REDUCTION OF NATIONAL INSURANCE SURCHARGE (Hansard, 13 July 1982)

§ Mr. Brittan
I beg to move amendment No. 145, in page 120, line 1 at beginning insert— 'Subject to subsections (2A) and (2B) below'.

Mr. Deputy Speaker
With this we may take Government amendment No. 146.

§ Mr. Brittan
These amendments make local authorities and certain related bodies which are also financed partly through the rate support grant liable to pay the same rate of national insurance surcharge—3½ per cent.—for the whole of 1982–83. From 6 April 1983, local authorities will again become liable to the rate applicable to other employers—2½ per cent.— with the reduced cost being reflected in a lower rate support grant for 1983–84.
The amendments are designed to give effect in the area of local authorities with a minimum of administrative and distributional difficulties to the Chancellor's proposal in the Budget to take steps to ensure that public sector employers would be left in the same position as they would have been without the reductions in the national insurance surcharge which are due to take effect from 2 August Similar amendments are not required in respect of other public sector employers, for whom offsetting reductions have already been announced in the cash limits of central Government, including the National Health Service, and in the external financing limits of the nationalised industries and corporations. These will take full account in 1982–83 of the reduction in these bodies' national insurance surcharge burden which will occur after 2 August.
At the time of the Budget it was envisaged that the local authorities should, like other parts of the public sector, pay national insurance surcharge at an effective rate of 2 per cent. from August 1982 to April 1983. The intention was that the whole of their reduction in costs arising from that lower rate of national insurance surcharge would be offset through a reduced rate support grant, but the current amendments meet local authority objections to handling the matter in that way, which rested on the fact that the 983 distribution of grant abatement would not, and indeed could not, match the national insurance reduction for each local authority. In some cases, the discrepancies could have been substantial.
For that reason we have accepted that it would be distributionally fairer for local authorities to pay the higher rate of tax for the remainder of this financial year and for the adjustment to be made in the following year through the rate support grant. It is for those reasons that I commend the amendments to the House.

§ Mr. Straw
We have just spent two hours discussing the need for fairness in taxation. That need is recognised on both sides of the House. It is a fundamental principle of taxation that taxes should have an even application and that all in the same circumstances should be liable to the same rate of tax and to pay it on the same conditions.
Since local authorities and public sector corporations were treated in the same way as other corporations in the private sector when the national insurance surcharge was first introduced—in other words, they became liable to that surcharge, and when it was increased they became liable to the increases—it was expected that when the Government announced the much heralded reduction in the surcharge, local authorities and public sector corporations would be subject to a similar reduction.
It then emerged that because of the Government's ideological opposition to the public sector, which is plain from the many speeches from the Conservative Benches, they were going to claw back the reduction in the national insurance surcharge, but only from public sector employers. The result was discriminatory and also had the perverse effect of reducing the intended reflationary effect of the reduction in the national insurance surcharge.
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As the Chief Secretary has remarked, the proposed method of clawback from local authorities which the Government originally had in mind would have been capricious in its effect. It would not have provided a proper readjustment through the rate support grant and the reduced NIS that local authorities were to pay. The right hon. and learned Gentleman referred to the distributional problems that would have arisen had the original proposal for clawback gone through and there had been a readjustment through the rate support grant. Those problems would have been substantial. Local authorities that did not receive grant would not have been subject to clawback through the mechanism.
The right hon. and learned Gentleman went on to say that, next year, clawback arrangements would be written into the RSG which did not involve a differential rate of national insurance surcharge. That is what I understood him to say. I see the Minister for Local Government and Environmental Services shaking his head. Are the Government clear that the procedure that they want to adopt for clawing back or offsetting the reduction in NIS through the rate support grant will fairly reflect the amount of employment of the local authorities and the lower amount that they pay as a result of the reduction in NIS?
As a result of substantial representations by local authorities, the Government have decided to change the clawback arrangements by the simple device of maintaining the old, higher rate of national insurance for local authorities. While the Opposition regard the whole 984 scheme of discrimination against the public sector as repugnant, we consider that this proposal for clawback is less undesirable than the original proposal. We shall not divide against it.
There are two further questions that I wish to put. The first concerns the effect of the change on direct labour organisations. The Government have been concerned to ensure that these organisations do not possess any competitive advantage over private sector builders. The result of the change, if unamended, will be that direct labour organisations, which are expected to have the same financial environment as private sector builders, will pay a higher rate of national insurance surcharge than private sector builders. That will place them at a competitive disadvantage. Will the Government make any adjustments in the rate of return imposed upon direct labour organisations so that they enjoy competitive neutrality with private sector companies?
The second point relates to the higher rate of national insurance surcharge on public transport authorities and London Transport. My information is that the Government's position is not clear. Is it intended that the higher rate should apply to passenger transport authorities and to London Transport? If so, will the appropriate adjustment be made in the grant?

§ Mr. Brittan
Consideration is being given to the means by which passenger transport authorities can be put on a par with other public sector bodies, with regard to the national insurance surcharge reduction. I cannot announce precisely how that will be done, but an announcement will be made in due course.
With regard to direct labour organisations, the differential impact of my proposal will be taken into account. I assure the hon. Member for Blackburn (Mr. Straw) that the offset in rate support grant for future years will leave local authorities neither better off nor worse off. That leads me to the substantial and central point that the hon. Gentleman made, which should not go uncorrected.
The hon. Gentleman implied that in some sense it was objectionable or unfair for the benefit of the national insurance surcharge reduction not to apply to public bodies. I remind the House that it applies not only to local authorities but to nationalised industries and central Government Departments.
The criticism that the hon. Gentleman makes totally ignores the purpose and the motive of the reduction in the national insurance surcharge. The cost of extending the benefit of the national insurance surcharge reduction to public bodies would have been £360 million in 1982–83 and £430 million in a full year. It is plain that within any given total level of relief for industry the effect of applying the national insurance surcharge reduction to the public sector would have meant that the relief to the private sector would have had to be correspondingly less. As the object of the exercise with regard to the national insurance surcharge reduction was to reduce the costs of the productive wealth-creating sections of society and the private sector embodying that, it made sense that the reduction in national insurance surcharge should be confined in that direction.
It is for those reasons that I commend the principle, as well as its application to local authorities, which is reflected in the amendments.