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Tax Credits (Income Thresholds and Determination of Rates) (Amendment) Regulations 2016 — Motion to Approve

– in the House of Lords at 3:53 pm on 7th March 2016.

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Votes in this debate

Moved by Lord O'Neill of Gatley

That the draft Regulations laid before the House on 14 January be approved.

Relevant document: 23rd Report from the Secondary Legislation Scrutiny Committee

Photo of Lord O'Neill of Gatley Lord O'Neill of Gatley The Commercial Secretary to the Treasury 4:04 pm, 7th March 2016

My Lords, I confirm that the provisions contained in the regulations before your Lordships today are compatible with the European Convention on Human Rights.

I will start by setting out the purpose of the regulations that are put before the House today. These regulations make a single change: reducing the income rise disregard from £5,000 to £2,500, taking it back to the original level it was set at when tax credits were introduced and aligning it with the income fall disregard. This change was announced in the summer Budget of

8 July 2015. This means that awards will more accurately reflect the claimant’s recent earnings, meaning fewer overpayments and that fewer people will go into debt as a result.

Tax credits were introduced in 2003, at which point the income rise disregard was set at £2,500. At the time, the tax credits IT system was unable to cope with the unpredictability of family incomes, and in 2006 the amount by which a family’s income could increase before their tax credit award would adjust within the year—the income rise disregard—was increased to £25,000. This meant that two families with significantly different incomes could receive the same tax credits award.

Following the 2010 election, the coalition Government reduced the rate of the disregard to £10,000 and then to £5,000. Improvements to stabilise the tax credits system and the increased use of real-time information—RTI—mean that the system is now able to be more responsive to claimants’ changes of circumstances. I reassure noble Lords that when considering bringing forward this change, the Government considered the impacts on claimants in accordance with their legal obligations, and that there will be no cash losers from this measure in the tax year.

The purpose of a disregard is to provide a buffer zone in which a family’s income can increase during the course of a year without affecting their tax credit entitlement. It has been a feature of the tax credits system since its inception in 2003 and was originally set, as I said, at £2,500. Let me explain how the disregard works in practice. Following receipt of a claim, HMRC makes an initial tax credit award based on the claimant’s current circumstances and income from the previous tax year. As the current tax year progresses, claimants can notify HMRC of changes in their circumstances. Some changes must be reported within one month: for example, a partner moving in with a previously single claimant. However, other changes, such as a change in income, do not need to be reported until the year’s end, although claimants are encouraged to keep HMRC informed of changes in earnings.

After the end of the tax year, HMRC sends claimants renewal papers. The purpose of these is to determine the claimant’s actual entitlements for the year just ended and, if appropriate, to initiate a claim for the year ahead. HMRC does this by asking the claimant to confirm their income and circumstances for the year that has just ended. Where the claimant’s income has stayed the same, or if the income in that year has risen by less than the disregard amount compared to the year before, the increase in income does not affect the tax credit award in that tax year. It is disregarded from the final calculation of a tax credit award. If, on the other hand, their income has risen by more than the tax credit disregard, their tax credit award is decreased in the year. However, it is important to emphasise again that individuals will still be taking home more money, owing to the increase in their income.

Either way, in the subsequent year a claimant’s tax credits award will be calculated in the usual way, using their full annual income from the previous tax year to determine their tax credit entitlement. After the change in the tax year, whether the recipient’s pay rise was above or below the disregard level, their tax credit award for the following year will be adjusted downwards to what it would have been had no disregard existed.

I turn to fairness. In practice, this means that when the income rise disregard was set at £25,000, someone on tax credits could get a pay rise of £2,000 per month and still be technically entitled to the same tax credits award until the tax year end. Even under the current system, a household’s income can rise by £400 a month and they will still be entitled to the same tax credits award until the end of the tax year. Claimants would see their tax credits entitlement reduced in the following year, having become accustomed to the significant income change.

Let us assume that this pay rise of £400 a month means that this household is now taking home as much money as their next-door neighbours, whose circumstances are exactly the same. But the next-door neighbours are not entitled to the same level of tax credits even though they have exactly the same income and circumstances. Under the system set out in the regulations, with an income rise disregard of £2,500, the household with an increased income of £4,800 a year would have their tax credits award adjusted to reflect their increased earnings sooner. Their total income would rise more than the decrease in the tax credits award, providing the buffer zone that the income rise disregard is designed for, and they would also see their award aligned more closely with next year’s tax entitlement—the same as the next-door neighbours.

This example shows how reducing the income rise disregard reduces the unfairness in tax credits awards for families in similar circumstances. This is the right thing to do to ensure fairness to all tax credits claimants. This principle is already live in universal credit, where a claimant’s award changes each month based on their earnings, and this change brings forward some of these benefits.

HMRC will communicate this change by providing information in tax credits renewals packs, which will highlight the annual income threshold that would need to be exceeded to trigger a change in their tax credit awards, and when they should report changes in income to HMRC.

With the introduction of RTI—as I said, real-time information—employers can now submit employee payroll information in real time. Ninety-nine per cent of employers are covered by the scheme, which means that HMRC is now in a better position proactively to check that it has the correct income details when claimants renew their award at the end of the tax year. It also provides an opportunity to check awards within the year.

From September 2016, HMRC will use this real-time information to conduct automated checks of an individual claimant’s monthly income. This means that HMRC is better able to assess claimants’ tax credit entitlement in relation to their increased income. Should RTI find that a claimant’s entitlement should be reduced by £500 or more, HMRC will send a letter, text message or automated voice message to the claimant, prompting them to make contact with HMRC within 14 days. If they do not, their income will be automatically amended on the system.

Let me be clear: HMRC will not only tell all claimants up-front when they must report changes in their income, it will also, in the majority of cases, prompt claimants to report significant increases in income that HMRC has picked up through the RTI feed. If claimants do not respond to the prompt, the system will automatically make the change and reduce the claimant’s tax credits award. This reduces the risk of overpayments while making clear to the claimant their responsibilities.

Finally, the Government are committed to seeing this change implemented correctly, and are taking this considered approach in both the operational IT delivery and in engagement with claimants. This will ensure that we see a reduction in the risk of tax credit overpayments and, therefore, a reduction in claimants falling into debt.

In conclusion, the disregard reduction will affect only those claimants whose income increases in-year by more than £2,500. Let me repeat that there will be no cash losers. This change will make tax credits more responsive to income changes; will reduce the overinflated rise and subsequent fall that follows an income rise; and will reduce the inequality of very different awards to families in similar circumstances and with similar incomes. It returns the disregard to its original design and purpose, and now is the right time to do this because the tax credits system is now much more able to deal with income changes. I beg to move.

Amendment to the Motion

Moved by Baroness Manzoor

At the end to insert “but that this House regrets that the draft Regulations reduce incentives for low-income working people to increase their salaries, will lead to an increase in overpayments of tax credits, and could place families in additional hardship at the end of the financial year”.

Photo of Baroness Manzoor Baroness Manzoor Liberal Democrat Lords Spokesperson (Work and Pensions) 4:15 pm, 7th March 2016

My Lords, I thank the noble Lord, Lord O’Neill, for that overview of the income disregard level applied to working people on tax credits. As I have said previously, I was delighted when the Chancellor decided not to move forward with his proposed cuts to tax credits; however, despite the perception that changes to tax credits were stopped entirely, the reality is somewhat different.

We all know that the cuts to universal credit, while they mirror precisely the tax credit cuts and matter more in the long run, will go ahead, despite the efforts of those on these Benches to stop them. They will, in the long term, affect millions of the low-income working people the Chancellor claims to support. There is also another hangover from the plan to cut tax credits—the change in the income disregard obliquely referred to in the Chancellor’s Autumn Statement. These regulations will reduce the additional amount a person can earn while claiming tax credits in any given year from £5,000 to £2,500, as we have just heard. That means that if a person’s salary exceeds their expectations by more than £2,500 they will face an overpayment at the end of the year.

Overpayments can cause real hardship for those on low incomes, who get what amounts to a bill at the end of the tax year. For those living week to week, this can prove catastrophic, forcing them into rent arrears or limiting their ability to put food on the table. So, the level of the disregard matters. If the Government truly cared about making work pay, they would ensure that the level of the disregard allows people to feel confident in taking on additional hours, or taking a promotion, without worrying that they are going to breach the tax credit disregard and face an overpayment charge at the end of the year.

The income disregard is particularly important for those taking on unpredictable work. I want people to take up a job, assuming they are able, regardless of the job. Unlike some, I do not think, for example, that zero-hours contracts are fundamentally wrong. Indeed, for some people they are a useful tool to balance their work and personal lives. While there are concerns about their exploitation in some sectors and by some businesses, ultimately, we want people to feel able to take up a job, even on zero hours, and feel confident that it is the right decision. So, the level of the income disregard matters in giving people confidence to take up work; setting it at a level where it hits only people whose salary increases substantially is important in giving that confidence.

I do not believe that £2,500 is enough of a disregard to prevent significant overpayments. What is the primary reason for that? We have been here before. The Minister is absolutely right that when tax credits were first introduced by the Labour Government in 2003, the disregard was set at £2,500. The result was £2.2 billion of overpayments, which affected 2 million households—a third of all tax credit claimants—who were hit with overpayment debts that year, many of which ran to thousands of pounds. That meant that millions of low-income working families faced unexpected changes that they struggled to pay for. Do we want to return to that state of affairs? The Labour Government, realising this problem, hugely increased the disregard, all the way up to £25,000. Many would see this as a sledgehammer to crack a nut, but it had the desired effect. Overpayments by HMRC fell significantly in the subsequent three years: from £2.2 billion to £1 billion for the years 2006 to 2009. The Government decided to reduce the size of the overpayment buffer zone: first, in 2010, from £25,000 to £10,000; and then to £5,000 from April 2013. Reports by HMRC show that as the income disregard has reduced in value, overpayments by HMRC, unsurprisingly, have increased. By 2013-14, when the disregard had returned to £5,000, the total amount of tax credit overpayments had again reached £1.9 billion—almost back to 2003 figures.

The £2,500 disregard proposed in the regulations would, in real terms, be the lowest threshold ever imposed on tax credits, given the inflationary changes since 2003. There is a risk that it will lead to further significant increases in overpayments and hardship for low-income working families. Yet in making this decision, the Government have offered little evidence as to what the impact of these changes will be. The original regional impact assessment, which was published alongside all the tax credit cuts, simply scored the savings of the change in disregard, which was mentioned only twice in the entire document. No further impact assessments have been made for these regulations.

In response to the Secondary Legislation Scrutiny Committee, the Government said that they expect that 800,000 people will be affected by this change. However, they seem to offer little explanation of this estimate or of what the average impact on each person will be. We should not allow the Government to make such big decisions, affecting so many people on low incomes, based on so little information. In the Commons, Ministers utterly failed to give further explanation, simply saying that the majority of those hit will be couples, and the majority of those will be male-female couples. That is simply the law of averages, not an adequate explanation of the impact of the Government’s policy. I also note, for those on the Labour Benches who are hesitant to support a Lib Dem Motion to Regret, that their own Front Bench in the Commons stated that the Opposition are seriously concerned about the impact of the reduced figure of £2,500 on low-income families, and rightly divided on the issue. It is therefore surely right for the House of Lords Opposition Front Bench to follow their Commons colleagues in voting against these regulations, albeit on a Motion to Regret rather than attempting to stop the Commons having its way.

The Minister was always likely to say that things have changed since 2003, and indeed he did. He said that this change is because of the new real-time information system, which will cut overpayments as RTI uses monthly pay figures to spot an income rise during the year, so that tax credit payments can be adjusted quickly instead of leaving a debt to be paid at the end of the year. However, organisations such as the Child Poverty Action Group say there is no mechanism allowing tax credit awards to react automatically to many of the changes in circumstances that currently affect entitlement to tax credits, such as a change in the presence of a partner, the number of dependent children, spending on formal childcare, or whether parents work more or less than between 16 and 30 hours a week. Entitlements to tax credits change on the day when these changes occur, yet awards cannot be adjusted until families tell HMRC, which recalculates the entitlement. Overpayments often arise during this intervening period but that will not be picked up by real-time information. How do we know that? Because it is not picked up at the moment. If real-time information worked, we would not have seen, as I noted earlier, the increases in overpayments that have occurred since the £5,000 disregard was put in place.

These regulations will have a big impact on families, but do they actually benefit the taxpayer? I suggest that the benefit is likely to be limited. There is real concern that in the end, it will end up costing HMRC more in trying to claw back the overpayments than it will have saved in lowering the disregard. HMRC figures show that as of June 2014, no less than £5.6 billion in tax credit overpayments was owed by households, £89 million of which was from 2003-04. So these regulations are likely to put a significant financial burden on families and deter people from taking on additional hours of employment, and yet may not in the end result in the overpayments being returned to the Treasury. This is a badly thought through plan that runs counter to the Government’s supposed aim of incentivising people to take up work.

We must understand that this is only a short-term fix. Universal credit, as the Minister has said, will replace tax credits in a few years. That is very welcome, since that system will do away with the need for disregard altogether—exactly the right approach to the overpayment problem. As universal credit comes in, the scored savings from the cutting of the disregard reduce significantly, so these regulations are likely to hit millions of people over the next few years to no long-term end. This is bad law, poorly justified by the Government and running counter to their own stated aims. That is the reason for my Motion to Regret. I beg to move.

Photo of Lord Kirkwood of Kirkhope Lord Kirkwood of Kirkhope Liberal Democrat

My Lords, I am delighted to be able to follow my noble friend. She has done the House a service this afternoon in raising this very important issue. It is particularly important for the Liberal Democrats because, in our reduced circumstances in the Commons, it was impossible for us as a group to take part in the debate on Thursday 3 March when these draft Tax Credits (Income Thresholds and Determination of Rates) (Amendment) Regulations 2016 were discussed in the Delegated Legislation Committee. Now, we have a straightforward and excellent statement of what the Liberal Democrats in Parliament think about these regulations, and my noble friend did a tremendous job in that regard.

We also owe her a debt because she brings in front of us a Treasury Minister who is a significant figure, not just because he is a Minister in the Treasury but because of his background. I hope that more than anything else this afternoon he will say to us straightforwardly that he is going to take an interest in these regulations. His name is now on them. He is an experienced hand, he understands statistics and he understands how processes of administration work, and I have some questions for him.

The Minister is at the heart of the policy-making. My noble friend is absolutely correct to say that some of the consequences of these regulations will conflict with the Government’s stated intention of trying to progress people within work. Unemployment may be less of a problem going forward in the rest of this Parliament, and it may be that we will be trying to get people to earn more—certainly that is part of the spirit of universal credit—but these regulations are a disincentive for people to go up the career ladder. My American friends keep saying, “It’s any job, a better job, then a career”. That is the progression that we should be thinking about. I put it to the Minister—and I would be grateful if he would reflect on it—that these regulations contradict that way of thinking.

The second thing that I want to say directly to the noble Lord in his position as a Minister is that the Secondary Legislation Scrutiny Committee had a bit of a job dragging information out of his department.

That is perhaps not unusual, but in future can he use his influence to try to make sure that everything that can be known is put into the public domain in the furtherance of regulations of this kind? That is important in our understanding of what the Government are trying to do.

In that regard, is the Minister really saying to the House today that this new system, which will start to operate in April this year—that is, not months but days away—is being brought forward in a way that will be capable of being discharged properly, professionally and not to the detriment of the people who will be subject to the new constraints of the regulations? I do not have the figures at the front of my head but there will be 4 million families on child tax credit and approximately 2 million families on working tax credit. That is 6 million households that these regulations could potentially affect, and 800,000 households are likely to be affected. I repeat: we are talking about introducing measures that will take effect in days.

Therefore, I want reassurance from the Minister that, while he is monitoring these regulations, he will pay attention to their effect, using the real-time information system that he now has available to him. I understand that that is significantly different from the situation in 2002. Then, I was the chairman of the Select Committee in the other place that oversaw the introduction of these things. My noble friend was absolutely correct to say that all of us who were there at that time bear the scars of the overpayments of tax credits, and I do not want that to come round again.

The Minister says that nobody will be cash losers. I think that technically, over time, that will be correct. However, there will be big disruptions in month-to-month income if the Treasury takes a clawback out of the tax credit payments. In that regard, will he confirm that the Budget decision in 2014 will increase to 50% from 25% the rate at which clawback can happen? That is a significant change that is taking place in a few days’ time, and I wonder how many people have been warned about it. I do not have any great confidence that the system is up to that and capable of dealing with it.

I want to say one other thing, and will quote from the Red Book for Budget 2015. We were told in the Explanatory Memorandum that £170 million would be saved by the Government, and that is a significant sum. However, in the summer Budget 2015 Red Book, at page 73, it goes on to say that in the financial year after that, £225 million will be taken out; the year after that, it will be £250 million, and the year after that, it will be £180 million. It is diminishing because, as my noble friend quite rightly said, this is all going eventually into universal credit. My arithmetic takes that to a reduction of £935 million, so this is no insignificant order. It adds up to quite a big row of Treasury beans.

I finish by saying that the main worry I have—I referred to it earlier—revolves around the impetus for this going forward, which my noble friend correctly mentioned. We are trying to encourage people to trade themselves out of debt by getting more hours of work and higher pay, and we understand that the Government are attempting to assist that process. However, reading the IFS Green Budget 2016 for the upcoming Budget, it is quite clear to me that the people who are going to suffer most for the rest of this Parliament are the two deciles at the second and third points of the income distribution. That is exactly the 800,000 families that are going to be hit by this and exactly the kind of households and families that this Government want to support. I do not understand why we get this contradiction in policy, except to say that the Government, and, more accurately, the Chancellor, want £935 million as part of their £12,000 million reduction in the welfare budget. I hope that the Minister will go away and reflect carefully on this policy and give us a guarantee that it is not all going to fall over in three weeks’ time because the RTI computer process fails to function.

Photo of Lord Tunnicliffe Lord Tunnicliffe Opposition Deputy Chief Whip (Lords), Shadow Spokesperson (Treasury) 4:30 pm, 7th March 2016

My Lords, as has been outlined, the regulations before us today would reduce the tax credit income disregard from £5,000 to £2,500. We believe that it is right that we work towards developing a system which ensures that households do not incur tax credit overpayments. However, until such a point when real-time responsiveness can be guaranteed, it is surely justified that there is enough leeway in the system to reduce the shock of these overpayments and give households some time to readjust the family finances.

Thus far, the Government have failed to show that the system is resilient enough to cope with the reduction to the income disregard, having failed to provide your Lordships’ House with either an impact assessment or any evidence to support claims that the service mechanisms respond to real-time information. In inviting us to agree this order, surely the Government should have provided this information as a matter of course. In keeping with what I regard as standard practice, I would expect the Government to have produced an impact assessment to accompany these regulations, particularly in the light of public interest and your Lordships’ interest in this matter. However, that was not the case, and it was left to the Secondary Legislation Scrutiny Committee, to which we are indebted, to investigate further.

In responding to the committee’s questions, the Government admitted that this change will impact on 800,000 households next year—a figure which only adds to my disbelief as to why no assessment was produced. They also go on to say, without supporting evidence, that of the 800,000 people,

“none will be cash losers because their income will have increased”.

In the absence of further detail, the House of Commons Library has analysed the impact that the disregard reduction will have on a family’s income, and its findings directly contradict the claims made by the Government. The findings suggest, for example, that for a lone parent with two children the income disregard reduction could hit a household by as much as £1,000. Of course, this is just one scenario, but in the absence of any data to support the claim that there will be “no losers”, it certainly calls the claim into question.

There is also no explanation for why the Government have determined that halving the income disregard is appropriate. Why the £2,500 figure? Is it the average minimum salary increase of tax credit claimants assessed over previous years? Is it an amount that would provide an adequate cost-of-living buffer for those on the lowest salaries within the scheme? I would be very interested to hear the Government’s rationale. I hope that the Minister can give us some indication of why an impact assessment was absent as well as an assurance that, particularly in matters which attract such intense public interest, such documents will accompany future instruments.

I turn to the apparent improvements in tax credit delivery systems which the Government alluded to in their response to the Secondary Legislation Scrutiny Committee. It was suggested that it is now acceptable to return the disregard to the original level of 2003 because,

“the tax credit system is now operationally better able to cope … now that it has more up to date information on people’s earnings … HMRC are also making it easier to report changes quickly online, so that people will less often receive overpayments”.

Yet this is the third time since 2010 that the Government will have cut the income disregard and in every year since then the amount of overpayments has increased. That does not suggest to me that we have a system which can at present manage people’s changes in circumstance on a real-time basis. This cut will serve only to exacerbate such problems. That is not good for households which receive tax credits and nor is it good for our country’s public finances as a whole. Surely it would have been more sensible to wait for the introduction of universal credit, test the relevant systems and then explore the capacity of those systems to cope with real-time changes in people’s income.

These proposals have been poorly presented. I do not believe that the Government have given sufficient thought to how this reduction will impact on people who receive tax credits or given any consideration to how the mechanisms which process these claims will cope with the added demand. I hope that the Minister will make a serious attempt to address the specific points that I have raised and refrain from parroting the Treasury line that these measures will “make work pay”. As I have made clear, that has not been the focus of our concerns.

The Government must give assurances that a full impact assessment and evidence base will be provided for future instruments. I would be grateful if the Minister could also give a commitment to outline not only the ongoing improvements being made to the operational mechanisms used to calculate tax credits but what HMRC can do to help support those who receive overpayments. For example, where repayments are large, can they be spread over a number of years? Furthermore, can the Minister assure us that no unreasonable penalties will be levied against those who have been overpaid?

Your Lordships’ House has played its role in ensuring that full and effective scrutiny can take place, not only though this debate but, crucially, through the work of the Secondary Legislation Scrutiny Committee, which helped inform the discussion in the other place. I assure the Minister that we will watch developments in this area very carefully, as it is vital that we begin to see progress on addressing the overpayment of tax credits. Labour was well represented in the debate in the other place and made its position clear. The matter went to a vote and the Government succeeded. So the Government must now get on with ensuring that the real-time mechanisms live up to their promises.

In the coming weeks and months, I do not doubt that there will be issues on which we will have to go further than simply indicating our disapproval and will have to test the opinion of the House. However, it is our judgment as Her Majesty’s Official Opposition that today is not such an occasion.

Photo of Lord O'Neill of Gatley Lord O'Neill of Gatley The Commercial Secretary to the Treasury 4:45 pm, 7th March 2016

My Lords, I thank those who have taken part so far in this debate. Each time that I have had the pleasure of standing here, I have always learned some interesting thoughts on whatever the topic is. I will try to respond to the things that I have heard as part of my closing statement. First, I will reiterate the broad framework.

This measure needs to be considered alongside the broader steps that the Government are taking, with their ambition for a higher-wage, lower-tax and lower-welfare society, which they were successfully elected to deliver in 2015. Under this proposal is the belief that work will always pay. In that regard, these regulations will reduce the degree of unfairness still persistent in the tax credit system. The reduction to the income rise disregard will reduce the instances where one family receives a higher tax credit award than another family with precisely the same income and the same circumstances. As I have already set out, it is also not unimportant to recall that this policy returns the income rise disregard to its original level.

With the introduction of real-time information, which each of the three speakers mentioned, the tax credits IT system is now more responsive and able to adjust to the fluctuations in family incomes in-year. I will return to that but, as the noble Lord, Lord Kirkwood, in particular mentioned, it is of course important that we try our best to monitor how that progresses. In the event that things do not turn out the way we expect, one would hope that a rational response would be to react accordingly. Before I come back to the specifics, it is also important to point out, as the noble Baroness, Lady Manzoor, herself said and other noble Lords touched on, that this is against the background where we are in any case migrating to universal credit. As part of that, a monthly system will be in operation and it is important to bear in mind that we are already in a position of travel. These new regulations reflect—

Photo of Lord Tunnicliffe Lord Tunnicliffe Opposition Deputy Chief Whip (Lords), Shadow Spokesperson (Treasury)

Will the Minister admit that the only possible rational response if the circumstances turn out as he has just described—and he promised a rational response—would be to return the disregard to the £5,000 level?

Photo of Lord O'Neill of Gatley Lord O'Neill of Gatley The Commercial Secretary to the Treasury

I am not sure that that would be the only rational response, but it would certainly be one of a number of ideas that one should consider in the event of any evidence that would subsequently accumulate as a result of the implementation of this regulation. Other policies could be thought of as well.

Photo of Baroness Manzoor Baroness Manzoor Liberal Democrat Lords Spokesperson (Work and Pensions)

On that, of course there will not be sufficient time to return and up-level the income disregard from £2,500 to £5,000 because obviously universal credit will come into play. We will have all this upheaval. Bearing in mind what my noble friend Lord Kirkwood has already indicated, we are talking about this being implemented from 6 April. By the time the Government assess their evidence, many people may well find that they are in debt.

While I have the Floor, I must pick up on what the Minister has said twice. This is not a special award for people. People have to pay this money back the following year. Whether it is set at £5,000 or £25,000 is just a matter of accountancy. I do not want noble Lords who may not be familiar with this issue to think that people are getting £5,000 or £25,000 in their pockets without any comeback. It is simply a buffer zone. But it is the impact of those overpayments that causes real problems because they can push quite a number of people into debt. That is the issue here.

Photo of Lord O'Neill of Gatley Lord O'Neill of Gatley The Commercial Secretary to the Treasury

Let me respond to the two specific points made by the noble Baroness, Lady Manzoor. The first is linked to the question put by the noble Lord, Lord Tunnicliffe. As I said, there are a number of ways one could think of to make a rational response, and one of the reasons I hesitated to go down the path that the question sought to take me is that it is important that this be seen in the context of what is happening with universal credit. Rather than prejudging what is implicit in both questions, which is that the real-time information system will not succeed in the way we believe it will, I think we should give it a chance.

In response to the second point made by the noble Baroness, I suspect that a number of noble Lords will not be aware of something that is technically quite complicated; there may not be sufficient awareness of what we are trying to deal with here. The reason why the disregard is being put back to its original level is because there are people who receive a significant increase in their income where there is no consequence without it coming back down. That is why all members of the coalition were perfectly happy to reduce it so significantly at the start of the last Government.

Photo of Lord Kirkwood of Kirkhope Lord Kirkwood of Kirkhope Liberal Democrat

I appreciate that the Minister is trying to make progress, but I wonder if I could ask him a brief follow-up question to RTI. Is he confident that the new system which is to take effect in a few days’ time will be sufficiently sophisticated to disaggregate the data flows in the new system from the old system? Otherwise the overpayments that are overhanging the data at the moment will make it impossible for any statistical changes to be determined in the new system as opposed to the old, in terms of how successful or otherwise it might be.

Photo of Lord O'Neill of Gatley Lord O'Neill of Gatley The Commercial Secretary to the Treasury

My Lords, I have not personally studied the RTI system in enormous detail, but I am confident in our officials’ advice and guidance that the system has been sufficiently upgraded to enable us happily to undertake this policy initiative.

Photo of Baroness Manzoor Baroness Manzoor Liberal Democrat Lords Spokesperson (Work and Pensions)

My Lords, that may be the case, but we still have £1.9 billion of overpayments being made now—not before, but now—with more than £5 billion in overpayments and £89 million from 2003-04.

Those are the latest figures. There is a real issue around the real-time information processed at the moment, and that is my concern. I do not feel that the Minister is reflecting his confidence that the systems are working as they should. I am married to an IT expert who works around the world on these major systems and he expressed concern when I told him about the scale of the problem that the DWP is trying to deal with. Some reassurance from the Minister would be really helpful because the system is not working now, and I am talking about now.

Photo of Lord O'Neill of Gatley Lord O'Neill of Gatley The Commercial Secretary to the Treasury

My Lords, I want to answer in part by referring to something that I have touched on already and I shall elaborate further on its purpose. I could bore noble Lords with the detailed estimates of overpayments going back to when tax credits were first introduced. The underlying purpose of this should be looked at in a broader manner. As I said a few moments ago, this is being done within the context of trying to encourage a higher employment, high wage-earning and more gratified society. Trying to undertake this initiative, despite what happened as a result of the remaining part of the original tax credits proposals, is a sign of the belief that this, to some degree, is a technical decision based on the fact that we have been persuaded that the quality of the IT system can improve this dilemma. By definition, narrowing the income increase to a lower level reduces the conceptual scope for the size of aggregates over payments. It is only appropriate, particularly in the circumstances where we are migrating to universal credit, that this proposal be given a chance.

That takes me directly to some of the more specific comments that I have not answered. In particular, the noble Lord, Lord Kirkwood, very thoroughly outlined the other attraction, against the background of what I have just said, as to why this is being pursued in terms of the aggregate savings over the lifetime of the Parliament. Again, I bring it back to the bigger purpose. The noble Lord correctly identified the £935 million in the last Budget proposals against the background where this is positioned. This is about the same amount of money being agreed with a number of cities around the country in devolution deals over 30 years. To answer all the questions implicit from what the noble Lord said, if more places have the ability to use that money and choose initiatives locally to support greater skills and greater training to help even more work, it is a relatively straightforward policy choice, which should not be seen as too similar to some of the issues debated on tax credits. In that sense it seems relatively straightforward.

The noble Baroness, Lady Manzoor, raised an interesting point, suggesting that the Labour Benches were not as supportive as she hoped they might be. She pointed out the irony, given that this was a policy originally brought in by a Labour Government. That might well be among the reasons why that is the case, because it is in the circumstances where we are migrating to universal credit, where assessments will, in any case, be adjusted on a monthly basis. As I said, if it allows some savings so that the Government can then feel more confident allocating to broader and more substantive initiatives to help real pockets of disadvantage to change their supply response to labour market conditions—which both the initiatives I mentioned, one of which was not tabled here, should be seen as—it seems an extremely logical thing to do and not as contentious as the noble Baroness implied.

I turn to the questions, which I am not surprised have come, about the impact assessment. It is fair to say that, as a result of that remarkable debate and subsequent vote in this House some time ago, the Treasury has provided a lot of information to the various appropriate committees, the exact names and acronyms of which I shall not attempt to repeat, because I am sure I will get them wrong. A lot of information has been provided as part of that process. That is where the figure of approximately 800,000 people comes from. After considerable discussion, it is not clear to me that any further special impact assessment on this technical measure will necessarily help to provide anything of substance beyond what has already been provided.

As I said earlier, we have an environment in which the Government are trying to continue to boost employment and productivity, which we hope will lead to even higher incomes than under the specific policies that we have initiated. There will be no income losers with the introduction of this new policy. That is consistent with the policy. As I said, it is important to see this in the context of the consistency of different policies which are all geared along the same lines. It should not in itself be regarded as directly attached to the other parts of the tax credits debate that has taken place previously.

With respect to the inequality debate, as I have also said previously in this Chamber, there are notable differences within certain quartiles and quintiles, as the noble Lord, Lord Kirkwood, touched on. But, again, this should be seen in the context that—contrary to a lot of misconceptions—according to the general in-aggregate measured evidence, a narrowing of inequalities is taking place both pre-tax and after tax. That is the case unless one looks at wealth where, because of the consequences of significant house prices, there are, unfortunately, signs of inequalities changing for the worse. It is important that sufficient thought is given to policies which do more to boost the supply of new housing, and then that inequality would not arise at some point in the future. While the technical specifics of this measure may pass a lot of people by, it is important to consider that it will not result in any cash loser and is being introduced as we migrate to a universal credit system, which, in itself, will allow for monthly analysis, response and change. Therefore, it is a relatively straightforward matter.

Photo of Lord Purvis of Tweed Lord Purvis of Tweed Liberal Democrat 5:00 pm, 7th March 2016

I have listened to the whole debate. I hope the Minister will clarify the matter further as he referred to other areas where the £935 million reduction in expenditure could be implemented—the city deals and employability and housing. However, I was under the impression that this measure aimed to achieve deficit reduction savings. Page 3 of the Red Book states that this is part of deficit reduction savings. So will he be clear: is this for hypothecated other expenditure or is it for deficit reduction?

Photo of Lord O'Neill of Gatley Lord O'Neill of Gatley The Commercial Secretary to the Treasury

My Lords, I can be very clear: this is being done specifically to achieve deficit reduction. However, the goal and policy on deficit and debt reduction also contain a number of economic policy priorities, which include a very strong commitment to devolution in many parts of the country. I was merely trying to illustrate that the amount we estimate will be saved from this proposal is very similar in size to the sorts of figures that we are successfully negotiating in a number of parts of the UK. We hope to do more of that going forward.

This change aims to reduce the disregard to £2,500 because that is fair to claimants, reduces inequalities in the tax credits system and is fair to the taxpayer, reducing unnecessary costs. As I have said a number of times, there are no cash losers because these are people whose pay will go up by £2,500 or more. This change will reduce the incidence of temporarily inflated awards, because the system will respond sooner and further to people’s changes in income in-year. I commend the regulations to this House.

Photo of Baroness Manzoor Baroness Manzoor Liberal Democrat Lords Spokesperson (Work and Pensions)

My Lords, I thank the Minister for summing up. I also thank my noble friend Lord Kirkwood and the noble Lord, Lord Tunnicliffe, for their support today, although I am very disappointed. I agreed with everything the noble Lord said, up to a point, but when he said that he would not be supporting the Motion to Regret my heart fell.

I have listened very carefully to what the Minister has said. He has said a number of times that there are no cash losers. We have to disagree on that, because it depends on how you classify cash losers. It is really important to say that this is not a pay rise by any means. This £2,500 is actually recouped back from the tax claimant. It is not a pay rise but can cause great difficulties because of the fluctuations for people who are working on low incomes.

I will not go over the debate again. The House has been very patient and I thank noble Lords for listening. I feel very strongly about this issue and wish to test the opinion of the House.

Division on Baroness Manzoor’s Motion

Contents 104; Not-Contents 206.

Baroness Manzoor’s Motion disagreed.

Division number 1 Tax Credits (Income Thresholds and Determination of Rates) (Amendment) Regulations 2016 — Motion to Approve

Aye: 102 Members of the House of Lords

No: 204 Members of the House of Lords

Ayes: A-Z by last name

Tellers

Nos: A-Z by last name

Tellers

Motion agreed.