar examples to that which my hon. Friend offers of HMRC's excuses for its incompetence. A problem of the sort that we have not heard mention of so far arrived on my desk yesterday. As a result of an internal systems breakdown, an overpayment remained unrecognised for more than six months. The advice given to my constituent—the excuse—was, "Treat it as an interest-free loan and we will come and get it from you later. We cannot sort it now because things are in such a mess."

Photo of Roger Gale Roger Gale Conservative, North Thanet

My hon. Friend highlights a point that has been made time and again in our debate. You will be relieved to know, Mr. Deputy Speaker, that I do not propose to read out all the 106 cases with which I have dealt. Twenty-nine are still live, many have been outstanding for more than two years, one has been referred to the adjudicator, and eight more will have to be referred to the adjudicator. Because of our debate, I plucked out 12 cases from the 29 live ones and discovered that there was an average repayment claim of £2,190 per household, a lowest figure of £611 and a highest figure of £4,262.

By implication, we are talking about some of the poorest, most underprivileged families in the country. Sadly, the per capita level of deprivation in North Thanet, in east Kent, is still among the highest in the United Kingdom. Can any Member begin to contemplate the terror and misery felt by a young man or woman who picks off the doormat a bill for £4,000, when they do not have 4,000 pence in the bank, and such money as they did have has long been spent on household and living essentials? How can the Treasury and the chairman of the Revenue and Customs, who was rewarded with a knighthood for his incompetence, dare to justify this sort of situation? We know how, because in response to another constituency case, a Revenue and Customs senior business manager wrote to me on 1 June and said:

"Overpayments are sometimes inevitable in a flexible system as changes in circumstances which reduce entitlement can happen at any time in the year."

Forgive me, but Mr. McFall has referred over and over again to the wonderfully flexible system. The system is flexible, in so far as I can see, in terms of the number of excuses that it allows Revenue and Customs to generate for its failures, but it is not responsive to data input—I think that that is the expression.

In evidence to the Treasury Committee, the Paymaster General said with tremendous and accustomed candour:

"I am not a computer person."

The problem is that not only is the right hon. Lady not a computer person, but so far I can see, the people responsible for the installation and maintenance of the Treasury's computers are not computer people either—they are not capable of getting it right—and the result is a Treasury Committee report that is absolutely scathing in its determination.

We are dealing with real people. Teething troubles have been referred to—if there are such troubles, all I can say is that second teeth are coming through, because the programme is now three years old. The Treasury team responsible, including the Paymaster General and the Chancellor of the Exchequer, have had three years to get it right.

Members of Parliament continue to receive cases of hardship and misery, generated by a scheme that we were told would solve people's problems and help them out of debt, poverty and hardship and back into work. For a third of the people involved in the scheme, who are supposedly receiving money as beneficiaries, the reverse is the case—it is creating problems and causing hardship. It hurts me to have to say this, but frankly, if the chairman of Revenue and Customs and the Treasury team responsible for the scheme cannot get it right after three years, they should move over and make way for someone who can.

Photo of Sally Keeble Sally Keeble Labour, Northampton North 3:41 pm, 7th June 2006

A bit later in my remarks, I want to deal with an aspect of the tax credit scheme that has not been talked about much: the child care element—a particularly important point that is responsible for some of the very high levels of overpayment. Before I do so, it is important to return to the fact that the policy is basically the right one. Although everyone says, "Oh yes, we agree that it is the right one, but...", we are left with the "buts", which are undermining. The implication that the system is working so badly that it cannot be made to work and therefore that it must be changed is one of the things that I want to refute very strongly.

We have a choice, and my right hon. Friend Mr. McFall was right to press on both Opposition parties that there is a choice between flat-rate and real-time benefits. Of course, a flat-rate benefit would be easier to administer. We could just say, "We know the family size, and here's a flat-rate payment." However, the real issue is what the payment should be. That is where things become problematic, because we might assume that there is an identikit family and we might give people a certain amount of money. Labour Members' suspicion is that if the Opposition ever got their hands on the system, the level would be too low.

People are now much more familiar with working with computer systems and real-time benefits can take account of changing circumstances. In a sense, people expect the system to target their real needs much more carefully. Again, that comes back to the child care element. That is why it is so important and why my right hon. Friend was correct constantly to press the point about the flat-rate system versus the more flexible version.

By providing flexibility, we make it possible for people to remain in work. That is fundamental not only to the fight against poverty, but to people's dignity, self-respect, standing in society and ability to support their children and to hold out the prospect of a better life for them and all the other things that people want to do for their families. In a previous incarnation, when I was the leader of an inner-London council during all the Tory recessions, I saw people on flat-rate benefits who lived on large council estates, and those benefits only served to keep them in poverty.

Photo of Tobias Ellwood Tobias Ellwood Opposition Whip (Commons)

I remind the hon. Lady that her party is in power and this motion has been tabled because mistakes are being made by the Government. Does she agree that about half of those who apply for tax credits receive the wrong assessment? That is what we should be addressing, not some fictitious idea of what a future Conservative Government might do.

Photo of Sally Keeble Sally Keeble Labour, Northampton North

It is not a fictitious idea, because it relates to policy choices and what has been learned from the past to inform the future. It also relates to what happens to lone parents—unemployed women bringing up children—and their prospects. I do not think that anyone—and that includes Labour Members—has referred to that key issue for the tax credit system.

Photo of Danny Alexander Danny Alexander Opposition Whip (Commons), Shadow Spokesperson (Work and Pensions)

The hon. Lady rightly sets out the objectives for the system, but major problems are caused by the high degree of error and incompetence, and they would make it worth while investigating returning to a system of fixed awards. The experience of my constituents is that it is no longer worth the trouble of engaging with the tax credits system—which was set up to help them—because the incompetence has been going on for three years and they are sick of it.

Photo of Sally Keeble Sally Keeble Labour, Northampton North

The hon. Gentleman makes the fair point that if a system is constantly run down, people disengage from it. It is important therefore to ensure that the public understand that the system can make a real difference to their life chances. I accept that it is complicated, and people may need help with working their way through it. The Committee's report contains important recommendations with which, as a member of the Committee, I wholeheartedly concur. We must recognise that if we are to give people a hand up, not a hand out—to use one of our old phrases—we must ensure that we provide them with the kind of support that will help them best in their present circumstances, not the circumstances in which they were last year.

The system is important because of what it has done for women, and that is why we must get the administration of it right. I take second place to nobody in criticising the administration and the amount of fraud. The system was designed to give a real chance to people on low and average incomes—and in some cases, people with fairly high earnings but large family commitments—to get children out of poverty and to provide some dignity for women who had been kept out of work and at home on benefits for many years, and it is a scandal that it is hampered by administration problems and fraud. That is why Labour Members are so concerned about the administration and why the Committee's report has received so much attention. It is certainly an excellent report.

Much of the ground has already been covered and other hon. Members wish to speak, so I shall make only a few points. The staff have received much criticism, and when we visited them in Preston it was clear that they have thought a lot about the issues and learned a lot from doing so. Some of the managers had done superb jobs in sorting out their targeting and working out ways to deal with the administrative problems. That deserves to be recognised, and the staff should be congratulated on their work. The system is complex and people who are not used to it or to dealing with benefits of this type can find it difficult to come to terms with. Such problems need to be resolved, but it is important that we do not merely castigate the staff for what has happened.

The report identifies various problems, but other challenges—such as the difficulty of reporting a change in circumstances—remain. The report spends a lot of time talking about how people's income can vary in-year. That is understandable when people working shifts or in temporary jobs have to adjust their hours for school holidays and so on. However, evidence gathered for the report made it clear that people's lives change. We must accept that families break up and that people find new partners. New babies get born and children grow up, moving from nursery school to their main school and then out to work.

All those changes can have an impact on a person's tax credit claim. My right hon. Friend the Chancellor announced changes to the system in his Budget statement, and their implementation must take account of people's changing circumstances. I am sure that my right hon. Friend the Paymaster General is more familiar with the details than I am, but I think that one of the proposals is that a change in circumstances will have to be reported in one month rather than in three months. Staff must be geared up and ready to deal with such changes, and claimants must also be aware of what they have to do. They must be able to manage what can be quite a complicated process, as it is not always clear that a change in circumstances will be permanent.

In addition, the relevant computer systems must be geared up to deal with the requirement that changes in circumstances are reported more quickly. It is important, too, that people who advise claimants understand the changes.

The Treasury Committee also talks about the ombudsman's recommendation about an independent appeals system, and makes it clear that it wants to see a report on the practicalities involved. I hope that HMRC can look into the matter very carefully and make a report available quickly, because it is really important to ensure that a paper chase, once begun, does not proliferate.

Mr. Gale mentioned the arguments that people can get into, and the sequence of events is familiar to all hon. Members. When a person in receipt of a tax credit award undergoes a change in circumstances, he or she is likely to say that the award was wrong in the first place. Details of the changes are fed through the system, making the first award even more wrong and rendering incorrect any award made subsequently. The problem then is that it is very difficult to alter the first award, with the result that a paper chase begins that goes on and on. It can take an inordinately long time to resolve such a problem.

Any appeals system has to be appropriate. It must arrive at the right decision and provide proper redress, but it also has to be quite fast. It must not add to the paper chase—it is very important that the appeals system makes things better rather than worse. I hope that the HMRC report on an independent appeals system is made available to hon. Members, and that it is prepared very quickly.

My final point has to do with child care, an element in the debate that has been overlooked so far. It is important that we remember that the flexible tax credits system recognises the cost of caring for children. It is not perfect, but for the first time ever women can claim their child care costs and go out to work.

In the early days of the system that led to some fraud, but the new process has helped a bit. Some problems remain, such as how to deal with holidays and what mature students with children can do about their child care costs. However, it is really important that, as we move forward, we retain the recognition that a woman might need only a small amount of money in tax credits because she can earn reasonably well, but she can earn well only if all her child care costs are paid. She might need only a few pounds a week in tax credits, but she will need £100 a week or more in child care costs. I hope that that is recognised.

I hope that it is also recognised that, because that is the case, I have constituents who have received huge overpayments because of the child care element. I am sure that other hon. Members have such constituents, too. I ask that that be looked at—particularly in any future proposals that the Treasury makes—to make sure that women can get their child care costs, and also that, if mistakes are made, women do not suddenly find themselves plunged into paying large amounts of money because of miscalculations on child care, especially when child care costs sometimes do not take account of holidays and some of the difficulties that women have.

I know that Conservative Members do not like being told about things that happened in the past. Fortunately, it is a long time since the last Tory Government. However, I remember hundreds of people being laid off work and being put on benefits in the middle of one of the worst of the Tory recessions in Birmingham. That was in the days before computers—or before large-scale computers. The then Department of Health and Social Security system—all the offices in Birmingham—shut down in a strike because people were overloaded. It was not just that the admin did not work; it shut down completely. For about nine months, people got nothing. That was an example of the Conservative Government administering financial support to people who were out of work because of the recession that the Conservative Government created, and who were in dire poverty. The suffering was severe, which is one reason why Labour Members think twice when they hear Conservative Members talking about benefits for people on low incomes.

As I say, I will be second to none in criticising maladministration and fraud in the benefits system. Will my right hon. Friend the Paymaster General make sure that we have a welfare system that does not act as a kind of opium of the masses in keeping them in unemployment, but enables people to transform their lives, go out to work and have proper child care for their children, and create a much better future for their families?

Photo of Greg Clark Greg Clark Conservative, Tunbridge Wells 3:57 pm, 7th June 2006

There is no perfect system of welfare. The system always involves choices. There is no utopia that we can ever hope to achieve. Because those choices have to be made, it is important that they should be debated properly and fully in Parliament. Those choices are fundamental to the designs of systems. There is the choice to provide incentives for people to stay in work—that extends in-work benefits up the income scale to the levels that we have. That is a choice that has to be made. We can have the simplicity of universalism in benefits, but that comes at a cost. All those questions need to be discussed fully and properly. What has been a bit disappointing in the contributions from Labour Members is how unwilling they have been to have a proper and open debate about the changes. Instead, they have defended a system that reflects some policy choices that can and should be questioned. The Select Committee report has done that.

It is important to address three points in particular. First, there is the question of overpayments. Secondly, there is the complexity of the system and, thirdly, there is the effect of the tax credit system on low pay. When it comes to the level of overpayments, let none of us be under any illusions. The overpayments are a direct consequence of the policy. The tax credit system is engaged in bringing together two completely different policies: the tax system, which has traditionally taken a look at income on an annual basis, and the welfare system, which takes a much shorter term—often week by week—looks at what claimants need. Needless to say, putting those two things together involves exactly the type of problems that we have seen and that are intrinsic in that system. That is why that requires debating.

Quite reasonably, the Government have recognised the problem and increased the disregard from £2,500 a year to £25,000. No doubt that will help to solve the problem. It is, however, important that we assess whether the change represents value for money, but the Government have consistently refused to allow us to make such an assessment.

When the disregard was set at £2,500, the Treasury was able to estimate that it would cost £800 million. When the disregard was increased tenfold to £25,000, similar figures, miraculously, could not be produced and no assessment could be given—or so we thought. When the Public Accounts Committee questioned senior officials in Her Majesty's Revenue and Customs on the matter, it emerged, after a degree of probing, that such estimates had been produced. However, presumably because it would have been inconvenient to Treasury Ministers if the figures were disclosed, the information was not put in the public domain, although we know that it is available.

The Institute for Fiscal Studies, a well-respected think-tank that does valuable work to inform all parliamentarians about the technical aspects of the tax system, was eager to obtain the information so that it could make what, as every hon. Member would agree, would be an independent assessment of the consequences of the change, but its request was refused. HMRC sent the IFS an unbelievable letter in which it disclosed that it had information about the cost of the increased disregard, but refused, on freedom of information grounds, to give it. The letter read:

"In applying this exemption we had to balance the public interest in withholding the information against the public interest in disclosing the information."

I have no idea what the public interest in withholding the information can be. If the Paymaster General wishes to explain it to me, I will be happy to take her intervention, but she is, perhaps conveniently, buried in her paperwork, as ever.

We are able to make an estimate of the figure because we know that the overpayments in the most recent financial year amounted to some £1.8 billion. It is argued that the overpayments reflect several factors, of which changes to income in-year is but one, and that it is impossible to work out the situation, although calculations have been done. However, in the qualification of the annual report and accounts of the Inland Revenue, the Comptroller and Auditor General was able to make an assessment of the reasons for the overpayments. In the 2004-05 accounts, the CAG said that the

"Total overpayments for 2003/4 were mainly because family income had increased by more than the £2,500 disregard".

In other words, the CAG, who is an unimpeachable figure, says that the main contribution to the then £2.2 billion figure, which is now £1.8 billion, was in-year changes in income. If the Paymaster General wishes to correct Sir John Bourn on the record, I will happily give her the opportunity to do so, but I see, again, that she chooses not to intervene. The matter is important. If we interpret the CAG's assessment as generously as possibly by regarding "mainly" as constituting half the expenditure, the relevant figure is well over £1 billion a year and could be as high as £1.8 billion.

I said at the beginning of my speech that the welfare system involves policy choices. We should be able to debate in both Select Committee and the Chamber whether £1 billion of Government expenditure is best applied to simplifying the system in such a way, or whether, for example, we should use it to increase child benefit by £140 for each family, which would be an alternative. Ministers are disgracefully denying us the opportunity to exercise such scrutiny. Although I understand the political interest in doing such a thing, I do not see the public interest.

Photo of Greg Clark Greg Clark Conservative, Tunbridge Wells

I will be glad to hear an explanation of the public interest in withholding the information.

Photo of Sally Keeble Sally Keeble Labour, Northampton North

If the hon. Gentleman reads the report, it works out that 30 per cent. of the overpayments are due to changes in income, roughly 30 per cent. due to changes in circumstances, and about 15 per cent. each to two other factors. That does not mean that there can then be a transfer into values. There is an interrelationship between the different elements, so the conclusion is wrong.

Photo of Greg Clark Greg Clark Conservative, Tunbridge Wells

The hon. Lady is right in saying that there are different factors. That is why I referred to the Comptroller and Auditor General, whose qualification of the accounts was based not on the number of claimants—he has no interest in that—but on value. He said that the main contribution was from in-year changes in income. That was his assessment.

There are two more deficiencies in the present system. The first is its complexity. We should be able to have a reasonable exchange of views on the complexity of the developing system without having to pretend that it is the best possible system for the best possible set of circumstances. The National Audit Office takes a balanced and reasonable view. In a report on the complexity of the benefits system that the PAC considered, the NAO said:

"We consider that an appropriate degree of complexity exists when there is an equilibrium between the system being complex enough to meet the needs of the wide range of different individuals in various circumstances, yet straightforward enough to run efficiently. Overall, in the National Audit Office's view, this equilibrium has not yet been reached."

Those are the objective and independent words of the NAO. Surely Ministers should reflect on that and concede that the system is too complex and needs to be reformed so as to be more simple. If the words of Sir John Bourn do not carry much weight with Treasury Ministers, perhaps those of the Child Poverty Action Group will. Its helpful handbook on welfare benefits and tax credits has, I think, been sent to all of us, as Members of Parliament. It now runs to 1,600 pages. In this year's introduction, it says that recent

"changes...have left activists exhausted, claimants increasingly anxious about their entitlements"— we have heard that from many of my hon. Friends—

"and arguably, a system more fragile and complex than ever before."

This cannot be seen to be a system that works.

I was concerned when the Chief Secretary seemed almost to be welcoming the ever-increasing numbers of people who are claiming tax credits. I will be the first to welcome improvements in take-up—that is to say people who are entitled to benefits taking them up—but surely it cannot be a benchmark of Government policy that more and more people coming onto state benefits should be a symptom of success. What basis of economic competitiveness is that?

Another way of thinking of record numbers of people claiming tax credits is that 7 million working people—representing 6 million families—are in jobs that are not productive enough to generate an income to keep themselves and their families without a top-up from the state. Of course, if they are not able to earn to that level, they need to have a top-up. They need to be helped, but we cannot congratulate ourselves that earnings are so low that more and more people every year require the intervention of the state so as to have a decent sum on which to live.

I endorse the view of the Secretary of State for Work and Pensions, who, in a notable lecture to the Fabian Society, recently said:

"It is a striking fact that around half of the children living in poverty today live in a household where an adult is in work."

There are two reasons why people require these top-ups to sustain themselves. One reason is that they may not be productive enough—their skills may not be adequate enough to support themselves and their families. An increase in claimants for that reason is a damning indictment of what we need to do to be competitive. Again, the Secretary of State for Work and Pensions said:

"Whereas we today have 3.4 million unskilled jobs, it is estimated that by 2020 we will need only 600,000."

It is extremely important that we increase skill levels within society.

Photo of Sally Keeble Sally Keeble Labour, Northampton North

The conclusion of the hon. Gentleman's argument is that it is better to be unemployed and on benefits than to be in work and on benefits. However, the tax credit system is designed to support people into work, which is why they claim when they are in work.

Photo of Greg Clark Greg Clark Conservative, Tunbridge Wells

The hon. Lady has got the wrong end of the stick. People who cannot earn enough to keep themselves deserve to be supported, but we should not congratulate ourselves, as every year, more and more people have jobs that pay so little that their earnings need to be topped up by the state. However, support should be available.

Unusually for a Conservative Member, I endorse the campaign by the Transport and General Workers Union on low pay in the cleaning industry, in which it points out that, for example, 60 per cent. of cleaners employed in the City of London earn less than £5.50 an hour. It is unacceptable for employers who make do very well from large profits and who depend on those services to get away with poverty pay. We should not accept such behaviour, and Government Members should not accept it either. We need to look seriously at the tax credit system and its interaction with the minimum wage if we are to address the argument of the eminent academic Jonathan Bradshaw of the university of York:

"At the moment the state is playing a vital part in supporting market earnings. At no time in our history has it had to do more...The taxpayer is providing a large subsidy to low-paying employers and no doubt many are laughing all the way to their shareholders".

In conclusion, this is such an important issue that it is disappointing that the Government have complacently defended the present position. We need to debate these things more thoroughly and positively. If my words and those of of my right hon. and hon. Friends do not carry any weight with Treasury Ministers, perhaps the words of Mr. Milburn will do so. In March, he said that we need to

"tackle the root causes, not the symptoms. That must mean moving beyond simply correcting low wages and family poverty after the event, towards policies that spread opportunity and help people to realise their own aspirations for progress."—[ Hansard, 28 March 2006; Vol. 444, c. 710.]

Conservative Members certainly share those aspirations, and I hope that when she replies to our debate, the Paymaster General will say that the Government do so, too.

Photo of Andrew Gwynne Andrew Gwynne PPS (Rt Hon Baroness Scotland of Asthal, Minister of State), Home Office 4:12 pm, 7th June 2006

It is a pleasure to follow Greg Clark, given his apparent conversion to Labour's national minimum wage.

I welcome this debate, but the House will be relieved to learn that I wish to make only a brief contribution. Tax credits have made a huge difference to a great many families in my constituency. Earlier, Anne Milton bemoaned the citing of facts and statistics, and she urged us to focus on individuals. I am happy to do so, because she reminded me that in the last general election campaign, I ran a street stall on Denton market ground on a Sunday morning. A young mother came up to me and said, "Are you Labour?" Given her tone, I hesitated to reply, but I said, "Yes." She said, "That's okay, because your lot have made a real difference to my life. You have done so much for me and my family. The tax credits have really made a difference, and have enabled me to go out and find a job."

That is the hidden success of the Government's tax credit system. Quite simply, tax credits have made work pay, and they have helped to support families financially. As the Minister said, they have helped us to lift 700,000 children out of relative poverty, which is good news that should be applauded. Yes, some of my constituents have experienced problems, and when things go wrong they often go very wrong indeed, which causes those families great concern. However, as my right hon. Friend Mr. McFall said, our right hon. Friend Mr. Field and others have received anecdotal evidence of fewer tax credit problems than in earlier years. Having worked in my predecessor's constituency office, and having dealt with many of those tax credit problems myself, I can confirm that there has been a substantial reduction in cases, although there are still some issues that need to be resolved. I have every confidence that they will be.

I welcome the changes being put in place by Her Majesty's Revenue and Customs, which will alleviate some of the problems in the system, not least with the increase in the disregard for earnings between one tax year and the next from £2,500 to £25,000. That will reduce the overpayments substantially once the measure is fully implemented, as has been acknowledged by speakers in all parts of the House. People whose circumstances have changed and who currently get caught up in the system should not get caught up in future. That is surely to be welcomed.

I am working to resolve the cases that my constituents have brought to me, and I will continue to do so, as I am sure other hon. Members will do. I re-emphasise what tax credits mean to many people. Tax credits benefit 6 million families. In my constituency, Denton and Reddish, that amounts to 7,600 families in receipt of family tax credit and 12,600 in receipt of child tax credit. Those are often lower paid families who struggled to survive under the Conservative Government.

For all the difficulties that there were and are in the system, that extra money is making a fantastic difference to a great many families in Denton and Reddish and throughout the country. It is most certainly not the shambles that Mr. Gale described. Yes, let us iron out the problems, but let us also be proud of this good policy—a redistributive policy, a Labour policy and one that is lifting families out of poverty and giving people opportunities to secure work. I am proud of that and I want to see those principles continue into the future.

Despite the apparent conversion today of those on the Opposition Front Bench, I do not

"long for a Chancellor who...introduces a Budget which abolishes all of Brown's endless reliefs and credits", as Mr. Cameron does. That would be a retrograde step and it would be a disaster for that young mum on Denton market and thousands like her in Denton and Reddish, Greater Manchester and throughout the country.

Photo of Tobias Ellwood Tobias Ellwood Opposition Whip (Commons) 4:17 pm, 7th June 2006

It will take me just three minutes to get my views across in this interesting debate. I am sad that the Chancellor is not present to hear some of the comments, and that it has taken the Conservatives to bring the issues to the fore. We listened with interest to the Chief Secretary, but one can always tell when a Minister is on the back foot. Rather than answer the questions put to him by the shadow Chancellor, the hon. Gentleman went on to attack what a Conservative Government might or might not do in the future. He failed to explain why about half of those who apply for tax credits do not receive the correct amount. He failed to explain why the overpayment threshold has been changed from £2,500 and increased tenfold to £25,000, and the consequences of that to the taxpayer. On a personal note, he also failed to explain why his own constituency is among those that fare worst in the tables published last week.

We have a benefits system that is getting worse, not better, getting more complicated, not simpler, and costing more, not less. It has taken the Conservatives to bring the matter to the Floor of the House. It is interesting that Mr. Speaker decided to throw out the amendments to the motion because they were not worthy. We wanted to discuss issues of overpayment, fraud and incompetence in the administration of the tax system. We wanted the Chancellor to reply, since he created the system in the first place, but he is not here.

In their amendment the Government usually cite a great many statistics. I am glad to hear that some of the £15 billion that is being spent on the tax system is going to some places, but with just under half the people not getting the right amount, there are clearly questions to be answered. They were not answered today. I hope that the shadow Chancellor will have the wisdom to call another debate when the Chancellor can fit it into his diary and be present in the Chamber. However, the Government have been forced in their amendment, which has been thrown out, to acknowledge that there are IT problems and that there have been administration cock-ups, and to acknowledge the need for more changes yet again in a system that the Chancellor created.

We have had enough renaming, rebranding and restructuring. We need a radical overhaul of the tax system, with a programme that simplifies it to its core, that is revenue neutral and that reduces the gap between the cost of paying a tax and the amount of tax collected. Until we go down that road, more and more of the £15 billion that has been spent every year will be wasted.

Photo of Mark Francois Mark Francois Shadow Paymaster General 4:20 pm, 7th June 2006

It is a genuine pleasure to sum up the debate today for Her Majesty's Opposition and to highlight what has become the shambles of the tax credits system as administered by the Government. The system now costs some £16 billion a year, or the equivalent of 5p on the standard rate of income tax. It incorporates some 6 million families, of which some 2 million were overpaid in 2004-05, while at the same time just under 1 million families were underpaid. In other words, nearly half of all the payments in the entire system were incorrect. I therefore welcome the Chief Secretary's admission that the system has serious problems, and his acceptance this afternoon that there is now "a consensus" that tax credits should be retained. It was important that the Government accepted that there was a consensus to retain them, and we welcome that.

However, the tax credits system, as it is currently configured, is seriously flawed. It is prone to fraud and it is also far too complicated, to the extent that many of the claimants who use it do not fully understand what they are claiming, many of the staff who administer it do not really comprehend it properly, and it is all based around a computer system that itself is highly unreliable, as was brought out clearly in the typically punchy contribution of my hon. Friend Mr. Gale. That serves only to compound the mistakes in the system itself.

The Government's defence, as outlined in their hurried written statement that was rushed out on Monday, is essentially that the package of remedial measures announced in the December pre-Budget report will put things right. But six months on, they still refuse to tell the House what the package will really cost, and even then, they admit that this will reduce the overpayments by only a third, so well over 1 million families will still be overpaid even when the package is fully up and running. The PBR package does not address the problems at the heart of the current system—namely, its excessive complexity and its dependence on unreliable information technology. [Interruption.] The Chief Secretary has returned just in time for me to welcome his acknowledgement of our consensus. In effect, the PBR package is an attempt to place a sticking plaster over what has become a gaping wound.

Since the new, and supposedly more flexible, system was introduced in 2003, a series of independent reports has subsequently criticised the operation of the Chancellor's system. In June 2005, after receiving thousands of individual complaints about the new system, the parliamentary ombudsman produced a report that concluded:

"A review of all the cases referred to the Ombudsman shows that the greatest difficulties are suffered by the core group that the tax credit system is aimed at helping, mainly families on low incomes."

In September 2005, the Public Accounts Committee looked at the system and attacked its complexity. It concluded:

"The Government intended the new tax credits to provide a system that was simple for people to understand and to administer. In practice, many people have found the scheme difficult to understand. Many have complained to the Inland Revenue about the system and the frustration and misery it has caused to claimants."

We heard that reflected on both sides of the House in our debate this afternoon.

In January 2006, after reviewing the ombudsman's findings, the Public Administration Committee delivered the following damning verdict on the IT system, which underlines the current tax credits system. It said:

"We are concerned that the IT system which is supposed to enable an efficient delivery of the scheme has in fact been a root cause, first of creating some of the problems which have led to the criticism and complaints about the scheme and then of acting as a barrier to resolving them quickly."

Then, in April 2006, we had a scathing report by the Public Accounts Committee that looked at the fraud and errors in the system, including overpayments that totalled £1.8 billion in 2004-05. It concluded:

"The Department does not have reliable or up to date information on levels of claimant error and fraud in tax credits. The absence of this information and its analysis seriously impairs the Department's management of the schemes and its ability to safeguard taxpayers' money".

Despite that, Ministers at all levels in the Treasury keep trying to insist in the media that the system is working well.

Can the Paymaster General tell us the true extent of the fraud that is now inherent in the tax credits system? We were promised those figures in the spring—let us have them now. Picking up on what my hon. Friend Greg Clark cleverly pointed out, we still have not had the cost of the tenfold increase in the disregard, and we are now told that it is not in the public interest to tell us, as elected Members of Parliament, what that figure is. Will the Paymaster General tell us why?

Only yesterday we had, as Mr. McFall said, a very objective report from the Treasury Committee, which looked in great detail at the administration of the system and concluded:

"It is obvious to us that the Paymaster General's account makes no reference to causes of overpayments which have arisen as a consequence of the Department's own processes—for example official error and IT systems error. Rather, the Paymaster General has referred only to those causes of overpayments which can be attributed to claimant error or omission, or to the design of the tax credits regime, or a combination of both."

All these critical reports, in just two years, represent a litany of failure, and it is a failure lodged firmly on the doorstep of No. 11 Downing street.

There is also a growing consensus among the voluntary sector that the current system does not work properly. As we have heard, the National Association of Citizens Advice Bureaux—citizens advice bureaux now advise tax credit claimants as a major part of their work load—provided a frank commentary on the problems in the system:

"Last year Citizens Advice Bureaux across the UK advised on around 150,000 tax credit problems. CAB experience is that the recovery of overpayments has caused significant hardship to many families as payments have stopped without warning or explanation."

Whereas, for those who read The Guardian, the Reverend Paul Nicholas, chairman of the Zacchaeus 2000 Trust, was quoted in the paper this week as follows:

"Enforcement is driven by computers that have no means of identifying the illiterate, blind, disabled, mentally or chronically ill"— and in some cases, even dead. He concludes that

"an overpayment of tax credits can lead to a downward spiral of a family's fortunes into a morass of debt."

Even the Fabian Society has acknowledged that the system is not working. In its report, "Narrowing the Gap", issued earlier this year, it admitted that the system had faults and that tax credits were associated with "complexity and administrative problems". Now it has a sleeper within the Treasury arguing that agenda, as the report was launched by none other than the Economic Secretary—and where is he?

It needs to be remembered that this system was established to assist people on low incomes. In many cases, it is doing precisely the opposite. It needs to be reformed in order to continue to provide help to people who need it but without driving them to distraction in the process. As far as the current configuration of tax credits is concerned, the Treasury is shuffling the deck chairs on the Titanic, with the Economic Secretary particularly desperate to get one before they all disappear.

Perhaps the greatest irony of all is that the architect of this system is the Chancellor himself, who famously said in the mid-1990s that he wanted to abolish means-testing. Yet the current system is the apotheosis of that concept, against which there is now an overwhelming consensus that it needs to be reformed. The Prime Minister referred at Prime Minister's questions earlier this afternoon to: "Working families tax credit, which makes work pay for people."

Working families tax credit was abolished three years ago. That is the old system. We are debating the new one. The Chancellor has created a system that is so complicated that even the Prime Minister does not understand it, so what hope is there for a single mother, who perhaps has not had a strong financial education, living on a run-down council estate struggling to fill in the forms and deal with the bureaucracy that the Select Committee identified?

The greatest shame is that the system was the Chancellor's personal creation. It was his pet project above all others. Yet when the day came for him to be held to account, what did the iron Chancellor do? He ran away. Unusually, the Government's amendment has not been selected, so hon. Members have a clear choice. They can put up with the shambles that is the current system, and go along with the fact that the Chancellor invented it but would not come and defend it, or they can join us in the Lobby and protest against a system that drives ordinary working families to distraction. I hope that they will do the latter.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 4:30 pm, 7th June 2006

We have had another interesting debate on tax credits. As always, the Conservatives miss the point—about tackling child poverty, helping those with volatile incomes and helping people into work.

I welcome the Treasury Committee report and congratulate my right hon. Friend Mr. McFall, not only on steering through that helpful contribution to the general debate, but on presenting the outstanding issues so comprehensively and in such a considered way today.

The debate divided into two halves. The first dealt with administration and the second considered a flexible system—the tax credit system as it is now—versus a fixed system. I shall revert to those points later.

My right hon. Friend the Member for West Dunbartonshire specifically mentioned the pause or the 30 days and the appeals process. I shall respond to those points shortly. He also made it clear that Her Majesty's Revenue and Customs must put the needs of the claimants first. I agree with him and the Committee. He also said that there must be a shift in the fundamental culture of HMRC if tax credits are to be a success. I agree with him about that and so does the Department, as the report acknowledges.

My hon. Friend Ms Keeble congratulated the staff on their commitment and recognition of the challenges and the changes that they needed to make.

Mr. Gale made several things absolutely clear but I shall pick on one of them. He said that the system was about people. I could not agree more. He knows that I have made it clear both in private meetings and in exchanges across the Floor that it is crucial to do what needs to be done to take forward a basically sound policy and ensure that its administration is right.

My hon. Friend the Member for Northampton, North also highlighted the challenges that remained to be met of the changing circumstances that people experience in their lives and the accuracy and swiftness of the Department's response. She made important points about child care, to which I want to refer.

My hon. Friend Andrew Gwynne echoed the point about the important contribution that tax credits have made in his constituency and in constituencies throughout the country.

Let us be clear: the tax credits deliver three key achievements. They improve incentives to work, they reduce tax on low to middle income families, they help dramatically to reduce child poverty and they have played a major role in helping people into work and to move up the employment ladder, ensuring that work pays over benefits.

I am not surprised that a party that presided over doubling child poverty when in power attaches so little credit to those achievements. When we seek a consensus in the Chamber—the consensus to which my right hon. Friend the Member for West Dunbartonshire referred—it is to get all Opposition parties to commit themselves to the principle of eradicating child poverty and the practical means of achieving that. Every time the Conservatives and the Liberal Democrats were challenged by Labour Members this afternoon, they were unable to say how they would match the huge contribution that tax credits have made to this important debate.

Let us remind ourselves of that contribution. A couple with two children moving into full-time work on the national minimum wage will be £41 a week better off, compared with £34 in 1997. A lone parent—and I can assure hon. Members that they can read and write—with two children moving into full-time work on the national minimum wage will be £76 a week better off, compared with £54 in 1997. A single person without children moving into full-time work on the national minimum wage will be £58 a week better off, compared with £39 a week in 1997.

Tax credits are central to reducing the tax on low and middle-income families, as the recent OECD study shows. The tax paid by a couple with two children earning £21,000 a year has fallen from 17.3 per cent. of gross earnings in 1997 to 9.8 per cent. in 2004. That is the lowest rate in any G7 country. In the UK, a single-earner family with two children can now earn just under two thirds of the average wage before they start to pay any tax. Those are the benefits of tax credits. That is the contribution that is being made by a policy that the Treasury Committee unanimously agreed in principle was the right way to proceed. It has reduced poverty and raised children out of living on absolute low incomes.

Are families responding to this in a positive way? We have only to look at the take-up figures to see the answer. In the first year, 93 per cent. of families on an annual income below £10,000—that is low pay by any definition—claimed their entitlement, compared with 50 per cent. in the early years of family income supplement, and 57 per cent. for family credit.

My right hon. Friend the Member for West Dunbartonshire asked about appeals and about the pause. On the latter point, the Department entirely supports in principle the ombudsman's recommendation to give taxpayers notice before commencing recovery—the so-called 30 days—and we are considering how we can integrate such a pause into the information technology system without jeopardising it. On appeals, we are exploring with the adjudicator's office the feasibility of introducing a fast-track process to provide claimants with the timely, accurate response that my right hon. Friend described. We have done that in close consultation with the ombudsman, who circulated a letter to every Member of this House on 27 March 2006 stating:

"Since I published that report, my staff and I have had regular discussions at senior level with staff in the Revenue, including the Tax Credit Office and the Adjudicator's Office."

Those matters are being taken forward.

The key objective in tackling poverty is to consider how the needs of families—especially low-income families—change, and how we can respond to those changes. We know that their incomes are volatile. More than a quarter of households analysed by Professor John Hills had erratic and high levels of income changes. The statistics for tax credits show that 1 million families saw their income fall between 2003 and 2004, and 700,000 of them would have been worse off under a fixed system. We would have to bear that in mind if we went back to a fixed award system. They would not have received the extra money that tax credits provide for them. We need that flexibility, and of course that means that there sometimes has to be an end of year adjustment. Let us keep this in perspective, however. Fifty-four per cent. of the overpayments are less than £500, and 31 per cent. are less than £200.

In 1997, only 800,000 families received family credit; 6 million now receive tax credits. In 1997, only 50 per cent. take-up was achieved; now take-up is 93 per cent. among the poorest families. Today the income tax liability of 3 million families has been effectively wiped out by tax credits which ensure that they can use their money to spend on their families.

The consensus that we seek today is one that includes the Tories and the Liberal Democrats. We seek a commitment to the eradication of child poverty, a commitment to recognising that people have volatile incomes, and a commitment to willing the means. Today the Conservatives failed in that regard. That is no surprise in the case of a party that presided over child poverty in the 1990s.

Question put,

The House proceeded to a Division.

Photo of Alan Haselhurst Alan Haselhurst Deputy Speaker and Chairman of Ways and Means

Order. I ask the Serjeant at Arms to investigate the delay in the No Lobby.

The House having divided: Ayes 218, Noes 287.

Division number 257

See full list of votes (From The Public Whip)

Question accordingly negatived.