My Lords, we think it is a basic principle that people on very low incomes should not be paying income tax. It may be a difference of view between this side of the House and the other side, but this is the view that we have taken. This is the policy that we are introducing and we will continue with it.
A number of noble Lords asked why we are proceeding via a legislative route. We believe it is only right that we set out our plans in advance and give as much certainty as possible. The Bill gives certainty on further savings, making a crucial contribution to our plans and helping us to maintain credibility, not least in the markets. We have to keep reminding ourselves that even a one percentage point rise in effective mortgage rates would add £12 billion a year to households’ mortgage interest payments, costing the average household with a mortgage around £1,000 a year. Given the current level of the deficit, such an interest rate rise, in the absence of a credible fiscal policy, is perfectly plausible. The IMF made this element clear when it said in October:
“To anchor market expectations, policymakers need to specify adequately detailed medium-term plans for lowering debt ratios, which must be backed by binding legislation or fiscal frameworks”.
This Bill takes us in that direction.
A number of noble Lords asked what will happen if inflation soars. First, the independent MPC remains committed to maintaining price stability, which is defined by the Government as an inflation target of 2%, as measured by the 12-month increase in the CPI. Although inflation is forecast by the MPC and the Office for Budget Responsibility to be above the 2% target in the near term, it is then forecast to fall back towards the target in the medium term. It is right that the Government make plans based on the best available forecast. However, we know that these are forecasts and targets and we are aware that external factors and unforeseen events can produce a different outcome.
We always monitor the rate of inflation and the impact that it has on households and the wider economy. That is why, in the Autumn Statement, we took action to help households with the cost of living, including cancelling the January fuel duty rise, providing funding for local authorities to freeze council tax and announcing a further increase in the personal allowance. We will continue to monitor the rate of inflation closely, based on monthly data on consumer price inflation published by the Office for National Statistics, and the impact that it has on the cost of living for families. This will continue to be a key consideration for this Government’s policies in the future.
Many noble Lords raised concerns over the impact of this Bill on poverty, particularly child poverty. I will start by saying that any two-dimensional measure for
poverty, which looks at relative income only, is not an adequate way to measure progress on poverty. The most recent decrease in child poverty—a fall of 300,000 in the number of children in relative poverty in 2010—was due to the recession causing a fall in median income and pushing the poverty line down. That is clearly absurd, which is why we are consulting on a better measure of child poverty, one that includes income but goes beyond it to tackle root causes; for example educational failure, problem debt or worklessness.
In terms of how we tackle this issue, it is worth while looking at the success of the previous Government in dealing with child poverty. In the period 2003-04 to 2010, £170 billion was spent on tax credits but there was little or no progress in reducing the levels of child poverty. We in this Government want to look at some of these basic issues around educational failure, problem debt and worklessness. We recognise, as I am sure all noble Lords do, that education is one of the key factors in getting poor children out of poverty. That is why this Government are committed to providing additional funding for disadvantaged pupils through the pupil premium, which will rise by £2.5 billion a year by 2014-15. We are also spending £200 million extra in universal credit to support families with childcare costs. For the first time, this support will be made available to families who work fewer than 16 hours per week, which will mean that 100,000 more working families will be helped with their childcare costs. All two year-olds from low-income households will be able to access 15 hours per week of early education, starting with the poorest 20% in 2013 and extending it to 40% in 2014.
Debt is also a major problem for poor families, who not only take out debt but often take it out at extortionate rates of interest. That is why we are putting in place stronger, more responsive regulation of unsecured lending and other forms of consumer credit to ensure that borrowers are protected and can be confident of getting a fair deal, and why we have given the Financial Conduct Authority power to regulate loan sharks and cap interest from payday lenders for the first time.
However, work is the best route out of poverty. As my noble friend Lady Stowell set out at the start of this debate, the Government are reforming the welfare system to improve incentives for individuals to enter work. Universal credit will not only improve the financial incentives offered for people who want to work but will simplify the benefits system. Replacing the main benefits with one single payment and removing the complex system of hours rules and different tapers that currently exist means that claimants will understand that they are better off getting a job and increasing their hours. Under universal credit, 3.1 million households will benefit by an average of £39 a week and up to 250,000 children will be taken out of poverty. Any household whose migration to universal credit is initiated by the DWP will receive transitional protection, and there will be no cash losers from the policy.
A number of noble Lords have spoken eloquently about issues facing the disabled. I repeat that we have protected those benefits designed to reflect the additional costs that disabled people face as a result of their disability. Of course, as we have heard, this does not
mean that no disabled people will be affected. In common with other working-age recipients, many disabled people will also be claiming benefits that include help towards everyday living expenses or housing costs, but those benefits for the extra costs of disability are protected. I am afraid that I cannot give the noble Lord, Lord Macdonald of Tradeston, the assurance that he is seeking in respect of ESA, but I suspect he is not too surprised about that.
Government policy towards disability is not limited to benefit levels. We will shortly be publishing the most comprehensive analysis of available data about disability since 2005, entitled Fulfilling Potential: Building a Deeper Understanding of Disability in the UK Today. This will help inform the next stage of our disability strategy: the development of actions, outcomes and indicators. It will help increase public understanding, change attitudes and enhance the commitment to improving the lives of disabled people. We are setting up a new disability action alliance, bringing together organisations of disabled people and organisations from across government and the public, private, voluntary and community sectors. This will take forward practical actions at both the national and local level, making a real difference to the lives of disabled people. We will publish a further strategic document and action plan to include the alliance actions as well as actions across government in the spring.
There have been a number of questions about the cumulative impact of the various changes that have been made in recent years and why the Government have not produced an analysis of these to the extent that people would like. Looking at the cumulative impact of tax, tax credit and benefit reforms since the June 2010 Budget, the top 20% of households continue to make the greatest contribution towards reducing the deficit as a percentage of their income and benefits in kind from public services. So far, HMT’s analysis has not included universal credit. Separate analysis shows that three-quarters of the gainers from UC are in the bottom 40% of the income distribution.
As noble Lords know, the analysis in this area is extremely complicated, and breaking down the results in detail is extraordinary difficult to do accurately, if not impossible. Similarly, not all policy changes can be modelled robustly, and the IFS has acknowledged that the effects of dynamic reforms such as those to disability living allowance and housing benefit cannot be precisely modelled. In these circumstances, it would be simply irresponsible for the Government to do so.
I shall try to respond to a number of specific questions as quickly as I might. The noble Lord, Lord German, asked me to commit the Government to no further welfare cuts in this Parliament. I remind him that at the Autumn Statement 2012, the Government said that detailed spending plans for 2015 and 2016 would be set in the first half of this year. We cannot prejudge the outcome. By “first half of this year”, we mean the back half of the first half of this year.
The noble Lord, Lord Bates, referred to the living wage. The Government support the idea of the living wage. Civil servants are paid the living wage; and contractors, for example at the DWP, are paid the living wage. My guess is that the living wage will increasingly become the norm, particularly in London.
The right reverend Prelate the Bishop of Ripon and Leeds asked about asylum seekers. Asylum-seeker benefit rates are a matter for the Home Office and are not within the scope of the Bill. I will draw his remarks to the attention of my colleagues in the Home Office, because I know that the right reverend Prelate feels strongly about that matter.
The noble Lords, Lord Kirkwood, Lord Whitty and Lord Best, and the noble Baronesses, Lady Donaghy and Lady Lister, in various ways talked about how the growing disparity between benefits and earnings impacts among other things on the housing market. There are very long-term, secular changes in the relationship between benefits and earnings and, as the noble Lord, Lord Whitty, said, there are long-term failings in the operation of the housing market. We will have many opportunities to discuss these, no doubt in Committee but more generally in your Lordships’ House. I am sorry that I have not been able to deal with them tonight. There are quite a number of issues that noble Lords have raised this evening that I have been unable to cover, and I look forward to debating them in Committee.
Welfare spending accounts for more than a quarter of all public spending. In these touch economic times, when people across the public and private sectors have seen significant restraint in their pay, this Bill finds the right balance between finding savings from welfare while ensuring that benefits and tax credits continue to be increased in cash terms. I commend the Bill to the House.