My Lords, I shall also introduce the Guardian’s Allowance (Northern Ireland) Up-rating Order 2013 and the Tax Credits Up-rating, etc. Regulations 2013. It is the Government’s view that the regulations and orders are compatible with the European Convention on Human Rights.
The regulations and orders before the Committee put into effect a number of reforms to tax credits and child benefit announced at the spending review 2010, the June Budget 2010 and the Autumn Statement 2012. In the spending review 2010, we announced that the basic and 30-hour elements of working tax credit would be frozen for three years from 2011-12. The regulations confirm that policy for 2013-14.
At the June Budget 2010, we announced that the rates of child benefit would be frozen for three years from 2011-12. We also announced that the income disregard, which is the amount by which a family can increase its income within a tax year without a recalculation of its tax credit award, would decrease from £10,000 to £5,000 in April 2013. At the Autumn Statement 2012, we announced that the child element of child tax credit, and the couple and lone-parent elements of working tax credit, would be uprated by 1% for three years from April 2013.
Benefits that help with the extra cost of disability have been protected. The regulations increase the disability elements of tax credits—that is, the disabled child and severely disabled child elements of child tax credit, and the disabled worker and severely disabled worker elements of working tax credit—in line with CPI. The rate of guardian’s allowance will also be uprated by CPI.
The Committee will be aware that the decisions on uprating contained in these regulations are part of a wider package of uprating measures. My noble friend Lady Stowell has already presented the Social Security Benefits Up-rating Order for 2013-14, which increases certain working-age social security benefits by 1%. The Welfare Benefits Up-rating Bill, which confirms the 1% uprating decision for 2014-15 and 2015-16, including for certain elements of tax credits and child benefit, is now entering its Report stage in the House.
I will start by saying that tax credits and child benefit provide valuable support to millions of families, so the decisions to freeze child benefit and tax credit rates or to increase them by less than CPI were difficult. They will mean that the rates will reduce in real terms. However, they are necessary decisions that should be considered in the context of the exceptional fiscal challenge that we inherited: namely, the largest deficit since the Second World War.
The Government are committed to reducing the deficit. Around four-fifths of the total consolidation in 2015-16 will be delivered by lower spending. This is consistent with OECD and IMF research that suggests that fiscal consolidation efforts that are focused on spending are more likely to be successful.
Tackling the unsustainable welfare budget is a key part of addressing our fiscal challenge. From 1997 to 2010, spending on welfare increased by some 60% in real terms, which is equivalent to an extra cost of £2,900 per household in Great Britain. It is an increase
from 11% of GDP in 2007-08 to more than 13% today. Welfare now accounts for £1 in every £4 of public spending. Tax credits have significantly contributed to this increase. Under the previous Government, spend increased an extraordinary 340% compared with the benefits it replaced. Tax credits will cost around £30 billion this year, and child benefit costs a further £12 billion. Together, they make up over 40% of working-age welfare spend.
Freezing the basic and 30-hour elements for three years will save almost £1 billion in 2013-14, while uprating the child, couple and lone parent elements by 1% saves £320 million, and decreasing the income disregard will save £125 million in 2013-14. The three-year child benefit freeze will save an additional £1.25 billion. If these savings were not delivered, this could clearly put additional pressure on spending on public services. While they are tough decisions, they are necessary and will be implemented through these regulations.
I assure noble Lords that while we are taking these tough and necessary decisions on welfare, we are also ensuring that high earners pay their share. The top 20% of households continue to make the greatest contribution towards reducing the deficit. This is true both in cash terms and as a percentage of their income and benefits in kind from public services. Overall, the richest will pay more tax in this Parliament than under the previous Government’s plans. As a result of this Government’s actions, a high earner pays an additional £10,000 on a £100,000 capital gain; pays an extra £60,000 on the purchase of a £3 million house, and an extra £300,000 if purchased via a corporate envelope; loses up to £4,500 a year in entitlement to tax reliefs on annual pension contributions, for an individual previously claiming the maximum annual tax-free pension allowance and paying the additional rate; can no longer benefit from tax relief on contributions to pension pots over £1.25 million in value; and will no longer be able to use income tax reliefs to reduce their tax bill excessively year after year.
These measures clearly affect benefits that are designed to support families with children. I am conscious that there has been much discussion, both in the House and through the media, about the impact that this might have on child poverty. The Government are committed to tackling child poverty and focus on interventions that transform lives rather than push up benefit incomes to lift people just above a relative income line. We already know that focusing on the relative income line alone yields perverse results. In 2010, 300,000 fewer children were said to be in poverty because the recession had caused median incomes to drop. In other words, people were said to be pulled out of poverty not because anything changed in their lives but because the rest of society had got poorer.
The Government are consulting on a better measurement that includes income, which is of course an important part of tackling child poverty but goes beyond income to tackle the root causes of poverty, including worklessness, educational failure and family breakdown. I re-emphasise that one of the most important things that we can do to support children is to tackle the nation’s debt and restore economic growth. In doing so, we can create a future of prosperity and
opportunity. I simply disagree that what is best for children is to continue spending unaffordable amounts on welfare while building up debts to pay for it.
The Government are prioritising our resources into reforms that really help families with children. We have invested £2.5 billion in the pupil premium for disadvantaged pupils. We have put £1.2 billion into capital investment in schools. We are investing in making work pay through universal credit, sending out a clear signal that we believe that work is the best route out of poverty for parents and their children. As part of universal credit we are spending an extra £200 million to support families with childcare costs, and for the first time this support will be made available for families who work fewer than 16 hours per week. This will mean that 100,000 more working families will be helped with their childcare costs. Of course, we also provide significant support to families through the National Health Service and schools, which, even in these difficult economic times, we have protected the budgets for.
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We also should not forget that we increased the child element of child tax credit by £180 above inflation in April 2011, so this benefit is already much higher than it otherwise would have been. Some have asked why we need to reduce spending on benefits that support working households. Of course, it is true that working tax credit is for working families and that child tax credit and child benefit go to in-work and out-of-work families. However, I have already said that tax credits and child benefits are over 40% of working-age welfare, so it is simply unrealistic to suggest that these benefits could be excluded from the need to make savings.
There is a more fundamental point here. I simply disagree with the concept that the only way to support working families is through welfare payments. Although we are taking difficult decisions to reduce the welfare bill, we are prioritising our resources towards measures that really help working families. We are supporting working families through raising the personal allowance. The largest ever increase to the personal allowance, in April, will benefit 24 million people by an average of £223, and will lift 1.1 million people out of paying income tax altogether.
In 2013-14, almost three-quarters of in-work families in receipt of tax credits will have benefited from the increases to the personal allowance. We are supporting working families through cancelling increases in fuel duty. Cancelling the 3p fuel duty increase planned for January means that it now costs £5 less for a typical family to fill its car with fuel. We are supporting working families through providing a further £450 million to help freeze council tax bills in England. The support for local authorities means that taxpayers living in an average band D home in England could save up to £72 on a 5% rise in council tax.
As a result of the measures announced in the Autumn Statement, working families will be on average £125 a year better off, and better off on average no matter where they sit in the income distribution. We are also implementing radical reform to the benefits
system to ensure that it always pays to work. Universal credit, introduced over two Parliaments, will replace the current complex system of means-tested working-age benefits with a single, streamlined payment.
This Government are committed to restoring the country to sustainable growth and prosperity. The savings enabled by these regulations are a crucial part of delivering on that commitment. However, the Government are committed to doing this in a way that will protect those who need protection and ensure that the highest earners pay their share. This Government are taking action that will really benefit those in work and families with children, not just pumping more money into the benefit system. We have not shirked our responsibility to take the tough decisions to return the UK to economic stability. I commend these regulations and orders to the Committee.