Child Poverty Bill

My Lords, I thank the noble Lord, Lord Freud, for his interesting amendment and the interesting but short debate that has followed it. I was thinking of resting my case on the basis of the contributions of the previous two speakers, but I feel that I should put something more specific on the record from the Government’s point of view. Amendment 38 would require the Secretary of State to consider the appropriate interrelationship in the benefits and tax credits system between the levels of benefit, the earnings break-even point and the rate at which benefits are withdrawn—as we know, now dubbed the iron triangle of benefit reform. In recent days and weeks, we have learnt a lot about the iron triangle, although, as the noble Lord, Lord Kirkwood, said, it has been around for a considerable time. Doubtless, we will continue to debate it—it is entirely appropriate that we should. Whether it is an appropriate addition to Clause 8 is a completely different matter. The issues of ensuring appropriate work incentives and making work pay are of course very important and I contend that this Government have done a lot in recent times to address both issues. Clearly, these issues will also be a priority for the child poverty strategy. Tackling in-work poverty and promoting parental employment is crucial both as a means of reducing poverty and because work has positive impacts on families and children over and above the effect of increased household income. Therefore, I am confident that the strategies produced under the Bill will carefully consider ways of supporting more parents into work that pays and of enabling parents to progress in work. Indeed, Clause 8(5)(a) specifies that the strategy must consider measures relating to, "““the promotion and facilitation of the employment of parents or of the development of skills of parents””." The interrelationship between the levels of benefit, the earnings break-even point and the rate at which benefits are withdrawn does not relate to the approach to tackling child poverty alone. It is about the wider structure of the tax and benefits system and the balance between levels of support and work incentives—an issue that goes much wider than the strategies to be produced under the Bill. There already exist processes for such considerations to be made through annual Pre-Budget Reports and Budgets—they are, I am bound to say, generally within the financial privilege of the other place—and specifying a requirement such as this in Clause 8 of the Bill is not at all appropriate. The iron triangle argument referred to by the noble Lord—my noble friend Lady Hollis made this point—uses a simplified economic model of the tax and benefits system to derive the common assumption that the generosity of the benefits system and the rate at which benefits are withdrawn determine the point at which benefit entitlement ceases. While it is undoubtedly true in a highly specified model of the benefits system, in practice there are many ways in which we can avoid the trade-off that this implies—that is, that you have to reduce benefits to increase work incentives. If that is the noble Lord’s proposition, we need to be clear about it. For example, in our benefits and tax credits system, out-of-work benefits are withdrawn when a customer works more than 16 hours a week; for parents, the in-work benefits guarantee a minimum income, which is usually substantially higher than out-of-work benefits income; and the way in which in-work support is withdrawn varies with income, with a mixed system of universal and targeted benefits and tax credits. This allows us to maximise work incentives while focusing support on those least able to manage on their own, including providing help to all families with children. We are all aware that any Government have to make trade-offs between the levels of support provided to families and the cost of the support system. The Government believe that support for children living in poverty should be a government priority; that is why we have made a commitment to ending child poverty. The iron triangle does not show, as the noble Lord implied at Second Reading and today, that spending additional money on the benefits system is ineffective; rather, it shows that, if we want to maintain work incentives and provide sufficient support for the poorer people in our society, this will be more expensive in the short to medium term than maintaining work incentives in a system that provides minimal or no support for those who are not in work. We do not want to accept a system that provides no support for those who are not in work and therefore cannot sufficiently protect children from the negative effects of poverty. The noble Lord referred to marginal deduction rates and what those would imply. It is important to note that issues around marginal deduction rates apply only to the group for whom the target is set. Our child poverty target applies to children and their families. This is a group for whom we believe sufficient financial support is crucial, both in terms of social justice and for the good of society as those children become adults. For this group it is right that families relatively far up the income scale can benefit from the system, which is why we designed a tax credits system that benefits those on middle incomes as well as the very poor. In addition, these consequences apply only if tax and benefits rates are the same for everyone. In reality, different people have different needs and the system can be designed to respond to this. Indeed, our system recognises that the balance of work incentives and support needs to be different in different circumstances. For example, there are some groups, such as the longer-term unemployed, for whom good work incentives are a crucial element of any support system. There are some people, such as those with severe disabilities, whom we do not expect to move into work. Also, there are some groups, such as families with children, whom we think it is particularly important to protect from the negative effects of poverty. Therefore, while it is important that any system is designed with marginal deduction rates in mind, it is also important to realise that the empirical evidence shows that people do not always respond to financial incentives to work in a way that economic models would predict, as my noble friend Lady Hollis said. This is particularly unsurprising for parents given the range of factors, apart from money, that affect their decisions about work. A recent DWP study revealed that some parents chose to live on lower incomes because they wanted one parent to remain as a full-time carer for their children. The noble Lord asserted that our current approach does not take into account the dynamic analysis. Again, as my noble friend stressed, this is not the case. The system already takes into account the dynamics. It is for this reason that we have tapers to withdrawal rates for benefits such as housing benefit. I am sure that we could have a substantial debate around this and it would be good if we found time to do that. However, I do not believe that it is appropriate to put this in the Bill in the terms proposed by the noble Lord and, on that basis, I hope that he will withdraw the amendment.