On 16th November 2017 the Bishop of St Albans, Rt Revd Alan Smith, led a debate in the House of Lords on the benefit freeze. His opening speech and that of the Minister responding are below. The whole debate can be read here.
“The Lord Bishop of St Albans to ask Her Majesty’s Government what is their assessment of the impact of rising inflation on families affected by the freeze of working age benefits.”
Lord Bishop of St Albans: My Lords, we are at risk of failing a substantial number of children and some of the most needy people of this country. If a society is to be judged by how it treats its most vulnerable, then unless we are prepared to put aside party difference and make common purpose in addressing inequalities in our system of social security, we will surely be found wanting.
So what are the principles we should use when assessing the design and the implementation of benefits policy, particularly the freeze on working age benefits?
We on these benches are not ignorant of the government’s substantial financial challenge. An ageing population, a sizeable deficit, the need for additional expenditure on the NHS and on our education system all of those put limits on the Chancellor’s options.
Understanding these challenges, in a debate in 2009 the Church of England’s General Synod asked that policies intended to reduce the deficit be judged against three principles; fairness, generosity, and sustainability.
The first of those principles, fairness, I know is important to many members of this house, although we might have different ideas about what fairness is. Nonetheless, a fair benefits system needs to transparent and consistent. On this point I would simply note that treating those in receipt of benefits fairly will require a recognition of their individual dignity, and sensitivity to individual circumstances.
The notion of generosity in welfare provision is of course contentious. As I said in a debate earlier this week, this point is illustrated in the Bible, where the community is called to ensure the welfare of the widow, the orphan and the stranger, although, as St Paul so succinctly put it, a person who is not prepared to work should not expect to eat. It was Archbishop William Temple, who popularised the phrase ‘the welfare state,’ and it’s right to want fellow citizens to thrive and flourish. As such the welfare system should be an instrument that facilitates mutual responsibility especially for those who for reasons beyond their control not do have enough to survive on. To that end profitable companies and the wealthiest members of society should seek to fulfil, rather than avoid, tax obligations, even if their activity meets the letter of the law. After all, the reason why so many international companies do so well here in the UK is that they benefit from an educated, healthy workforce, and a world class social infrastructure. In return they need to make a fair contribution towards the funding of these things.
Thirdly, the welfare state should be sustainable. Incentivised reliance on the welfare system inhibits individuals’ ability to flourish. Yet, a society that allows large numbers of its citizens to live in poverty risks social disorder and disintegration.
Now all of this brings me on to the current welfare system. The four-year freeze in most working-age benefits was announced by the then-chancellor in the budget, to last from the 2016/17 period to the 2019/20 period. The stated intention of the policy at the time was to correct perceived policy issues, firstly an alleged unfairness that benefits were rising at a faster rate than wages, and secondly it would make sure that people were better-off in work than out. Despite this, in part owing to stagnating wages, and rising prices, what we are finding is that benefit cuts are making families, even those in work, worse off.
According to the IFS, absolute child poverty is projected to rise by 4 percentage points between 2015-16 and 2021-22, and relative poverty around 7 percentage points, primarily due to the impact of a continued freeze of benefits. A rise in absolute child poverty in this country is unprecedented and, indeed I must say, is unacceptable. That the burden of the freeze weighs disproportionately on children is revealed when it is estimated that in the same time frame pensioners will see a 2% decrease in absolute poverty, and their relative poverty will remain unchanged. This is fundamentally an unfair burden for children to bear.
At the same time, the impact of the freeze is being intensified by rising inflation. Yesterday the ONS announced the most recent inflation statistics, reporting that food and non-alcoholic drink prices last month were 4% higher than in October last year, the fastest rate of growth since September 2013. Gas and electricity prices are also up by 6%, hitting the poorest families hardest. The cost of essentials has been rising faster than inflation since 2006. While benefits and tax credits will have only risen by 3% over the 7 year period between 2012 and 2019, average prices are expected to rise by at least 13% on average over the same period. Families relying on benefits to supplement their income are simply unable to keep up with the rising cost of living.
The effects of this policy are felt intensely by the families affected and its impact is huge; equivalent to taking £7bn every year from family budgets. Yet this is easily overlooked, because its effect is incremental and works not by reducing the amount of benefits or tax credits that people receive, but by reducing what these can buy. Families may be receiving all of the benefits they are normally entitled to yet, able to stretch them less and less far. Moreover, the majority of affected families are working families, undermining the Government’s objective to make work pay.
The National Audit Office reported in September this year that the freeze in Local Housing Allowance rates has contributed to private rental properties becoming less and less affordable for families, which in turn is likely to be contributing to rising homelessness. Shelter estimates that the freeze on local housing allowance puts over a million households at risk of homelessness by 2020. Since 2006 the maximum award for childcare costs that can be claimed under tax credits, has been fixed. This amounts effectively to a decade-long freeze in the refundable element of childcare costs for low income families. As the cost of essentials rises and families have less money for childcare and housing, the benefits freeze actually serves as a barrier to work, rather than enabling it. The status quo is unsustainable.
There is room for re-assessment. The benefits freeze will actually save considerably more than originally anticipated due to rising inflation. Ending the freeze a year early or uprating benefits by 1% a year for the next 2 years could still achieve the same overall saving as originally planned, and I hope all parties will commit to making this change. Raising the personal tax allowance is not an effective solution, as most of the benefits go to better off households. Only £1 in every 6 spent on raising the personal tax allowance will go to households in the bottom half of the income distribution, with a negligible impact on poverty.
On Tuesday the Governor of the Bank of England Mark Carney warned that the lack of a Brexit deal could see inflation rise further, putting even greater pressure on poorer people. A fundamental reconsideration of the benefits freeze, in light of the principles which should guide welfare policy, is urgently needed. I hope the noble lord the minister will not only assure the house that Her Majesty’s Government is listening but will respond by committing Her Majesty’s Government positively to end the freeze which is already causing so much misery.
Lord Young of Cookham (Con) [Minister]: I begin by thanking the right reverend Prelate the Lord Bishop of St Albans for securing this debate—his second debate this week, each focusing rightly on the least well-off in society. I am grateful for the way he set out his case and for what he said about families, much of which was endorsed by my noble friend Lord Elton. The other speakers in this debate are all veterans of previous debates on universal credit—an important qualification which I hope has reassured the noble Baroness.
The noble Baroness wanted to look at history. If I may, I shall do exactly the same, going back a little further than she did. This debate is very different from one that might have taken place when I first entered government in 1979 as a Minister at the Department of Health and Social Security, a precursor to today’s DWP. Welfare spending on people in work barely existed at that time, often leading to a sharp drop in income as people moved off supplementary benefit into work, with all the disincentives that went with it.
In the decades that have followed, we have seen in-work support evolve from its inception through family credit and housing benefit to the introduction of statutory sick and maternity pay in the 1980s and then on to tax credits, which started in the late 1990s and have grown in importance ever since. The more than £25 billion that the Government now spend on in-work benefits and tax credits sits at the heart of a welfare system dedicated to supporting people, first, to seek and find work, and then to stay in work and take home more of what they earn. This has been a dramatic change in priorities over my political lifetime.
I hope it does not sound hard-hearted to say that work is the best route for families to get out of poverty and become self-reliant. I genuinely believe that to be the case. Earnings provide people with the best opportunity to grow their income and become financially secure. Across the UK, the unemployment rate is at its lowest level in over 40 years and there are fewer households where no one is in employment than at any time since comparable records began. That is why we are committed to incentivising work for those who can. This debate, however, is about the next step.
What happens to living standards when people have found a job? Here, the Government have taken a number of steps, not all of which have been mentioned in the debate. They have cut income tax for over 30 million people and taken 4 million low earners out of income tax altogether. As of April this year, a typical basic rate taxpayer will pay over £1,000 less income tax, compared to 2010-11. Our plan, as the noble Lord, Lord Kirkwood, mentioned, is to increase the tax-free personal allowance further to £12,500 by the end of this Parliament.
Other measures, such as freezing fuel duty and reducing social rents to 2020, will mean more money in the pockets of those social tenants paying their own rent and a lower housing benefit bill. If one puts it all together and takes into account the national minimum wage, in 2010 a single person on the national minimum wage working 35 hours per week would have taken home £9,200 after tax and national insurance. Following the national living wage and changes to the personal allowance, they would take home £12,500, an increase of £3,300.
The national living wage has had a big impact. It has given the UK’s lowest earners their fastest pay rise in 20 years. In 2016 their full-time earnings increased by 6.2%—well above median growth of 2.2%. Since 2010 the annual average income of the poorest fifth of households has risen in real terms by more than £300, while the incomes of the richest fifth have fallen. Our aim is for the national living wage to reach 60% of median earnings in 2020. Since 2010, we have 600,000 fewer people living in absolute low income on a before-housing-costs basis, and 1.2 million fewer people on out-of-work benefits, so income inequality is down.
My noble friend Lord Elton and others mentioned working families on low income. Here we have made the childcare element of universal credit more generous. Parents on universal credit can now claim back up to 85% of eligible childcare costs, compared with 70% in working tax credit, a change that is benefiting 500,000 working families. Working families in England with children aged three and four can now get up to 30 hours of free childcare a week in England, worth up to £5,000 per child. This amounts to a record investment by the Government in childcare. By 2019-20 we will be spending over £6 billion per year to support working families in this way. Helping the younger unemployed, we have seen more than 3 million apprenticeships start since 2010, with a commitment to 1.9 million more apprenticeships by 2020, helping young people into better-paid employment. Youth unemployment has fallen by over 40% since 2010, and the proportion of young people who are unemployed and not in full-time education remains below 5%
While the debate has focused on the specific impact of the benefit freeze, we should put on the other side of the scales the many measures that I have just mentioned. If we do that, we get a fuller and more balanced picture.
At the time of the 2015 summer Budget, we estimated that the benefit freeze would save £3.5 billion in 2019-20, equating to an average notional loss of £6 per week in 2019-20. Some of the other measures I have just referred to should be taken into account before one comes to an overall judgment.
The noble Baroness, Lady Sherlock, and others, contrasted the freeze in working-age benefits with a more generous regime for the state retirement pension. There is a key difference that justifies this. Once you reach state retirement age, there is no turning back. For most, there is no opportunity to increase their income through paid work, whereas those of working age and who are fit have this opportunity. Between August and October of this year there were 780,000 job vacancies. Just to make the point, around 80% of people leave JSA within six months of making a claim, indicating that this is a stream rather than a pool.
A number of noble Lords raised statistics about poverty. We can trade statistics about relative or absolute poverty, before or after housing. Since 2010, on a before-housing-cost basis, there are 600,000 fewer people on absolute low income—a record low—including 200,000 fewer children, 100,000 fewer pensioners and 300,000 working-age adults.
In his opening remarks, the right reverend Prelate said that one of the three criteria should be fairness. I agree. The Treasury published a cumulative distributional analysis alongside the Autumn Statement in November last year, showing the impacts on household income of tax, welfare and public expenditure changes implemented—or planned to be implemented—since the 2010 general election. This is the most comprehensive analysis available, covering the effects of not only direct cash transfers between households and government but of front-line public service provision. This analysis shows that the state is highly redistributive. On average, the 10% of households with the lowest incomes receive over four times as much support in spending as they contribute in tax, while the 10% of households with the highest incomes contribute over five times as much in tax as they receive in spending. The Government’s policies have repeatedly increased the tax contribution of the wealthy through measures such as the reform of dividend taxation and the increase in stamp duty. Income inequality is now lower than it was in 2010.
My noble friend Lord Elton mentioned children and families. We are committed to supporting families and tackling the root causes of child poverty and disadvantage. We know that children do worse in households where no one is in work. A child growing up in such a family is almost twice as likely to fail at all stages of their education as a child living in a working family. Children in households without a working member are five times more likely to be in poverty than those in households where all the adults work. Hence the emphasis in our policy on getting people into work wherever possible.
I shall touch briefly on some of the points raised in the debate. I join the noble Lord, Lord Beecham, in paying tribute to the voluntary sector and the work it does in helping some of the families we have been talking about. On the spare room subsidy—rather than the bedroom tax—he will know that discretionary housing grants are available to help those in need as a result of the change. My noble friend Lady Buscombe addressed the two-child policy in the debate that has just concluded. I should like to write to the noble Lord if I do not touch on all the points he raised.
On the benefit cap, there is a basic issue of fairness which, I think, resonates with the public as a whole. It is absolutely right that you cannot get more from a life on benefits than from work. This is the principle behind the cap.
I am grateful to the noble Lord, Lord Kirkwood, for curtailing his speech on the earlier debate. I will pass on to the Chancellor his suggestion of switching the resources from cutting the personal tax allowance to putting more into universal credit. He asked why we used primary legislation to freeze the benefits and tax credits. Legislating for four years brought certainty on levels of welfare spending to benefit recipients, the taxpayer and the Exchequer. The annual uprating includes benefits for carers and disability premiums. My understanding is that, once we come to the end of the freeze, we revert to the default position of uprating on the normal basis.
The noble Lord asked about the SSAC. The annual uprating order that provides for increases in benefits and pension rates is not subject to SSAC scrutiny. The order is fiscal policy and that is why the four-year benefit freeze was provided for in primary legislation and not as part of the annual review.
This is a Government who support families. We support people below state pension age with over £90 billion a year in payments, providing a robust welfare safety net. We support families who face additional obstacles and costs as a result of disability or illness by maintaining the value of the payments they receive. We support parents to get into work and out of poverty, to earn more, to gain financial security for their families and to give their children the best prospects for the future.