§ 10.1 p.m.
§ The Under-Secretary of State for Health and Social Security (Mr. Eric Deakins)
I beg to move,That the draft Social Security (Contributions, Re-rating) Order 1978, which was laid before this House on 22nd November, be approved.I understand that it will be for the convenience of the House, and particularly of hon. Members who have a special interest in these matters, if we discuss in the same debate the next motion relating to social security, which is as follows:That an humble Address be presented to Her Majesty, praying that the Social Security (Contributions) (Earnings Limits) Amendment Regulations 1978 (S.I., 1978, No. 1669), dated 21st November 1978, a copy of which was laid before this House on 22nd November, be annulled.My right hon. Friend the Secretary of State for Social Services has carried out the review of national insurance contributions which he has to make each year under the Social Security Act 1975, and the draft order now before the House provides for the changes in the contribution rates and earnings limits which he considers are necessary from next April as a result of his review. In determining the rates and levels specified in the order, he has taken account of earnings movements as the Act requires him to do. Indeed, the sole purpose of the increases proposed by the order is to take account of increases in earnings levels.
I shall deal first with class 1 contributions—that is, those paid by employed earners and their employers. No change is proposed in the rates of class 1 contributions. I have already referred to the regulations which are the subject of the Opposition's Prayer. Those regulations provide for the lower earnings limit for class 1 contributions to be raised from £17.50 to £19.50 a week, which is the current level of the basic retirement pension, and for the upper earnings limit to be raised from £120 to £135 a week, which is a little less than seven times the pension rate. These changes to the earnings limits are in line with the requirements of section 1 of the Social Security Pensions Act 1975.
1366 The effect of these changes will vary according to whether an employee is contracted out under our new earnings-related pension arrangements. Employees who earn less than £120 a week—that is, the vast majority—and their employers will either not be affected by these changes at all or, if the employment is contracted out, will pay only a few pence a week more.
Employees who are not contracted out and who earn £120 a week or more will pay higher contributions, progressing to a maximum increase of 97p a week for those with earnings of £135 a week or more. Their employers will also pay correspondingly more, with a maximum increase of £1.50 a week, excluding the national insurance surcharge, which is a matter for my right hon. Friend the Chancellor of the Exchequer. Employees with earnings of £120 a week or more who are contracted out, and their employers, will similarly pay more, rising to a maximum of 65p a week for the employee and 91p a week for the employer.
I think that it will be helpful if at this point I explain why the Social Security Pensions Act requires the upper earnings limit to be increased roughly in line with increases in the basic rate of retirement pension. Retirement pensions account for over three-quarters of the expenditure on benefits from the national insurance fund. The value of these pensions is generally increased in line with increases in earnings. For most employees, contributions increase in line with their earnings automatically at the time they receive a pay increase. Higher earners, however, pay no additional contributions at the time of a pay increase if their earnings already exceed the upper earnings limit for liability. The increase in the upper limit from the start of the next tax year produces the corresponding increase in their contributions. I hope that this explanation will dispel any belief that it is only high earners who are called upon to pay extra contributions.
I turn now to the self-employed. The House will recall that a year ago, when the proposed new contribution rates for 1978–79 were debated, I said that we hoped to hold the level of liability of the self-employed steady until 1983, apart from changes to take account of increases in the general level of earnings. The 1367 following proposals are consistent with that aim.
The draft order provides for an increase in the flat-rate class 2 contribution from £1.90 to £2.10 a week. No change is proposed in the rate of the class 4 contribution, which remains at 5 per cent., but the range of profits or gains on which the contribution is levied is being changed. Under the draft order, the range will be from £2,250 to £7,000 a year in place of the present range of £2,000 to £6,250 a year. The effect of this change is that there will be no liability for class 4 contributions where profits or gains are £2,250 a year or less. There will be a modest reduction in liability on any particular level of profits between £2,250 and £6,500 a year, and an increase in liability where profits are over £6,500 a year.
The maximum increase in the class 4 contribution will be £25 a year and will be payable where profits or gains are £7,000 or more a year. The new upper limit of £7,000 a year is the annual equivalent of the new upper earnings limit of £135 a week for the contributions of employees and employers, in the same way as the present upper limit of £6,250 is the annual equivalent of the present upper earnings limit of £120 a week.
The draft order also raises the level of earnings below which a self-employed person can be excepted from liability for class 2 contributions from the present limit of £950 a year to £1,050 a year. The remaining change made by the order is to increase the rate of the voluntary class 3 contribution from £1.80 to £2 a week. So much for what the draft order seeks to do and how the various classes of contributor would be affected by it.
Before I seek approval of the order, there is one matter to which I think the House will wish me to refer—that is, the surplus of income over outgo in the national insurance fund which is now expected for 1978–79. Hon. Members who have studied the Government Actuary's report, which accompanies the draft order, will know that on the basis of certain assumptions a surplus of £247 million is now expected for that year. This compares with an expected deficit of £25 million to which he referred in his report of December 1977 on the draft rerating order governing that year. Hon. 1368 Members will, I hope, appreciate that there are immense practical difficulties in making assumptions—which are the Government's responsibility—as to such factors as the levels of unemployment, earnings and prices which may be expected in a coming year; and also for the Actuary in estimating the significance for the national insurance fund of these and other relevant factors.
On this occasion, the change from the original estimate of a small deficit to a surplus has broadly been due to a lower level of unemployment and a faster increase in earnings than was originally assumed. I should add that it is important to view these figures in the context of the massive size of the fund's transactions. The expected expenditure for 1978–79 is over £11,000 million and for 1979–80 over £12,000 million. It is important also to recognise that the surplus now expected for 1978–79 will represent a fall in the real value of the fund. What is more, it has been our aim for the coming year —1979–80—to achieve a close balance between income and outgo. The expected surplus of £34 million for that year will represent a yet further fall in the relative value of the fund. To put it rather more precisely, the balance in the fund at the end of 1977–78 represented about 39 per cent. of expenditure in that year whereas, on the basis of the estimates now made by the Government Actuary in his report the balance in the fund will fall by the end of 1979–80 to about 34 per cent. of expenditure in that year.
I hope that, from what I have said, hon. Members will see that 1979–80 is a year for which we are making no more than minimum changes in contribution liability. The changes simply reflect the changes in earnings and other factors which will affect our expenditure on benefits and will enable the national insurance scheme to continue to operate on a fair and sound financial basis.
I commend the order to the House.
§ 10.9 p.m.
§ Mr. Patrick Jenkin (Wanstead and Woodford)
Looking round the House at the galaxy of talent behind the Ministers and the rather greater galaxy of talent behind me, one would not think that we were actually debating subordinate legislation which will raise about £9,000 million towards the cost of paying national 1369 insurance benefits. It may be thought that these are routine orders which perhaps might be taken as a matter of course and that there is little point in debating them. I cannot agree. I think that the House owes it to those who are to pay these contributions—nearly £9 billion in the current year—to scrutinise them with care.
Strictly speaking, the sums involved here are not taxation, but I suspect that for most people increasingly their national insurance contributions have more the quality of taxation than they used to do before we went over to earnings-related contributions. Since we have also been moving progressively away from the contributory basis for paying many social security benefits it has become more and more difficult to relate the contributions to the benefits.
The amounts paid by individual earners under these orders are substantial by any standards. The figures were set out in the attachment to the Secretary of State's statement at the time of the announcement. Somebody on average earnings of about £90 a week in the current year pays £5.87 a week, which is getting on for £25 a month. At the new upper limit of £135 a week, the contribution in the year to come will be no less than £8.77 a week. Those of us who have been paying these contributions longer than others will recognise that it is not so long ago that one's national insurance contribution was a relatively small sum. Now it is substantial.
Next year, those on £135 per week, which is only about one and a half times national average earnings, will be paying about £35 a month—a considerable sum. The same applies to the self-employed, whose figures are reckoned annually. On quite modest incomes, on earnings of £2,000 a year, which attracts only the class 2 fixed rate liability, they will pay next year £109.20, and towards the upper levels of up to £7,000 a year—not an extravagant salary—people will be paying £346.70 a year. These are substantial sums which should be debated. To that end, I have some questions for the Minister.
Much the most surprising feature of the orders is the assumptions upon which they are based—which, as the Minister rightly said, it is the Government's job to make, but which they give to the Government 1370 Actuary and on the basis of which he has made his estimates. Adding together the two separate figures in the paragraph, it is estimated that unemployment for the current year will be 1,470,000. The Government estimate an increase next year to a round figure of 1½ million. That may or may not be realistic—there are many variables in determining whether it is—but it is in stark contrast to the marked optimism of the Chancellor and the Prime Minister, who are never slow to tell us that unemployment is coming down. Yet the assumption that they give to the Government Actuary is that next year it will be higher than this year.
It is when one considers the assumptions on earnings and prices that one's credulity is strained. I do not want to turn this into an economic debate—I fancy that you would stop me promptly, Mr. Speaker—but these assumptions are astonishing. Paragraph 7(ii) of the Government Actuary's report sets this out. It says thatby the end of July, at the end of the current phase of pay policy, average earnings will be at a level 7 per cent. higher than a year before and…the increase in the following year will he 7 per cent.The Government Actuary then goes on to talk about price increases. He has been asked to assume that prices will increase by 8½ per cent. between November 1978 and November 1979. These are very surprising figures on two counts.
The first surprise is the 7 per cent. figure for earnings. This is consistent with the recent Treasury forecast in which the same figure was given, but it is not a figure which anyone treats seriously. The Financial Times said, on 16th November:The credibility of the whole forecast may be undermined by the pay assumption, which is regarded as wholly unrealistic by most non-Whitehall commentators.We already know that the provisional figures for earnings for the 10 months to September showed an increase of 12.4 per cent. on the old series and 11.7 per cent. on the new series. How on earth can we make the assumption of 7 per cent. over the 12 months to July? That figure must be compared with 11.4 per cent. for the uprating of long term benefits which must now cast doubt on the confident statement of the Minister for Social Security, given in Committee on 1371 21st June, when the benefits uprating order was debated. He said:There is no reason to call into question the provision we have proposed for increasing pensions and long-term benefits."—[Official Report, First Standing Committee on Statutory Instruments, &c.; 21st June 1978, c. 30.]That looks a bit odd today. I find it impossible to believe that the 7 per cent. of which the Government instructed the Government Actuary to take account has any validity at all.
The assumption for prices is even odder. It is assumed that next year prices will rise faster than earnings. If that is right, it is a gloomy outlook for the people of this country. It is no wonder that the Treasury is rumoured to be urging the Prime Minister to hold an election as swiftly as he can. It is the weird combination of the assumption of rising unemployment, of the 7 per cent. pay figure and the 8½ per cent. price figure that is frankly incredible and casts more than considerable doubt on the value of the elaborate figuring in the Government Actuary's report.
I repeat that I am not criticising the Government Actuary. These are the Government's assumptions, and they must take full responsibility for them. The Actuary simply took the assumptions of the Government. It is rather like the old warning to inexperienced computer programmers"garbage in—garbage out ". The Actuary's figures are no more valid than are the assumptions on which he has had to base them.
I turn to a point of procedure and refer to the report of the Public Accounts Committee, which had some pretty rough things to say about the errors in forecasting the 1976–77 surplus. In its ninth report, published in July this year, the Committee said that there had been a remarkable discrepancy between the estimate of surplus on the fund of £389 million and the outturn of £928 million. I am sorry that the Under-Secretary looks so puzzled. His Department published an answer to this last month. I am sure that it must be very fresh in his memory.
In paragraph 63 the PAC said:We have noted these considerations but are concerned that changes in contributions and benefits should have been submitted for Parliamentary approval on the basis of estimates of their financial effect which proved so inaccurate.1372 A little later it went on:We hope that every effort will be made to ensure that these estimates, which support decisions of considerable financial importance to employees, employers and the economy as a whole, are as accurate is possible.The passage to which I wish to direct the attention of the Under-Secretary of State reads:We also consider that Parliament's consideration of proposed changes in the contribution and benefit arrangements would be assisted if the Government Actuary's reports gave information on the financial effect on the Fund of changes at the margin to the rates proposed.There has been no attempt to comply with that recommendation of the Public Accounts Committee. The Treasury minute made it clear that the Government were not going to do anything about it. Paragraph 111 of the Treasury minute, in reply to the PAC report, states thatIf future changes in the national insurance scheme lead to uncertainties in expenditure, the Government Actuary, as recommended by the Committee, will consider in consultation with the Department of Health and Social Security, what further information can be given about the financial effect on the fund of changes at the margin to the rates proposed.It is obvious that we have had nothing of that. The PAC made an important recommendation and once again it has been completely ignored by the Government. We have the effect of variables on the economic assessments but that is not what the PAC was asking for in its report.
I recognise all the difficulties in estimating. The Under-Secretary of State referred to the difficulties when he made his opening speech. We are dealing with differences between large aggregates. Fairly small percentage changes in the aggregates lead to large changes in the surplus or deficit. This year we have moved from an estimated deficit for 1978–79 of £25 million given last December, and to an estimate of minus £69 million in May 1978. This December we had a forecast surplus of £247 million. That is a variation of £316 million. That is not quite as bad as 1976–77, but it is still a pretty big swing in six months.
Despite the surplus, it is right to observe that the balance in the fund, although rising to £4,106 million, represents a lower proportion of the total expenditure than in the previous year, namely, 34 per cent. as against 39 per cent.
1373 The figures reinforce the case made by the PAC for information on the financial effect on the fund of changes at the margin to the rates proposed. The size of the balance is important, because it helps to finance the public sector borrowing requirement. The contributions, if they are to contribute to a sizeable surplus, are financing the Government's borrowing requirement and not paying for benefits. The House is entitled to the further information for which the PAC asked.
I turn now to consider the pattern of the increases in the upper and lower income limits. They have some strange features. There are set out in the Government Actuary's report. With the assistance of my calculating machine, I have worked out the percentages. The lower earnings limit for employee contributions has increased by 11.4 per cent, while the upper limit has increased by 12.5 per cent. For the self-employed the fixed contribution has increased by 10.5 per cent. and class IV contributions at the lower limit have increased by 12½ per cent. while the upper limit has increased by only 12 per cent. There seems to be no rhyme or reason for those rather strange variations.
For example, why has the upper limit for employees increased by a greater percentage than the lower limit, while for the self-employed the situation is reversed? I do not understand why there should be these variations.
Finally, I want to look at the effect of the changes over a period of several years. In 1975, we had the switch to earnings-related contributions. There was a general assumption that if national insurance contributions were to rise in proportion to earnings the contributions would remain broadly fair at all levels of income. It is true that in 1978 the new scheme came into effect. There were new benefits and therefore there was a greater jump in contributions. But contributions were still intended to be roughly proportional to earnings. Yet if we look at what has happened at particular levels of income over these four years, we find that a very different picture emerges.
I will take first the man on average earnings and then the case of man near the upper limit. I have taken the period from July 1975 to July 1979, because it 1374 is in July each year, broadly speaking, that we have had the new pay guidelines taking effect.
Between July 1975 and August of this year, average earnings rose by 44 per cent. One is entitled to guess that by July of next year there will have been a 50 per cent. increase in average earnings in four years. But in July 1975, at £60 per week, the contribution was £3.30 a week. By July 1979, on average earings of £90, the contribution will be £5.85 a week. Over the four years, average earnings will have gone up by 50 per cent. but national insurance contributions have gone up by 77 per cent. It can be seen immediately, therefore, that national insurance contributions are now taking a much bigger share of income than they were, even for people on average earnings.
The second case is even more striking when we look at the effect of raising the upper earnings limit over the period. The Under-Secretary was at pains to say that people in the upper brackets were not paying an unfair share. I will quote some figures which may come as a surprise even to him. In July 1975, the upper incomes limit was £69. In July 1979, it will be £135. There will have been over these four years an increase in the upper earnings limit of 96 per cent., compared with an average increase of 50 per cent. in earnings.
Let me look at the case of the man who will be on this new figure of £135 a week —and see what has happened to him, assuming, over the last four years, that he had had no more increases than were allowed under the successive Government pay policies.
Such a man would have started at £105 in 1975. In 1975–76, he would have had the £6 flat rate increase, taking him to £111. In 1976–77, he would have had the 5 per cent. increase taking him to £117. In 1977–78, he would have had the 10 per cent. limit, taking him to £129. In 1978–79, I assume that he will get the current 5 per cent, limit, taking him to £135. In four years, his pay would have increased by 29 per cent.—a little over half the national average increase in earnings.
But when we look at what has happened to his national insurance contributions, I think that the House will be a bit 1375 shaken. In July 1975, on £105 a week, his contribution was £3.80. In July 1979, on £135 a week, his contribution will be £8.78. Against an increase of 29 per cent., he will have had a national insurance increase of no less than 131 per cent., which is over four times as great.
I find it very difficult to believe that this is fair. When the Act was passed in 1975, how many Members of the House realised that some people would, after only four years of earnings-related contributions, find that their contributions were rising over four times as fast as their increases in income?
The upper income limit, as the Under-Secretary said, has kept in line with seven times the single pension rate. That sounds at first sight as if it might be reasonable, but the effect is to load a wholly disproportionate share of the burden on important sections of middle management and of the professions—those very sections which have been hardest hit by incomes policy and by the Government's tax increases.
§ Mrs. Audrey Wise (Coventry, South-West)
I am wondering what the eventual point of this will be. Is the hon. Gentleman advocating that those extra payments should be made by those on lower incomes, or that benefits should be reduced?
§ Mr. Jenkin
I was just coming to that. Does the hon. Lady think that it is fair to have a 29 per cent. increase in income and a 131 per cent. increase in contributions? No doubt she will be able to catch Mr. Deputy Speaker's eye and say whether she thinks that it is fair.
The national insurance scheme is still basically a contributory scheme, and the burden of contributions must bear some relation to the amount of the benefits. That has been the basis of the scheme ever since it started in 1946, and that is still the basis under the new arrangements. But that should apply not just overall; it should apply, broadly, to each individual. Of course, I am not arguing that we should go back to a flat-rate contribution as it was for so many years. That would be absurd. We are just as committed as the Government to earnings-related contributions, which are an essential feature of the 1975 Act scheme and which was the basis of the bipartisan agreement.
1376 But the relativity between contributions at different levels is not immutable. There is nothing about the seven-times limit in the 1975 Social Security Act. That is a working rule of thumb which Ministers have evolved. I think that when Ministers are considering these matters they must have regard to the relative burdens on different sections of the community. When one finds, as I have demonstrated, that one can have someone whose income has risen in line with the Government's policy by no more than 29 per cent., and his national insurance contributions in the same period have risen by 131 per cent., one is entitled to argue that that person is bearing a totally disproportionate share of the burden of paying benefits.
A combination of rigid pay limits and swiftly rising upper limits for national insurance has turned the national insurance contributions for some people into a steeply progressive income tax. In a contributory scheme, I do not believe that that can be right. At the very least it calls for some explanation, and I hope that the Under-Secretary of State will give it.
From what I have said, the House will realise that these orders are far from being the straightforward routine orders which the Minister sought to indicate when he opened the debate. I do not suggest that we divide on these orders, although I think that there is ground for criticism, both in the assumptions on which the Government have asked the Government Actuary to base his report and on the trend of contributions as they have developed over the years. We are all ready, on both sides of the House, to call for improved social security benefits and for new benefits for those who do not have them, but we do not always give the same attention to the equally serious question of how these benefits are to be paid for.
I for one would greatly welcome it if in future years it were possible to debate benefits and contributions at the same time. I think that we would have a good deal more realism in some of our debates. These orders raise the take of the national insurance fund to £9 billion in the current year and to £9,658 million in 1979–80. I think that the House owes it to those who send us here—those who have to pay these contributions—to scrutinise these charges with very great care.
§ 10.34 p.m.
§ Mrs. Audrey Wise (Coventry, South-West)
It is not my intention to make a speech, but I made an intervention and I think it worth while reiterating the point of that intervention. I asked the right hon. Member for Wanstead and Woodford (Mr. Jenkin) whether he was advocating that those on lower incomes should pay higher contributions or whether benefits should be reduced. I feel it necessary to draw the attention of the House to the fact that he gave no answer.
One or other of those things must follow from his complaint. I should like to make it perfectly clear that I am confident that there would be considerable resistance on the Labour Benches to any notion of placing a heavier burden on those on lower incomes, and considerable resistance to any lowering of benefits. Unless the Conservative Opposition are prepared to state far more clearly exactly how they would propose to reduce the contributions of those at the top end, I really think that they are playing ducks and drakes with this debate. It seems to me to be not at all a tenable position. Therefore, I think it worth while spending these 30 seconds or so emphasising this point to the House.
§ Mr. Robert Boscawen (Wells)
Does the hon. Lady agree that, whether it is right or wrong that those on higher incomes should pay more in contributions, this is no longer insurance in any form, but is a system of progressive taxation in which those who are earning more pay more towards the benefits of those who are less well off? Let us get that clear.
§ Mrs. Wise
In my opinion, those who are paying disproportionately are those on the lowest incomes. It is, indeed, a form of taxation and it would not be imposed by the House in a Finance Bill. The progressive character of contributions has gone far enough. It is at the stage that people start paying contributions that the unfairness arises. I am in favour of dealing with benefits entirely through a taxation system, but as long as the present system exists the Opposition are taking a thoroughly untenable and hyprocritical line in calling for lower contributions at the top end without being willing to follow it through by admitting that either those who are poorest will 1378 have to pay more or benefits will have to be reduced. There is no getting away from those alternatives.
§ 10.37 p.m.
§ Mr. Deakins
With the permission of the House, I shall reply to the right hon. Member for Wanstead and Woodford (Mr. Jenkin). He accepted that contributions must be related to the level of benefits, which, in a sense, is a statement of the obvious, but he later made suggestions that seemed to ignore that basic feature of the national insurance scheme.
The right hon. Gentleman referred to assumptions. I emphasise that these are working assumptions and not forecasts. The right hon. Gentleman was a little confused about the figures. I understand that, because there are a vast number of figures and we have had several orders dealing with this subject in the past 13 months.
Let me deal first with the unemployment assumptions. Taking 1978–79 as the year for which assumptions have been made at various times, in the 1977 contributions review in November last year the assumption was an unemployment level of 1,470,000, excluding school leavers. In the uprating in May this year, the assumption had been reduced to 1,380,000. In the current review, it has been further reduced to 1,315,000. The average unemployment level for 1977–78 was 1,341,000 and the unemployment level for the first eight months of 1978–79, after seasonal adjustment, averaged 1,310,000.
Although unemployment has come down only a relatively small amount, it is at least coming down. The right hon. Member for Wanstead and Woodford was a little unfair in not acknowledging what has happened. The fact that the working assumption for 1979–80 is 1,350,000 must be seen in the light of the forecast for the current year, of 1,470,000, made in the 1977 review. That proved to be too high, and I think that we shall see that figure further improved in time, but obviously much must depend on what happens to wages policy in the coming months.
The right hon. Gentleman also criticised my right hon. Friend the Secretary of State for his statement about the level of benefits last year and the assumptions on which they had been uprated. The 1379 right hon. Gentleman and other hon. Members will have to wait on the question of long-term benefits until January, when we shall get the final earnings figures for the year November to November.
On prices, I take the right hon. Gentleman's point. But I do not think that the forecast by the Government Actuary and by the Government of 8.5 per cent. is unjustified by current policies. The relative stability of prices under this Government in the past few months is a good indicator for the future, provided that the pay policy can be made to stick.
The right hon. Member criticised the Department in relation to the ninth report of the Public Accounts Committee. The criticism was made of changes in the rates of contribution. I am told that the Government Actuary takes the view that the approximate effect of varying class 1 contribution rates can be calculated from appendix 4 of the Actuary's report, which shows the approximate yield in 1979–80 of total contributions.
If, in that report, one examines the table in appendix 4 on class 1 contributions, headed"Secondary employers ", one sees the figure of £7,381 million. That should be added to the figure of £485 million for the National Health Service and £198 million for the redundancy fund, which gives a total of £8,064 million. Therefore, the yield of 1 per cent. change at the margin would be about £806 million. That may not be good enough for hon. Members who do not have the right hon. Gentleman's calculator or his arithmetic knowledge, but this is a debate for those who take a special interest in these matters.
§ Mr. Patrick Jenkin
The Under-Secretary's figure of £8,064 million does not appear in appendix 4. How, then, is one expected to add a 1 per cent. change to it? Does the hon. Gentleman think that that is an implementation of the Public Accounts Committee's recommendation?
§ Mr. Deakins
I said nothing of the sort. I was explaining only that the three figures that I have quoted come to £8,064 million and that it is therefore possible to work out the effect of a 1 per cent. change. It is, of course, far more 1380 difficult to work out, say, a change of ¼ per cent.
The right hon. Gentleman made a big point about variations in earnings limits. He particularly contrasted the percentage increases for various categories of people. I think that his major point was to contrast the employed and the self-employed.
Let me deal first with the self-employed under class 4. The right hon. Gentleman made a big thing of that, but it is a bit of a nonsense, by saying that there had been an increase in the lower profits limit of 12½ per cent., whereas for the upper profits limit the figure was 12 per cent. That is true, but even in the Treasury, as well as in this Department, the rounding of figures is not unknown. Had we taken precisely 12½ per cent. for the upper profit limit, it would have given us the awkward figure of £7,031, which I would have thought was best avoided. We are probably rounding those figures to the nearest £50.
We did a great deal for the self-employed last year. The House acknowledged that then, and should do so now. The poorer self-employed will pay more. while many of the better off will pay less in 1979℃80. That is one of the anomalies that the right hon. Gentleman pointed out. The different effect of the proposed contribution changes at various levels of earnings arises from the mixed flat rate and earnings related contribution liability for the self-employed. Both the flat-rate class 2 contribution and the profits limits between which earnings-related class 4 liability arises are being raised to take account of increases in earnings levels, as are the earnings limits for employees.
The result is that all the self-employed. other than those exempted from liability on the grounds of low earnings, will pay increased class 2 contributions, but those whose earnings are within or slightly above the existing profits bands of class 4 liability will have a small reduction in their class 4 contribution liability, which in most cases will slightly exceed the extra cost of the class 2 contribution.
The annual review that the Secretary of State had to undertake showed that the general level of earnings had increased and it was appropriate to make an order increasing the rate and levels of contributions for 1979–80. He took into account the increase of 11.4 per cent. in the basic 1381 rate of the retirement pension. Although we have not applied that percentage precisely as he would like us to every feature of the order, to the limits of the contributions for various categories of people, employed and self-employed, nevertheless we have acted rightly in painting with a rather broad brush, and we have limits which are perfectly defensible even if the percentage increases are not precisely the same.
The right hon. Gentleman's most important point, which I should like to take up—here I congratulate my hon. Friend for Coventry, South-West (Mrs. Wise) on her valid point about variations in incomes—
§ Mrs. Wise
I appreciate that my hon. Friend is anxious to get through this quickly, but before he leaves his previous point I should like to ask him one question. He said that the poorest self-employed would pay bigger increases. I am not sure whether he said that that would be cancelled out, or whether that was an absolute statement. If it is, and the poorest self-employed pay bigger increases than those who are better off, will he tell me why?
§ Mr. Deakins
May I repeat the statement? I said that all the self-employed will pay an increased class 2 contribution. That is a flat rate, and it is inevitable because the voluntary contribution, which is class 3 and is also a flat rate, has gone up as well. So everyone paying a voluntary contribution will have an increased contribution. Some will not have very much income and will be poor. I went on to say that those self-employed whose earnings are within or slightly above the existing profits bands for class 4 liability will have a small reduction in class 4 contribution liability, which will in most cases slightly exceed the extra cost of the class 2 contribution. So for most of them there will be a benefit.
To return to the right hon. Gentleman's main point. In contrasting contributions with average earnings in recent years, he missed out one important factor in the equation with which he was seeking to bemuse the House, which is that longterm benefits have gone up substantially because they have to go up in line with either prices or earnings. That is an 1382 achievement of this Government. Therefore, they have gone up much more than average earnings. Indeed, our long-term benefits have increased substantially, in real terms, during the life of the Government. That goes quite a long way to deal with the point about why contributions have gone up so much more.
Also, I remind the right hon. Gentleman that if there is any doubt left about that, the increased contributions that we put through earlier this year were, of course, to start paying for the new pension scheme, which I think he will agree is a great social advance, accepted by all parties.
There is no answer to the proposition that increased benefits, particularly better benefits in real terms, have to be paid for, and we believe that the system that we have evolved—that is not to say it could not evolve further—is broadly right. We believe that we have it balanced this year as the result of the implementation of the new pension scheme. This will be of great benefit to the vast majority of working people, employed and self-employed, in the future. It will also be much more fair and equitable than the sort of alternatives which the right hon. Gentleman might have in mind.
§ Question put and agreed to.
That the draft Social Security (Contributions, Re-rating) Order 1978, which was laid before this House on 22nd November, be approved.