§ Lord WELLS-PESTELL rose to move, That the draft Social Security (Contributions, Re-rating) Order 1978, laid before the House on 22nd November, be approved. The noble Lord said: My Lords, with your Lordships' permission I propose to take this fairly briefly. This is an annual event and we go over much the same ground every year except that the figures are rather different. Your Lordships will know that the Secretary of State for Social Services has completed the review of National Insurance contributions which he has to carry out each year under the Social Security Act 1975. He has had regard to changes in the general level of earnings as he is required to do under the Act, and in the draft order now before 315 your Lordships he has proposed certain changes in contribution liability from 6th April, 1979. Your Lordships will recall that when I addressed the House last summer on the subject of the draft Benefits Uprating Order I indicated that levels of contribution liability would be reviewed about now and would take account of the extra expenditure which would fall on the National Insurance Fund in 1979–80 as a result of the benefit increases which had then been proposed and have since been put into payment. I think your Lordships will find it helpful if I say at the outset that only minimum changes in contribution liability are proposed under the draft order.
§ Before coming to details of the changes I should explain that in specifying the rates and earnings limits for 1979–80 my right honourable friend the Secretary of State for Social Services has aimed to achieve a close balance between income and outgo in the National Insurance Fund for 1979–80. I think it right at this stage to refer to the balance of income over outgo which, as the Government Actuary's report accompanying the draftorder shows, is now expected to be in the region of £247 million. This compares with an estimated deficit of £25 million to which the Government Actuary referred in his report at this time last year. The change from the original estimate of a small deficit to a surplus has been broadly due to a lower level of unemployment and a faster increase in earnings than originally assumed, but it is important to recognise that both the surplus of £247 million now expected in the year 1978–79 and the much smaller one of £34 million expected next year, 1979–80, represent a fall in the value of the Fund in relation to benefit expenditure. To put it in rather more precise terms, the balance in the Fund at the end of 1977–78 represented about 39 per cent. of expenditure in that year whereas, on the basis of the estimates now made by the Government Actuary in his report, the balance in the Fund will fall by the end of 1979–80 to about 34 per cent. of expenditure in that year.
§ Coming now to details of the changes, I will deal first with Class 1 contributions, that is with those payable by employed earners and their employers. No change is to be made in the rate of Class 1 316 contributions. The upper and lower limits of earnings on which employees and employers pay contributions are being raised for the coming year. They will be £19.50 and £135 a week in place of the present limits of £17.50 and £120 a week. The effect is that a person who earns at least £19.50 a week will pay contributions on all his earnings up to £135 a week. These new earnings limits are not specified in the draft order because, under the Social Security Pensions Act, they are now a matter for regulations. My right honourable friend has already made the regulations, which are subject to the Negative Resolution process, but I mention them for the sake of completing the picture. The new lower and upper limits are consistent with the requirement of the Pensions Act, which is that they should be respectively about equal to, and about seven times the amount of, the basic rate of the retirement pension. As your Lordships will know, this is now £19.50 a week, and seven times that gives us roughly the £135 a week. The effect of the changes to the earnings limits will vary according to whether or not an employee is contracted-out under the new earnings-related pension arrangements.
§ Employees who earn less than £120 a week—that is, the vast majority of employees—and their employers will either not be affected by these changes or, if they are, and if the employment is contracted-out, they will pay only a few pence a week more. The earnings-related structure of the scheme means that these employees, and their employers, already pay increased contributions immediately an employee gets a pay increase. Employees who are not contracted-out and who earn £120 a week or more, will pay higher contributions, progressing to a maximum increase of 97p a week for those with earnings of £135 a week or more. Their employers will also pay correspondingly more, with a maximum increase of £1.50 a week (excluding the National Insurance surcharge, which is a matter not for my right honourable friend the Secretary of State but for my right honourable friend the Chancellor of the Exchequer). Employees with earnings of £120 a week or more who are contracted-out, and their employers, will similarly pay more, rising to a maximum of 65p a week for the employee and 91p a week for the employer.317
§ Turning to the self-employed—and in the past the House has shown a good deal of concern for the self-employed—your Lordships will recall that this time last year I indicated that we hoped to hold the level of liability of the self-employed steady until 1983, apart from changes to take account of increases in the general level of earnings. The proposals before your Lordships today are consistent with that aim. The draft order provides for a small increase in the flat-rate Class 2 contributions going up from £1.90 to £2.10 a week. No change is proposed in the rate of the Class 4 contribution, which remains at 5 per cent., but the range of profits or gains on which the contribution is levied is being changed.
§ Under the draft order, the range will be from £2,250 to £7,000 a year instead of the present range of £2,000 to £6,250 a year. The result of this change is that there will be no liability for Class 4 contributions where profits or gains are £2,250 a year or less; there will be a small reduction in liability on any particular level of profits between £2,250 and £6,500 a year, and an increase in liability where profits are above £6,500 a year. The maximum increase in the Class 4 contribution will be £25 a year and will be payable where profits or gains are £7,000 or more a year. The new upper limit of £7,000 a year is the annual equivalent of the new upper earnings limit of £135 a week for the contributions of employed earners and employers.
§ This appears to be rather complicated and perhaps I can best illustrate it by giving an example. A person with profits or gains of £2,250 a year will pay £12.50 less for 1979–80 than he did for the current year. On profits of £6,500 a year a person will pay the same amount in each year. Only on profits above this level will his liability for Class 4 contributions be increased. He will, for example, pay an extra £10 if his profits are £6,700 and, as I mentioned, an extra £25 if his profits are £7,000 a year or more.
§ Finally, I come to the remaining two changes which the draft order makes. It increases the level of earnings below which a self-employed person can be exempted from liability for Class 2 contributions, from the existing limit of £950 a year to £1,050 a year. So it has been raised by £100 a year. It also raises the rate of the voluntary Class 3 contribution 318 from £1.80 to £2 a week. I have tried to keep my remarks as brief as possible because, as I indicated earlier, no more than minimum changes in contribution liability are proposed on this occasion. The increases specified in the draft order simply reflect the changes in earnings levels and other factors which will affect our expenditure on National Insurance benefits and will enable the scheme to continue to operate fairly and, we think, on a sound financial basis. I hope my explanation has been adequate and I commend the order to your Lordships for approval.
§ Moved, That the draft Social Security (Contributions, Re-rating) Order 1978, laid before the House on 22nd November be approved.—(Lord Wells-Pestell.)
§ 5.26 p.m.
§ Lord SANDYS
My Lords, the House will be grateful to the noble Lord, Lord Wells-Pestell, for his explanation of the draft order. Very substantial sums are mentioned here and I do not think any of us when discussing the Social Security Act 1975 were at that time aware of the speed with which the contributions would multiply. Under this piece of subordinate legislation a sum of no less than £9,000 million will be raised towards defraying the cost of the Health Service. It is not a matter which normally concerns your Lordships' House—it is a question of Supply—but in this particular circumstance we are considering the uprating of contributions and it is therefore a matter of special significance.
I have previously mentioned on the annual review of these upratings the question of the surplus and I feel it is appropriate to refer to it again this year; and no doubt the noble Lord, Lord Banks, who is part of the same cast for this annual event, will do the same. The Public Accounts Committee's Ninth Report, published in July 1978, refers to some very significant figures, namely that for the year 1976–77 there was a wide discrepancy of no less than an estimated surplus of £389 million and an outturn of £928 million. These are very big figures indeed, though one in no way casts this as the responsibility of the Government Actuary, on whose shoulders so much of the burden of estimating will lie.
319 The suppositions which are put to the Government Actuary are at fault and we on these Benches say that in the Government Actuary's Report some particularly difficult suggestions are made with which we do not agree. I refer to the estimates of income and outgo to be found in paragraph 7 of the Actuary's Report, and in paragraph 7(ii) he says:By the end of 1979, and at the end of the current phase of the pay policy, average earnings will be at a level of 7 per cent. higher than a year before and the increase in the following year will also be 7 per cent.".It is difficult in present circumstances to see how this estimate can in any way measure up to the prognosis we have received from other sources. Nevertheless, the estimate which the Actuary was asked to make was on this basis. Therefore, I think we can expect a considerable discrepancy between the estimate and the outturn, and I must leave it at that.
I am grateful to Lord Wells-Pestell for the example he gave, which differed from that given by his right honourable friend in that it was a new example on the Class 4 contributions. Examples are always welcome and I am grateful to him for altering his right honourable friend's statement in that he removed certain passages which would have been very lengthy for your Lordships to listen to.
§ 5.30 p.m.
§ Lord BANKS
My Lords, I wish to join with the noble Lord, Lord Sandys, in thanking the noble Lord, Lord Wells-Pestell, for his very careful and thorough explanation of the order. I am glad that the percentage contributions in respect of employed persons are not going up for either employers or employees this year, but inflation again makes it necessary, as the noble Lord explained, to raise the limits, both lower and upper, for Class 1 contributions; the former in step with the basic pension, and the latter so that it remains seven times the basic, as required by the new earnings-related scheme which commenced in April. This latter process is accomplished by separate regulations, but as the noble Lord pointed out, it is convenient to take it together with the provisions of the order.
Those earning less than the old upper limit pay no more. Those between the old and the new upper limits have the 320 highest percentage increase, as always, and those over the new top limit have an increase of a decreasing percentage, the larger their income. That is an anomaly which I have previously pointed out, and it must be so where contributions are cut off at a fixed limit.
Presumably the self-employed flat rate has gone up because it covers a larger amount of income with the raising of the lower limit for the 5 per cent. levy from £2,000 per annum to £2,250 per annum. Unfortunately, that means that the self-employed earning below the lower limit for the levy pay more, although employed persons in the same income range do not. Anyone earnings between £1,050, which is the exception limit—the limit below which contributions from the self-employed are not required—and the old lower limit for the levy of £2,000, will pay £10.40 more per annum; that is £2.10p per week, instead of £l.90p per week. However, those earning between the new upper limit of £2,250 and the old upper limit of £6,250 will pay £10.40 per annum more—just the same basic flat rate contribution—but they will pay £12.50 less per annum levy. So they are favoured with a net reduction, while the lowest earners pay extra. I am sure that the noble Lord will be able to confirm that I have got the figures right; and if he does, then what I have mentioned is another anomaly.
I note from the Government Actuary's report that the estimated surplus for the year 1978–79 is now £247 million, against £25 million deficit forecast a year ago, and £69 million deficit forecast in May this year. None of the proposals in the order and the related regulations will contribute to that turnaround, that surplus. So that is satisfactory so far as it goes and it suggests that the current percentages are the right ones.
For 1979–80 a surplus of £34 million —with the changes in contribution which the order and the regulations introduce— is forecast, as against a £25 million deficit forecast a year ago for the operations of the previous year. Considering the changes in benefit entitlement listed in the Government Actuary's report, which take effect in April 1979, this is encouraging, although we are warned by the Government Actuary that the forecasts are subject to rather greater un- 321 certainty then is usually the case; and the noble Lord, Lord Sandys, has referred to some of that uncertainty. It is pointed out that the balance in the fund—and here the noble Lord, Lord Wells-Pestell, underlined it—is, as a percentage of the annual expenditure, decreasing. On the whole it is a year of minimum change, as the noble Lord said, and with some reservation of the anomalies which I have mentioned, I am content that the order should be approved by the House.
§ 5.35 p.m.
§ Lord WELLS-PESTELL
My Lords, I do not think that either of the noble Lords who have spoken has asked me to produce any facts of which they themselves are not aware. With regard to one of the points raised by the noble Lord, Lord Sandys, it is worth repeating that the difference between the Actuary's estimate and outturn in 1976–77 was due mainly to contributions under wholly earnings-related structure which provided more than was estimated. There was also a smaller proportion than expected of those who were qualifying for unemployment benefit. This is the only explanation one can give for the point which the noble Lord made.
The noble Lord, Lord Banks, asked why are the poorest self-employed to pay more than the better off? The different effect of the proposed contribution changes at various earnings levels arises from the mixed flat rate and earnings-related contribution liability of the self-employed. Both the flat rate Class 2 contribution and the profits limits between which earnings-related Class 4 liability arises are being raised to take account of the increases in earnings levels, as are the earnings level limits for employees. The result is that all the self-employed, other than those excepted from liability on the grounds of small earnings—which in the coming year will be £1,050, and in the present year is £950—will pay an increased Class 2 contribution, but those whose earnings are within, or slightly above, the existing profit bands for Class 4 liability will have a small reduction in their Class 4 contribution liability, which. in most cases will slightly exceed the extra cost of the Class 2 contributions.
I should not have thought that there would be a great deal in it, and I did not 322 think the noble Lord, Lord Banks, was drawing attention to any considerable discrepancy. I do not think that it is necessary for me to say anything more, other than to thank both noble Lords for their observations and comments.
§ On Question, Motion agreed to.