Brooks Newmark on Tax Credits

Brooks Newmark highlights the mismanagement of the tax credit system, citing wrong payments, the complexity of the system and the fact that the Government has not fully budgeted for the system - relying on it not being used to capacity.

2.47 pm

Mr. Brooks Newmark (Braintree) (Con): I am delighted to participate in the debate. This is about the fifth time that I have debated this issue this year, given my role on the Treasury Committee.

In 2002, the Chancellor said:

"Our new Tax Credits are both symbol and substance of this Government's ambition for Britain."

If they are a symbol for anything these days, it is error, fraud and incompetence. The substance, as we have heard from the Public Accounts Committee, is the £5.8 billion that was overpaid to claimants in the first three years of the current tax credits scheme; the £1.9 billion of overpayments that have either been written off or are likely to be written off; and finally, the increase in the income disregard, which was intended to reduce complexity and errors, that is costing £500 million a year. The Paymaster General must be sick and tired of coming before the House to explain the latest sorry tale on tax credits, and she must also be tired of being used as a human shield. I am sorry that she is unwell and is unable to be here, and I wish her a speedy recovery.

At the time of the Treasury Committee's Budget hearing, the Chancellor had not answered a direct oral question on tax credits for 1,050 days. Another 48 days later, he still is not prepared to accept that the buck stops with him. Perhaps, after 1,100 days of avoiding the issue, he will see fit to use his first 100 days in his new office to confront some of the issues that three separate Select Committees have raised with such monotonous repetition.

On the theme of repetition, I have three points to make, and I look forward to hearing the Financial Secretary's response in the Paymaster General's absence. According to Her Majesty's Revenue and Customs-the latest facts that I have go up until 2005-two fifths of the moneys paid out involve overpayments and one fifth of them involve underpayments. So, three fifths of the money that is paid out to claimants is paid wrongly. I shall go into that later, but given an uptake of only 25 per cent., only two fifths of 25 per cent. of the people who should be getting money are receiving the right sum. That is the tragedy.

I should cite a comment made by the hon. Member for Newcastle upon Tyne, Central (Jim Cousins), who serves on the Treasury Committee with me. He gave his verdict on that state of affairs during the Treasury Committee's follow-up session, and I shall repeat it for the record. He said that

"under or overpayments of tax credits"

-I cannot use the emotion that he did-

"is a shocking, devastating damage to the whole welfare reform policy...these administrative deficiencies have a major impact on the Government's welfare reform policies."

In that view, the hon. Gentleman joins other, equally distinguished colleagues on the Labour Benches. The right hon. Member for Sheffield, Brightside (Mr. Blunkett) has said:

"The tax credit system is a shambles-such a shambles that I've had to help out one of my constituents financially, only the second time that I have ever done this, and the first was for a child. I don't know if I will ever get the money back, but what else can you do when the tax credit system is such a total mess?"

That tragedy, and the emotion shown by my colleagues on the Treasury Committee, is driven by the fact that the poorest members of society-some 97 per cent. of people who earn less than £10,000-should be receiving the tax credits. They deserve them, and they should be receiving the right amount. As we heard so eloquently from the hon. Member for Edinburgh, West (John Barrett), this situation puts an enormous amount of stress on these families.

I live in a fairly well-to-do constituency, but 25 per cent. of the people who come to my surgery do so because they have received the wrong amount. These people have received letters that come across, to them at least, as highly aggressive and put even more stress on them, because they are being asked to give back, in some cases, thousands of pounds, and they simply do not know what to do.

The financial problem is compounded by the fact that an enormous amount of money has been written off. When we had our Treasury Committee hearing, the amount was £400 million, but I believe that the Public Accounts Committee recently said that the amount to be written off was a whopping £1.9 billion. Braintree has been waiting for a community hospital for a couple of years, and we have been told that it will cost about £5 million-for the sum we are talking about, we could build 200 community hospitals in Braintree. I believe that the hon. Member for Edinburgh, West used the word "shambles", but that is an understatement of the gross financial mismanagement of tax credits.

My second point concerns the enduring complexity of the system, which has shrugged off all previous attempts at simplification. As I have said, the tax credit system is relied upon by millions of the poorest people, which is why the failures in its administration are such a scandal. Large numbers of people are put off from applying for money to which they are en titled simply because of the complexity of the system. In the poorest communities, where people should be applying for tax credits, word gets around very quickly. The word on tax credits is that they are often more hassle than they are worth. If nothing else, that is a condemnation of a system that the Chancellor, with the best will in the world, wants people to take up.

I have brought a copy of the forms with me, and they illustrate the problem. I know that this is not show and tell, but I do not know whether the Financial Secretary has even seen a copy-he probably does not use the system. I admit that these forms date from 2005, so it is, at least, conceivable, if not probable, that things have got a little better. For the benefit of the Hansard reporter, I should say that there is a 12-page main form, with four additional pages to use if, like me, someone has more than two children, and a whopping 56 pages of guidance notes. I have at least two degrees, one of which is a finance degree from Harvard business school, and I find it challenging enough to deal with the complexities of the forms. Of course, the most useful information to claimants does not even come from HMRC-it is the four-page advice guide from Citizens Advice on what to do in the event of an overpayment.

I repeat that tax credits are intended for the poorest and most vulnerable members of our society, who often lack the time and education to deal with them. The sheer volume of criticism that the system has attracted does not seem to have dented the commitment of Ministers to carry on regardless. Even if HMRC can improve fraud and error rates from their current woeful levels, there is little evidence that anything is being done to confront the root cause of that fraud and error, which is the complexity. HMRC is sticking its fingers in the dam and, as the Public Accounts Committee report from last week has shown, it is running out of fingers.

My final point also concerns uptake, but it relates to the more cynical side of uptake-the extent to which it is budgeted for. I tried to get answers straight from the horse's mouth when the Chancellor appeared before the Treasury Committee earlier this year but, to stretch the analogy, it was a bit like pulling teeth. HMRC's report on child tax credit and working tax credit take-up rates, published in March this year, forms the basis for budgeting uptake. For public expenditure purposes, the Treasury assumes that take-up will continue to be in line with current rates.

This was an issue when the Treasury Committee examined the Budget, because we were worried that the Chancellor's abolition of the 10 per cent. starting rate of income tax would result in a leap in the take-up of working tax credit, which had not been budgeted for. The Treasury has in fact budgeted for an uptake of about 25 per cent. Should one create a system in which one assumes that only 25 per cent. of people will apply and take up the tax credits which are their due and which they richly deserve? The answer is no. If everyone who was en titled to working tax credits claimed them, I believe that there would be a hole of more than £1 billion in the public accounts.

Again, I tried pushing the Chancellor on this issue. Those of us who come from a business background would do some sort of financial model-we would do a sensitivity analysis-and we would ask, "What would happen if there were 50, 60 or 80 per cent. take-up?" Those are the aspirations mentioned by the Chancellor. He wants more people to take these things up, but he could not answer my question. I suspect that he and his team had done no financial analysis on a much greater take-up of working tax credits.

The Chancellor would not comment on any potential increase in take-up, because he thought that any figure I gave him above the level of his projection was hypothetical and, therefore-in a leap of logic-impossible. I was delighted when he admitted to a group of schoolchildren recently:

"I did maths at school and one year at university but I don't think I was...very good at it-and some people would say it shows."

I guess that I am one of them. If there were less wastage, which HMRC now seems to accept as a fact of life, perhaps the system could afford to sustain an uptake of working tax credits of more than 25 per cent.

My final concern about the tax credit system is that after all the mistaken payments, the write-offs, the fraud and the wastage, the Chancellor is counting on people not to use it to capacity. It is tempting to think that the system has been designed to fail, but fail it has, and that is the Chancellor's legacy.

2.59 pm

AND LATER IN THE SAME DEBATE

Mr. Newmark: Is that not symptomatic of the Chancellor's character? He is rather like Macavity: every time there is a problem, he is nowhere to be seen.

Danny Alexander: I am not a psychologist and I would not wish to comment on the Chancellor's character, so I will leave that to others. In this context, I am more interested in commenting on his policies and his attitude to them, which seems to be characterised by taking the credit when things are good and running to hide when they are not so good.

Mr. Newmark: I shall take only a few seconds. Perhaps I could make another suggestion, although I appreciate that that is not really the prerogative of Opposition Back Benchers. The Government could also simplify the forms. If they were simpler, there would be fewer errors and the Government would not need to write off almost £2 billion.

Mr. Francois: My hon. Friend makes a good point. Many of those who claim tax credits are on marginal incomes, and they do not necessarily have detailed financial training. Therefore, making the system and guidance as easy as possible to follow would be of great assistance to the more than 5 million families who currently claim.