My Lords, I thank the noble Baroness, Lady Prosser, for initiating this debate. I agree with many noble Lords, specifically the noble Baroness, Lady Drake, that what we have been discussing today is arguably the biggest challenge that we face with regard to economic policy—how we deal fairly with the bottom 50% of the workforce in terms of their earnings. I agree with the noble Baroness, Lady Prosser, that putting the current situation right is extremely challenging.
I agree very much with the noble Baroness’s analysis of the issues that are central to that challenge. Some of them, like the labour market changes that she and other noble Lords described, are very long-term challenges, while some have been exacerbated by the banking crisis. With regard to labour market changes, I agree with the noble Baroness, Lady Donaghy, who said that there is a real challenge because of, as it were, the hollowing out of the middle and the problem that people with intermediate skills have found their real wages squeezed. One of the reasons why we are keen to have a much higher level not just of apprenticeships but of advanced apprenticeships is to upskill many more people in that middle band so that they are more able to earn a higher income than they are at the moment.
I will talk later about low pay, but there has been quite sensible interest in and concern about what has been happening as part of a long-term trend on high pay. I was a member of the High Pay Commission, which looked at this whole issue. It has been very striking how over a couple of decades pay at the top has virtually lost touch with the reality of everything else and gone into the stratosphere. The Government are in the process of implementing the majority of the recommendations of the High Pay Commission, not least in giving shareholders a greater say in the pay of senior executives. It is a fact that bonuses have fallen by 85% since the peak year 2007-08, so something has happened in a way that we would all think was beneficial. However, I do not think anyone believes that we have gone as far as we should.
With regard to financial services, the remuneration code, which is in the process of being strengthened, will tie earnings much more closely to performance and lead to a much greater degree of deferred payment, which will not stop people being paid a lot of money but to a far greater extent will tie those earnings to what they have actually achieved. That, combined with greater shareholder control of earnings, will make some difference at the top end.
Fixing the economy is the Government’s first priority because this will raise everyone’s living standards. We are also keen to oversee a fairer tax system to ensure that jobs are created across the country and that those who make the most pay the most. However, we understand the immediate financial pressures that have been the main subject of today’s debate. I shall do my best to respond to as many of the issues that have been raised as possible—first, by looking at the way in which the Government’s economic policy is helping to keep employment as high as possible and interest rates low; secondly, by discussing the action that we have taken to protect standards of living; and, thirdly, by discussing our commitment to ensure that the impacts of our policies are as fair as possible.
First, on economic policy, we know, and have been discussing, the extent to which times are difficult. However, our view is that the only way to deliver a sustained improvement in living standards is to tackle the economy’s problems head-on and deliver a recovery that works for everyone. The Government’s economic plan is designed to equip the UK to secure a stronger economy and a fairer society and to help people who aspire to work hard and get on. The economy is turning a corner. Third-quarter GDP grew by 0.8%. This growth was broad-based across all sectors of the economy, and surveys of future intentions suggest that the growth will be sustained. This does not mean that we have eliminated all risks, but by cutting the deficit significantly, we have helped to secure near-record low interest rates which, as a result of the Bank of England’s forward guidance, are not likely to rise significantly in the short term. These low interest rates have supported hard-working families’ living standards, especially those families which have mortgages to pay. If mortgage interest rates rose by 1%, we would see average mortgage bills increasing by around £1,000 a year. It has been a central tenet of this Government’s policy to have a credible deficit reduction plan so that we can sustain low interest rates, and in this central aim, the Government have been successful.
Our economic policies are also helping people across the country get into work. There is obviously no better way to increase standards of living than by making sure that people are in work and securing a reasonable wage. There are now more people in employment than ever before: 1.4 million private sector jobs have been created over the past three years and 155,000 have been created over the past three months. It is pleasing that of the groups about which we have most concern the number of NEETs has fallen for the past five quarters. It has not fallen far enough, but there has been progress.
Last year, real household disposable incomes grew by 1.6% on average above inflation despite the squeeze, which was the fastest for three years, and according to the OBR, next year total earnings will increase above inflation and by 2015, they will be more than double the rise in inflation.
I realise that in the mean time pay, earnings and disposable income have been squeezed significantly, but one element of the issues that we face, which the noble Baroness, Lady Prosser, did not highlight, was that when this Government took office, there was no money left. This has been the leitmotif throughout all the policies we have had to adopt in order to get the deficit down and to keep interest rates down. We are also taking steps wherever we can directly to protect standards of living by pursuing measures that will keep cash in the pockets of hard-working people up and down the country. Noble Lords will be pleased to know that I am not going to list everything, but I shall mention the key points.
First, we are increasing the tax-free personal allowance to £10,000 by April next year. Taken together, this Government’s increases to the personal allowance will put £700 back into the pocket of each and every average taxpayer and will have taken around 2.7 million people on low incomes out of income tax altogether. We believe this is the most effective way to support those on low and middle incomes because it enables people to keep more of the money they earn. Achieving this in times of plenty would have been hard enough, but doing it under the economic circumstances we inherited makes it even more important. As a result of the changes that we have made, nine out of 10 working households will on average be almost £300 a year better off as a result of tax and benefits changes that took effect this year.
We are also taking a series of actions to keep consumers’ energy bills down. Although I agree that there is quite a row—to put it mildly—about what is happening to energy prices, and there is some suggestion that they are not actually rising very much, the wholesale price of gas this winter will be 8% higher than the price last year, according to Ofgem. That is the back ground to the price increases that we are seeing at the moment. The steps we are taking on energy bills include 2 million households getting help under the warm home discount, including well over a million of the poorest pensioners who will receive £135 off their electricity bill. Under the winter fuel payment, between £100 and £300 is available tax-free to those over 61 to help them pay their heating bills. A £900,000 Big Energy Saving Network will help the most vulnerable get the best deal for them. We are legislating through the Energy Bill to ensure that suppliers place all customers on the cheapest tariff that meets their preferences. We are making energy bills simpler, clearer and fairer, helping the 84% who do not switch and could be missing out on savings of up to £158. It simply is not the case that all electricity companies charge the same. There are savings to be made.
We are going further. The Prime Minister has announced there will be an annual review into the state of the competition in the market. This review will be led by the OFT, Ofgem and the new Competition and Markets Authority, when it comes into existence, to report by next year. Further measures on energy will be announced shortly by my noble friend Lady Verma when she gives the annual energy Statement. I recommend that all noble Lords stay for that.
Finally on energy, I completely endorse the comments of my noble friend Lord Horam on Labour Party policy in this area. It is simply incredible to believe that a temporary price freeze would have the effect for which the Labour Party hopes. I suspect that that is why the majority of people, when polled about this last weekend, said that they did not believe that it would work. We have also helped local authorities to freeze council tax, and we have frozen fuel duties. All these measures help to reduce the day-to-day cost of living for millions of people up and down the country.
I turn to redistribution and the distribution of income more generally. Before the fiscal consolidation we are now implementing, the richest 20% contributed three and a half times as much in tax as they received from public spending. This has now increased to around four times as much. As noble Lords have already discussed, there has been a fall in income inequality to the lowest level since 1986. There may be a number of caveats around that, but it is the case that income inequality is at the lowest level since 1986. For those of us to wish to see less income inequality, that is something to be pleased about. We have also taken steps to ensure that the most vulnerable low-income groups have been protected against the effects of economic circumstances.
Not least are the measures that we have taken for pensioners. It is interesting that not a single noble Lord has mentioned pensioners in the debate. I suspect that the reason is that the Government have treated pensioners, if not overgenerously, then certainly very fairly over the past three years. Pensioners have seen above-inflation increases to the state pension. The triple lock means that the basic state pension is higher by £6.85 a week than if it had been increased by earnings only. The average person reaching state pension age in 2013 with a full basic state pension can expect to receive an additional £12,000 in basic state pension over their retirement. In April this year, following a 2.5% increase, the basic state pension was estimated to be almost 18% of average earnings, the highest it has been in any year since 1992. In times of austerity, this is a significant achievement.
The noble Baroness, Lady Tyler, and others talked about improved childcare for people on low incomes. She referred to the fact that we are doubling the number of disadvantaged two year-olds receiving 15 hours of free childcare a week to 260,000 by September next year. We have also implemented 15 hours a week for all three and four year-olds and have announced free school meals for all children in their first three years of primary school.
Almost every noble Lord who has spoken in the debate has talked about low pay, which is clearly a very significant issue. The problems we now face are in part the result of long-term trends in unemployment. For example, the noble Lord, Lord Monks, pointed out that many people moving from the public to the private sector have taken a cut in pay because, on average, public sector wages have become somewhat higher than private sector wages. We have had a big shift from public to private, which has obviously had an impact on many people’s wages. The Government agree with the analysis of the Milburn review in this area. Its conclusion was that,
“the taxpayer alone can no longer bridge the gap between earnings and prices”,
and that employers,
“need to step up to the plate by providing higher minimum levels of pay and better career prospects, enabled by better skills”.
On the minimum wage, as noble Lords have pointed out, my colleague Vince Cable has asked the Low Pay Commission to look at the scope for increasing the minimum wage without having detrimental effects on the level of employment. We hope very much that that will lead to a greater increase in the minimum wage. However, the minimum wage is the minimum, and the living wage is a level that the Government support and encourage employers to follow. As a number of noble Lords pointed out, when the minimum wage was introduced there was a lot of scaremongering about the employment costs, which proved to be completely false. It has been estimated that the living wage might cost 160,000 jobs if implemented overall. I do not know whether that is a realistic assessment, but certainly the work that we have asked the Low Pay Commission to do to increase the minimum wage will begin to tease that out.
My Lords, the noble Baroness, Lady Donaghy, called me something I have never been called in your Lordships’ Chamber—a “treat”, which is impressive given that yesterday in particular I was called quite a lot of things, all of which were extremely derogatory. It is a great pleasure to hear what I think is an undeserved accolade. The noble Baroness talked about compliance. When the minimum wage was going through, I remember expressing some concerns that the legislation seemed to have very little in it about compliance. Although I understand that greater arrears have been identified in the past year than there were a couple of years ago, more needs to be done. I will take up the point she raised about the website with BIS, as we ought to be able to do something about that.
I am extremely sorry that I have been unable to deal with many of the questions and points raised by noble Lords in today’s debate, but I am out of time. Again, I thank the noble Baroness, Lady Prosser, for tabling the Motion. If we do not try our very hardest to improve the quality of life for the hard-working people of the UK, then we are not doing our jobs properly. I can assure noble Lords that we understand the financial pressures that hard-working families are facing, and that we are taking and will continue to take what we believe are the right steps to help them.