§ The Minister for Social Security (Mr. Hugh Rossi)
I beg to move,That the draft Social Security (Contributions, Re-rating) Order 1982, which was laid before this House on 8th November, be approved.
§ Mr. Deputy Speaker (Mr. Ernest Armstrong)
I understand that it will be for the convenience of the House if we consider at the same time the draft Social Security (Contributions) Amendment (No. 2) Regulations 1982.
§ Mr. Rossi
The draft order and the Social Security (Contributions) Amendment (No. 2) Regulations 1982 have to be read together with the Social Security (Contributions) Amendment Regulations, which my right hon. Friend made on 4 November but which are not before the House this evening. The three measures form the basis of what is generally known as the contributions rerating exercise for 1983–84. It may be for the convenience of the House if I deal with the three instruments together.
The rerating exercise is, as hon. Members will know, very much an annual routine event. It arises from the review which my right hon. Friend carries out each year both of the general level of earnings—which is a duty laid on him by the Social Security Act 1975—and of the state of the national insurance fund, which the same Act empowers him to review. It is in the light of this review that the earnings limits and rates for national insurance contributions for the coming tax year are set.
My right hon. and learned Friend the Chancellor of the Exchequer announced the new earnings limits and rates for class 1 contributions for 1983–84 in his autumn statement on 8 November. On the same day, my right hon. Friend the Secretary of State gave details of these and other contribution rates for 1983–84 in reply to a question from my hon. Friend the Member for Orpington (Mr. Stanbrook). He also laid before the House a copy of the report of the Government Actuary on the effect of the changes that we are proposing, as he is required to do by the 1975 Act. The instruments which are the subject of tonight's debate give effect to those changes.
Essentially, the rerating is an exercise in good housekeeping or, if it is preferred, in responsible management of the national insurance fund. Its basic purpose is, and always has been, to ensure that there will be enough money in the fund to cover the expected expenditure from it on benefits for the year in question. To put it another way, the aim is to achieve a reasonable balancing of the books.
In proposing the changes for 1983–84, we think that we have achieved this balance while keeping extra burdens on employers, employees and self-employed people to the minimum compatible with the kind of good management that I have just mentioned.
I begin by considering the lower and upper earnings limits for class 1 contribution liability. The House will know that our discretion in setting these limits is closely circumscribed. The Social Security Pensions Act requires the lower limit to be no more than 49p below the basic pension rate and the upper limit to be between six and a half and seven and a half times that rate. Accordingly, with the basic pension rate for next year of £32.85, the choice of a lower earnings limit of £32.50 was almost automatic. 968 An upper earnings limit of £235 for 1983–84 will be, as it has been for 1982–83, in the upper half of the range of six and a half to seven and a half times the basic pension rate. The multiple is a little under 7.2, compared with 7.4, following last year's review. This will involve increasing the upper earnings limit from £220 to £235 a week.
In essence, the tying of the earnings limits to the pension rate ensures a degree of buoyancy in income of the national insurance fund; in other words, it allows for an element of inflation. The increases in the contribution rates, which are provided for in the rerating order, are aimed at meeting the needs of the fund which are not attributable solely to inflation.
§ Mr. Andrew F. Bennett (Stockport, North)
Will the Minister confirm that he could have gone another £10 higher with the upper earnings limit and say how much extra would that have raised?
§ Mr. Bennett
Will the Minister confirm that that sum would have helped pay back the 5 per cent. abatement for unemployed people?
§ Mr. Rossi
I am not in a position to confirm or deny that. The hon. Gentleman is at liberty to make that point later.
We have been at some pains to keep the increases for both employers and employees to the minimum compatible with protecting the fund. Hon. Members who have studied the report of the Government Actuary will see that, even with the changes that we propose, a deficiency in the fund is expected during the coming year. I shall have more to say about that in a moment. The essential point is that, given the likely effect on the fund, we could not reasonably contemplate a net increase in contribution rates of less than 0.25 per cent. for both employers and employees, taking account for the latter of the 0.1 per cent. reduction in the employment protection allocation, about which again I shall have a little more to say.
The House will want me to say something about what these increases will mean in concrete terms for employers and employees. In doing so I shall take account of the reduction in the national insurance surcharge which ray right hon. and learned Friend the Chancellor announced in his autumn statement. To do otherwise would be misleading, since hon. Members will be concerned about the actual amounts that employers will have to pay in 1983–84, compared with what they are paying at the moment.
In giving those figures I am taking as a basis for comparison the 2 per cent. surcharge which employers have been paying since August of this year, in order to give them the effect of a full year's reduction of 1 per cent. This does not fully reflect the position taking the years 1982–83 and 1983–84 as a whole. For 1982–83 the average rate would have been 2½ per cent. before allowing for the extra temporary relief. As my right hon. and learned Friend the Chancellor said, the combined effect of the NIC and NIS changes which he announced will mean a considerable saving overall for employers in 1983–84 compared with what they would otherwise have paid. I do not take 969 account of the extra relief for the current year which my right hon. and learned Friend the Chancellor announced in his statement.
For those who are not contracted-out, all employers will pay less in contributions and surcharge during the coming year than they are at present, except on earnings of just under £225 a week or more. For example, on weekly earnings of £60, 15p less a week will be payable, on £170—the expected average for next year—43p a week less will have to be paid and on earnings of £220 a week 55p less. For an employee on those earnings the increased weekly contribution will be the same as the decrease for the employer—15p, 43p and 55p respectively.
For employers who are contracted-out, extra contributions will be payable on all earnings—except, obviously, those that are below next year's lower earnings limit. The reason for that is, however, not the rerating exercise which is the subject of tonight's debate. It is because of the reduction in the amount of the contracted-out rebate, which was the subject of separate regulations approved by the House earlier this year. As an illustration, the extra weekly contributions payable on earnings of £60, £170 and £220 respectively by employers will be 9p, 25p and 33p respectively.
The increases for employees on those earnings will respectively be 31p, 98p and £1.27p. I must stress again that the reduction in the rebate which is the cause of that has nothing to do with tonight's debate.
Before I leave the subject of class 1 contributions, it may be for the convenience of the House if I say something about the increased employee's rate for so-called "opted out" married women and widows, who retain the right to pay reduced rate contributions.
The regulations that we are debating provide for an increase in the contribution of rates for those women from 3.2 per cent. to 3.85 per cent. The increase is needed solely and entirely to provide for the inclusion of such women in the statutory sick pay scheme which will come into operation next April. At present, opted out women do not qualify for sickness benefit. Therefore, it was reasonable to expect that their entitlement to statutory sick pay, the cost of which will come out of the national insurance fund, should be paid for by an increase in their contribution rate.
Hon. Members will recollect that I said consistently during the passage of what is now the Social Security and Housing Benefits Act that that would be so. At the time, I estimated that there would be an increase of between 0.5 per cent. and 1 per cent. in their contribution rate. In the event, I am glad to say that we have been able to keep the increase nearer the lower limit.
The full cost of including opted-out women in the statutory sick pay scheme would have suggested an increase of 0.75 per cent. However, since those women's contributions include in full the employment protection allocation, which this year is being reduced by 0.1 per cent. we thought it only fair to abate the increase in their contribution accordingly, hence the 0.65 per cent.
§ Mr. Andrew F. Bennett
Many married women who have opted out are unclear about the changes. How will the Minister ensure that all such married women are aware that they will qualify for the new sick pay as opposed to receiving none at all?
§ Mr. Rossi
Information on sick pay will be sent to employers before the scheme is introduced. I hope that the scheme will be adequately advertised. The position of such women will be made clear at that time. However, if the hon. Gentleman feels that that is not the case we shall be prepared to discuss the matter with him further when the time is right.
As a purely procedural footnote, the House may wish to note that the Social Security Advisory Committee has agreed that, since the regulations that give effect to this increase form an integral part of this year's re-rating, it will not wish to consider them when made.
I deal next with the proposed contribution rates and profits limits for those who are self-employed. The House will know that there is an established formula for calculating what the flat-rate class 2 and the profits-related class 4 contribution should be, which was introduced in 1977 with all-party support. The strict application of that formula, which derives self-employed rates from the class 1 rates applicable to contracted-out employments, would have suggested a weekly class 2 rate of £4.60. However, my right hon. Friend the Secretary of State felt that it was right to continue for the coming year the modest relief to the smaller self-employed business man which he was able to offer last year by abating the full rate shown by the formula. Therefore, we are proposing a weekly class 2 rate of £4.40 for 1983–84. The class 4 rate of 6.3 per cent. is that suggested by the formula.
We felt that it was right to apply it in full to the class 4 rate, which, by definition, is payable only by the higher-earning self-employed, rather than to depress the application of the formula artificially. To have done that would have resulted in an unacceptably sharp increase in later years. The report of the Government Actuary on his first quinquennial review suggested that over the years there will have to be a disproportionate rise in class 1 contracted-out rates and, accordingly, in the rates for self-employed people. As that occurs we shall naturally want to keep the fairness of the formula under review. For the present, however, it is pretty clear that there is no rational way of deriving contribution rates for self-employed people that is more favourable to them than the present one.
The profit limits between which class 4 contributions will be payable in 1983–84 are to be £3,800 a year and £12,000 a year. The percentage increase in the lower limit from £3,450 to £3,800 is virtually the same as the increase in the lower earnings limit for class 1. The upper profits limit for class 4, like the upper earnings limit for class 1, is being increased by a percentage slightly lower than the increase in the basic pension rate, and will go up from £11,000 to £12,000. The small earnings exception limit, below which exception from class 2 liability may be granted, will rise from £1,600 this year to £1,775 next. The rate of voluntary class 3 contributions has in recent years tended to be 10p a week less than that for class 2. We are continuing that this next year, with a proposed class 3 rate of £4.30 a week. Clearly, it would be absurd to raise the class 3 rate above the level for class 2, when it brings less benefit rights.
The special class 2 rates for share fishermen, to reflect their entitlement to unemployment benefit, for which other self-employed people do not qualify, will be the subject of separate consequential regulations which will be laid before the House in due course. This rate forms no part of tonight's debate. 971 I mentioned earlier in the context of the class 1 contribution rates that my right hon. Friend the Secretary of State for Employment had found it possible to reduce the employment protection allocation in the employee's contribution by 0.1 per cent., from the 0.35 per cent. introduced last year to 0.25 per cent. I know that this news will be welcomed by both sides of the House. It results from a drop in the number of claims for redundancy payments, which my right hon. Friend anticipated when he introduced last year's contributions Bill.
The House will have noticed that we are not this year proposing any change in the level of Treasury supplement to the national insurance fund. As the report of the Government Actuary shows, retaining the present level of 13 per cent. will result in an increase of just under £200 million from the supplement next year. We judge that this will maintain the proper sharing of the cost of contributory benefits between contributions and general taxation that recent years' changes in the level of the Treasury supplement have been designed to achieve.
I deal finally with the effect of the changes that we have proposed on the national insurance fund. The Government Actuary in his report estimates that the financial effects of the provisions in the regulations and order that we are debating will be to create a deficit in the national insurance fund for 1983–84 of £262 million. The detailed assumptions upon which that estimate is based will be found in his report. The estimated balance in the fund at the end of 1983–84 will be £3,261 million.
My right hon. Friend has considered these estimates and is satisfied that the increases that we have proposed are entirely compatible with the proper protection of the fund. The forecast balance in the fund will not be far below the level of about 10 weeks' benefit which the Government Actuary recommended in his quinquennial review as a working balance, and hon. Members will know that the Public Accounts Committee, in its twenty-third report to the House, recommended a thorough review of the right level for the balance.
When we have carried that out we shall be able to make arrangements for future years accordingly, but hon. Members may rest assured that in proposing these changes my right hon. Friend has at all times borne in mind the paramount need to ensure a reasonable balance between expenditure and income and the preservation of a safe reserve in the fund.
That leads me to end as I began, by stressing that the order and regulations are matters of routine good housekeeping. We shall be paying out just under an estimated £20 billion in benefits from the national insurance fund in 1983–84, well over £14 billion of it in retirement pensions. The purpose of the annual rerating of contributions is always to ensure that there will be enough in the kitty to pay for these benefits.
We believe that the changes contained in the order and regulations provide this guarantee and at the expense only of the minimum extra burden possible on contributors. What they aim to do—and what we think they achieve—is to strike a balance between the protection of the national insurance fund, with these huge benefit calls upon it, and the protection of those who contribute to that fund.
§ Mr. J. W. Rooker (Birmingham, Perry Barr)
The Minister has given us a run around of the two regulations in the Government Actuary's report. I do not intend to play 972 around with the national insurance surcharge because it is irrelevant to our discussion. It is not, I believe, mentioned in the Government Actuary's report because that is concerned solely with the operation of the national insurance fund.
I should like to examine the figures in respect of employees and employers. Once again, for the fourth time since the Government came to office, we are here to increase taxation, via the national insurance fund, on those at work. One quarter of 1 per cent. does not sound very much for the employee and the employer, but one must judge what the Government are doing against the position when they came to office. In 1979–80 the employer was paying 10 per cent. into the national insurance fund. From April 1983, he will be paying 10.45 per cent. In 1979–80, the employee was paying 6½ per cent. From next April he will be paying 9 per cent. The employer's impost has increased by about 5 per cent. The employee's impost has [...]increased by no less than 38 per cent. That is the measure of the increased burden of national insurance in the rates alone since the Government came to office.
If, for that extra impost, extra benefits were being paid and increases in benefits in real terms were being made, there would be no need for me to make the point that in the current year 1982–83 there have been cuts in national insurance benefits, which are paid for out of the insurance fund by the very contributions that we are debating, to the tune of approximately £1 billion. That amount has been taken from the benefits paid out of the national insurance fund while the national insurance rate has increased under this Government.
That £1 billion is made up of cuts in the retirement pension, unemployment benefit, sickness benefit, industrial injury benefit, the freezing of the earnings rule for pensioners, the change in the waiting days for those who are away from work sick, the abolition of the earnings-related supplement, the abatement of unemployment benefit to occupational pensioners over the age of 60 and the fiddling of the children's addition to short-term national insurance benefits. Added together, those amount to about £1 billion of cuts in benefit. They are itemised for hon. Members who wish to study them in an updated parliamentary answer of 18 November in c. 281 and 282 of the Official Report.
For a massive increase in contributions for employees from 6½ per cent. to 9 per cent., there is £1 billion cut in benefits to those employees. That is one of the reasons why we intend to vote against this further increase in taxation on employees.
The system is less fair than when the Government came to office. I should like to illustrate that by giving examples of what will occur from April 1983 for someone on average earnings. As the Minister has made clear, from next April those on average earnings will be paying 9 per cent. of their income in national insurance contributions. Those who are fortunate enough to be earning twice national average earnings—in excess of £300 a week—will be paying only 6½ per cent. of their income in national insurance contributions. Those who are well-heeled enough to be on five times national earnings will be paying from next April only 2½ per cent. of their income in national insurance contributions. That is hardly fair.
That is brought about because of the operation of the upper earnings limit which—I make no bones about it—was introduced—as the regulations clearly imply—by the Labour Government. 973 Not operating the pension payment to the maximum advantage is grossly unfair, for the reasons that the Minister gave earlier. The upper earnings limit for next year could have been £245 a week, but it has been settled at £235. I understand that the £245 level is practical, as was admitted in an answer yesterday to my hon. Friend the Member for Thurrock (Dr. McDonald).
If the Government had chosen to levy national insurance contributions on incomes up to £245 a week instead of on incomes up to £235 a week, they would have drawn in an extra £87 million. They could restore the 5 per cent. cut in unemployment benefit with £87 million and still have a few million pounds left. Why should people earning over £235 have an extra bonus from the Government. I suspect that the decision is Department rather than Treasury inspired. Ministers should take every opportunity to garner every penny that they can from people at the upper end of the earnings scale.
The low-paid contribute a disproportionate amount in national insurance contributions because there is no threshold as there is in relation to tax payments. From next April, someone earning £32 a week will pay no national insurance contributions. Someone earning £32.50 a week will pay about £2.90 a week in contributions. It cannot be worth earning the extra 50p.
Many employers pitch their part-time payments so that they are not caught for national insurance contributions either. If an employee pays the contribution, so will the employer. The system is double-edged because the employee gains no credits for future national insurance benefits.
§ Mr. Jim Craigen (Glasgow, Maryhill)
Is that not another example of how the Government's job-splitting scheme will push more employers into the loophole?
§ Mr. Rooker
Unless there is a radical change in part-time working in relation to the national insurance fund millions of people will be unfairly treated. It will be grossly unfair if the earnings in the job-splitting scheme are fixed so that people are deprived of accruing pension benefits and are penalised through pay rises. Ministers do not need lectures at this time of the night. They are aware of the circumstances and they cannot plead ignorance.
The system means stoppages for workers. Tax and national insurance contributions are calculated differently, but they are both stoppages. When in Opposition today's Ministers often said that national insurance payments were taxation and should be treated as such.
Two parliamentary answers about that are of interest. The first was published on 27 November last year in reply to my hon. Friend the Member for Birkenhead (Mr. Field) in c. 495-98 of Hansard. An updated version was given in a reply to me on 18 November this year and appeared in c. 233-34. We asked what the tax and national insurance take was as a percentage of earnings, using 1978–79—the last full year of the Labour Government—as a base. It is remarkable how the extra imposition of tax, both national insurance and income tax, has been shifted to the low paid since the Government came to power.
I shall not recite all the examples, because I am sure that my hon. Friends will bring them to the attention of the House. However, in 1982–83, a married couple with two children—the mythical average family—on two-thirds average earnings pay 25 per cent. more a week in income 974 tax and national insurance than they did in 1978–79. The same couple on average earnings pay 12 per cent. a week more in tax and national insurance contributions than they did during the last year of the Labour Government. The couple on five times average earnings pay 11 per cent. less compared with the last year of the Labour Government. The well-heeled married couple with two children and on 10 times average earnings pay 21 per cent. less a week now than they did under the Labour Government. That is a sample of this Government's fairness. I have not juggled the figures. They are the Government's figures given in parliamentary answers.
The same pattern is repeated for the single person, and for the married couple with no children, and it is even worse for the married couple with four children. There are massive increases in taxation for those on two-thirds average earnings and massive decreases for those on five or 10 times average earnings. That is the damage done by the Government.
When the Labour Government left office the marginal rate of tax for the low paid was 6½p in the pound for national insurance and 25p in the pound on the first £750 of taxable income—a total of 31½p in the pound. In 1983–84, they must pay 9p national insurance and the lowest rate of income tax will be 30p in the pound—a total of 39p in the pound. The Government have the brass neck to talk about a Labour Government being one of high taxation for the low paid. There have also been cuts in the spending power of what are now the working poor—those who are still lucky enough to have work under this Government.
The Government's record is a sorry one. That is slowly coming home to the country, although it has taken a little time. Those on the receiving end of the cuts know about them. The well-heeled members of the media, who report or do not report events, are beginning to get the message that the Government have brought in massive increases in taxation for the low-paid and massive decreases for the very well paid.
The Government Actuary's report also mentions the Government's clawback proposal. The Prime Minister spoke about that on several occasions recently and I have entered into correspondence with her about some of her grossly misleading statements. I shall await her answers before I deal with the matter again. In table 2 and paragraph 11 of his report, the Government Actuary makes it plain that he was told to use assumptions about the clawback that lead one to believe that next November the Government intend to cut the rate of increase of pensions and other benefits by 1.6 per cent. They estimate an increase of about 5 per cent., so in November 1983, retirement pensioners and others will receive a 3½p in the pound increase. It is nonsense for the Government to say that they have made no decisions when paragraph 2.25 of the Chancellor of the Exchequer's autumn statement and table 2 of the Government Actuary's report make it clear that they have done the arithmetic and that it is set out on paper. That point must be made clear.
We would not be here tonight, were it not for the fact that the Government need to bring in this extra increase. It is not just good housekeeping, as the Minister said. It is good housekeeping in the sense that there is a greater call on the national insurance fund, but part of the reason is the massive increase in unemployment that has taken place under the Government. 975 The Government Actuary has been told that, when calculating the figures on which the increase is based, he should reckon on average unemployment next year being 300,000 more than this year. That is what the Government are assuming. Were it not for that, I suspect that it would not be necessary to make the percentage increase, although I accept that the earnings levels, both upper and lower, require to be changed each year as the pension is changed.
§ Mr. Andrew F. Bennett
Is that the number of people who will receive unemployment benefit or the number who will be unemployed?
§ Mr. Rooker
We know that the Government are discounting many people from unemployment figures, and are basing the count on claimants. My hon. Friend will see in the Government Actuary's report that the number of unemployed, excluding school leavers, will average 300,000 more.
On the basis that the Government are assuming that on average 300,000 people presently in work will be out of work, when they lose their jobs, more likely than not, they will be entitled to national insurance unemployment benefit. They may also be entitled to supplementary benefit because of other cuts that the Government have made. That would not affect directly the operation of the national insurance fund.
The fact that 300,000 more people will lose their jobs cannot be denied. Their first port of call will be the national insurance fund. That is where the extra money will be needed to fund the over-inflated dole queue that has built up over the past three years.
I want to ask the Minister one question, which I hope he will not think is unfair or seek to dodge. I am not trying to be tricky at this time of the morning. The matter is referred to in paragraph 11 of the Government Actuary's report. The Minister will remember that during the passage early this year of the Social Security and Housing Benefits Bill, we were working on figures that are in legislation for the operation of sick pay. There are three rates of sick pay from next April. It is within my memory and that of my hon. Friends that the Minister gave us a categorical assurance, and we had a financial memorandum in addition to the Bill and the notes on clauses, saying that those rates of sick pay in the Bill would be increased before the sick pay scheme started to operate.
I remember the Minister agreeing with me in answer to a question that I asked that the appropriate time to announce what the sick pay rates for next April would be was around the time of the year, in November, when the Minister has to make a judgment to the House about national insurance contributions from next April. I tabled a parliamentary question last week on that matter. I received an answer that said that the matter had not been decided. No decision was announced.
It is clearly stated in paragraph 11 of the Government Actuary's report that he was told to assume that the higher rate would be uprated to £39.50. The Minister made a commitment. Employers will want to know about the scheme. Many of them have not heard of the sick pay scheme. Therefore, there will be considerable difficulties when it comes into operation.
Employers are entitled to as much warning of the rates of sick pay as of the increase in national insurance contributions. The Minister said so in Committee. I hope that he will be able to say within days rather than weeks 976 what the rates will be. It would be unacceptable to employers if they had to wait until 1983 for that information.
§ Mr. Rossi
I shall assist the hon. Gentleman as far as I can now. The £39.50 to which he referred is a working assumption. The matter is still under consideration. There will be a revision. I hope that the House will be told as soon as possible what the figures will be. I reaffirm the assurance that I have given the hon. Gentleman previously that the figures will be uprated and new figures will come into effect in April.
§ Mr. Rooker
I am grateful for that assurance. I am glad that the Minister has put it on record that the figures will be uprated before the Act comes into operation. It is in the interests of employees and employers to know the figures as soon as possible, simply because of the interaction of company sick pay schemes and for the good conduct of good industrial relations after the scheme comes into operation.
§ Mr. Andrew F. Bennett
Does my hon. Friend agree that it is also important for wage negotiations in the next few months involving people on low pay? The amount that is received may affect which band they go into and which levels of benefit they are entitled to in future.
§ Mr. Rooker
My hon. Friend has made my final point for me and I shall not repeat it. The Opposition will vote against the regulations because they are another gross and unfair burden placed on working people by the Tory Government.
§ Mr. Frank Field (Birkenhead)
In a powerful speech, my hon. Friend the Member for Birmingham, Perry Barr (Mr. Rooker) knocked aside my first point. Before the debate I was in the Library trying to find an acceptable face of Thatcherism in these regulations. On examining the increase in the lower rate of contributions and the increase in the ceiling, it emerged that the Government had increased the ceiling more rapidly than they had increased the lower earnings band for contributions. That seems to be a point in the Government's favour, and I am surprised that the Minister did not make anything of it.
As every hon. Member present knows, the national insurance scheme is not a progressive tax. In the band of income that we are debating, it is a proportional tax. By raising the earnings ceiling more rapidly than the lower band in which people are brought into contributions, one increases the area in which proportional contributions are collected for the Exchequer.
As always with this Government, every cloud has a black and sombre lining. By increasing the lower level more slowly than the ceiling, the burden of taxation has been shifted from higher to lower income groups. Having bent over backwards to try to be fair to the Government, and having examined one aspect that might be construed as the acceptable face of Thatcherism, I shall examine the unacceptable face that appears in the regulations.
The national insurance contribution is a regressive tax and the Government are making more and more use of it. The figures have already been put on the record, but I wish to underline them by repeating them. When the Government came to power, contributions were at a level of 6.75 per cent. We are now debating an increase that will bring that level to 9 per cent. That massive increase, 977 together with the low level at which contributions start to be paid, helps to explain the changing burden of taxation under this Government.
My hon. Friend the Member for Perry Barr looked at the effect of tax, and, more importantly, at national insurance contributions as they affect the horizontal distribution of income. I shall look at the effect on the vertical distribution of income. I shall take some of the very poorest workers, who are on two-thirds of average earnings. I shall use the parliamentary answers that my hon. Friend used. I shall use the answers that I was given, and those which my hon. Friend received more recently, updating that information. Both of us had, in our answers, a starting base of 100 for the last year of the Labour Government.
Those of us who entered the House after the last general election will know that we fought a campaign against the background of the Tory claim that a Conservative Government would make significant tax cuts. If the Government had fallen after their first year—and many of my constituents probably wish that they had—they could have proudly said that they had fulfilled their election pledge. For all income groups there was a significant decrease in the burden of taxation. However, as my hon. Friend the Member for Perry Barr said, the projected tax burden for 1982–83 is higher. In the Government's first year of office the index fell from 100 in 1978–79 to below 96 for a single worker on two-thirds average earnings. In 1982–83, the index rises to 110. For a married couple, with two children, there is a rise to 125 in 1982–83.
So much for the Government who will cut taxation and who still claim to be the party of the family. Therefore the first unacceptable face of Thatcherism under debate is the significant increase in the burden of taxation that falls on those with the lowest incomes.
The second unacceptable face of Thatcherism is the twofold change in the distribution of the tax burden which the Government have brought about by reducing the Exchequer contribution to the fund. The Minister proudly said that the Government were making no change compared with last year, but we must consider the life of the Government as a whole.
There has been a twofold change in the burden of taxation. There has been a decrease in the Exchequer contribution, taking funds away from those with the broadest backs and putting the burden on those with the weakest backs, and a further transfer of the burden of taxation from employers to employees. That is reflected in tonight's debate. There has been a move from the Exchequer to the employed community, and from employers to employees. The Minister almost proudly says that the Exchequer contribution stands at 13 per cent., but almost 40 years to the day the Beveridge White Paper was published with a table showing what he calculated the Exchequer contribution should be by 1975.
Beveridge accepted that everyone should pay some contribution from their wages, because that would underline that they were earning their benefits, which was an important factor in overcoming the stigma of means-tested benefits. His view was that by 1975 the Exchequer contribution would be 67 per cent. of the fund. Let us compare that with the Minister's figure of 13 per cent.
§ Mr. Rossi
Beveridge did not envisage the extent to which non-contributory benefits would increase in the intervening years. Rather than compare 67 per cent. with 13 per cent., the hon. Gentleman should compare it with 46 per cent., because that is the total contribution which the Treasury now makes to contributory and non-contributory benefit. That is a more apposite comparison.
§ Mr. Field
It is only half apposite. Summing up the total social security budget, the Minister proudly said that a large percentage of that went to the national insurance pension, which is contributory, so to a large extent his earlier argument undermines the point that he sought to make in his intervention.
In that White Paper of 40 years ago, Beveridge was suggesting that the scheme would be unfair if the Exchequer share did not increase year by year. Under this Government and, sadly, under the Labour Government, there has been a decrease. Therefore, we are now debating an increase in taxation that will hit hardest the poorest wage earners and those with children.
We should be debating how best to reform the system. I shall describe briefly three reforms. First, although I accept that there should be a funded scheme, there should be a massive increase in the Exchequer contribution, not only to make the scheme more progressive, but for one of the reasons which the Minister himself advanced—that the scheme is under increasing strain because of the growing number of unemployed. That factor affects the social security budget not only in this country but throughout the Western world. To meet that problem, resources should be drawn from general taxation rather than place the contribution burden almost entirely upon those lucky enough still to be in work.
The second reform—if only we could debate it today—might be to scrap the national insurance contribution altogether and combine it with the income tax system. We should then be debating how to make our taxation system progressive.
Finally, I return to the example of the poverty-wage earner—the single person on two-thirds of average earnings. In the last year of the Labour Government, such a person paid just under 27.7 per cent. of his income in tax and national insurance contributions. Under the Conservative Government, who promised to decrease the burden of taxation, that proportion has risen to well over 30 per cent. The idea of combining national insurance contributions with income tax thus opens the way for a wide debate on how we should reform the income tax system along progressive lines.
§ 1.3 am
§ Mr. Peter Bottomley (Woolwich, West)
I shall be brief. It is ridiculous to have extended debates on minute details of a scheme of this kind and to give far too little time to the major reforms to which the hon. Member for Birkenhead (Mr. Field) refers. I do not agree that we should try to make the income tax system progressive over a broad band of middle incomes, because simplicity is highly to be desired. Nevertheless, I believe that any serious consideration of our tax allowance and benefit contribution system by Government or by major political parties would mean getting rid of the anomaly whereby adding the tax and benefit contributions together shows that the burden is reduced for those on higher than average earnings. 979 I do not argue for that today or even this year, but we need to review the matter so that the House may consider the various stages of the analysis and work towards a more progressive system. I use the word "progressive" not in any technical sense but to describe a system that would meet some of the criteria that a tax and benefit system ought to meet. I recognise that this is not easy. If it had been easier, the previous Government or the present Government might have done it.
The only really progressive system of taxation is value added tax which is worthwhile provided that exemptions are made for essentials. It would be sensible for the Government to adopt the suggestion that I have made as an individual and through Family Forum of getting tax and benefit analysis over the family cycle at different income levels and in different circumstances. Only by that process will sufficient public interest be created to bring pressure on the Government and civil servants to do what they know to he right. They should get rid of much of the present cock-eyed system and lead to the adoption of a more sensible one. That will not happen if hon. Members spend all their time discussing 2.5 per cent. of this, that and the other in a virtually empty House.
§ 1.5 am
§ Mr. Reg Race (Wood Green)
The debate is not only about the taxation of low-paid and employees generally through national insurance contributions. Hon. Members have also to consider the pay received by individuals in employment. Low-paid workers have seen their burden of taxation increase and their position relative to average earnings decline during the Government's term of office.
In 1979 the lowest decile of male workers earned 66 per cent. of the average male wage. This year they earned only 64.5 per cent. It is important for hon. Members to consider the issue before the House tonight in the context of the Government's broader policy. The Government are intent on screwing the living standards of the low-paid even further into the ground. Their action over national insurance contributions is part of that process. They are also intent on reducing the bargaining power of the low-paid by abolishing the fair wages resolution of the House.
A tradition that has lasted for almost a century is abolished by the Government's reduction in the number of wages inspectors for wages councils. This attacks the ability of the wages councils to impose fair wages on recalcitrant employers. The position of all low-paid workers is therefore undermined. The measures before the House are part and parcel of the wider attack on low-paid workers and employees generally.
I wish to deal mainly with the philosophical question of the Government's intentions towards the improved benefits generated by the benefit scheme introduced by the Labour Government and with the consequences for future taxation levels and the national insurance fund of the increase in the number of claimants. The Government have had to ask themselves whether they can afford relatively modest levels of social security benefit financed through the national insurance fund when the number of old-age pensioners, of the short-term unemployed and of those claiming supplementary allowance is increasing for various reasons.
The answer that the Government have come up with is interesting. There are various choices. Governments do not have only one option. The Government had the option of doing four different things. They had the option of 980 cutting benefits, and my hon. Friend the Member for Birmingham, Perry Barr (Mr. Rooker) correctly drew attention to the way in which the Government have cut national insurance benefits, supplementary benefits and other benefits by £1.8 billion this year, of which £1 billion comes from national insurance. That is one option which the Government have been keen to adopt.
The second option for the Government was to increase national insurance contribution for both employers and employees. They have taken that course as well, as is shown by those measures, to try to jack up the contributions to the fund.
My hon. Friend the Member for Birkenhead (Mr. Field) referred to the third option, which was to increase the Treasury contribution to the national insurance fund. The Government were not prepared to do that, because that comes from general taxation, and their key objective is to get down the rate of general income tax before the next general election, irrespective of the impact of that policy on the national insurance contribution. Therefore, that option was not available to them.
The fourth option, which was also not available to them but which bears on these measures, was for the Government to change their general economic policy. The Government are in difficulty with the national insurance fund. This stems from the fact that so many people have stopped paying national insurance contributions because they are unemployed. The greater the number of unemployed, the fewer there are to pay national insurance contributions. The Government could change their basic economic policy to get people back to work so that they could begin to pay taxes and national insurance contributions. That would avoid the need for rises in the contribution levels to the national insurance fund. But these measures show that the Government are not prepared to do that.
The changes brought about by these proposals are not inevitable. The Government were faced with choices, and they funked the challenge. They funked the option of expanding the economy and creating jobs and of paying for the fund through an increase in general taxation.
The problem is that the fund is based on a false premise. Beveridge said that peoples' self-respect would be increased if they paid for their benefits through their contributions and their employers' contributions. That is a valid point, but it is important to have a funded scheme if one has a private employer who could go broke. It is crucial in that case, because there is no guarantee for the employee that his employer will still be around in 30, 40 or 50 years' time, at the end of his working life, to pay out the contributions paid in by the employee.
Governments do not go broke. They do not need a national insurance fund as such to pay pensions and other benefits at the end of the day when someone reaches the age of 60 or 65. Governments do not go broke, and therefore it is nonsense to have the kind of national insurance fund that we have. We should combine taxation through income tax with national insurance contributions.
As my hon. Friend the Member for Perry Barr said, our system of taxation is regarded by ordinary people as unitarist. It is the bottom line that matters. People are concerned with what they take home at the end of the week or the end of the month. That is the reality. We should say that we are in favour of decent benefits paid for by general taxation, and of an end to this economic policy which the Government are pursuing, which is producing not only 981 increased unemployment but further burdens of taxation of the poor and those on low incomes. That is the consequence of their policy, and we must ram that home firmly tonight by voting against these measures.
§ Mr. Andrew F. Bennett (Stockport, North)
I shall not detain the House long. Although these orders appear technical, they nicely illustrate this Government's major shortcomings. The Government's mismanagement of the economy has produced massive unemployment and many of the problems of the national insurance fund. The Government have deliberately made our tax system less fair by increasing the burden on the least well off and reducing the burden on the richest people. It also illustrates the meanness of many regulations to people on the lowest incomes.
I shall start with the meanness. In these regulations the Government should tackle the problem that has been repeatedly pointed out of the people who are caught with earnings close to the lower earnings limit. Those people pay national insurance contributions for perhaps half the year, and when the Government raise the lower earnings limit such people stop paying contributions for a period, but then, as a result of a pay increase, they start to pay contributions again. Often they do not pay enough contributions in the year to qualify for any benefit. So for a part of the year they pay contributions which achieve little for them. Certainly, they do not achieve any right to unemployment benefit, although people in those earnings groups are often the most likely to lose their jobs and therefore require unemployment benefit.
If people pay for part of a year and then do not pay because of an increase in the lower earnings limit, surely their contributions should be refunded. For those groups, the contributions are the highest proportion of their total income. Those people are meanly treated as a result of the upward movement of the lower earnings limit, which takes them out of contributions, breaks their record, and thus renders them ineligible for unemployment benefit. It is an illustration of the way in which regulations are often mean to some of the lowest-paid people in our society.
Many of my hon. Friends have said that the Government's creation of unemployment has had a major impact, in the number of people who do not work and therefore do not contribute to the fund, and in the increasing number of people who have to be paid out of the fund. That is unfair. In addition, last year the Government manipulated the Treasury contribution to the fund, to reduce it, so that more was paid from national insurance and less from general tax revenue. That, too, is unfair.
There is also the unfairness to the individual, whose contribution has been increased by almost one-third, while his benefits have been savagely cut—the £1 billion of which my hon. Friend the Member for Wood Green (Mr. Race) spoke. Moreover, by increasing the national insurance contribution and reducing the income tax level, the marginal rates of tax have been savagely increased for the low paid and cut for the rich.
This measure illustrates the Government's unfairness in encouraging inequality and their meanness to most of the people on the lowest incomes. It deserves to have a big vote against it tonight.
§ Mr. Rossi
I do not know to what extent the House wishes me to detain it. Opposition Members were here to raise the points that they wished to make. In an intervention, the hon. Member for Stockport, North (Mr. Bennett) asked me for a figure that I was unable to give at the time. The raising of the upper earnings limit to £245 would have brought in another £87 million—£39 million from employees and £48 million from employers. Of that sum only £70 million would have gone into the national insurance fund.
§ Mr. Rooker
When I gave the figure of £87 million I was quoting the Minister's answer yesterday to my hon. Friend the Member for Thurrock (Dr. McDonald) in c. 445 of Hansard.
§ Mr. Andrew F. Bennett
That is a helpful figure, but would the Minister tell us what that would do if we wanted to get rid of the 5 per cent. abatement?
§ Mr. Rossi
I am grateful to my hon. Friend. I was asked why the level was set at £235. That will be 7.15 times the pension rate and represents an increase of 6.8 per cent. on the present upper earnings limit. The figure has been pitched at that level because it is in line with the rise in earnings.
I believe that the House will agree that we should use our achievement in reducing the rate of inflation to keep the extra contributions from employers to the minimum needed for the good housekeeping of the national insurance fund.
§ Mr. Field
I intervened from a sedentary position because the Minister was saying that the Government should make the most of the falling rate of inflation. By putting the burden on employees the increase is put into the retail price index calculation. By putting the increase on to the employer it is not put into the retail price index calculation. The Minister was again undermining his argument.
§ Mr. Rossi
They are both going up at the same rate. The hon. Member for Birmingham, Perry Barr (Mr. Rooker) made much of the relationship between employers' and employees' contributions. He is right. Between the mid-sixties and 1980–81 the balance between employees' and employers' contributions was changed progressively in favour of the employee. The loading of the 1981–82 and 1982–83 increases on the employee 983 readjusted what had taken place earlier and struck the balance as it was originally intended to be—and the Beveridge report was quoted.
At the moment we are keeping the two contribution rates in line. This uprating is not putting a disproportionate burden on either side. The point was made that this is a regressive form of taxation, but the lower earnings limit is tied to the basic pension rate. That is a basic feature of the new pension scheme which had all-party support. Therefore, the £32.50 lower earnings level for 1983–84 is automatic and avoids low earners being caught for contributions.
The upper earnings limit can only be regarded as regressive if one ignores the contributory principle.
§ Mr. Rooker
As the lower earnings limit is tied to the pension rate and pensions are now only raised in line with prices rather than with earnings, what will happen if there is a divergence between earnings and prices in the near future if the earnings limit is linked to a pension which is not linked to earnings? Will not that create massive contradictions in the operation of the national insurance fund?
§ Mr. Rossi
That would cause problems which we would have to meet as and when the time arose by looking at the rates to see what adjustments should be made. Those are all matters to be taken into account when judgments are being made on a year-to-year basis. The hon. Gentleman cannot complain about the lower earnings limit when it was originally introduced by the Labour Government with all-party support.
§ Mr. Rooker
It is not fair to use that argument, because when it was introduced the basic pension rate was tied to prices or earnings, whichever was the higher. Therefore, tying the lower earnings limit to the pension rate was justified. It is not any longer.
§ Mr. Race
If we are talking of the regressiveness or otherwise of the national insurance contributions for the employed, will the Minister tell the House about the simple fact that, when someone crosses the national insurance contribution threshold, payments are made on the whole income, not that part above the limit? That must be a wholly regressive tax on the low paid. Does the Minister agree that it is foreign to anything in the income tax provisions?
§ Mr. Rossi
Yes. When people come above the lower earnings limit they must pay the full amount. That is a well-known feature of the scheme which has operated ever since the scheme began. That again is a problem that must be considered at some point by the House. As long as we adhere to the contributory principle—it would be an enormous step were we to decide to abandon it—there will inevitably be the kind of effects that we are now discussing. Hon. Members must accept that.
When hon. Members talk of unifying the tax and national insurance systems in order to remove altogether the regressive nature of the national insurance contributions, it abrogates the contribution principle. There will not then be a relationship between what people are paying and the benefits they are likely to receive.
§ Mr. Rossi
All non-contributory benefits are breaches of the principle. It is a principle that has been eroded over 984 the years by Labour and Conservative Governments in different ways. Nevertheless, there is still a link between contributions paid to and benefits received from the national insurance fund.
§ Mr. Rossi
Not entirely. That is so in respect of unemployment benefit. Payments out of the fund for unemployment benefit amount to about 9 per cent. of all payments out. Labour Members have made great play of the "enormous" increase in contributions, which they claim is due to the increase in unemployment, but that is not so. The increase in benefits is related directly to the increase in pensions, and those are still earnings-related.
The hon. Member for Birkenhead (Mr. Field) talked about the percentage of the total social security benefits that is payable. He was making a false point. I was talking earlier of the relationship and the proportion of the pension payments to the total contributory benefits that are paid out, which is an entirely different matter. It is £14.5 billion compared with £20 billion. This is why, on a pay-as-you-go basis, which the fathers of the scheme decided was the right way in which to proceed, the workers of today have to pay that much more in their contributions as we pay out higher benefits and greater pensions, which are the largest element of all contributory benefits. That is something that Labour Members find it convenient to avoid and ignore for the purpose of debate.
This is why we have had to ask for increases in contributions by employers and employees. The increases will be necessary to meet the increases in benefits that have started this week, on 22 November. I have not heard the Opposition argue that we should reduce the benefits and pensions, but that would be the concomitant of reducing the contributions that we are asking people to pay. It is in that context that I ask the House to approve the order.
§ Question put:—
§ The House divided: Ayes 93, Noes 40.985
|Division No. 18]||[1.31 am|
|Alexander, Richard||Goodhart, Sir Philip|
|Atkinson, David (B'm'th,E)||Goodlad, Alastair|
|Bendall, Vivian||Griffiths, Peter Portsm'th N)|
|Benyon, Thomas (A'don)||Gummer, John Selwyn|
|Berry, Hon Anthony||Hamilton, Hon A.|
|Biggs-Davison, Sir John||Hampson, Dr Keith|
|Blackburn, John||Hawkins, Sir Paul|
|Boscawen, Hon Robert||Hawksley, Warren|
|Bottomley, Peter (W'wich W)||Heddle, John|
|Bright, Graham||Henderson, Barry|
|Brinton, Tim||Hogg, Hon Douglas (Gr'th'm)|
|Brooke, Hon Peter||Hunt, David (Wirral)|
|Brown, Michael(Brigg & Sc'n)||Jopling, Rt Hon Michael|
|Browne, John (Winchester)||Knight, Mrs Jill|
|Bruce-Gardyne, John||Lang, Ian|
|Buck, Antony||Lester, Jim (Beeston)|
|Butler, Hon Adam||Lloyd, Peter (Fareham)|
|Carlisle, John (Luton West)||Lyell, Nicholas|
|Carlisle, Kenneth (Lincoln)||MacGregor, John|
|Colvin, Michael||Madel, David|
|Dorrell, Stephen||Major, John|
|Dover, Denshore||Marshall, Michael (Arundel)|
|Dunn, Robert (Dartford)||Mates, Michael|
|Dykes, Hugh||Mather, Carol|
|Fairgrieve, Sir Russell||Mellor, David|
|Fenner, Mrs Peggy||Meyer, Sir Anthony|
|Fowler, Rt Hon Norman||Miller, Hal (B'grove)|
|Mills, Iain (Meriden)||Stanbrook, Ivor|
|Moate, Roger||Stanley, John|
|Murphy, Christopher||Stevens, Martin|
|Neale, Gerrard||Stewart, A.(E Renfrewshire)|
|Nelson, Anthony||Stewart, Ian (Hitchin)|
|Neubert, Michael||Stradling Thomas, J.|
|Newton, Tony||Taylor, Teddy (S'end E)|
|Osborn, John||Thompson, Donald|
|Page, John (Harrow, West)||Townend, John (Bridlington)|
|Page, Richard (SW Herts)||Trotter, Neville|
|Patten, Christopher (Bath)||Viggers, Peter|
|Pattie, Geoffrey||Waddington, David|
|Proctor, K. Harvey||Waller, Gary|
|Rhys Williams, Sir Brandon||Watson, John|
|Rossi, Hugh||Wells, Bowen|
|Rumbold, Mrs A. C. R.||Wheeler, John|
|Sainsbury, Hon Timothy||Wolfson, Mark|
|Shaw, Giles (Pudsey)|
|Shepherd, Colin (Hereford)||Tellers for the Ayes:|
|Smith, Tim (Beaconsfield)||Mr. John Cope and|
|Speller, John Francis (B'ham)||Mr. Tristan Garel-Jones.|
|Spicer, Jim (West Dorset)|
|Atkinson, N.(H'gey,)||John, Brynmor|
|Beith, A. J.||Lyons, Edward (Bradf'd W)|
|Bennett, Andrew(St'kp't N)||McKelvey, William|
|Callaghan, Jim (Midd't'n &P)||Penhaligon, David|
|Campbell-Savours, Dale||Prescott, John|
|Cocks, Rt Hon M. (B'stol S)||Race, Reg|
|Craigen, J. M. (G'gow, M'hill)||Robertson, George|
|Cryer, Bob||Rooker, J. W.|
|Davis, Terry (B'ham, Stechf'd)||Ross, Ernest (Dundee West)|
|Dean, Joseph (Leeds West)||Sever, John|
|Dormand, Jack||Skinner, Dennis|
|Eadie, Alex||Snape, Peter|
|Eastham, Ken||Soley, Clive|
|Evans, John (Newton)||Spearing, Nigel|
|Ewing, Harry||Wainwright, E.(Dearne V)|
|Field, Frank||Welsh, Michael|
|Hardy, Peter||Whitehead, Phillip|
|Harrison, Rt Hon Walter||Wrigglesworth, Ian|
|Hogg, N. (E Dunb't'nshire)||Tellers for the Noes:|
|Hooley, Frank||Mr. George Morton and|
|Hoyle, Douglas||Mr. Allen McKay.|
§ Question accordingly agreed to.
That the draft Social Security (Contributions, Re-rating) Order 1982, which was laid before this House on 8th November, be approved.
That the draft Social Security (Contributions) Amendment (No. 2) Regulations 1982, which were laid before this House on 8th November, be approved.—[Mr. Brooke.]