§ 8.30 p.m.
§ Lord WELLS-PESTELL
My Lords, I beg to move that the Social Security (Contributions Re-rating) Order 1976, a draft of which was laid before this House on 7th December, be approved. Under the Social Security Act 1975, the Secretary of State for Social Services is required to review each year the general level of 449 earnings in Great Britain and to consider what changes in National Insurance contributions need to be made in the light of movements in earnings and other relevant factors. This year's review has been completed and the draft order now before your Lordships provides for increases from next April in certain of the rates and levels of contributions. I will deal first with the details of the proposed changes and then explain the background to them.
Under the order, the lower earnings limit for Class 1 contributions—that is, the contribution paid by employed earners and their employers—is to be raised from £13 to £15 a week and the upper earnings limit is to be raised from £95 to £105 a week. The percentage rate of employed earners' and of employers' contributions will remain unchanged at 5.75 and 8.75 per cent, respectively. The effect will be that under the order increased contributions will be paid where earnings are £95 or more a week. These increases will be at a maximum where earnings are at or above the new upper earnings limit of £105 a week, and will amount to 58p a week for employed earners and 88p a week for employers. Perhaps I ought to make the admission at this stage, before I am reminded of it, that I acknowledge that employers will also be liable to pay a surcharge under the National Insurance Surcharge Act. Your Lordships, and in particular the noble Lords, Lord Banks and Lord Sandys, will realise that this is outside the scope of my own Department. It is a tax measure, and perhaps they will not mind if I say no more about it.
The order also provides for increases in the contributions of the self-employed. On this occasion, the increase is shared between the flat-rate Class 2 contribution and the earnings-related Class 4 contribution. After being held steady at £2.41 a week since summer 1974—and I should like to emphasise that date—since which time the rate of retirement pension has increased by 53 per cent., the Class 2 contribution is being increased by 25p a week to £2.66 a week.
No increase in the rate of Class 4 contributions is proposed. This will continue to be 8 per cent. However, the range of profits or gains on which the contribution is levied is being raised. 450 Under the order, the liability for Class 4 contributions will not begin until the profits or gains reach the new lower limit of £1,750 a year, in place of the present limit of £1,600 a year. The upper limit of profits or gains will be increased from £4,900 a year to £5,500 a year, which corresponds with the new upper earnings limit for Class 1 contributions, to which I have already referred.
The effect of the revision of these two limits will be to remove the liability for Class 4 contributions on those whose profits or gains are less than £1,750 a year, to reduce the liability on any particular level of profits between £1,750 and £5,050 a year and to increase the liability where that level is more than £5,050 a year. The maximum increase in the Class 4 contributions will be £36 a year and will be payable where profits or gains are £5,500 or more a year. I hope that your Lordships will feel that these changes in Class 2 and Class 4 contributions match the intentions of my right honourable friend the Secretary of State for Social Services who said, when announcing the changes, that,we continue to seek—within the confines of a mixed flat-rate and earnings-related contributions structure—to be fair both to the self-employed as a whole and as between those with different levels of profits".The draft order also raises the level of earnings below which a self-employed person can be exempted from liability for Class 2 contributions from the present limit of £775 a year to £875 a year. The remaining change made by the order is an increase from £2.10 to £2.45 per week in the rate of the Class 3 contribution which is paid weekly by some contributors on a voluntary basis and paid also by other contributors who wish to make good deficiencies in their contribution records. At this point I think I should mention that under a separate order, which was also laid on 7th December, the rate of Class 2 contributions for women is increased from £2.20 to £2.55 a week. I think your Lordships will know the reason for that, and therefore there is no reason for me to go into it at any great length. The rate is being brought in stages up to that for men and there will be a common rate from April 1978 when the new pensions scheme commences.
451 My Lords, I will now explain why my right honourable friend seeks to increase contributions in the way I have described. I am, of course, aware—as your Lordships will be—that questions were asked in another place about the need for any increase in contributions, given that the National Insurance Fund is expected to have a substantial surplus of income over outgoings both this year and next.
We are not unmindful of the feeling—it has been made perfectly clear to us—but in spite of that we consider it is the right thing to do. It was to provide reassurances on this, that my right honourable friends the Secretary of State for Social Services and the Minister for Social Security produced an explanatory note, which I made available in your Lordships' Library. I personally sent one to the noble Lord, Lord Banks, and another to the noble Lord, Lord Sandys, in, I hope, good time to give the Government's thinking behind this matter, even if they perhaps find that they are unable to accept the Government's thinking on it. The points covered in that note are very important, and I think it is necessary that I should give some kind of explanation of them to your Lordships.
The Government Actuary's Report on the draft order shows that, on certain illustrative assumptions as to the levels of earnings and unemployment, the income of the National Insurance Fund will exceed the outgoings by about £932 million in the current year, and by about £875 million in 1977–78. As to the first of these amounts, I have to say that this estimated amount is very much greater than had previously been forecast by the Actuary. There are two main reasons for this. The first is that the yield of contributions had been under-estimated. The new earnings-related system of contributions began as recently as April 1975, with the result that earlier reports had to be based on more speculative information about the yield of these contributions than is now available. The second reason is that the cost of unemployment benefit is proving to be less than had been allowed for. This is because the proportion of the unemployed entitled to unemployment benefit has turned out to be lower than had been expected. Here, again, the Actuary's original estimates had to be based on information which, in the event, proved 452 to be a less reliable guide than he would have hoped—in this case, because at the time those estimates were made there were no statistics of the relevant characteristics of such a high level of unemployment as we now have.
Two factors enhance the effect of these developments on the surplus. First, the receipt of more money by way of contributions than had been expected leads automatically to a higher Treasury supplement. Secondly, the increased balance in the Fund means a bigger income by way of interest. The result of all these factors is, as I have said, that the Government Actuary now expects that the current year's surplus will be about £932 million.
I am sure that your Lordships will ask the significance of such a surplus. The answer is that it would increase the balance in the Fund at April next to about £3,000 million. This is, of course, a very large sum of money, as we are aware. However, what one must also take into account is the rate of expenditure on all the benefits that we meet as a Government. The fact is that the balance now in the Fund represents no more than about three months' expenditure on benefits. If my memory serves me correctly—because I do not have the figures before me—we pay out something like £10,000 million a year in benefits. By way of comparison, I should mention that for many years after 1948 the balance represented about two years' expenditure. So we are away from a balance representing two years' expenditure, down to something like a balance representing three months. Not to produce a re-rating order—as some critics have suggested—at a time when the general level of earnings was rising, would, in the Government's view, be an unreasonable step to take, as I shall explain, given the nature of an earnings-related system of contributions.
In relation to the majority of the contributors to the National Insurance scheme—that is, to employed earners and their employers—the contributions arrangements are fully earnings-related. Their contributions are equal to particular percentages of earnings, subject to an upper limit; and, where earnings are below that limit, contributions increase automatically as earnings rise. Subject, therefore, to adjustments to the earnings limits—to match changes in the general 453 level of earnings—the arrangement is buoyant and automatically provides additional income to set against the increased expenditure on benefits resulting from their link with increased prices and earnings. Even without any change in the earnings limits for 1977–78, most of the Fund's income would be assured, because, as I have indicated, people who earn less than the present upper earnings limit of £95 a week would pay additional contributions as soon as they received a pay rise next year. Indeed, out of an estimated increase of about £650 million in Class 1 contributions between the current year and 1977–78, only about £100 million will result from the increase in the upper earnings limit.
I have been a long time explaining this matter, but I realise that there is a certain hostility to it and I think it is only fair to explain it in some detail, even though the number of Members of your Lordships' House who are present is few at the moment. But I hope that I have said sufficient to indicate the reasons why my right honourable friend proposes to increase the earnings limits for Class 1 contributions for 1977–78. The limits must be adjusted periodically as the general level of earnings increases; otherwise the dimensions of the scheme would contract in real terms; and if the limits were not increased, the result would be unfair, because the effect would be that a minority—those with the highest earnings—would be shielded against any increase in contributions next year.
At this point, I ought to mention that when the new pensions scheme starts in April 1978, the upper earnings limit for Class I contributions will be linked to the basic rate of retirement pension. It will, in fact, be about seven times that rate. This relationship was established by the Social Security Pensions Act 1975. The maintenance of the upper earnings limit at that level provides a stable basis for the new pension scheme. It has been used as a firm structure for pensions planning, both in regard to those who will be in the scheme, and, by the pensions industry, in regard to those who will be contracted out as members of occupational pensions schemes. My right honourable friend took account of this new relationship for 1978 in determining the new limit of £105 a week for 1977–78, which is less than 454 might have been justified on the basis of the increase in the general level of earnings.
What my right honourable friend has done, therefore, is to propose increases which fit the structure of the scheme and are fair to individuals, but which are restricted to those necessary to secure a smooth transition to the contribution arrangements of the new pension scheme. The effect in money terms is, as I have said, to create the expectation of a surplus of about £875 million in 1977–78. This is not an excessive amount, given that it is an estimate based on certain illustrative assumptions which, in the present economic situation, may not be borne out by events. Nor is it excessive when viewed against the scale of operations to the Fund, with income and outgoings of something like £10,000 million a year.
Perhaps I may now add the further thought that the National Insurance scheme does not operate in a vacuum, but has an impact on the public sector borrowing requirement. The balance held in the National Insurance Fund is invested, in accordance with Section 133 of the Social Security Act, in public sector stock. Besides providing substantial interest for the Fund, to the benefit of all contributors, this reduces the Government's need to borrow from other sources to finance its overall borrowing requirement. It would, therefore, be unreal to think that having, by a normal use of the machinery by which contributions are adjusted each year, acquired the expectation of a healthy surplus of income for 1977–78 my right honourable friend should deliberately reduce that surplus by taking on additional benefit commitments. In the present period of severe restraint on spending there could be no justification for such a course. What is more, any additional benefit expenditure which involved a continuing commitment would mean higher contributions than would otherwise be necessary in the years to come. Further, a reduction in the estimated surplus would require further Government borrowing or a reduction in forecast public expenditure.
Perhaps I could finally say this. Our prime reason for introducing this order is to maintain the structure of contributions. It is true that this assists with the management of the public sector borrowing 455 requirement. My right honourable friends and I have not attempted to conceal the fact, and I hope that your Lordships will feel that we have been perfectly honest about it. This is a situation in which the proper management of the National Insurance scheme and the needs of the national economy both point in the same direction. Yet the way, if I may say so—although I do not want to make any political points out of this—that some Opposition spokesmen in another place have talked would lead one to think that something particularly sinister and underhand was going on. I think that anybody who has looked at the situation will realise that this is not so. Surely the fact that our management of National Insurance will have beneficial and important side effects cannot be regarded as some form of discreditable and covert manipulation.
I apologise again for having spoken at some length about the draft order which is now before your Lordships. Although the increases for which it provides are comparatively small, I have been aware of some very real misunderstandings about it. I like to think that they are misunderstandings, although I realise that there is another point of view. I hope that I have said sufficient to remove them. Therefore I conclude by asking your Lordships to accept the order. I commend it to the House for approval.
§ Moved, That the draft Social Security (Contributions, Re-rating) Order 1976, laid before the House on 7th December be approved.—(Lord Wells-Pestell.)
§ 8.55 p.m.
§ Lord SANDYS
My Lords, at this late hour I shall be brief. However, in opening my remarks may I say that I am grateful to the noble Lord, Lord Wells-Pestell, for sending to me a copy of the note which was given in explanation by his right honourable friend the Secretary of State.
The base from which we start is Section 120 of the Social Security Act 1975. Justification for the whole of the order is given by that section. However, may I remind the noble Lord that at the end of an annual review the Secretary of State is not bound to make a re-rating, because under subsection (7) he may report to another place that his determination is otherwise. It is our submission 456 that on this occasion there was a strong case for doing that. The noble Lord said that there was no justification for new benefits in the present circumstances, and in view of the extreme pressure on public finance I think that we would probably agree with him. At the same time, however, we would most strongly emphasise that there is no justification for increasing the contributions.
I should like to go into the question of the substantial surplus, because I believe that its history requires to be examined in a little detail. As it stood at March 1974, there was a total surplus of £1,461 million; in 1974–75 a total of £638 million was added; in 1975–76 a total of £319 million was added; and in the current year, as the noble Lord, Lord Wells-Pestell, has rightly reminded your Lordships, a total of £932 million is added. We estimate, therefore, that at 5th April 1977 a total of £3,350 million will have been invested, as the noble Lord again reminded us, in public sector stock under Section 133 of the Social Security Act 1975.
This is an enormous sum of money which, of course, is substantially assisting the Government in a quite different direction from social security benefits. It is assisting them in their public sector borrowing requirement. We are more than ready to acknowledge that this is perhaps a mere three months' amount which is being set aside to act as a cushion; but this emergency is wholly unlikely to arise, because it is impossible for the Government to switch off the contributions at some particular instance. Therefore this enormous sum of money has been credited to a totally different purpose from that for which it was actually designated.
I read with interest the remarks of the Secretary of State when he introduced the order in another place on 7th December. At column 157 of the Official Report in another place he said this about the surplus of £932 million:…this favourable balance will be of advantage in view of the economic uncertainties and in moving towards the higher contributions needed from April 1978 under the new pension scheme.I do not think that that statement can be justified in the circumstances. To be told that in order to await the increased contributions in 1978 we have to suffer at some mid-point in 1977, and that therefore the contributions must be raised 457 now in anticipation, is an argument which it would be very difficult to advance.
Further, in the notes supplied by the noble Lord's Department, it is interesting to see the situation in regard to the numbers of unemployed. It is of further special relevance today that the Prime Minister in another place referred to the numbers, when he said:I do not think it is possible that this figure"—and he referred to the figure of 1,448,193, the worst January figures for 29 years—will be reduced for some time. As long as we are trying to squeeze inflation out of the economy this is one of the consequences we have to bear.The situation as we understand it is extraordinarily complex, because although there are nearly 1½ million registered unemployed persons, figures supplied for us by the Government of those who are seeking unemployment benefit at the present moment are approximately 750,000. Therefore, it would seem that very nearly the same number again of unemployed persons are for some reason not claiming that benefit. They may be ineligible for any one of a number of complicated reasons. But to advance the case that has been advanced, that this surplus was unexpected because of factors which were unforeseen, is difficult, especially when we must appreciate the Actuary's report in which the position is set out very clearly.
Finally, we must recognise that the Government's reason for advancing a re-rating order is wholly unacceptable to this side of your Lordships' House. We do not believe that they have advanced a case of sufficient strength to enable them to put forward this order as it stands. We are not going to add further to the argument this evening in a very sparse House, but I should like to say to the Government that I believe in the statement made by the Secretary of State on the 7th December, he advanced a very slight case for these enormous increases in relation to the position as it stands today. I will not go into the figures, but I believe that should the Secretary of State consider introducing a further uprating in the course of the next twelve months he will have to make a much better case.
§ 9.4 p.m.
§ Lord BANKS
My Lords, I should 458 like to thank the noble Lord, Lord Wells-Pestell, for explaining the provisions of this order with his customary thoroughness and clarity. It is clear that the reason why the upper limit and the lower limit are being raised is to take account of inflation and also to maintain the seven-to-one ratio which is to be applied to benefits and contributions under the new pension scheme to come into force in April 1978. If there are upper and lower limits, it is understandable that these should be adjusted periodically to keep pace with inflation. However, having an upper limit at all gives rise to an anomaly to which I have previously drawn attention. Every time the upper limit is raised, it is those between the old and the new upper limit who are most heavily penalised. This year inevitably they will again bear the heaviest percentages increase. Those below the old upper limit have no increase, and those above the new upper limit have a progressively lower percentage increase the higher their income is, and those on £105 a week—the new upper limit—in two years have had their National Insurance contributions raised by 60 per cent., having been caught by the two extensions of the upper limit 2nd the last one having been quite a considerable one.
The answer which was given in another place by the Minister for Social Security was that benefits had gone up and pensions had risen by 50 per cent. in the same period, but pensions rose because of increases in prices matched by almost exactly the same increase in average earnings, and increases in earnings should produce—and indeed the noble Lord, Lord Wells-Pestell, explained how they were producing—a buoyant revenue, and that is what is happening.
But when we say that people on £105 per week—and I hope the noble Lord has the point which I have just been setting out—have had their National Insurance contributions raised by 60 per cent. we are assuming no increase in their earnings at all, so Mr. Orme's figure of a 50 per cent. increase in pensions to justify that 60 per cent. increase in their contributions is not relevant to his argument.
Would it not be better and fairer to have no upper limit of contributions so that a lower percentage contribution would be levied on all earnings? Since tie scheme is "pay as you go", and since an individual's 459 contributions do not fund an individual's own benefits, it surely would not matter if there was an upper limit on benefits but no upper limit on contributions. But if we have upper limits, then those upper limits have to be raised. What then about the surplus? The balance is a considerable balance. As the noble Lord said, it is a balance on three months: it is a quarter of the annual requirement which in a "pay as you go" scheme is a very substantial precaution and more than most people would regard as being necessary from the point of view of ordinary prudence.
The comparison with the earlier years is not exactly reasonable, because in 1948 there was a build-up of benefit; the scheme was new, there were not many people with entitlement and, in any case, the whole basis of paying for National Insurance has been altered over the years from what it was at that time. If we are to have these substantial surpluses, and if we say that the limits should be raised, as I believe they should, then, surely, either the benefits should be increased or new benefits should be introduced, or the percentage rate should be reduced. Since increases in benefits or new benefits are outside the scope of this order, and in any case are rejected by the Government, the rate per cent. should be reduced, at least, I would suggest, by the one quarter of 1 per cent. each side which was most recently imposed.
It is clear that the reasons for the refusal to make this reduction have nothing to do with National Insurance. I think this was made clear in the latter part of the noble Lord's speech and is implicit in the final paragraph of the note which he was good enough to let us have in advance. It is clear that the refusal is not made for reasons which have anything to do with National Insurance. It is made as part of the exercise of reducing the public sector borrowing requirement, and it is very similar in effect to the effect of the 2 per cent. surcharge, except that the surplus raised, unlike the proceeds of the surcharge, must be held in reserve and cannot be spent other than on National Insurance. In conclusion, I am bound to say that I am not happy at the unduly heavy burden thrown onto national insurance contributions for reasons which are quite separate from national insurance itself.
§ Lord WELLS-PESTELL
My Lords, I am very grateful to both the noble Lord, Lord Sandys, and the noble Lord, Lord Banks, whose contributions, if I may say so quite sincerely, are always worth having and worth listening to, even if the Government are unable to accept some of the things said. I think perhaps I ought to re-emphasise that the Class I contribution rates have not been increased. All that has happened is that the earnings limit, as both noble Lords know, has been adjusted in line with the movement in average earnings. I would, with very great respect, say that this is absolutely essential to maintain the structure of the scheme. The surplus for the year which has arisen—let me be quite frank and say so—in a sense was quite inadvertent. Having arisen one would expect it to be invested, and this is precisely what has happened. This will happen, and the economy as a whole—I think we have got to face the fact—will benefit. Next year's surplus is only an estimate, and the estimate, as I said a moment or two ago, is subject to a good many variables.
I think the one point I should like to make in respect of what the noble Lord, Lord Banks, has said is that those with earnings between the upper and lower limits have contribution increases automatically as their earnings increase. The scheme is an earnings-related scheme, and that being so, I feel that what my right honourable friend the Secretary of State has done is really in keeping with what is required of him. I am most grateful to noble Lords for their contributions. I hope what they have said, and perhaps the inadequacy of my replies, will nevertheless enable them to approve this order.
§ On Question, Motion agreed to.