NATIONAL INSURANCE (RESERVE) FUND

HC Deb 12 December 1968 vol 775 cc717-30

10.13 p.m.

The Minister of State, Department of Health and Social Security (Mr. Stephen Swingler)

I beg to move, That authority be given pursuant to section 84 (4) of: he National Insurance Act 1965 for the payment to the National Insurance Fund out of the National Insurance (Reserve) Fund of the sum of £200,000,000. This Resolution is put forward under Section 84 (4) of the National Insurance Act, 1955. It gives authority for the transfer of £200 million from the National Insurance (Reserve) Fund to the main National Insurance Fund. I wish to emphasise at the outset that this is not a Resolution authorising additional expenditure. The authority for expenditure on the National Insurance Scheme is, of course, in the National Insurance Acts and this Resolution does not affect that in any way. It is designed to top up the current account of the Scheme and so put it in a better financial position to meet demands which may be made on it.

As the House knows, the present National Insurance Scheme has two funds. The Reserve Fund is, so to speak, the deposit account of the Scheme. It provides a reserve, for use if necessary, as well as being an interest-bearing Fund. The interest, of course, serves to keep down the level of contributions. Under the National Insurance Act any drawing on the Reserve Fund needs a Resolution of this House.

The National Insurance Fund is the current account of the scheme. Into it go all the contributions, including Exchequer Supplement, and the interest on the Funds; out of it are paid all the benefits and the administrative expenses. It is run on the pay-as-you-go principle, which means that we try to set contributions at a level which will give an approximate balance of income and outgo over a short period of years. The balancing of income and outgo cannot be done with absolute precision and we must always have a substantial sum in the National Insurance Fund. This balance is needed for normal working to provide against the ordinary fluctuations in income and outgo which are always occurring, and for the unexpected contingencies which may arise.

Ten years ago the National Insurance Fund was about £350 million. It has been running down fairly regularly since then, under both Administrations. We have been passing through a period when the demographic and other factors which affect the out-turn of the Fund have been changing. Pensioners have tended to live longer; people have been retiring sooner; the level of sickness has increased in recent years; and more married women have chosen not to contribute. Some of the changes have been only marginal but the out-turn of the National Insurance Fund depends very much on small margins. For example, a rise of only one per cent. in the benefit payments and a corresponding fall in contribution receipts represents over £40 million.

The Government Actuary has naturally taken account in his estimates over the years of these changing trends, but some of the changes have tended to accelerate more than previous experience would have suggested.

It may well be that in such a period it would have been prudent to budget consistently for a surplus big enough not only to take account of these trends, but on each occasion to make up for the deficits of earlier years. That would be a perfectly fair point to make. However, in making it one would have to acknowledge that it would have meant setting the flat-rate contributions higher on a number of occasions than they were actually set, and higher than might have proved to be necessary. It is generally agreed that increasing the flat-rate contribution puts a severe burden on the lower paid worker. For this reason both Administrations have been reluctant to increase it more than has been absolutely necessary. We are, I hope, in sight of a solution to this problem through the Government's new earnings-related scheme which will be fully explained in the forthcoming White Paper. However, meanwhile we have to deal with things as they are.

It was clear early in the year that there would be a particularly heavy deficit in the working of the Fund in 1967–68, and further deficits were in prospect for the following two years. For this reason contributions were raised without any increase in benefits in May of this year under the Public Expenditure and Receipts Act, 1968. The increase was 6d. a side from employer and the employed man, and it was hoped that this would remove the deficits and indeed produce small surpluses up to March, 1970.

In fact the deficit in 1967–68 turned out to be larger than forecast. The cost of sickness benefit in particular was higher than the estimates used for the Public Expenditure and Receipts Bill and there was what amounted to a long epidemic of sickness last winter from January to April. It now emerges that the deficit on current working in 1967–68 was £92 million instead of the £75 million which was forecast. This means that the balance in the National Insurance Fund on 31st March, 1968, was only £116 million instead of the £133 million forecast—a perfect illustration of the kind of unexpected contingency which the National Insurance Fund must be prepared to face.

So far this year the adverse experience has continued. Sickness claims have been rather higher than last year and unemployment seasonally adjusted rose in the earlier part of the year, although there has been a welcome fall in the last three months. Expenditure on retirement pensions has also risen slightly faster than allowed for. For these reasons, there now seems likely to be an appreciable deficit on the working of the Fund this year, instead of a surplus. This is without taking account of such possibilities as an epidemic of sickness this winter.

In this situation, it is only common prudence to reinforce the working balance in the National Insurance Fund so that it can cope with any situation that may arise. At present this balance is a little over £100 million. That seems a lot of money, but it is too small for safety, because up to £70 million of it is needed as ordinary working capital—for financing day-to-day operations and meeting normal fluctuations in income and outgo, especially, for example, at bank holidays when an extra week's pension can be paid in advance.

That is why we are seeking the authority of the House to transfer £200 million from the Reserve Fund to the National Insurance Fund.

The House will see that this measure is complementary to the increase of contributions in the Spring, which was designed to achieve a closer balance between current income and expenditure. Perhaps with hindsight that increase should have been a little bigger than it was. However, I accept that it would not be appropriate to ask for a further increase of contributions at this time.

This is a precautionary transfer and it is possible that the money transferred will not actually be drawn upon. If so, all the better, but we cannot afford to take chances with the Fund, out of which are paid the benefits on which so many people depend. To face this winter on the present declining balance hoping that no epidemic or other unexpected drain on the Fund would occur would be to take an unjustifiable risk.

I therefore ask the House to pass this Motion to enable us to safeguard against that situation.

10.23 p.m.

Sir Brandon Rhys Williams (Kensington, South)

This large sum of money ought not to be authorised by the House without comment being made. The moderate and reasoned statement made by the Minister shows how urgent it is that we should reconsider the basis of the financing of National Insurance. This discussion is not about benefits. It is purely about finance. If we do not know the way in which we are to pay for the benefits of National Insurance, what we decide about the benefits is an irrelevance in the long run. I therefore hope that my few remarks on the subject will serve to direct attention to this very real problem, a problem which has now taken the shape of £200 million.

This money in the National Insurance Reserve Fund is money which has ceased to exist. It ceased to exist about 15 years ago. It is not, as it were, wine which has been put into a cellar and which when it comes out again will be all the better for the time it has been waiting. If this money exists at all, it is simply as a glint in the Government Broker's eye, a method by which the Government shuffle their securities from time to time. It is not possible to say of a factory or a motorway or any tangible asset, "That is the asset which has been set aside for the financing of National Insurance in case of emergency". Search where one may throughout the British economy, one cannot find any real asset which corresponds to the £1,000 million or £1,100 million; it is printed on paper as existing, but it does not exist in fact anywhere in the economy. Therefore, when the Government decide to draw upon that money, they are drawing upon the printing press.

I realise that the idea of setting money aside in good times so that one may draw it out later was one of the more sophisticated concepts of Keynesian days when people, at the end of the war particularly, were still obsessed with the idea that, when the war ended our principal problem would be to set purchasing power going again. Lord Keynes' idea that we should have post-war credits which would take purchasing power out of the economy during the boom times, as they were, of the war, so that we could start the machine going again when there was a general contraction of purchasing power alter the war was part of the concept of building up a reserve fund for National Insurance. But we have moved on since the days of the great 1944 White Paper which envisaged that the Government would be called upon to spend money like water to keep the economy afloat. Now, we are spending money like water—that is all too true—but it is not keeping the economy afloat; it is actually dragging it under. This £200 million is another £200 million of spending which corresponds to no real production and no asset. It is, as I said, a production of the printing press.

It is true, as the Minister said, that National Insurance has to be paid for on a "pay-as-you-go" basis. But there is a word, a good old English word, I think, which was taken over by the French and which we could now borrow back and bring into regular currency again—the word "repartition". I accept that National Insurance has to be paid for by repartition, that is to say, that in any year what we spend on benefits must be paid for from the arisings of taxation in that year. It is proper that National Insurance should proceed on that basis and that it should not attempt a conventional funding operation.

My reason for saying that is that we depend upon National Insurance to see us through in times of real need; in other words, we cannot look upon it as an actuarial calculation which will not move necessarily at the same pace as inflation. If inflation is going to sink the value of what we have in our savings, then we must be able to depend on National Insurance to provide us with at least a bare minimum of subsistence. If it is to do that, to pretend that it works on any system of correct actuarial funding is wrong. National Insurance must rest on repartition. If that be so, it must cling strictly to repartition, and what the Government spend they must see that they also raise.

This year, we have had a sad chapter of faulty estimates and accidents as a result of which money must be found urgently from somewhere. In fact £200 million must be found. It is wrong to resort to this old fiction of a reserve fund, which really does not exist. It would be far better if the Ministry were to say on this occasion," We must go back cap in hand to the Exchequer and ask for a larger Exchequer contribution ". I am sure that very few hon. Members know why the Exchequer contribution to National Insurance is what it is. I do not know. I wonder whether the Minister can enlighten us. This £200 million, if it has to be found, should be found from the Exchequer; it should appear in the Budget accounts and not be hidden away in a White Paper which nobody ever reads.

Mr. Swingler

Perhaps at this point I ought to interrupt the hon. Gentleman's interesting observations, since there is a limit to the number of fallacies which should be circulated at any one time. There is a National Insurance (Reserve) Fund, and there are investments. Second, I am not asking for approval of any additional expenditure. I stated that categorically. The Motion does not involve approval of any additional expenditure, and the money is there to be transferred from the Reserve Fund to the main Fund.

Sir B. Rhys Williams

The message the Minister has brought us is a message from cloud cuckoo land. My remarks were intended to show that the money does not exist. It is a relic of the way we fought inflation in the 1940s and 1950s. There is no tangible asset corresponding to this reserve I beg the Minister to reflect on this and realise that that reserve is a pure fiction and does not correspond to any asset. Therefore, if we draw on it we are drawing on the printing press.

One thing the hon. Gentleman said that I heartily endorse is that a flat-rate contribution cannot pay. I look forward to the White Paper, which we hope to receive some time next year, in which the Government will set out their way of drawing contributions from the working population on an earnings-related basis. In so far as it refers to contributions to National Insurance, I believe the White Paper will receive a general welcome. But it seems to me that the move to take as much as £200 million out of thin air and put it in the current account of National Insurance is simply a preparation for a beano to launch the White Paper on its way. We should reject this move and ask the Minister to think again.

10.31 p.m.

Mr. Marcus Worsley (Chelsea)

Although the Minister was very fair in most respects in moving the Motion, he did not say that it is without precedent, that during the 20 years and more that the National Insurance Fund has existed there has never been a Motion to move money into it from the Reserve Fund.

The Government announced the move last week or the week before, without warning. The miscalculation has clearly taken them by surprise, and the Minister was frank about this. But it reflects a very grave situation. It was only last February that Ministers explained that the miscalculation in the National Insurance Fund had been so great that for the first time contributions were to be increased without benefits also being increased. Now Ministers tell us, apparently again taken unawares, that they have scored another first—the first transfer from the reserve into the National Insurance Fund. It amazes me that the Government can be in such a muddle about their calculations that twice within a year they should have to own up that they have got their sums completely wrong.

The hon. Gentleman gave us the figures very fairly. He showed that the balance on the National Insurance Fund up to 1st April this year had fallen by about £90 million. He did not say that this was, as is the case, a wholly exceptional figure. I have jotted down the balances at the end of each year since the Fund started, but I will not weary the House by repeating them. But the hon. Gentleman will know, as he has been long enough in the Department, that this is on a different scale to the fall in the balances in any other year. He said that the original estimate was for £75 million. That by itself would have been much larger than any other fall, but £90 million is that much larger still.

So we cannot fail to express some alarm at the state of the National Insurance Fund in a year when the Government have twice shown how wrong they have been, and twice taken wholly exceptional measures. The hon. Gentleman circulated on 20th November a statement about the proposal, which started with the words: The Resolution does not in any way affect the amount of money which will be spent. That can be called the Government's motto. It applies to everything they do. But of course, that is correct. This is not about what is spent but about financing.

The hand-out goes on to say that this is simply a precautionary transfer from the Reserve Fund to current account. It is rather more than a precautionary transfer. It is an indication that the current account of the ordinary National Insurance Fund is in danger of running into the red. The reserves, if we take the two funds together, 10 years ago stood above the £1,500 million mark, and have now fallen to about £1,200 million. This is an enormous fall. The hand-out goes on: It would be an unjustifiable risk to face this winter on the present declining balance in the current National Insurance Fund and hope that no epidemic would occur. I ask in all seriousness whether the Government are really expecting an epidemic this winter. Is it likely to happen on such a colossal scale as to upset the National Insurance Fund? Are we to see some faceless germ undermining the Welfare State? I do not apologise for a sceptical turn of mind towards the Government's statements.

I think that the Government are really afraid of massive unemployment this winter, brought about by their mismanagement of the economy. I believe that this is why they want to transfer the money. The hon. Gentleman may smile, but I remind him of the early days of the Fund. It was not epidemics which upset it but the miscalculation on unemployment. When the Fund was set up, the assumption was that the rate of unemployment would be about 8½ cent. In the early years, unemployment ran at about 2 per cent., however. This was the principal reason why, during the first 10 years, the Fund increased its balance every year. It was only in the year 1958–59, for the first time, that the balance of the Fund went down, and since that date it has gone down in every year except two. There is no doubt that a miscalculation of any scale of unemployment is likely to make a big difference to the balance. It was primarily because of the low unemployment factor that it was possible during the first 10 years—under Tory rule—to transfer no less than £400 million from the National Insurance Fund into the National Insurance Reserve Fund. Only two transfers have been made in the past until, for the first time, the House is being invited tonight to approve a run-down of the reserves and a movement into the National Insurance Fund itself.

I hope that the hon. Gentleman will say frankly—because we are talking about the financing of the Fund—how much he expects unemployment to increase and how big a part this has played in the calculations. If the Motion is passed, it will reduce the total balances in the National Insurance Fund and the Reserve Fund taken together to £1,000 million. He must justify that figure. By what standard does he judge it to be a suitable figure? He is coming to the House, and saying, by implication, that reserves of £250 million, or possibly £350 million lower than previously, are now desirable and satisfactory. He must address himself to a defence of the proposition that this is the right size, roughly for the reserves. It is a proposition which needs defending. It is very much lower, in real terms, or relative to turnover in the Fund, than anything before.

In 1948 the then National Insurance Fund inherited balances of £786 million from its predecessors. Now, after tonight's transfer, I am talking about the Reserve Fund, the figure will be something about £200 million above that figure. I will not enter into the esoteric arguments of my hon. Friend, the Member for Kensington, South (Sir B. Rhys Williams), but in terms of money values, there has been, over these 20 years, an increase from about £800 million to about £1,000 million. That sum today is much less in value than £800 million was 20 years ago. In real terms we are working on a smaller reserve for the Fund.

I will not enter into the controversy about the investment of this Fund. In opposition hon. Gentlemen opposite waxed very eloquent, saying that it should be invested as an ordinary trustee security, with an equity element. As with so many other things, they have found themselves converted to a different point of view once in office. I would point out that a reserve £200 million higher in money terms is obviously less valuable in real terms than it was then. The hon. Gentleman must justify to the House that this new level of reserve is adequate. If he does this, he has also to show that the previous reserve was excessive.

Much more relevant than the question of the actual value is the question of the relations between the reserve and the turnover of the Fund. I have before me the accounts for the year ended 31st March, 1950. During that year the turnover of the Fund was £763 million, At that time, the reserves were a similar figure, £786 million. In 1966–67, the turnover was about £2,000 million and we are now being invited to agree to reserves of about £1,000 million. In other words, whereas it was thought right in 1948 to have a year's turnover as reserve, now it is thought right to have six months.

We deserve an explanation from the Government as to what is the thinking behind the proposition that this new reserve is right and the old one was wrong. The Public Expenditure Bill and tonight's events, cast very considerable doubts on whether these Funds are being prudently managed. For every year since 1958—except two—the favourable balance of the two Funds has been reduced, but never as much as during the current year. Never before have we found that the Reserve Fund has had to be called on.

I end by making a simple proposition. We cannot go on like this. Whereas the Insurance Fund took over a considerable balance from its predecessor, if the Government produce a new scheme, which is becoming more and more doubtful, there will be much less in reserve. The present Fund is running gradually but steadily into the red, and we must have an explanation from the Government tonight of how they intend to allay that process before we can give them the power to transfer this money.

10.45 p.m.

Mr. Swingler

By leave of the House; may I plainly and categorically assure the hon. Member for Kensington, South (Sir B. Rhys Williams) that there is a fund called the National Insurance (Reserve) Fund? Many years ago, the assets of the old health, pensions and unemployment insurance schemes were transferred to a reserve fund from which £100 million was transferred to the National Insurance Fund, when the new scheme was introduced after the war, as a commencing balance, and Parliament laid down certain provisions about the investment of the fund, saying that investment should be restricted to British Government and Northern Ireland Government securities, or securities guaranteed by those Governments. The Fund exists, therefore, notwithstanding what the hon. Gentleman said. The book value of the assets stands at £1,169 million.

Sir Frank Pearson (Clitheroe)

Can the hon. Gentleman say on what date the Fund was valued? Is that the value today, or the value on the date when the valuation was made?

Mr. Swingler

I will give the facts. I hope that the House appreciates that I am being candid. The present book value of the assets of the National Insurance (Reserve) Fund is £1,169 million. The market value of the securities has steadily declined over 20 years and at 31st March, 1968, stood at £821 million. That is the best information I can give. The Fund actually exists and stemmed from the assets of the old health, pensions and unemployment insurance schemes and it was decided by the Government and Parliament of the day that there should be a certain allocation to the Reserve Fund and the main National Insurance Fund. That is the state of the assets of the Reserve Fund at the moment. That is the most up-to-date information we have.

There has been a steady decline in the balance of the National Insurance Fund for many years. This is not a new problem. The House has discussed it many times in relation to contributions and the financial situation of the whole Fund. However, in view of the remarks of the hon. Member for Chelsea (Mr. Worsley) I should like to set out a few figures. On 31st March, 1958, the balance in the National Insurance Fund was £354 million. By 31st March, 1961, it had declined by £90 million to £264 million. By 31st March, 1964, before the present Administration took office, it had declined to £216 million, a decline between March, 1958, and March, 1964, from £354 million to £216 million. In the following financial year it declined to £195 million, in the next financial year it went up to £220 million, and it has since declined further. That has been the state of affairs over the last decade. On account of the trends which I have mentioned of earlier retirement, higher sickness rates and so on, there has been a declining balance in the Fund. When discussing up-ratings of contributions to the Insurance Fund the House has to take this into account.

I have given the up-to-date facts about the present balance in the National Insurance Fund. I was asked why we selected this sum of £200 million for transfer from the Reserve Fund, which actually exists, to the National Insurance Fund. I emphasise again that this is not asking the House for approval of additional expenditure; it is a contingency measure to ensure that there is money in the main National Insurance Fund to deal with any situation which may arise. There was a higher deficit, in respect of which I have given the figures, in the last financial year. The transfer is calculated on the basis of the problems that might arise in the event of an epidemic, or any other emergency involving retirement, sickness and unemployment that may have to be met in the next 12 months. The House will have to have discussions on this situation, and there will be discussions in the not-too-distant future when the Government present to the House a White Paper on the future of the social security system. Further decisions may then have to be taken.

This is a contingency measure to ensure that sufficient money is in the National Insurance Fund, not to meet expenditure that we can exactly forecast, but to meet contingencies, as the Fund has fallen to a level that is too low to meet emergency situations. On that basis, and in consideration of the trend over a long period, I hope that the House will be willing to approve the Motion.

Sir B. Rhys Williams

Is the Minister of State prepared to give the House a categorical assurance that, in the event that none of these unfortunate contingencies arises, the £200 million will instantly be repaid to the Reserve Fund and taken back out of the current account?

Mr. Swingler

Of course, that could be considered. I say again, and I mean it, that I am not asking the House to approve additional expenditure. This is to enable the National Insurance Fund to meet contingencies which might arise on the basis of present benefits. There have in the past been transfers from the National Insurance Fund to the Reserve Fund. This might happen again in the future, but I should not like to make any forecast about it. On the basis of the present financial facts about the insurance scheme, we should be less than responsible if we did not propose that this money should be transferred to the main Insurance Fund to meet contingencies.

Mr. Kevin McNamara (Kingston upon Hull, North)

Is my hon. Friend aware that he has converted the hon. Member for Kensington, South (Sir B. Rhys Williams) to believing that we now have a Reserve Fund, since he has spoken in terms of transferring funds which are not used from the current account to the reserve account?

Mr. Worsley

rose—

Mr. Deputy Speaker (Mr. Gourlay)

Order. The hon. Gentleman has exhausted his right to speak.

Question put and agreed to.

Resolved,

That authority be given pursuant to section 84 (4) of the National Insurance Act 1965 for the payment to the National Insurance Fund out of the National Insurance (Reserve) Fund of the sum of £200,000,000.