Tax Credits

Oral Answers to Questions — Treasury – in the House of Commons at 10:30 am on 12th July 2007.

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Photo of John Butterfill John Butterfill Conservative, Bournemouth West 10:30 am, 12th July 2007

What estimate he has made of the likely change in the number of people who will claim tax credits as a result of the abolition of the 10p starting rate of income tax in the financial year 2008-09; and if he will make a statement.

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Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

Tax credit take-up is rising, and is 97 per cent. among families with children that are on incomes of less than £10,000. Tax credits mean that households will be £100 a year better off on average, that 200,000 children will be lifted out of poverty and that 580,000 pensioners will be taken out of income tax.

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Photo of John Butterfill John Butterfill Conservative, Bournemouth West

Given the right hon. Gentleman's reputation for being concerned about social justice, is he not worried that his predecessor's doubling of the marginal tax rate now means that many more people will be forced to claim tax credits? Mr. Blunkett described the system as a shambles. Last year, 50 per cent. of all assessments were proved to be wrong and 25 per cent. of those entitled to tax credit found the system so complex that they failed to claim it. Does he not think that the whole matter needs re-examination?

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Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

I think that the basic proposition behind tax credits is right. The hon. Gentleman will recall that, back in 1997, one of the problems that we faced was a disincentive to working—work did not pay. The tax credit system was designed to ensure that when people went into work they saw the benefit, and that we could help people with additional costs such as child care and so on. However, the hon. Gentleman is right to say that there were administrative problems following its introduction. The National Audit Office report, which is published this morning, highlights some of them. They are comparable to some of the problems with the previous Government's introduction of jobseeker's allowance in the middle of the previous decade. Clearly we need to sort out the problems, but if the hon. Gentleman is asking whether I believe that tax credits are right in principle, the answer is yes, I most certainly do, because they are helping approximately 20 million families, and that is important.

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Photo of John McFall John McFall Chair, Treasury Committee, Chair, Treasury Committee

I welcome the Chancellor to his new position and wish him every success, for the country's sake.

My right hon. Friend knows that the Treasury Committee is interested in errors and fraud in the tax credit system. This morning he sent me, and others, a letter detailing the credit and working tax credit error and fraud statistics. The Select Committee does not condone any fraud in the system, but we want to know whether the Government have made progress in ensuring that there is less fraud. My right hon. Friend mentioned jobseeker's allowance. Has any improvement been made in the past 10 or 12 years on reducing fraud?

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Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

I thank my right hon. Friend for his good wishes. He has done some excellent work as Chairman of the Select Committee in the past few years and I look forward—if that is the right phrase—to appearing before him and the Committee at some stage.

Her Majesty's Revenue and Customs report was published this morning. I wrote to Opposition spokesmen, and I hope that they got the report. It was due to be published this afternoon, but I thought—not necessarily to my advantage, because of the NAO's comments—that it might be better to draw it to their attention. I am concerned about the extent of error in the system. My right hon. Friend asked about JSA, which was introduced in the mid-1990s. The error rate then was approximately 13 per cent. and it has now decreased to about 5 per cent. I well remember, from my time as Secretary of State with responsibility for social security, that error in the social security system is a problem, although, after years of bearing down on it, we are beginning to see some results.

Let me revert to the central point. The tax credit system, like the tax system, operates on a basis of annual assessment. We set it up that way so that it would be flexible, and people would not be subjected to weekly income tests as they are in most parts of the social security system. There were inevitably some administrative problems following its introduction—we are all aware of that. They need to be sorted out, and they will be sorted out. However, it is important to keep sight of the fact that tax credits have benefited nearly 20 million families, and that many people with children are much better off as a result of our actions. There are times when I wonder whether the Opposition are against tax credits themselves, rather than being concerned about errors in the system.

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Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer, Liberal Democrat Spokesperson (Treasury)

I, too, welcome the Chancellor, and I hope that he enjoys his honeymoon—until the day that he has to say no to the Prime Minister. If the Government are so keen to encourage the take-up of the working tax credit, which is as low as 25 per cent. for childless couples, why are people expected to fill in a 10-page form, with 57 questions and 60 pages of explanatory notes, compared with the user-friendly four-page note that is required to get non-domiciled tax status? Why do the Government make it so difficult for poorer people to claim entitlements and so easy for rich people to avoid paying tax?

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Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

I thank the hon. Gentleman for his good wishes. I do not know when the honeymoon will come to end; in fact, I think that it has come to an end already—but I thank him all the same. Of course I am willing to look at the application forms for tax credits, but he will appreciate that the simpler a form can be, the more difficulty that can raise later on. I have no doubt that he will focus on that possibility today, because of an apparently simplistic promise to cut income tax by 4p, which would cost him nearly £19 billion. He will find it quite hard to explain how he is going to fill that gap—to do so through fuel duty, for example, would mean something like 39p a litre on fuel. I look forward to hearing how the Liberal Democrats are going to explain their tax changes, and who will lose and who will gain.

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Photo of Paddy Tipping Paddy Tipping Labour, Sherwood

Have not tax credits proved a valuable way of taking families, and particularly children, out of poverty? Will they not prove to be more effective than, say, offering £20 a week for couples to get married and stay married?

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Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

I agree with my hon. Friend. The married couples allowance was steadily reduced under the previous Government. Indeed, it was Lord Lamont who did that, and at the time he was being advised by somebody—I think that it might have been the Leader of the Opposition. The problem is that the married couples allowance throws up all sorts of anomalies. For example, if the husband in a couple is killed in a tragic road accident, his widow and children will be left without support—so when we think through the consequence, we see that bringing back the allowance is not the right thing to do. Helping families with children, and the fact that the working families tax credit has lifted more than 600,000 children out of poverty, are things that we should keep in the front of our minds. All of us in the House say that we are concerned about cutting child poverty, and we have a target to do so. Our measures have helped to lift 600,000 children out of poverty, and that is why tax credits are so important to us.

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Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

I of course welcome the right hon. Gentleman to his new job and wish him well in his post. It will be fun shadowing someone with whom I am actually on speaking terms— [ Interruption ]—for the moment, at least. Unlike most Chancellors, he cannot blame his predecessor for the undoubted mess that he has inherited, and there is no greater mess than the tax credits system and its administration. Will he confirm that the figures that he published 30 minutes ago show that in 2005-06, the last year for which the Inland Revenue has published figures, it overpaid £1.7 billion of taxpayers' money and underpaid £549 million. That is well over £2 billion in mistaken payments that bring hardship to many hundreds of thousands of families, and, of course, cost the taxpayer dearly. Does the Chancellor accept, in his second week in the job, that that is a totally unacceptable scandal? Will he promise that the level of error and fraud will be reduced while he is Chancellor?

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Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

I thank the hon. Gentleman for his good wishes. May I congratulate him, too, on holding on to his position? I see that there was some speculation as to whether he would be moved, but I am glad to see him here. I hope that we shall remain on speaking terms—we shall try for the next 50 minutes or so and see how we get on.

On the hon. Gentleman's point about tax credits, of course it is unacceptable to have such high levels of error. Following the introduction of tax credits, I can well see how those errors arose, especially with a system that allows for annual assessment, and when there are many families whose incomes and circumstances may change quite a lot during that period. However, as a constituency MP, I know, as I am sure that most hon. Members will know, that we all have cases in our constituencies where things have gone wrong and the sums have added up very quickly, and that clearly causes distress. As I said a few moments ago, just as with the social security errors of a decade ago, so with tax credits. We need to do everything we can to reduce those errors. I still think that it is better to model the system on the tax system, and try to work on an annual basis, rather than moving to a far more complex system of assessment. However, the hon. Gentleman is quite right: we need to get the levels of error down and ensure that the right sums are being paid to the right people.

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Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

I thank the Chancellor for that answer, but, to be honest, he did not actually respond to the question that I asked. Will he make a commitment that during his time as Chancellor he will reduce the levels of error and fraud? I say that because, as he will have read, the Comptroller and Auditor General's report, which is part of the HMRC accounts, says that there is currently no evidence to demonstrate that there will be lower figures in the next published year. Indeed, the report also shows that the Treasury is still trying to collect almost £4 billion of overpayments from people out there in our constituencies, and that it has given up on £1.6 billion altogether. I therefore put the question to the Chancellor again. Does he believe that during his time as Chancellor he will be able to reduce the totally unacceptable levels of error and fraud, which cause hardship to so many of the people whom we represent?

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Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

As I have said, I think that the level of error is too high and I want to see it reduced. That will take time, as I know from my experience in dealing with jobseeker's allowance eight or nine years ago. However, as I said to the Chairman of the Select Committee, my right hon. Friend John McFall, those error rates, which had stood at 13 per cent. during the last year of the Conservative Government, came down to 5 per cent., and we must apply the same pressure in relation to tax credits. We need to deal with that, but we also need to keep in the front of our minds the benefits that tax credits can bring. I hope that when the hon. Gentleman next gets to his feet, he will tell us whether he supports tax credits—because, as with so many other aspects of Tory tax policy, it is not entirely clear what the Opposition's policy is on this, especially when they have made commitments to abolish inheritance tax, to reduce corporation tax by 1 per cent., to get rid of stamp duty—

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Photo of Tom Levitt Tom Levitt Labour, High Peak

I, too, welcome my right hon. Friend back to the Treasury; what goes around comes around, in that respect. Does he agree that the tax credit system is an integral part of the campaign to abolish child poverty by 2020, as we can all see that it is having an effect in our constituencies? Does he also agree that the target date of 2020 is a crucial part of that strategy, and that it is the absence of such a date and such a determination from the social policy document that the Conservatives published this week that shows that they are dealing in words and not deeds when it comes to tackling poverty?

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Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

I thank my hon. Friend for his kind remarks. I know that he has been extremely concerned over many years in the House to ensure that the Government meet their ambitions to eradicate poverty, especially child poverty and pensioner poverty, which is also important. The fact that we have been able to lift children and pensioners out of poverty over the years, through tax credits and other measures, is important. The key thing to keep at the front of our minds is that if the Government are serious about tackling poverty, we must be prepared to spend sufficient resources to do it. There are huge question marks over the Conservatives in that regard, as I was starting to say a moment ago—but you will be relieved to hear that I will not continue with that line just yet, Mr. Speaker.

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