Guardian's Allowance Up-rating (Northern Ireland) Order 2006

Part of the debate – in the House of Lords at 1:03 pm on 24th March 2006.

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Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions 1:03 pm, 24th March 2006

My Lords, I thank the Minister for introducing these orders and regulations. I initially agreed to debate the four instruments together on the understanding that they raised similar issues. When I got into the detail, I realised that this was not entirely true, but I have only myself to blame for that, so I, too, shall speak to all four together.

I do not believe that the first three instruments—the two guardian's allowance orders and the child benefit regulations—are controversial. To the extent that they uprate existing benefits by the movement in RPI, they are routine business. I would, however, like to clarify the nature of the uprated figures. The notes for the guardian's allowance orders helpfully tell us that the rate of RPI increase is 2.7 per cent, but they do not say over what period that was measured. It is only 2.4 per cent at the latest reckoning, so will the Minister say over what period the 2.7 per cent is measured?

The child benefit regulations do not mention the RPI rate at all, but I have calculated the increases actually applied as being 2.5 per cent for the guardian's allowance and 2.6 per cent for the two levels of child benefit. Will the Minister explain the rationale for these figures and will he explain the Treasury's policy towards rounding? I believe that it is the practice of the Department for Work and Pensions to round up. We perhaps should not be surprised to find the Treasury rounding down, but it would be helpful if the Minister can clarify policy in that regard.

I have one further question on the child benefit regulations. Regulation 3 has certain transitional provisions. The Explanatory Notes explain that they are to deal with transitional protection, but do not explain in what way. What type of child benefit will be paid under these provisions? By definition, they are paid to persons not qualified under Regulation 2. How many entitlements will there be? How much will be paid, and for how long?

I turn now to the tax credits regulations, and I will start with the easy bit. I tried to find out on what basis the Treasury had amended the tax credit scheme to take account of inflation. According to the Explanatory Notes, the Treasury is supposed to lay a report before Parliament each year setting out what would be required for the tax credit scheme to retain its value. The Explanatory Notes to the regulations did not give any further information—in fact, they left a square bracket for that particular information—but one of the Minister's very helpful officials sent me a copy of the Treasury's report. It shows that the Treasury, in maintaining the value of benefits and thresholds, has used rates of between 2.7 per cent and 3 per cent, which appears to be using something slightly higher on the whole than the RPI calculations. Alternatively, it is using the RPI figure of 2.7 per cent and doing a fair bit of generous rounding-up. I hope that the Minister will explain the Treasury's approach to calculating the maintenance of the value of the benefits and thresholds in line with inflation, in particular compared with the other instruments in this group.

While the Treasury has calculated the amounts necessary to protect the value of the amounts or thresholds, the regulations do not give inflation protection on a comprehensive basis. For example, the family elements of the child tax credit are left unchanged, as are some of the thresholds. Will the Minister set out the rationale for the various changes that have been made to the amounts and thresholds in the Tax Credits Up-rating Regulations?

I now come to the more important issue: the tax credit scheme itself. We know that the Government have completely mismanaged the implementation of tax credits, with the result that billions of pounds of tax credits have been overpaid and underpaid. We also know that the insensitive way in which Her Majesty's Revenue and Customs then acted in withdrawing credits and pursuing overpayments resulted in great hardship for many who were caught up in the mess, to the extent that some even became reliant on food parcels in order to survive. The Government have never issued a word of apology for that. The Government's tax credit system has also been undermined by massive fraud; somewhat belatedly, the Government closed down the online portal.

We know that tax credits are the brainchild of the Chancellor, but when they started to go wrong he was nowhere to be seen, and it was the Paymaster General who had to appear at the Dispatch Box to try to spin her way out of the extent of failure of the scheme. Perhaps it surprises no one that the Chancellor has not yet owned up to the fact that the scheme needs a radical rethink. Instead, the Government have produced a series of sticking plasters designed to give the scheme some semblance of operability. The tax credits regulations before your Lordships' House today contain one of those sticking plasters—a very large one.

As the Minister explained, the order increases the income disregard from £2,500 to £25,000, in effect putting the tax credit scheme for most practical purposes on to a prior-year income basis. We have tried hard to find out the cost of this massive change to the construction of the scheme, but the Government have hidden behind a complete fiction—namely, that the cost of this change cannot be separated from the other changes to tax credits announced in the Pre-Budget Report. We know that it is a fiction because officials from HMRC told the Public Accounts Committee in another place that they had the calculations. Since then, though, they have been prohibited from revealing them by the Treasury. Any accountant knows that it is perfectly possible to calculate the effect of one element of a number of changes. It just requires a little logic.

The PBR changes to the tax credit scheme overall were said to cost £100 million in 2006–07, but to produce savings of £200 million in 2007–08. In the past, the Government have said that the £2,500 disregard cost £800 million. If income volatility is indeed a feature of the income groups affected by tax credits, we might conservatively guess that the new disregard of £25,000 might cost three or four times that—around £2.5 billion, say. That means that the Chancellor's other measures in the PBR—namely, the timing and the increasing checks—are expected to produce reductions in tax credits of roughly that amount. That is why this issue is important. We need to know who is affected by the changes. Will it be the poorest, who need the tax credits most, or will it be middle England, who, with the £25,000 disregard, can now be within the means-tested benefit net at income levels of over £90,000? We do not believe that there can be a sensible debate about the elements of the changes to the tax credits that were made in the PBR until the Government are honest about the cost and incidence of the individual elements of the package.

My main question to the Minister today is: will he come clean on the cost of the increased income disregard set out in these regulations, and indeed of the other elements of the changes to the tax credit package set out in the PBR? Will he also say whether the Government yet have any strategy to get themselves out of the tax credit mess?