Tax Credits (Working Families)

Part of Opposition Day — [5th Allotted Day] – in the House of Commons at 5:28 pm on 7th July 2015.

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Photo of Julian Knight Julian Knight Conservative, Solihull 5:28 pm, 7th July 2015

It is a particular pleasure to follow Sir Gerald Kaufman, the Father of the House.

Tax credit payments play an important role in the finances of many of my constituents, helping them to provide for childcare, meet ongoing expenditure and, crucially, join the workforce. My constituency is the prosperous town of Solihull, but there is still a legion of very hard-working people on not particularly high salaries who are helped by tax credits. I remember one door I knocked on in Shirley about a year or so before the general election. I met a young couple who told me that they both worked full time, brought up two children and earned something like about £20,000 a year between them. They had to drive around in a 15-year-old car. Their lives were difficult financially and tax credits really helped them to get over a hump in the road. It would therefore be wrong to lose tax credits overnight without proper recompense through the tax system and other means of helping individuals. Incidentally, they also commented on how the state provided for people local to them who did not work, but had a much higher standard of living—a strong argument for a sensible cap on benefits, with which it seems that the shadow Chancellor now agrees.

We should not pretend, however, that tax credits are perfect. When they were launched, there was a massive problem with over and underpayments—2 million instances in the first year alone—and this has not stopped. Okay, they are better managed by HMRC, but there is still a great deal of confusion in the tax credits system. If we were designing a system now to help people into work and to support families, would we really design tax credits with the inbuilt pitfall of overpayments that must then be clawed back, often to the great personal distress of the claimant?

There are also long-standing issues of fraud in the tax credits system. The online portal was closed in 2005 when tens of millions of pounds was defrauded, much of it by organised gangs from overseas. I remember reporting on the story in my capacity as BBC News personal finance correspondent and being told by officials that although it was unfortunate, the fraud was seen as a price worth paying to deliver the project. The phrase used was “spray and pay”.

In addition, there is an issue, touched on by hon. Members, about how tax credits effectively top up low pay in the economy. They are effectively a subsidy for big business. I note that Shabana Mahmood disputed this fact, but that august publication, The Guardian, carried a story on 20 April saying that £11 billion was being used to top up low pay through the tax credits system.

There is also a strong cultural issue. Does it not damage society and individual entrepreneurialism to have so many people effectively in receipt of welfare and beholden to the state, as my hon. Friend James Cartlidge asked earlier? As we have seen in Greece and elsewhere, over-reliance on the state damages society and leaves individuals incredibly vulnerable to global financial shocks, as well as domestic economic shocks. He made an interesting point about whether many loans now active are predicated on tax credits. Surely that needs to be investigated further by the Financial Conduct Authority.

Also, it is possible that some governing parties have used tax credits as a means by which—heaven forbid—to curry favour with the electorate. We should not forget that the biggest rises in tax credits came just before the 2005 and 2010 general elections. Is it not significant as well that tax credit spend rose by 340% between 1997 and 2010, whereas average salaries rose by only 30%? Tax credits have increased by 10 times the level of average salaries, drawing more and more people into dependence on the state. There is also the wrongheaded situation of people on salaries far in excess of the national average being dragged into tax credits. In particular, single people often do not get any help whatsoever, yet the pattern in this country is of more single households being formed.

No Government Member has so far suggested that tax credits should be done away with overnight. They should, however, be replaced slowly over time by a different, cleaner system less open to fraud and miscalculation. For me, increasing the personal allowance, from £10,000 to £12,500 and potentially beyond, is key. We should cut out the middle man. There is no need to claw cash back. It is also essential to raise the 40p personal allowance. There are many people paying tax at 40p in the pound who should not be; the system should not have been so designed that they have to pay it.

We are doubling the amount of free childcare from 15 hours to 30 hours—a key means by which to enable people to get back into the workforce—while fuel duty is now 18p cheaper than it would have been under Labour’s plans, which has made a massive difference to family finances. In addition, ending the green levies on energy, including home energy supplies, should press down on home energy costs. In Solihull, we have just managed to freeze council tax for the fifth year on the trot—another means of delivering tax cuts, in effect, when compared to inflation, for working people. This has happened while unemployment in my constituency has fallen by 67% since 2010.