§ I have one last proposal to make. I have already set out the broad lines of the Government's strategy to improve the prospects for jobs. I have described a number of measures to improve training, remove legislative barriers to employment, and stimulate enterprise; and I have also raised tax thresholds substantially for the second year running; but I want to do more to improve job prospects for young people and the unskilled, among whom the problem of unemployment is most severe.
I have concluded that an effective response to this problem must include direct action in two related areas — to cut the costs of employing the young and unskilled, and to sharpen their own incentive to work at wages which employers can afford to pay.
I am therefore proposing, in collaboration with my right hon. Friend the Secretary of State for Social Services, a radical reform of the structure of national insurance contributions. The essential features of the contributory principle will be preserved. The changes will affect both employers' and employees' contributions.
Given the limited resources at my disposal, I cannot afford this year to make a further substantial reduction in the overall burden of employment costs, following the abolition of the national insurance surcharge in last year's Budget. I therefore propose to abolish the upper earnings limit for the employer's national insurance contribution, which for 1985–86 has been set at £265 a week.
Under existing arrangements, an employer pays in national insurance the same cash sum, which for the coming year would be roughly £28 a week, for all employees above the upper earnings limit, regardless of whether the employee is paid £15,000 a year or £50,000 a year. Under the new and arguably fairer scheme I am now proposing, the employer's liability will be the same flat 10.45 per cent. of earnings as at present applies below the upper earnings limit.
The £800 million raised by this change in a full year enables me to make a substantial reduction in the cost of employing people at the lower end of the earnings scale. There, instead of the uniform 10.45 per cent., I propose to introduce a system of graduated rates.
As now, there will be no national insurance payable for those earning below the lower earnings limit, which for 1985–86 has been set at £35.50 a week, broadly in line with the single person's pension, but for employees earning between this and £55 a week, the employer will in future have to pay only 5 per cent. instead of 10.45 per cent.; for 799 employees earning between £55 a week and £90 a week the new rate for employers will be 7 per cent.; and for those earning between £90 and £130 a week, the employer will pay 9 per cent. The full employers' rate of 10.45 per cent. will apply only for those earning over £130 a week.
These changes represent substantial reductions in the cost of employing the lower paid. They will significantly improve the flexibility of the labour market and the prospects for jobs. I recognise that employers cannot be expected to welcome the increased cost of employing higher paid workers, but for business and industry as a whole the increase in the cost of the higher paid will be fully offset—indeed it will be more than offset—by the reduced cost of employing lower paid workers.
Moreover, I propose to introduce a similar system of graduated national insurance contribution rates for the employees themselves at the lower end of the earnings scale. At present, those earning more than the lower earnings limit pay a flat rate of 9 per cent. on total earnings up to the upper earnings limit, and nothing on any amount they may earn above that limit.
This system makes national insurance contributions a particularly heavy burden for the low paid. I propose that, in future, those earning between £35.50 and £55 a week pay at the rate of 5 per cent. and those earning between £55 and £90 a week 7 per cent. Only those who earn above £90 a week will be liable to the full 9 per cent. on their earnings. However, I do not propose to abolish the upper earnings limit for employees' contributions. It is an integral part of the contributory system on which their benefit entitlement is based. Moreover, if it were abolished, those on the higher rates of income tax would face unacceptably high combined marginal rates, taking into account liability to both tax and national insurance contributions.
The changes I have proposed represent a substantial reduction in the burden of national insurance contributions on lower paid employees. In addition, as I have already indicated, I propose a corresponding reduction in the contributions paid by the self-employed. The Hate rate class 2 contributions, as I have already said, will be reduced from £4.75 to £3.50 a week.
My right hon. Friend the Secretary of State for Social Services will include legislation to give effect to this restructuring of national insurance contributions in the Social Security Bill now before Parliament, and I expect the new rates to take effect from the beginning of October. I should make it clear that these changes are not intended to affect benefit rights, and new rules will be introduced to protect those rights. Nor will the changes affect arrangements for the contracted-out rebate.
The overall cost of these changes will be £450 million in a full year, made up of £80 million less in employers' contributions, £270 million less in employees' contributions, and £100 million less in contributions from the self-employed. In 1985–86 the total cost will be £160 million.
800 The effect on job prospects will, over time, be substantial. The radical restructuring I have announced will encourage employers to take on the young and unskilled and give them, in turn, an incentive to seek work at wages that employers can afford. The cost of employing some 8½ million people on earnings of less than £130 a week will be reduced by almost £900 million in a full year. It will cost an employer £3 a week less to employ a young person or unskilled worker at just below £90 a week, and the take-home pay of some 3½ million people with earnings up to this level will be further increased, on top of the significant real increases in income tax thresholds I have already announced. Thus, a single youngster on just under £90 a week will pay about £1.80 a week less in national insurance on top of the reduction in his income tax bill of £1.15 a week—an overall increase in take-home pay of almost £3 a week.
The reduction in the total burden on the low paid—income tax plus employers' and employees' national insurance contributions combined — is even more dramatic. For someone on £80 a week it is cut by up to 30 per cent., and at £50 a week it is cut in half.
These are changes of a major order. They amount to a direct and powerful attack on disincentives to employment. They tackle the problem of unemployment where it is most acute. They complete my Budget for jobs.