Social Security Benefits Up-rating Order 2010

My Lords, I thank the noble Baroness, Lady Thomas, and the noble Lord, Lord Taylor, for their contributions to this debate. Although we miss the noble Lord, Lord Kirkwood, at our proceedings, I agree with the noble Lord, Lord Taylor: the noble Baroness, as ever, acquits herself extremely well. Let me deal first with the issue around the basic state pension as both the noble Lord and the noble Baroness referred to that and to what is happening. We made a commitment to increase the basic state pension by the higher of 2.5 per cent or inflation; that is exactly what we said and that is exactly what we did. On freezing additional pensions—SERPS and the state second pension in particular—as I said in my presentation, this involves not only cost implications; we also need to think about the implications. Those components of the pension are linked by statute to public service pensions because those schemes are contracted out of SERPS. Therefore, had those components of the state pension been increased, it would have fed over into requiring increases in public service pension schemes and there would be a potential mismatch with private sector pension schemes which would typically be uprated by inflation or with the 2.5 per cent cap. So there would have been a zero increase in a whole range of private pensions and we would, by this mechanism, have caused there to be an increase in public service pensions. That is part of our consideration as well. We believe that by focusing on the basic state pension we have targeted resources most fairly. There are a number ways that we could have done this through uprating. We have decided that the fairest way to target resources to help pensioners is to increase the basic state pension, as that still delivers, on average, an increase of £2 a week in overall state pension. It would put about an extra £1 billion into the pockets of pensioners. I reconfirm what I said. Increasing additional pensions automatically feeds into public sector pensions and if the extra £1 billion that we have applied to increases in the basic state pension were delivered instead by uprating the basic state pension, additional pensions and public sector pensions—if we spread it a different way—this would deliver on average an increase in the state pension of only £1, half the average increase generated by increasing the basic state pension by 2.5 per cent. So we do not apologise; it was the right thing to do. It is targeting resources in the right way, particularly because of this connection between SERPS and the state second pension and other pension provision. As for the uprating of a range of benefits by 1.5 per cent, what we need to do, if we are making a fair analysis, is to work through what would have happened under the normal rules. The normal rules are that you increase this range of benefits by RPI. We know that RPI was negative and that that would have implied that benefits would have simply stayed level. It would mean that, for next year, if inflation were 3 per cent—which I think is part of one of the projections in September 2010—then, in April 2011, a 3 per cent increase would have applied to that static base. By applying the 1.5 per cent increase, we have pulled forward part of that. That seems to me to be beneficial for people. Had we just followed the normal rule, there would have been no increase. People would have ended up in 2011-12 in the same place as they will now, but they would have missed the benefit of having part of that increase brought forward. Again, we do not in any way apologise for that. The noble Baroness, Lady Thomas, made reference to a bit of an old chestnut. I know that the noble Lords, Lord Kirkwood and Lord Oakeshott, are very keen on the National Insurance Fund, thinking that there is all this money sloshing around, so why can't we use it to increase pensions? Although the current estimates for the fund put the previous balances at around 67 per cent, the annual balance in 2010-11 is projected to be a deficit of £520 million. However, we cannot just use the money that is in the funds, because the surplus currently reduces government borrowing and therefore allows money to be invested in public services such as schools and hospitals. Without the fund—if we applied that in a different way—we would have to raise an equivalent amount by way of taxation. So it is not just a reserve sitting there to be used. If we did what was pressed on us, it would have very profound implications for public expenditure. On the question of why we should not use that fund to increase the basic state pension to £165—the current number that is bandied around—almost 90 per cent of the National Insurance Fund is spent on the basic state pension and the additional pension, with about 70 per cent spent just on the basic state pension. So if we raise the basic state pension to £165 a week now, it would cost something like £40 billion per year in the earlier years, significantly greater than the in-year surplus expected in the fund this year, and it would push the fund into a large deficit next year. It is simply not doable. The noble Baroness made reference to tax credits and tax allowances. Obviously, issues around those allowances are the prerogative of another place. However, as the noble Baroness will know, because we spent quite a long time discussing it in relation to the Child Poverty Bill, this Government are committed to a sustainable eradication of poverty, and child poverty in particular. Direct tax and benefit measures that we have introduced since 1997 mean that, in 2010-11, households with children will on average be £2,200 a year better off, and households with children in the poorest fifth of the population will be, on average, £5,000 a year better off. The noble Lord, Lord Taylor, said that my presentation was a bit subdued. I am sorry—maybe it is the day of the week and the hour of the day. He said that we have put the 2.5 per cent back on VAT. I am interested that we are challenged on that point by the noble Lord. I am not sure that his party supported the reduction of VAT in the first instance. It was an important part of the fiscal stimulus, but obviously there is always a balance in these things. We must have regard to the need to raise revenue as well in order to tackle the deficit we face. I am grateful for the fact that, on balance, he welcomes the order. As for the economic outlook this year, we will have to see. The Chancellor’s projections have been good. As I said, the last quarter of last year showed growth in the economy. The projections for this year as a whole are for the economy to grow, and it will grow more strongly the year after. It will not long before we have the first-quarter figures for this year. I said that we have cautious optimism, and I believe that that is right. We should not be complacent because we are highly dependent on what is happening in the rest of the world. We need to make sure that we continue to invest in the way that we have, which has ameliorated the effects of the recession. If we were to pull the plug on that, then I fear that the noble Lord’s fears may well be realised. But that is not something that we are going to do. I hope that I have dealt with each of the points raised. If not, I would be happy to try again to answer any residual questions.