Finance Bill

I am pleased to be speaking on behalf of the Treasury Committee. On Second Reading, I said that the Committee would undertake an inquiry arising from the controversy over the removal of the starting rate of income tax. The result is the report that was published on Saturday, which, I am glad to see, has been welcomed in the House and outside. It is a complex document, reflecting the complexity of the subject. It includes more than 70 pages of the report and recommendations and more than 170 pages of evidence, both oral and written. I had best refer Members to the summary, which documents the five main subjects that we considered. The first was low-income households and the abolition of the starting rate. We said that the losers were those with a small taxable income for whom the loss of a small amount of money was significant when managing a budget at a time of rising prices, particularly rapidly rising energy and food prices. Secondly, we considered the options for 2008-09 and the changes made on 13 May. The problems arose from a removal based in the tax system, and our main recommendation is that the solution should be required to be in the tax system. Thirdly, we looked at the broader context and the poverty targets, to which I shall return later. Fourthly, a big lesson for the Government is the need to get the process right. They need to learn the lessons from the budgetary process and to use the pre-Budget report as it should be used. They should not turn the pre-Budget report into an early Budget. Finally, we considered the way forward, which concerned no reforms other than those to the tax system. The 15 May announcement on increased personal allowances is, the Committee says, a welcome step to a simpler tax system with fewer of the low-paid paying income tax. The Treasury should resist introducing further complications to the system. Every effort should be made to avoid returning those who have been taken out of the tax system by the 13 May changes back into the system. I want to concentrate on three brief points. The first is the relationship between tax and poverty priorities. The second is the use of the tax system for further compensation measures. The third is the provision of information by the Treasury and the role of the pre-Budget report. On the relationship of tax and poverty priorities, our report's detailed analysis makes it clear that the losers from the removal of the 10p band do not equate to the very poorest in society. However, we also highlighted the danger that the household analysis may assume income-sharing in households that does not take place. The Government must pay heed to that. Also, the tax system needs to be considered alongside the welfare system. The system as a whole is not working as well it should, as is shown by the rise in child poverty in 2006. That figure rose by 100,000 to a total, before the deduction of housing costs, of 2.9 million children in poverty. Moreover, there was a sharp rise in pensioner poverty in 2006-07: before housing costs were deducted, that total rose by 300,000. Those figures reversed the tremendous improvements that this Government have made in both areas since 1997, and it is important that we get the Government to return to achieving success in the broader context when it comes to poverty. The Committee received powerful evidence that successes in combating poverty have concentrated on the non-working poor. Many people still find that work is not a pathway out of poverty. In-work poverty is an important problem, as we highlight in our report. The Government must solve the running sore of the abolition of the 10p tax rate, not least so that they can concentrate on more effectively on their long-term priorities in respect of poverty. The Committee made one recommendation that did not get as much attention at the weekend as others did. We proposed that a poverty commission should be established to help with the focus on poverty. The Pensions Commission, chaired by Lord Turner, achieved a lot. It was an independent, non-political body and its recommendations to the Government were listened to. I feel that a poverty commission could be a similar organisation: it would comprise independent and non-political people, and would provide an important way of keeping the Government on target. After all, this is the only Government to have set out an ambitious agenda to eliminate child poverty by 2020. If the Government are to achieve their ambitions by 2010, they will have to meet stretching targets: indeed, to do so, they would have to reduce child poverty by 300,000 every year over the next four years. That is ambitious, but they must not give up on that aim. It is important that they continue to concentrate on it, and so I hope that they will take that recommendation very seriously. Our second recommendation has to do with the use of the tax system for further compensation measures. The Committee report identifies further developments of the tax credits and benefits system that may be needed, in the medium term and beyond, to tackle poverty. However, we are clear that the only way to reach all those who have lost out as a result of the removal of the starting rate—and to compensate all losers in low-income households—is through the tax system. The Government should not meddle with tax credits or anything else, as compensation should be provided through the tax system. We identify a range of options through the tax system: none is perfect, but we give the Government an option menu. I concur with my right hon. Friend the Member for Birkenhead (Mr. Field): this subject was discussed on Second Reading, and if the Government had waited, that might have allowed them to find a more measured way to tackle the problem. However, we have to deal with reality, and my message to the Government is that any solution must be achieved through the tax system, in a measured and considered way. We do not identify a preferred solution, as the Treasury is best placed to do that. However, the key point that we make is that the changes announced on 13 May and implemented by the proposals before the House are the start of the process, not the end. It is very important that the Government take that on board. My final point has to do with information and the use of the PBR. We seek to identify lessons from the 10p tax saga for future Budget policy making, and draw two main conclusions. First, the Government must be clearer and more open about the distributional effects of their policies, and we recommend that a household impact assessment accompany each Budget and PBR. If such an assessment had been compiled when Budget 2007 was produced, the Treasury Committee would have had time to study it at our leisure. We would have identified both winners and losers, and we would have known where we were going. Any future changes must delineate the winners and losers, as otherwise we will return to opaqueness and confusion.