Clause 2

Finance (No. 3) Bill – in a Public Bill Committee at 4:30 pm on 10th May 2011.

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Question (this day) again proposed, That the clause stand part of the Bill.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

Good afternoon, Mr Hood, and welcome to the Chair for this afternoon’s sitting. You will, undoubtedly, chair future sittings and it is a pleasure to serve under your chairmanship and that of your co-Chair, Mr Gale.

This morning, we discussed clause 2, which changes the basic rate limit from £37,400 in 2010-11 to £35,000 for 2011-12. The key point is that, had that been indexed for 2011-12, the figure would have been, in my estimation, about £39,200 for the basic rate. There is a difference, therefore, between the current basic rate, proposed by clause 2, of £35,000 and the potential index rate of £39,200. Before we finished this morning, the purpose of our discussion was to test the Minister on the impact of that change on those taxpayers who will now fall into the higher rate—there will be several of them—as well as the knock-on effect in two years’ time, in 2013, on the number of individuals entering the higher tax rate. They will have to—[Interruption.]

Photo of Jimmy Hood Jimmy Hood Labour, Lanark and Hamilton East

Order. I am sorry if the right hon. Gentleman is interrupting a discussion on the Government Benches, but I would hope that the Government would listen to his speech.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

I am grateful for your assistance, Mr Hood. In fairness to the Ministers, I was summarising our discussion before our break at 1 o’clock, but I appreciate your support.

Photo of Jimmy Hood Jimmy Hood Labour, Lanark and Hamilton East

The right hon. Gentleman is wrong if he assumes that the purpose of my interjection was to support him—far from it. I am insisting that Standing Orders are adhered to and that, when Members are on their feet and addressing the Committee, others—not just those on the Government Benches—do not have conversations. He should not assume that I was supporting him. We should stick to the Standing Orders.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

I am grateful, Mr Hood. I did not in any way mean political support, but support for the Committee. I think that I should quit while I am ahead, because I would not wish to cross you on such matters so early in your chairmanship.

Before our break, I mentioned two issues that the Minister needed to reflect upon, and I would now welcome his view on them. What is his assessment of the number of people who will now enter the higher tax rate as a result of the proposed change to drop to £35,000? We have had some estimates and I would welcome his confirmation of the situation. That leads me to the impact of the tax changes in two years’ time on things such as child benefit for individuals who now pay a higher tax rate as a result of the clause. How many of the new entrants to the higher tax rate are single parents? Has the Minister made an estimate of the number? Some individuals who now fall into the higher tax rate will be denied universal child benefit in 2013, because they have joined that higher tax rate, but others who earn a lower rate of pay but who are in a partnership with someone who may well earn more money will not be removed from universal child benefit in 2013, because they will be taxed as an individual and not as part of a collective partnership.

I and my hon. Friends believe in the principle of the universality of child benefit and we will stick to that principle during the course of this Parliament. Before we discuss clause 2 and potentially take a vote on it, we need some clarity from the Minister about its impact downstream, especially on people who paid into the system believing that they would receive benefits, such as child benefit, at a later stage and who believed—until this provision was produced in the Budget—that they were lower rate taxpayers and not higher rate taxpayers, but who now find themselves in the higher tax band.

Photo of Bridget Phillipson Bridget Phillipson Labour, Houghton and Sunderland South

Perhaps I can illustrate the point that my right hon. Friend is making by giving the example of a constituent who contacted me. She earns a sum that currently puts her in the higher tax band. Her husband is terminally ill and they have a small child, so she is set to lose her child benefit at the point that she most desperately needs it. She finds that to be an unbearable burden on her family. I am sure that we sympathise with her for the position that she is in, as she does not regard herself as a wealthy woman and she is now responsible for providing the income for her whole family.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

My hon. Friend makes a very valuable point about the impact that the child benefit cut will have, in due course, on higher rate taxpayers. There are people today who would not have been in the previous higher tax band of £37,400. Because there has been a reduction to £35,000, those individuals are now in the higher tax band. They could well be single parents, or they could be people who, in due course, will have additional parental responsibilities because of bereavement. They are individuals who at one point were not in the higher tax band but now, because of clause 2, they will be in that band.

Can the Minister say how many of those individuals there are? What assessment has he made to establish how many of them are single parents, who will face an even heavier burden than other people when they lose their child benefit because of this change? How many people will lose other benefits because of the proposals in clause 2? The level for the higher tax band is set at £37,400, as opposed to £35,000. That sum of £37,400 is a significant amount of money but, even with the  allowances on top, it is not a king’s ransom. It is an average income for many people in society today. That £2,500 loss, from £37,400, plus the loss of indexation, which means a total loss of around £4,200—bringing more people into the higher tax band—means that there is a real squeezed middle who are paying for the Government’s deficit choices. When we debated the last clause we talked about the 50p tax rate, which is being removed from people who earn a significantly higher level of income than those who are being squeezed under the proposals that are before us today.

Photo of Ian Murray Ian Murray Labour, Edinburgh South

My right hon. Friend makes a vital point. In considering clause 1, we discussed at length how the 50p tax rate might be removed in 2013. That would be around the same time that all the new thresholds will kick in, so that people lose their child benefit. So the Government will be saying to the highest earners, “Here’s a tax cut”, while they are saying to everyone else, “We are taking more money from you”. Does my right hon. Friend think that that is really the way that the Government should be working?

Photo of David Hanson David Hanson Shadow Minister (Treasury)

My hon. Friend makes exactly the point that we spent some time this morning—around two and a quarter hours—discussing in relation to clause 1 and the amendment to it that we tabled, as well as the point that I am making now. Although the two changes will never equate and the money raised from one measure will not equate to the money forgone in another measure, there is a real change of policy whereby people on a higher level of income are taxed at a lower level and people on middle incomes are being squeezed. They will not only lose more in taxation, because of the changes in clause 2, but they will not qualify for benefits, such as child benefit, in 2013. We in Labour support universal child benefit.

There are some estimates from Government regional offices, quoted in Hansard on 30 March, that indicate the number of people who will enter the higher tax band this year compared to the number for last year, for each of the regions of the UK. Those estimates quoted in Hansard come from a parliamentary answer. Of those people, how many are entering the higher tax band because of rising levels of salary and how many are entering it because of the reduced levels of allowance that we are discussing today? For example, the figures quoted in Hansard on 30 March for the north-east region will be of interest to many Members in the Committee. Last year in the north-east, 80,000 people were in the higher tax band and this year there will be 100,000 people in the higher tax band, an increase of 20,000. We need some indication from the Minister about how many of those changes are because of rising salary levels, and how many are due to the fall in the allowance set out in clause 2. My hon. Friends the Members for Gateshead, for Middlesbrough South and East Cleveland and for Houghton and Sunderland South will take an interest in that figure because we need to know the impact of the change.

Figures for the north-west show 59,000 more people in the higher tax band in 2010-11. That may be because of increasing salary levels in Wirral South, but it may also be that some people will have moved into that higher rate tax band because of the changes proposed  in the legislation. I could give a range of figures, but it is estimated that a total of 600,000 extra people across the country will move into the higher tax band, including 90,000 in London and the constituency of my hon. Friend the Member for Walthamstow. There will be 47,000 such people in Scotland and the constituencies of my hon. Friends, the Members for Edinburgh South and for Airdrie and Shotts. Were he present, the hon. Member for East Londonderry (Mr Campbell) would have discovered that in Northern Ireland an extra 11,000 people will be going into the higher tax band.

In conclusion, we demand a greater level of clarity on the two big issues of how many people will move into the higher tax band because of the changes to the legislation, and how many of those will be disadvantaged because of the changes to child benefit. All those people will be affected, but we need a breakdown of how many single parents and others will be disadvantaged in real terms, so that we can see the impact of the clause before voting for or against it.

Photo of David Gauke David Gauke The Exchequer Secretary

First, may I say what a great pleasure it is to serve under your chairmanship in a Finance Bill Committee once again, Mr Hood? It is not a new experience for me, but it is a pleasant one none the less. I will try to address some of the concerns raised by the right hon. Member for Delyn. To some extent, we went around this track this morning, and I have already tried to respond to some of his points.

The right hon. Gentleman highlights the number of people who will be brought into the higher rate tax bracket as a consequence of clause 2, compared with what would have happened had the basic rate limit been uprated along with RPI. It is a perfectly fair question, and I am sure the right hon. Gentleman would not have wanted to give the impression that the previous Government intended to uprate those limits by RPI—they planned to freeze the basic rate limits and increase the personal allowance by less than indexation, as announced in the 2008 pre-Budget report. As a consequence, the most relevant numbers are those that compare the plans we inherited with what we have done. As I made clear this morning, the basic rate limit has been reduced rather than increased to ensure that the benefit of the increase in the personal allowance goes to basic rate taxpayers, not to those who pay the higher rate. That difference means that there will be 385,000 extra higher rate taxpayers, compared with the plans of the previous Government.

The right hon. Gentleman—as I thought he might—had some regional numbers. I fear that I may have tempted him down that line of argument when I said that I could provide him with regional figures for the 385,000 people who are now in the higher rate tax band but would not have been under the plans of the previous Government. The numbers are 12,000 for the north-east, which the right hon. Gentleman mentioned; 58,000 for London; 8,000 for Northern Ireland; and 38,000 for the north-west. Those were the areas that he particularly highlighted but I can provide him with the full figures. The point I made this morning is that two thirds of those people would still gain from the personal tax package. They would be better off because they would experience the full benefit of the personal allowance increase without experiencing the full loss of the reduction in the basic rate limit.

The second matter on which the right hon. Gentleman spoke was the inter-relationship with child benefit. Again, I made the point this morning that that is still 18 months or so away. Trying to consider these numbers at that level of detail will probably not be terribly helpful or accurate. However, as we announced at the time of the spending review, the withdrawal of child benefit from families including a higher rate taxpayer will affect about 1.5 million families. That estimate included the impact of the rise of the personal allowance and the consequent reduction in the higher rate threshold introduced under the Bill, which was announced in June’s emergency Budget by my right hon. Friend the Chancellor. It was therefore part of the baseline on which the child benefit changes were assessed. The reduction in the higher rate threshold in April 2011 to £42,475 does not therefore create any losers in addition to the 1.5 million already announced as a result of the withdrawal of child benefit from families with a higher rate taxpayer.

Photo of Bill Esterson Bill Esterson Labour, Sefton Central 4:45 pm, 10th May 2011

The Minister rightly sets out the number of families affected by the changes in the higher rate threshold and child benefit. He seems to accept that a large number of people will lose out from the changes, but when we add the VAT increase that took place at the beginning of January, he should accept that middle-income families are paying much more than they did before the changes made by the Government. As a result, families on not huge sums of money are being made to pay a big contribution towards paying off the deficit.

Photo of David Gauke David Gauke The Exchequer Secretary

The last words that the hon. Gentleman spoke, about paying off the deficit, or reducing the deficit, are important. We have to reduce the deficit. Choices need to be taken to achieve that, but we cannot get away from the fact that we have to reduce it. Only 13% of earners are higher rate taxpayers. All sections of society have to make a contribution, but it should be clear to Opposition Members that if we say that higher rate earners are not to play a role, it will have to be picked up by someone else.

The Government are determined to do it in as fair a way as possible; we should not target the poor, and believe that those with the broadest shoulders should bear the greatest burden. Yes, it involves making tough decisions. Nobody wanted to have to make the decisions on child benefit that we did, but we have to reduce the deficit. It is easy for the Opposition to say that they are against this or against that—against any type of proposal —because their constituents will understandably be upset about difficult decisions that have an impact on them. None the less, a sensible Government have to take those tough decisions, and I regret the fact that we have not received the support of the Opposition, which I believe we should receive.

Photo of Ian Mearns Ian Mearns Labour, Gateshead

Does the Minister accept that the consolidated impact on some households of the benefit change and the change in tax allowance could be as much as £1,700 a year?

Photo of David Gauke David Gauke The Exchequer Secretary

I do not wish to downplay the significance of what we have to do to reduce the deficit, but it is an indication of the size of the problem and the size of the deficit that we inherited. However, it might be worth  pointing out the cumulative impact of the tax, tax credit and benefit reforms introduced in the last Budget and earlier Budgets by both Governments but being implemented by this Government. The top decile will see the largest losses. I am not sure that Members on either side of the Committee would think that that was wrong, but it involved some tough decisions, and some people being hit hard.

We must remember, when considering clause 2, that the reduction in the basic rate limit needs to be looked at alongside clause 3 and the personal allowance increase. We have made significant steps to take a large number of people out of income tax to reduce the income tax liability for some 23 million individuals who are basic rate taxpayers. That is something of which the Government are proud.

Question put and agreed to.

Clause 2 accordingly ordered to stand part of the Bill.