§ 5.16 p.m.
§ Lord CULLEN of ASHBOURNE rose to move, That the draft order laid before the House on 22nd November, be approved. The noble Lord said: My Lords, my right honourable friend the Secretary of State for Social Services has completed the review of national insurance contributions which he is required to conduct each year under the Social Security Act 1975. The draft order now before your Lordships contains changes which he considers are necessary from next April. With your Lordships' permission, I will give the details of the changes, commencing with Class 1 contributions—that is, those payable by employed earners and their employers.
§ The rate of Class 1 contributions is to be increased by a quarter per cent for both employed earners and their employers. The proposed increase in the employer's contribution will however be partially offset by a reduction of 0.05 per cent in the employment protection element of the contribution which is 619 proposed in the draft Social Security (Contributions Rerating) (No. 2) Order 1979, which was laid before Parliament by my right honourable friend the Secretary of State for Employment on 28th November 1979.
§ The lower and upper earnings limits on which employed earners and employers pay contributions are being raised from £19.50 and £135 a week to £23 and £165 a week respectively. Your Lordships will note that these limits are not specified in the draft order. They are in regulations which my right honourable friend has made and these regulations are subject to the negative resolution procedure, but I mention them now for the sake of completeness. The proposed limits follow the requirement of Section 1 of the Social Security Pensions Act which provides that the lower earnings limit is to be approximately equal to the amount of the basic rate of retirement pension and the upper limit is to be between six and a half and seven and a half times that rate. As your Lordships will know, the basic rate of pension is now £23.30 a week; £165 a week is roughly seven times that rate.
§ For employees earning up to the current upper earnings limit of £135 a week, the effect of the proposals will be limited to the increase arising from the change of contribution rate and will be relatively small—varying from 4p to 36p a week where the employment is not contracted-out and from 13p to 43p a week where it is contracted out. The corresponding increase for employers will differ from that for the employees themselves by only a few pence a week. The increases for those with earnings above £135 a week will be higher because, in addition to the change in the rate, there will be the effect of the proposed upper earnings limit. The maximum increases—at earnings of £165 a week—will be £2.37 for the earner whose employment is not contracted out, and £1.69 for the one whose employment is contracted out. This does not mean that the higher earners are being discriminated against. Most employees pay additional contributions automatically as their earnings rise, but those with earnings at, or above, the upper limit do not. The increase in the upper limit from the start of the new tax year produces the corresponding increase in their liability.620
§ Turning now to the self-employed, the draft order provides for the Class 2 contributions to be increased from £2.10 to £2.50 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 raised. The order provides for a range of from £2,650 to £8,300 a year to replace the present range of £2,250 to £7,000 a year. The result of these changes is that for those with profits between £1,250 and £2,650 there will be an extra liability over the year of up to £21.20 because of the rise in the Class 2 flat rate. For those with profits between £2,650 and £7,000 there will be very little overall change because over this range of earnings the combined Class 2 and Class 4 contributions will still amount to about 5 per cent of earnings. For profits above the present upper limit of £7,000 the increase in liability will vary, rising to a maximum of £66.20 a year at the new upper limit of £8,300.
§ Finally, there are two remaining changes which the draft order makes. It raises the level of earnings below which a self-employed person may be exempted from liability for Class 2 contributions from £1,050 to £1,250 a year. It also raises the amount of the voluntary Class 3 contribution from £2 to £2.40.
§ Those, my Lords, are the proposed changes. They fall into two broad categories. Those changes to the flat rate contribution rates and to the earnings and profits limits are to enable them to keep pace with rises in the general level of earnings and with increases in benefit rates. Those to the percentage Class 1 contribution rates are necessary, as the Government Actuary's report accompanying the order makes clear, to ensure that income and expenditure of the National Insurance Fund remain broadly in balance in 1980–81. Pensioners and other beneficiaries have just received a substantial increase in their benefits, and this must be paid for. I do not need to emphasise the difficulties facing the economy next year, and this will put a burden on the social security system.
§ I now come to the conclusion of my remarks. I recognise that the increases in contributions which I have outlined will, like those which have preceded them in earlier years, be unwelcome. They are 621 however necessary to enable the National Insurance Scheme to continue to pay its way, while at the same time protecting pensions and other benefits against inflation. My Lords, I beg to move.
§ Moved, That the draft order laid before the House on 22nd November, be approved.—(Lord Cullen of Ashbourne.)
§ 5.24 p.m.
§ Lord WELLS-PESTELL
My Lords, I am sure that your Lordships will be as grateful as I am to the noble Lord the Minister for placing the order before us and explaining it. I do not want in any way to argue about the amounts of increase. I recognise that, with increased benefits and so on, it is necessary from time to time to increase contributions all the way round. However, what I am concerned about, and wish to call to the attention of your Lordships, is the report of the Government Actuary. He says that he has been instructed to assume for the benefit of the compilation of these matters that in 1980–81 there will be about 1,600,000 unemployed, and that does not include school-leavers. In fact, he is asked to assume that there will be in addition to that figure about 175,000 unemployed youngsters. It is perhaps the first time that the Government have acknowledged that there is going to be a very serious increase in unemployment; and I believe that we ought to remember what the Government Actuary says:A change of 100,000 in the average level of unemployment in 1980–81, with no change in the level for 1979–80, would alter the surplus by £175 million ".That means that in 1980–81 for every increase in unemployment amounting to 100,000 it will cost about £175 million, so far as the National Insurance Fund is concerned. Of course, if unemployment fell, the position would benefit by that amount, but higher unemployment reduces the surplus, and if the Government Actuary has been instructed to assume that there is to be increased unemployment, this is more than just statistics; it means that there will be considerable misery and deprivation for people who are unable to find work. That is the main point that want to make.
With reference to the income of the National Insurance Fund, the Government Actuary says: 622The assumption on the total number unemployed shows an increase to a higher level than in recent experience and it is therefore unusually difficult to estimate the proportion of the total which will not be entitled to benefit from the National Insurance Fund …".The Government Actuary goes on to say:Consequently the estimates of unemployment benefit expenditure and contribution income in 1980–81 in this report are subject to a greater degree of uncertainty than is normally the case ".I believe that it behoves the Government to give a great deal of attention to this monetary policy that they are pursuing, which undoubtedly will lead to far greater unemployment. I say that because I think that sometimes those of us who do not have to face the problems of unemployment do not realise what it means to the individual concerned.
I do not want to say anything about the National Insurance Fund. The noble Lord, Lord Banks, may have something to say about it; he is much more familiar with that field than I am. I thank the noble Lord, Lord Cullen of Ashbourne, for introducing the order.
§ 5.30 p.m.
§ Lord BANKS
My Lords, I, too, should like to thank the noble Lord, Lord Cullen of Ashbourne, for his careful explanation of this order, and of the effect of the Social Security (Contributions) (Earnings Limits) Amendment Regulations 1979. The raising of the lower and upper limits, to which he referred, is of course the inevitable consequence of inflation, and we are becoming used to it as an annual exercise. I regret that it has been found necessary to increase the Class 1 primary and secondary contributions by 0.25 per cent. each, but I think it is clear from the report of the Government Actuary that this is due to the high level of unemployment which he has been instructed to assume, and that is another indication of the unhappy economic circumstances with which we are faced.
The noble Lord, Lord Cullen of Ashbourne, explained that a Class 1 contributor on £135 per week will pay 36p per week more, but a Class 1 contributor on £165 per week—and the noble Lord explained this, too—will pay £2.37 per week more; so, though he is earning only £30 a week more, he pays £2.37 per more as against 36p more. So for him the increase is not 0.25 per cent. but 1.4 623 per cent., which is over four times the figure of 0.25. The actual increase for those earning more than £165 per week remains the same, but it becomes a lower per centage of income the higher the individual's income is; and I have suggested before that it would be better to have contributions paid at an appropriately lower rate on the whole of income, which would remove those anomalies.
My Lords, so far as the self-employed are concerned, those earning between the exemption limit—and, again, the noble Lord explained this—of £1,250 and the old lower limit of £2,250 will pay £21.20 per annum more, but those earning between the new lower limit of £2,650 and the old upper limit of £7,000 will pay that £21.20 more, the increase in the flat rate, but will pay £20 less in levy; so that they will pay only 80p per annum more, whereas the lowest earners will pay £21.20 per annum more. That anomaly arises because of the working of the combination of the flat rate and the levy for the self-employed. The Government feel it necessary to retain the flat rate in order to have a contribution record, but if they could move to a scheme, such as the tax credit scheme which we on these Benches have suggested, which did not require a contribution record, then they would no longer be obliged to have a flat rate contribution, and that anomaly would disappear.
Like the noble Lord, Lord Wells-Pestell, my attention is attracted by the high level of unemployment which is to be assumed, but I wonder whether sufficient allowance has been made for inflation in the assumptions given to the Government Actuary. My Lords, 14 per cent. over the next year might seem a trifle optimistic in view of our current experience. However, provided the rate of inflation does not rise too steeply, earnings-related contributions, coupled with adjustments in the upper and lower limits, ought to take care of inflation. But, as the noble Lord, Lord WellsPestell, pointed out, unemployment is another matter, and 100,000 more unemployed means £175 million off the projected surplus in the Fund. I suppose that whether the Government succeed in holding the contribution rate at its new, slightly increased level will depend on what happens so far as unemployment is 624 concerned in the next year; but, bearing in mind the limitations of the present scheme to which I have referred, and in view of the levels of inflation and unemployment we are experiencing, I am content that the House should approve this order.
§ 5.35 p.m.
§ Lord CULLEN of ASHBOURNE
My Lords, I am grateful to both noble Lords for their acceptance of this order. I should like to say to the noble Lord, Lord Wells-Pestell, that I know he is very well aware that it is necessary for Her Majesty's Government to provide the Government Actuary with working assumptions as to the average number of those expected to be unemployed and the anticipated increase in average earnings during the following year. I join very sincerely with the noble Lord in the concern that he has expressed about the figure given for the number of unemployed assumed for 1980–81, and I feel sure that he and other noble Lords will join me in hoping that this figure will not be reached. I also agree with the noble Lord that the assumed increase of 14 per cent. for both earnings and prices is dangerously high, and assure him that Her Majesty's Government will adhere to policies designed to reduce this rate of increase wherever possible.
I am grateful to the noble Lord, Lord Banks, because he always gives us so much education on this subject, about which he knows such a very great deal.
§ On Question, Motion agreed to.