Social Security

HC Deb 12 December 1985 vol 88 cc1165-79 10.14 pm

The Parliamentary Under-Secretary of State for Health and Social Security (Mr. John Major)

I beg to move, That the draft Social Security (Contributions, Re-rating) Order 1985, which was laid before this House on 12th November, be approved. It may be helpful to the House if I outline the purpose and main features of the order and the regulations associated with it. I should say at the outset that I do not intend to engage in speculation about what may or may not be in the Government's forthcoming White Paper on social security. It will be published shortly and the House will have ample opportunity on that occasion to debate what is in the White Paper.

This brief debate illustrates an important theme in social security—that benefits have to be paid for. We have to ensure that the money coming into the national insurance fund is sufficient to pay for expected benefits, and that there is an adequate balance to provide for unexpected contingencies. For that reason, we have this annual exercise in prudent accounting, which requires the Government to bring before parliament their proposals for national insurance contribution rates and related matters for the forthcoming tax year. The report of the Government Actuary on the effect of the proposed changes was laid before the House by my right hon. Friend the Secretary of State on 12 November, as required by the Act.

I shall begin by considering the effect of our proposals on employers and employees. In that respect, I hope that the House will acknowledge the Government's achievement in bringing before it proposals which will mean that for the third successive year there is to be no change in the rate of class 1 national insurance contributions. That is achieved against a background of an increase in main benefit rates which will add £2 billion to social security spending in a full year, bringing it to £41 billion. This steadying of contribution rates is beneficial to both employees and employers and reflects the Government's determination to keep the tax and contributions burden as low as possible.

Although the rate of class 1 contributions remains constant, there is, as usual, a change to the lower earnings limit for employees' and employers' contributions, as well as a change to the upper earnings limit for employees' contributions. The House will recall that the upper earnings limit for employers' contributions was abolished with effect from 6 October this year to help offset the loss of revenue resulting from the new reduced contribution rates for the lower paid and their employers.

In carrying out these changes, we are simply fulfilling the requirements laid down in the Social Security Pensions Act 1975, which requires the lower earnings limit to be equal to or no more than 49p below the basic rate of retirement pension and the upper earnings limit to be between 6.5 and 7.5 times that rate. A pension rate of £38.30 next year—representing a real increase in the value of retirement pension during the period in which the Government have been in office—points inevitably to a lower earnings limit of £38 a week.

The statutory requirements affecting the upper earnings limit for employees permit a little more discretion. It would have been possible to extend it to £287.25, but the figure we have chosen of £285 represents a 7.5 per cent. increase on the current limit, which is broadly the same as the general increase in the level of earnings. This maintains its relationship with the basic pension rate and is within the range of 6.5 to 7.5 times that limit—again as laid down in the Social Security Pensions Act 1975.

As my hon. Friend the Minister of State acknowledged in last year's debate, there were grounds for criticising the way the earnings limits worked. Since that time we have taken the opportunity, in the Social Security Act 1985, to introduce a graduated system of contribution rates which substantially modifies the effect of the lower earnings limit. The new graduated rates, based on three bands of earnings for employees and four for employers, soften the previous sudden onset of full rate contribution once the lower earnings limit has been reached. The purpose of the new system is to foster the creation of jobs by reducing the cost of employing some 8.5 million workers and for the lowest paid in particular reducing employers' contributions by more than half, from 10.45 to 5 per cent.

We propose to build upon that by increasing, under the terms of the order, the range of weekly earnings on which reduced rates of contributions will be payable. The lowest band of earnings on which contributions at 5 per cent. will be payable will run from £38—the new lower earnings limit—to £59.99 per week. The 7 per cent. band will run from £60 to £94.99 per week and the 9 per cent. band will start at £95 with an upper limit of £139.99. That is an increase of £10 over the previous limit.

The changes mean that an employer employing someone at £139 a week will have his employment costs reduced by over £2 a week. The weekly take-home pay of someone earning £94 a week will be increased by £1.88, and his employer's costs will be reduced by a similar amount. Only employees earning between £265 and £285 per week have any significant change to their contributions and here the maximum additional contribution will be £1.80 a week.

I should now like to tell hon. Members of our proposals for self-employed people. As the House is aware, self-employed people pay their contributions in two parts—the flat-rate class 2 contribution and the profits-related class 4 contribution. As we do not propose to increase the class 1 rate for employees, it follows that no increase is needed in the class 4 rate that is derived from it. The profits limit for class 4 contributions rises automatically each year broadly in line with the earnings limit for class 1 contributions. The figures proposed this year are £4,450 and £14,820, the latter figure being exactly 52 times the upper earnings limit. Contributions on profit are paid at the rate of 6.3 per cent. and have been since April 1983.

With regard to the self-employed class 2 rate as a deliberate and positive incentive to small businesses, we propose continuing the large abatement given to self-employed people earlier in the year. Consequently, we propose only a modest increase of 25p a week in the contribution, making it £3.75 a week from next April.

The effect of these changes is that for the majority of self-employed people there will be an overall reduction in their contributions of £38.40 a year in 1986–87 compared with 1985–86. Only those earning above the upper profits limit of £14,820 will pay more, and then only a maximum of £27.12 a year. The small earnings exception from class 2 liability also rises automatically—in this case by £150 to £2,075. Finally, the proposed voluntary class 3 contribution rate is, as usual, being set at 10p below the class 2 rate, giving a figure of £3.65 a week from next April.

The House will have noticed that we are not this year proposing any change in the Treasury supplement to the national insurance fund. It will remain at 9 per cent.

I deal finally with the effect on the national insurance fund of the changes that we have proposed. The Government Actuary in his report estimates that the order that we are debating will cause expenditure from the national insurance fund to exceed income by £80 million next year. That will have only a very marginal effect on the working balance in the fund, which will stand at the end of next year at an estimated £4,755 million. That balance represents 20 per cent. of the estimated benefit expenditure during the year, still well above the prudent minimum balance of 16.7 per cent. recommended by the Government Actuary.

My right hon. Friend the Secretary of State has considered these estimates and is satisfied that the changes that we have proposed are entirely compatible with maintaining a proper working balance on the fund, consistent with advice from the Government Actuary, while at the same time reducing, wherever possible, the burden on employers, employees and the self-employed alike.

In 1986–87 we shall be paying out just under £24 billion from the national insurance fund—nearly £18 billion of it in retirement pensions. The purpose of the annual re-rating of contributions is to ensure that there are sufficient funds to pay for those benefits.

We believe that the changes contained in the order provide that guarantee and, moreover, at the expense only of the minimum extra burden on contributors. What they aim to do— and what we believe they achieve—is to strike a balance between the protection of the national insurance fund, with the huge benefit calls upon it, and the protection of those who contribute to that fund. On that basis, I commend the order to the House.

10.25 pm

Mrs. Margaret Beckett (Derby, South)

As the Parliamentary Under-Secretary of State for Health and Social Security has pointed out, tonight's debate gives effect to the changes in the system of national insurance contributions that was introduced earlier this year in the Social Security Act 1985. We all recognised the regressive nature of the national insurance contributions system and the way in which it has been exacerbated by the policy that has been steadily pursued by the Government. That policy has increased the reliance upon contributions to fund social security benefits. At the same time, however, it has decreased the supplement paid by the Treasury from general taxation. It is thus collected with more regard for ability to pay. This year the Government have not, for once, chosen to reduce the Treasury supplement. We are pleased about that. However, we believe that it is set at too low a level, and we are not therefore as gratified as the Under-Secretary of State might expect.

It is extraordinary that a Government who have so steadily pursued a policy of increasing reliance upon contributions—contributions towards what was intended to be and is still called a "national insurance" system—should equally steadily have reduced the benefits for which those contributions were levied. The steady continuance of earnings-related contributions has gone hand in hand with the steady disappearance of earnings-related unemployment benefit, sickness benefit and maternity allowances. Most recently there has been the disappearance of the earnings-related invalidity pension. I hope I am not tempting providence by saying that, but that has been offset against the invalidity allowance, with a consequent reduction in the income of the disabled. My postbag is swollen with letters from the disabled who complain that they are not receiving the full effective increase that was allowed by the uprating last autumn. I hope that the Under-Secretary of State's postbag is swollen with similar letters.

We recognise that the system needed to be improved. The Government argue that the changes that they introduced earlier and that they are modernising by this order will provide additional help for the lower paid. However, the Under-Secretary of State will be aware that, although the proposals replaced one very sharp poverty trap, it was replaced, unfortunately, by several other poverty traps, although their immediate effect was somewhat diminished.

I do not know whether the Under-Secretary is aware that it has been calculated recently that the new set of poverty traps will catch three times as many people on low pay as were caught under the previous system. Those who are caught in the new poverty trap, or traps, will be subject to marginal tax rates that are as high as 70 per cent. precisely because, as earnings move across each band, people are subject to each rate on their whole earnings.

The biggest trap, as happened under the old system, occurs when somebody crosses the first threshold of earnings. Unfortunately, this will affect in particular part-time employees, the great majority of whom are women. If will affect young people too. In other words. it will affect precisely those groups of people who are already losing out in other ways. They are losing out already on unemployment protection rights and on benefit entitlement. They will now lose out not only because of the poverty trap but because employers will be encouraged to keep wage levels low, or to cut hours below the level at which employees become liable to national insurance contributions.

Mr. Tim Smith (Beaconsfield)

I listened carefully to what the hon. Member for Derby, South (Mrs. Beckett) said about the three poverty traps, but surely the position was far worse previously when there was just one rate —9 per cent. At a rate of 5 per cent. the poverty trap will be alleviated. The present arrangements improve the position. If the hon. Lady is so concerned about it, what is her solution to the problem?

Mrs. Beckett

I recognise that the present poverty trap is not so serious now, and I pointed out that fact. However, although the poverty trap is less severe, I think that the hon. Gentleman will recognise that if it catches three times as many people, those who will now be caught in the poverty trap but who were not caught by it before will not be so grateful as the hon. Gentleman appears to expect them to be. It is our duty to point out to the Government that more people will be affected by these changes, even though they will not be affected quite so seriously as were those who were previously caught by the poverty trap. We are concerned about the effect on part-time workers, especially women. The changes in employment figures, to which the Government so often refer, are largely accounted for by women. Unfortunately, those who can obtain employment will be caught by these changes.

Sometimes it seems that, so long as people do not appear in the unemployment figures, the Government are less worried about whether they have what the Prime Minister likes to call a "real job" and even less worried about whether they can live on and support a family on their earnings. The Minister of State said on Report that 'the proposed changes would increase the net income of the low-paid. There is a danger that, instead of increasing their net income over a comparatively short period, the proposals will merely change the composition of that income as gross wages are pushed down at the expense of three times as many people caught in the poverty trap.

This would be a matter for concern at any time, but it is especially so when the prices of so many of the basics of healthy and civilised living are pushed up by other Government policies. There has been an increase of about 12 per cent. in water rates, and increases in prescription charges and gas and electricity prices to meet the Government's financial targets. The Government still assert that people should be prepared to bear more of the burden of the costs that were previously borne through their contributions to the welfare state.

During the debate on the Social Security Bill much play was made of the help that the proposals would give to the young . unemployed. We drew attention to the fact that, although it may be argued—we would question this to some extent—that the proposals helped those people, the help was paltry compared with the penalty imposed on families which include the young unemployed and are forced to receive housing benefit because of their financial circumstances. At the time we made that complaint, the deduction from housing benefit for a young person in employment was at, as seemed to us and to the Government's Social Security Advisory Committee, the excessive level of £9 a week. Since then, the Government have increased that deduction by more than the rate of inflation to well over £10 a week.

In contrast to the increased penalty that the Government have imposed on the young unemployed, the self-employed continue to benefit from the Government's generosity. During the passage of the Bill, we pointed out that even self-employed people who might be reasonably well off and be earning substantial sums would have to pay only £3.50 under the proposals, to retain their entitlement to the basic pension. That was extremely good value for money—such good value for money that there seemed to be little question but that the state was subsidising that improvement. The Under-Secretary of State said that the sum had increased to only £3.75. As the non-dependant deduction from housing benefit was already thought to be excessive at £8.80, I believe that, if the Government were going to be generous to any group of people, they should have been generous to that group rather than to the people whom they chose.

Every year that we have had this debate since I have held this position we have touched on the nominal balance that is maintained in the national insurance fund. The Government Actuary recommended that a prudent level of balance would be 16.6 per cent. The proposal is for 21 per cent. for the current year and 20 per cent. for next year —substantially more than the Government Actuary said was needed for "prudence". These are sums which, even if they are only kept in notional balance, are not dispersed in benefit although they are received in contributions.

I also remember asking the Government and receiving no answer, whether they intended to keep substantially larger balances in the fund. It was proposed that the level of balances should be 27 per cent. rather than the 21 per cent. that finally emerged. I asked whether that was due to excessive prudence or the fact that the Government realised that unemployment would rise by much more than the Government Actuary was allowed to suggest.

As the outturn was 21 per cent. rather than 27 per cent. it seems that, although the Government were not prepared to admit it, they were concerned with the level of unemployment. We can only conclude as, for next year, they still propose to keep 4 per cent. more than is considered prudent, that, irrespective of whether they will admit it, they are confident that their economic policies will prove as big a failure next year as they did last year, the year before that and the year before that.

Although I do not doubt that these proposals will go through, they do so against a background of, at best stalemate and probably a deterioration in the Government's position.

10.35 pm

Mrs. Edwina Currie (Derbyshire, South)

I welcome the proposals. It is a great pity that the hon. Member for Derby, South (Mrs. Beckett), my neighbour in Derbyshire, has wasted this opportunity by making what has become a party political speech. She ought to be aware from her experience in social security that one never eradicates the poverty trap but just moves it around. There can be a shallow poverty trap that does not affect people very much, but it affects a lot of people, or a deep poverty trap that affects a small number of people considerably. As soon as we offer benefits in addition to what people can earn, there is a poverty trap. I do not believe that the Labour Government made a better job of getting rid of it than we have done. It is not logically possible to get rid of it.

The hon. Lady and her colleagues should recognise that, as my hon. Friend the Minister said, it is a considerable achievement to introduce these changes which help the low-paid and improve matters only six months after the scheme was introduced. My hon. Friend mentioned all of the changes. For most of us there will not be any change. The main class of contribution rates will stay at 9 per cent. for employees and 10.45 per cent. for the company. That deserves some kind of recognition. No change often receives no acknowledgement, but it deserves recognition.

We now have more pensioners in the United Kingdom. We pushed up the total cost of the social security budget last month by more than £2 billion—more than the rate of inflation. I am not sure where the hon. Member for Derby, South thinks the money is going, but it is going to some of my constituents and they are very pleased to have it. It all has to be paid for, but we did not need to increase national insurance contributions for the vast majority. Indeed, we have cut the rate for those who can most benefit—people in low-paid jobs. The day will come when the Opposition recognise some of these things and say, "Well done" but that time has not arrived tonight.

One or two of the things that the hon. Member for Derby, South said are worth pursuing in a non-party political way. It is not all sweetness and light. In the debate on the Budget in the previous Session, I said, as had many others who spoke before me, that national insurance contributions are a tax. I welcomed the Government's recognition at long last of that fact. It does not matter that it is called a contribution and that it confers a right. Most people know their gross income and their net income; and the rest are just "stoppages". They do not care very much what title those stoppages have. The same is true for the employer as it is a cost of employing people. It does not matter whether it confers rights and benefits to people in whose names contributions are paid.

We make nonsense of any policy to help the low-paid to stay in work if we push up employers' costs through national insurance while trying to cut income tax. The hon. Member for Birkenhead (Mr. Field) is nodding—

Mr. Frank Field (Birkenhead)

Am I?

Mrs. Currie

He will be aware that, under the Labour Government of 1976–79—

Mr. Field

Like one of those dogs in the back of a car.

Mrs. Currie

—the national insurance charge on employers rose from 8.75 per cent. to 13.5 per cent. It was to Labour's shame that they did that and to ours that we left it that high for far too long. A result of that is that it became more expensive for employers to employ people. If we charge employers about 13 per cent. , a figure which included the national insurance surcharge, we should not be in the least surprised when they switch to using equipment and machinery instead of people. That seems axiomatic. At last we are getting to grips with the problem, and I urge my hon. Friends to see this as the first step and to take the matter further.

I asked the Library to give me figures for the loss from an individual's income of national insurance and income tax. It gave me figures for average male earnings for a single person not contracted out. In April 1976 a single man on average earnings would have paid 28.1 per cent. of his earnings in income tax, 5.75 per cent. in employee's national insurance, and his employer would have forked out 8.75 per cent., which totals 42.6 per cent. I chose April 1976, because that was when the Labour Government went beserk in pushing up income tax rates. That is the highest proportion of income tax paid in recent years.

The latest figures for October 1985 made me swallow hard, because while we had managed to cut the take from tax from 28.1 per cent. to 23.7 per cent., which is a substantial improvement, unfortunately the take in employee's national insurance had increased from 5.75 per cent. to 9 per cent., and the take from employer's national insurance, which is significant for helping people stay in work by encouraging their employers to keep them, had increased from 8.75 per cent. to 10.45 per cent. That figure has improved as it was more than 13 per cent., but the total is 43.15 per cent. of earnings, in other words, it is more than it was in 1976.

For low-paid workers, someone on, say, half average earnings, the position is almost exactly the same. In April 1976 a man would have paid 21.2 per cent. in tax, and 5.75 per cent. in national insurance, and his employer would have paid 8.75 per cent., which totals 35.7 per cent. In October 1985 he paid 17.5 per cent. in tax, which is a substantial reduction and we must congratulate our right hon. and learned Friend on that, his insurance increased to 9 per cent. and his employer's insurance would have been about 9 per cent., which totals 35.5 per cent. In other words, we have managed to knock 0.2 per cent. off the total take in all those years.

Two significant points are to be drawn from that. First, it took the Library two da:ys and seven different sources to dig out what in my ignorant and humble view is the most basic information for studying the take from a man's pay. It should not have to be sought in seven sources. Secondly, it is obvious that we have yet to congratulate ourselves entirely on ensuring that we have reduced the take from a man's pay and from his company in employing him.

The Government Actuary's report states that today's order will cost £70 million, and the autumn statement made it clear that—because more people are working, there is more overtime, less short-time working and average earnings are rising faster than inflation— the total income to the national insurance fund will rise by more than the £70 million that it will lose— by £1.5 billion. Therefore, I urge all my hon. Friends that when debating whether the Chancellor of the Exchequer should cut taxes in the spring by changing the rates or the threshold, we should perhaps consider the national insurance figures instead. We should not be satisfied until the figure that we take from a man on average earnings drops to below 40 per cent., as it was 15 years ago. That implies a national insurance contribution of about 6 per cent. The figure for a man on half earnings should fall below one third. That seems perfectly reasonable. That implies a national insurance contribution of about 3.5 per cent.

My right hon. Friend the Chancellor described those changes in the autumn statement as, welcome assistance to the low-paid and their employers, and a stimulus to the employment of the young and unskilled."—[Official Report, 12 November 1985; Vol. 86, c. 433.] That must be right, and this small change is a welcome step. It is too soon to tell whether the changes that were introduced on 6 October are having any effect, but it was pleasing to see from the latest unemployment figures that more than 20,000 young school leavers came off the register last month. That is a net reduction over the same period last year, so perhaps the policy is having some effect. Such small changes, together with our policies on wages councils for the young, youth training and the Manpower Services Commission's efforts, lead me to hope that we can look forward to better employment prospects for all our people.

10.45 pm

Mr. Frank Field (Birkenhead)

It was unfair of the hon. Member for Derbyshire, South (Mrs. Currie) to say that my hon. Friend the member for Derby, South (Mrs. Beckett) had made a party political speech. Any reasonable person listening to my hon. Friend would have thought that she was her usual thoughtful, probing self, carefully considering the Government's proposals.

When the hon. Member for Derbyshire, South got into her stride, we realised why it was important for her to throw dust in our eyes, because if there was a party political speech, it came from her. However, it was a surprise speech, in that it seemed to be an indictment of the Government's tax policy. A Government who successfully fought two general elections on reducing the rate of tax must find the hon. Lady's remarks disturbing.

One hopes that the valuable information that she gleaned from the Library will not be completely lost by the Labour party as it prepares for the general election.

It would be difficult for anyone — certainly an Opposition Member—to disagree with the change in structure that has been introduced, although I shall return later in my speech to the remarks of the hon. Member for Derbyshire, South on the impossibility of getting rid of the poverty trap. Although it is right to appluad the Government for the change in structure, it is equally right to focus some attention on the other changes that they have made in the burden of national insurance contributions during the past six years.

There have been two significant changes, both of which were commented on fairly by my hon. Friend the Member for Derby, South. The first is that there has been a major switch in lessening—if one can call it that—the burden of the Exchequer on those in employment. That is not to accuse the Government of sleight of hand, because they said that they would do so, but it is interesting to compare our present position, with a small contribution from the Exchequer, with what was envisaged in the 1948 White Paper on the national insurance scheme. Following Beveridge's proposals, it was assumed that because it was a poll tax and, therefore, highly regressive, it should play only a small part in financing the cost of national insurance benefits.

By 1965, it was forecast that the Exchequer contribution would be about 70 per cent., and that employees and employers would make a small proportional contribution to financing the scheme, but the reverse has happened. The Exchequer contribution has almost faded away, and been given considerable stimulus to fade away under the Government, and the burden on employers and employees has increased substantially. Although one criticises the tax system for not being as progressive as it should be, it is more progressive than the national insurance scheme. That has been the first shift in the burden of taxation.

The hon. Member for Derbyshire, South was right to highlight the two consequences of that—on takehome pay for people considering the benefits of working or not working, and on the costs that employers must meet if they are to continue to employ their existing work forces, let alone take on new people.

Partly to meet the problems of putting that extra burden on the shoulders of those in work, the Government have made a second shift in the distributional impact of the tax by increasing the burden on those in work, who are earning wages and salaries, and reducing the contribution paid by employers. That is the second redistribution of the cost of financing the welfare state.

All this has taken place, as my hon. Friend the Member for Derby, South said, at a time when people are being asked to pay more, while getting less from the national insurance scheme. We do not quibble about the reforms that were introduced last year, which were welcomed. Nevertheless, there have been changes that have had a detrimental effect both on employment and on people's job opportunities.

Mr. Tim Smith

I do not quite understand what the hon. Gentleman is saying. He keeps on saying that a larger burden is now placed on those in work, but is he suggesting that a larger burden should be placed on those who are out of work, or on pensioners? Surely most taxation is paid by people who are in work, and in one form or another they will end up paying for it. I cannot see how, if Beveridge had anticipated 70 per cent. as the amount of Treasury supplement, it would be a contributary scheme at all.

Mr. Field

Unfortunately, Beveridge is not here, so we cannot have a conversation with him and ask whether he thought that the scheme would be contributary, and, as I am not skilled in conducting seances, we shall have to leave the question of what he would have thought.

My last point links in with another point that the hon. Member for Derbyshire, South made. One might criticise the Government over the poverty trap, but no Government can eradicate it. All that they can do is to move it around, as this Government have done. They have made it slightly better, in that the effect is less horrendous, but more people are caught in it. However, the changes in taxation that have occurred since 1979 show that for high income earners—less than 3 per cent. of the population—the cuts in taxation have been truly staggering. Had such cuts not been granted, we would have had the resources to eradicate the poverty trap as we know it today by changing the national insurance scheme, by raising thresholds, and by substantially increasing child benefit.

Mr. Tim Smith

Untrue.

Mr. Field

The hon. Member may not like that, but that is the choice. I shall give way if he wishes to dispute whether it is true about the tax cuts for what were called surtax payers. Do we now face the next election saying that even that pledge was not fulfilled by the Government?

Mr. Smith

That is not the point. We are not suggesting that the Government did not fulfil their pledge. However, the amount of revenue to be gained by raising the top rates of tax to their former level would not be sufficient to fund what the hon. Gentleman is describing.

Mr. Field

I am grateful for that intervention, because the parliamentary answers that we have had on this subject show that that small group of less than 3 per cent. have gained £8 billion since 1979. If the hon. Gentleman is saying that that would not make any difference to the proposals that we are discussing, he is living more in the world of Beveridge than the world in which I am living.

I do not disagree with the change in structure that the Government have made to the scheme. It is an improvement, but they have chosen to make other tax changes for those who are well off, rather than making major changes in reforming the financing of the welfare state and of the tax system for the majority of taxpayers. As a result, we still have the problem of the poverty trap. At the same time, we have been shifting the cost of the welfare state and, as the hon. Member for Derbyshire, South said, all of us are paying more for less.

10.55 pm

Mr. Tim Smith (Beaconsfield)

I welcome the fact that the order reinforces the radical proposals which my right hon. Friend the Chancellor of the Exchequer introduced in his Budget statement when he reduced contribution rates for the lower paid to 5 per cent. and 7 per cent. respectively. We cannot estimate the effects of the changes as they were introduced as recently as 6 October, but I am confident that they will have a substantial and beneficial effect on employment. The changes were welcomed by the majority. The regulations reinforce the changes.

I am concerned that thresholds are linked to pensions, which at present are linked to price increases. The result is that we are not increasing thresholds in line with earnings increases and they are falling as a proportion of earnings each year. It is nonsensical that someone earning only £38 a week should have to make any contribution to the national insurance fund, even if it is only 5 per cent. I know that if those contributions were not forthcoming there would be consequences for benefits, but it is crazy that someone earning so little should have to make any national insurance contributions.

I do not understand why there should be any Treasury contribution to the fund. If it is a genuine contributory pension scheme, those who participate should make contributions in exchange for which they are entitled to a pension after a certain period. There is no justification for the supplement. It has been reduced to 9 per cent., and in due course it should be eliminated.

10.57 pm

Mr. Archy Kirkwood (Roxburgh and Berwickshire)

I cannot agree with the remarks of the hon. Member for Beaconsfield (Mr. Smith) about the Treasury supplement. It is a matter of concern that the percentage has been reduced. In 1975–76— admittedly, before the Government took office—it stood at 18 per cent. and it is now only 9 per cent. That is a steep rate of decline.

I am optimistic about the order. I think that the appearance of the new Minister, the Under-Secretary of State, on the Government Front Bench has made a significant impact on the Government's policies and I look forward to the consequences of that in future. As the hon. Member for Derbyshire, South (Mrs. Currie) said, we should recognise that there has been some damage limitation. I recognise also that the national insurance rate has been held steady for three years, which is to be welcomed. The relatively small increases in the rates for the self-employed are to be welcomed.

In the context of the past six years, the small reductions that are proposed are only right and proper. I hope that they are a hint of things to come and that there will be further damage limitations and other improvements. If my understanding is right, the Government have a duty under section 120 of the Social Security Act 1975 to review the general level of earnings in Great Britain before they start to consider the content of the order.

I shall quote from an article that appeared in The Guardian of 30 October. It was concluded that the bottom 10 per cent. of all income earners had a rise in gross weekly earnings of 6.6 per cent. over the year to April compared with a rise in retail prices of 6.9 per cent. By contrast the top 10 per cent. took rises of nearly 71/4 per cent. while the average rise was just under 7.2 per cent. The article continued: The gross earnings of the bottom 10 per cent. of men have risen by 69.8 per cent. since 1979, well short of the 74.6 per cent. rise in retail prices. Meanwhile, the top 10 per cent. have had rises worth 101.2 per cent. and the average (median) is 84 per cent. That shows that there have been significant changes in the earnings of the better off and of the worse off. The gap between the better off and the worse off is increasing, and that is not adequately reflected in these provisions.

My hon. Friend the Member for Colne Valley (Mr. Wainwright) welcomed the lower rates of national insurance contributions at the time of the Budget as a move towards an integrated tax and credit system. The problem is that, as the system is working, instead of having one large discontinuity in contributions, the spread is bringing more people into the earnings trap. Reference has been made to the large number of people, between 70 and 80 per cent., on the marginal rates. We must watch carefully how the system works. I agree that these are early days, the scheme having come into operation in October.

Mr. Timothy Wood (Stevenage)

Is it not a fact that the increase in numbers to which the hon. Gentleman referred reflects the large increase in the number of people who are paying lower rates of national insurance contribution and, thus, are beneficiaries of the alterations that have been made by the Government? That should be welcomed, particularly in the context of what has been said about the lower paid not having wage increases as large as some of the higher paid.

Mr. Kirkwood

I welcome that so far as it goes, but two consequences flow from that development. Although the take-home pay of some people on very low rates of pay is increased, it makes it difficult for them to secure a real improvement in pay because of the earnings trap, especially as it gives employers the opportunity to hold down pay. They can tell employees, "There is no point in my paying you an extra two or three quid because it will all go in lost benefits, school meals and so on."

The Low Pay Unit, the Institute for Fiscal Studies and researchers at the London School of Economics have clone some interesting work on this subject, and I will give an example of what can happen under the three phased reduced lower rates. A grade C part-time cleaner working 16 hours a week for £2.13 an hour earns £34.08 a week and is exempt from paying national insurance. If she receives an increase of 9p an hour, to £2.22 an hour, taking her pay to £35.52, she becomes subject to national insurance payments of £1.78 a week, meaning that her real take-home pay after the increase is £33.74, which is less than she earned before the increase. This instrument will increase the number of people who will find themselves in that situation, and we must keep a close eye on that.

I agree that the increases in the class 2 and 4 contributions could have been a great deal worse. The actuarial assumptions of increases in earnings of about 7 or 8 per cent. which have been written into the order fall a long way short of what will happen in respect of self-employed people, especially in the retail and hotel sectors. The experience of the past 12 months shows that they will have no increase in earnings. They will be lucky if they can hold their own in cash terms in the next 12 months, never mind have an increase in earnings.

Many self-employed people will find that the new stage rates will impose an increased burden on them. They will have to calculate the three new low rates. When there was only one rate employers had only to do one set of sums. They now have to do three. That must be taken into account. The self-employed have had a bad deal.

The rate revaluation in Scotland has had a severe impact on the earnings of small businesses in the past year and will continue to do so in the coming year. As has been mentioned, rates are a hidden impost on the self-employed that they must face in addition to the increases in gas, electricity, telephone and, in England, water prices. They have combined to prejudice the self-employed. They make the actuarial assumption of a 7 or 8 per cent. increase in their earnings optimistic, to say the least.

In general, the self-employed feel that the impost of class 2 and 4 contributions is unfair. They consider them to be a tax on employment that bears heavily on small businesses. They believe that they should have parity with employers who pay class 1 contributions and should be spared class 4 contributions and pay class 2 contributions. They cannot recoup their class 4 contributions because if they increase their prices to increase their incomes they increase the profits on which the class 4 contributions are based.

The self-employed have been dealt a rather unfortunate series of blows. The increased impost appears small on the face of it but, if we consider the way in which the Government have been acting in this matter over the past six years, the increases are stiff. We shall be looking for further reductions in self-employed and class 1 contributions in the future if we are to redress the balance that has become so sadly out of kilter over the past six years.

11.7 pm

Mr. Major

I began my introductory remarks by saying that I did not propose to anticipate the social security White Paper. That was prudent. I begin my closing remarks by saying that I do not propose to step between the hon. Member for Derby, South (Mrs. Beckett) and my hon. Friend the Member for Derbyshire, South (Mrs. Currie). I am prepared from time to time to be reckless, but I am not prepared to be wholly foolhardy. I hope that the two hon. Ladies will appreciate that.

The hon. Member for Derby, South said a great many things. From time to time she even touched upon the order that we are debating. In one of those moments she mentioned that the national insurance fund balance of 20 per cent. of annual benefit still seemed high in relation to the 16.6 per cent. balance suggested as a minimum by the Government Actuary. I do not want to quibble with the hon. Lady, who was a distinguished luminary of the Labour Government, but in that Government's closing years the percentage balance was 39, 40.8 and 38.3 respectively. If I follow through the logic of what she subsequently said, I can only assume that they left that level of balance because they were anticipating the subsequent legacy of unemployment.

The hon. Lady also said—and what she said was echoed to a degree by the hon. Member for Roxburgh and Berwickshire (Mr. Kirkwood)—that three times as many people may be caught in the poverty trap post changes in graduated contributions as were caught previously. As my hon. Friends the Members for Beaconsfield (Mr. Smith) and for Derbyshire, South said, it is not specifically the numbers of people who may be affected that matters, but how badly they are affected. The hon. Member for Birkenhead (Mr. Field) touched on that point quite clearly and honestly.

There are great difficulties with the poverty trap, and we all acknowledge that. No Government have yet found a way to eliminate those difficulties. We hope that we will ameliorate them with the proposals that we will set out in the White Paper that I am not disposed to discuss this evening. Nevertheless, it is clear that the changes that were made in October have softened the effects of those difficulties— and done so quite dramatically. That is wholly to the good.

The hon. Lady spoke about why it might be a good idea to spend the balance in the fund — perhaps on higher pensions or some other attractive area of spending. The answer is quite clear. It is a matter of simple prudence. The balance in the fund is necessary for working purposes. It is needed as a reserve against unexpected increases in benefit expenditure or falls in contribution income. We would be very unwise to operate on a very narrow margin.

My hon. Friend the Member for Derbyshire, South spoke of the attractions of a reduction in the national insurance rate to 6 per cent. I must tell her that a 1 per cent. reduction would result in a £1,300 million drop in resources in the first year, and a reduction of the size that she suggested would cost the fund about £4 billion, which would be a very substantial reduction indeed.

There was considerable discussion by my hon. Friends the Members for Beaconsfield and for Derbyshire, South and the hon. Members for Birkenhead and for Roxburgh and Berwickshire about the anticipated effects on employment of the changes in graduated contributions. It is fair to say that as the changes became operative only from 6 October, it is too early to make any realistic assessment of what may be achieved. The predictions that we have seen — from the private sector, not the Government sector — suggest the creation of between 150,000 and 400,000 extra jobs by 1987.

The purpose of those changes — should they be successful—was clear. It was to create a climate in which employers would take on extra staff. We hope that they will seize that opportunity, not only for the economy at large but for those at present out of work who would come into work if they were able successfully to do so.

The hon. Member for Roxburgh and Berwickshire said that employers might find it difficult to work with three different rates of contribution. I hate to disagree with him, but he is wholly wrong. All employers are issued with national insurance tables and they merely need to read across them to see the liabilities. I cannot believe that the changes in graduated rates will cause any significant difficulties.

There was a modicum of discussion about the size of the Treasury supplement, which remains steady this year at 9 per cent. I cannot offer the hon. Member for Roxburgh and Berwickshire any commitments for the future, but was pleased to hear that he was content that the level of contribution would remain steady this year.

However begrudgingly, the Opposition should give the Government some credit for one or two of the matters in the regulations and in the October changes that preceded them—

Mr. Frank Field

We are spreading it around with a trowel.

Mr. Major

If the hon. Gentleman thinks that, I would hate to be here when he was not doing that —[Interruption.] Perhaps I will be here—it is a pleasure to which I look forward during the next few weeks.

We could have had a little more credit for the fact that the class 1 contribution rates did not rise for the third successive year. That is a substantial achievement, bearing in mind the background against which it was achieved. I hate to contradict the hon. Gentleman, but it compares favourably with the previous Labour Administration, who increased employers' contributions by five percentage points. We did not hear much about that from the Opposition. We might also have heard a little more about the fact that we are proposing to extend the advantages of the new lower contribution rates a good deal higher up the earnings scale. I think that that is generally welcomed. I hope that it will also be welcomed outside the House. We still intend to ensure that those paying contributions at the lower rates will have their benefit rights protected.

I think that that is a good record and one which we can commend to the House with some pride and pleasure. I commend the order to the House.

Question put and agreed to.

Resolved, That the draft Social Security (Contributions, Re-rating) Order 1985, which was laid before this House on 12th November, be approved.