Social Security (Contributions) Bill (Hansard, 13 January 1981)

HL Deb 13 January 1981 vol 416 cc9-32 9

§ 3.3 p.m.

§ The Minister of State, Department of Education and Science (Baroness Young)
My Lords, I beg to move that this Bill be now read a second time. The Bill which has the mundane title of the Social Security (Contributions) Bill, is in fact an important measure which has significant effects for the economy in general, for the National Health Service and for national insurance contributors. My right honourable friend the Chancellor of the Exchequer has explained in another place that the Bill is an essential part of the Government's economic strategy. I should like to begin my speech by reviewing the economic effects of the Bill as a whole. Later I will describe its provisions individually.
Your Lordships are aware that the Government are committed to reducing inflation by restraining the growth of the public sector borrowing requirement. The effect of the changes in this Bill will be to raise extra revenue which will enable the PSBR to be reduced in 1981–82 by £1 billion. First, the Treasury supplement paid into the National Insurance Fund from general taxation will be reduced by £529 million. This will have a direct effect on the PSBR. Second, the element in the national insurance contributions which is paid into the Consolidated Fund towards the cost of the National Health Service is to be increased to yield an additional £254 million. This, too, will have a direct effect on the PSBR. Third, the contributions paid into the National Insurance Fund are to be increased by about £250 million so as to ensure that the fund does not go into deficit, which would create a need for increased public borrowing. My noble friend Lord Cockfield will wish to say more about the importance of the Bill in the context of the Government's economic strategy when he comes to wind 10 up at the end of our debate this afternoon, but I would like to mention now three very significant objectives of the Bill.
The first is that by reducing the Treasury supplement paid from taxation into the National Insurance Fund, the Bill will help to correct an imbalance that has developed since 1975, when the rate of the supplement was fixed at 18 per cent, of contributions, between the national insurance contributor and the general taxpayer in financing the social security system. I will explain this further when I come to discuss Clause 2 of the Bill, but it is a fact that over the last five years the payments from general taxation towards social security have grown considerably in real terms, and there is, the Government believe, an undeniable need to adjust the balance. The second objective is to restore the proportion of the National Health Service expenditure financed from contributions to what it was as recently as 1976–77. Your Lordships will know that the Government have given a commitment that they will maintain the gross spending plans of the National Health Service in line with the projections of our predecessors. But the cost of these plans is rising. Part of the extra cost is to be saved by increased efficiency in the use of resources, but this still leaves extra money to be found. The Government consider that it is right that, in the circumstances, contributors should be asked to pay more towards the cost of the services provided for them.
The third objective is that employers should not be asked to pay contributions at a higher rate in 1981–82. As my right honourable friend the Secretary of State for Social Services said in Second Reading on this Bill in another place: The Government are very well aware of the strains on manufacturing industry during a period of structural change, and felt that this was not the right moment at which to put extra burdens in the form of higher national insurance rates … on industry".—[Official Report, Commons, 8/12/80; col. 948.] It is a fact that the balance of responsibility for national insurance contributions between employers and employees has gradually moved over recent years to the advantage of employees and to the disadvantage of employers. In 1966 the ratio of employees' contributions to those of employers was almost exactly 1 to 1. In the current year—leaving aside the effect of the national insurance surcharge—it is 1 to 1.5. The effect of the Bill will be to change the ratio to 1 to 1.3. In the Government's view, it is right that there should be this adjustment in the balance of responsibility for contributions. In effect, it will mean that those in work will be called upon to shoulder an increased part of the burden of providing for those who are not, and that the corporate sector will be protected from increases which could damage profitability and competitiveness. Including the surcharge, employers will pay an extra £971 million in 1981–82, which represents an increase of just over 8 per cent. This is below the forecast rates of wage and price inflation over the year. I am sure that representatives of the corporate sector, now that they have had an opportunity to reflect on these figures, will accept that the Government have indeed had regard to difficulties which they currently face. These are the objectives which I think should be kept very much in the forefront of our minds in our discussion and consideration of this Bill.
11 I come now to the individual provisions. For the convenience of your Lordships, I propose to deal first with Clauses 3 and 2, because they contain provisions which are reflected in the overall increases in contributions provided for in Clause 1. I deal first with Clause 3. The effect of this clause is to increase the National Health Service allocation from the employees' Class 1 contribution from 0.4 per cent, to 0.65 per cent, of the earnings on which the contribution is paid. The rates for the other classes of contribution are increased by corresponding amounts, apart from the employers' Class 1 contribution which is not affected by the Bill and remains at 0.6 per cent, of earnings.
The National Health Service contributions have remained unchanged since the rates were fixed in the Social Security Act 1975. Since 1975 spending on the NHS has gone up by 7 per cent, in real terms so that the value of the contributions as a proportion of spending has declined. The proposed increases will do no more than restore the proportion to earlier levels. In 1976–77 the contributions accounted for about 9.6 per cent, of NHS spending in Great Britain. This year they will account for about 8.3 per cent. Under the Bill the proportion will rise to 10 per cent. This will still be much lower than in the early 1960s, when the contribution accounted for up to 17 per cent, of spending. The clause, therefore, does not break any new ground in the balance between the different sources of finance for the NHS.
Your Lordships will know that planned spending on the NHS will rise to £9.9 billion in 1981–82. The Government announced last year that they intended to raise the extra income needed to provide for planned growth through various charging measures, but they subsequently decided that they would not pursue some of those measures. The decision meant that extra money had to be provided for the NHS in order to maintain the planned spending to which the Government are committed. As I have said, the Government decided that the proper course, in the circumstances, was to increase the NHS contributions to raise an extra £254 million towards the cost of the NHS in 1981–82. The increase is reflected in part—a quarter—of the overall 1 per cent, increase in the employees' Class 1 contribution. I should add that in increasing the employees' NHS contribution to slightly more than that paid by employers—0.65 per cent, of earnings, as compared to 0.6 per cent.—the Bill will restore the position obtaining for the greater part of the lifetime of the NHS. From 1948 to 1975 the employees' contribution was the larger; it is only since the passing of the 1975 Social Security Act that employees have paid less than their employers.
Clause 3 also contains a power—in subsection (3)—for the NHS contribution rates to be altered in future tax years, within stated limits. At present, under Section 122 of the Social Security Act 1975, the NHS contribution rates can only be altered as a consequence of changes to the national insurance rates. This link is unnecessary and NHS contribution rates will in future be decided independently of any national insurance considerations.
I turn now to Clause 2. The effect of this clause is to reduce the rate of the Treasury supplement from 18 per cent, to 14.5 per cent, of relevant contributions. 12 The supplement is paid from the Consolidated Fund, that is to say from general taxation, and is calculated having regard to all classes of contribution after the appropriate NHS and employment protection contributions have been deducted.
There is no objective basis for the rate of the Treasury supplement. When the national insurance scheme was first started it was necessary to make large payments into the fund from taxation, to make up the difference between income and expenditure. Thereafter the amount of Exchequer support for the National Insurance Fund fluctuated quite widely, but as the principle of graduated contributions came to be established the average rate of the supplement steadied at about 18 per cent, and the drafters of the Social Security Act 1975 clearly chose this figure as respecting the status quo operative at the time. However, the social security scheme has not been static since 1975. Since that year, the total Exchequer support for the scheme, taking together expenditure on non-contributory benefits and the supplement, has risen dramatically. Leaving aside family allowances and child benefits, which are difficult to include in the equation because of the complicating factor of the abolition of child tax allowances, Exchequer support has risen, in real terms, from £5,213 million, in 1975–76 to £6,671 million in 1980–81—a rise of 27 per cent.
There are other sound reasons for reducing the supplement. It cannot be denied that increasing the proportion of benefits financed by contributions reinforces the contributory principle, to which this Government attach great importance. It is also a fact that the social security scheme has developed in a way that was not foreseen by Beveridge and other pioneers. Instead of a mainly contributory scheme with a small non-contributory element, no less than 32 per cent, of social security expenditure is currently devoted to non-contributory benefits. Clearly it is time to readjust the balance of responsibility for financing contributory benefits. The readjustment is reflected by half of the overall 1 per cent, increase in the Class 1 employees' contribution.

§ Lord Davies of Leek
My Lords, before the Minister continues, may I interrupt? I do beg her pardon, but has the Minister any examples of that figure of £32 million? What is one going to cut to take away that £32 million? Something is going to be cut. Have we a list of what is likely to be cut?

§ Baroness Young
My Lords, the noble Lord has misunderstood what I said. I said that the amount of social security expenditure which is non-contributory has increased to 32 per cent. This part of the Bill has nothing to do with cutting expenditure: in order to make up the fall in what the Treasury will contribute a larger proportion will be paid for by higher contributions. That will be half of the 1 per cent, increase that employees will take.
Clause 2 also contains—in subsection (2)—a power to vary the rate of the supplement by up to two percentage points in future tax years. The power will enable future adjustments of the balance between contributions to the fund—if such adjustments should ever be necessary—to be made by means of an order, 13 subject to the Affirmative Resolution of both Houses, rather than by resorting to the lengthy process of primary legislation.
I come now to Clause 1. I am sure your Lordships are aware of the effects of this clause. They are, in brief, to increase the rates of the contributions paid by employees, including opted-out women, the self-employed and voluntary contributors; and to increase the earnings and profits limits for the payment of contributions by employees and the self-employed respectively. Each year changes to national insurance limits and rates, necessary in order to keep pace with inflation and to balance the National Insurance Fund, are effected by means of an order, which is debated here and in another place. This year those changes have been combined with the increase of the NHS contributions and the reduction of the Treasury supplement.
The increase in contribution income to which I have referred stems both from the increases in limits and from the increases in rates. The Social Security Act 1975 provided that if an employee's earnings are more than a minimum amount, known as the lower earnings limit, both he and his employer shall pay a contribution of a percentage of all his earnings up to the upper earnings limit. The 1975 Pensions Act provides that the lower limit shall approximate to the basic pension rate for a single person. This year that rate is £27.15 a week, and the limit has accordingly been fixed at £27. The Act requires that the upper limit shall be between 6½ and 7½ times the basic pension rate, that is to say between £177 and £203, though the limit is customarily fixed at a multiple of £5. The only option for the upper limit open to the Secretary of State which would not produce a forecast deficit on the fund is £200, and this figure has accordingly been adopted. Both employees and employers will therefore pay contributions on earnings up to these limits.
I should mention that altering the lower and upper limits has a subsidiary—but nevertheless important— effect, which is to increase the yield of the national insurance surcharge paid by employers. The surcharge is 3½ per cent, of the earnings in respect of which the Class 1 employers' contribution is paid. The increased yield from the change in the limits will be £104 million.
The Class 1 employee contribution rate is increased by a further quarter per cent, to keep the fund in balance, giving a total increase in the employee rate of 1 per cent. The effect of the increase in contribution rates on individual contributors has been well documented and I do not think I need go into the details now. A full point increase in employees' Class 1 contributions will not, I realise, be welcome. I have explained the reasons for it, and I feel sure, as does my right honourable friend, that contributors will recognise that with unemployment rising it is right that they should be asked to pay more to provide for those who are not.
The contribution rate for those women who still have the right to pay contributions at a reduced rate is being raised by 0.75 per cent, (to 2.75 per cent.) to take account of the increased NHS allocation and the reduced Treasury Supplement. This rate has stood at 2 per cent, since 1975 when the standard employee's contribution was 5.5 per cent., a difference 14 of 3.5 per cent. Even after the increase now proposed, the difference will widen to 5 per cent.
It is proposed to increase the Class 4 contribution rate for the self-employed by 0.5 per cent, on account of the reduced Treasury supplement and by 0.25 per cent, for the NHS; the Class 2 flat-rate is increased by equivalent amounts. The self-employed are not being asked to contribute a further 0.25 per cent, towards the cost of higher unemployment because they do not get unemployment benefit. The increases are in accordance with the method of calculating the contribution rates for the self-employed adopted by the then Government in 1977.
The effect of all the changes in Clause 1 on the National Insurance Fund is explained in the report of the Government Actuary on the Bill, which I commend to your Lordships. Noble Lords often draw attention to the Fund's balance, and I think it might be helpful if I said a few words on this subject now. Your Lordships will notice that table 2 of the Government Actuary's report estimates a surplus for 1980–81 of £682 million, which is considerably more than was estimated. The surplus has been swelled because wages have risen higher than was expected in the autumn of 1979 when the estimate was made. For 1981–82 the Government Actuary—in table 2 of his report—estimates a modest surplus of £39 million. This is based on estimates that the income of the Fund in 1981–82, from contributions, the supplement and investments will rise by £1.7 billion and that total expenditure, on benefits and administration, will rise by £2.4 billion. I should like to draw noble Lords' attention to paragraph 16 of the report, which explains the relationship between the balance and surplus of the fund and the likely demand for benefits. It is there explained that the estimated balance for 1981–82 will represent 30 per cent, of the estimated outgo for the year. The value of the balance in real terms will therefore be considerably less than in the present year.
My Lords, the Bill we are now considering is, as I have said, an important and significant one. It puts into effect several necessary, perhaps overdue, adjustments in the balance of responsibility for funding the national insurance scheme and the National Health Service and it provides timely help in restraining the growth of the public sector borrowing requirement. Overall it brings the National Insurance Fund into balance, enabling the proper provision of benefits over the coming year. I ask your Lordships to support it. I beg to move that this Bill be read a second time.

§ Moved, That the Bill be now read 2^a.—(Baroness Young.)

§ 3.24 p.m.

§ Lord Wells-Pestell
My Lords, I look forward to the time when we on this side of the House can offer our congratulations to the Government for a measure showing the same real concern for those not so fortunately placed as some others in the community. Alas! this is not the occasion. May I say at the very beginning that we on this side of the House recognise the need on the part of the Government to raise money to meet the country's needs, and that it does not seem unreasonable to us that this particular method should be adopted. It seems perfectly reasonable that 15 the Government should seek to raise contributions: our concern is the method by which it is done.
The Social Security (Contributions) Bill 1980, which we are considering today, is a further example of the Government's intention to limit the public sector borrowing requirement, no matter, as I say, who suffers in the process. The difficulty which faces us on this side of the House is this: when are the Government going to get the public sector borrowing requirement under control 7 It seems quite clear that the Government are in a state of absolute chaos and confusion in this matter. At the last Budget period, the Chancellor of the Exchequer forecast that the public sector borrowing requirement would reach £8,500 million during 1980–81. This was revised, if I have understood the situation correctly, in November last to a possible £11,500 million. Now the Treasury forecast is in the region of £12,000 million in 1980–81, and I see in today's Times that the City anticipates that it might be as much as £13,000 million.
This means we have had four forecasts in a matter of a few months, and I would ask the noble Lord the Minister who will be replying whether he can give us some concrete information as to what the Government expect the position to be at the end of this financial year. After all, the Government have had the benefit of a large number of so-called competent experts to advise them in this field. They have now taken on board another one whose salary is being paid in part out of Conservative Party funds. I do not quarrel with that one little bit, but do they really know what they are doing?
This is a matter which exercises our minds more than anything else. We seem to be stumbling forward into the dark and into greater darkness. If the noble Lord the Minister, who we on this side of the House feel has a great deal of knowledge and ability in this field—he could not make a worse job of being Chancellor of the Exchequer than the present one, and some of us rather hoped that there might have been a change in that direction in the recent Government changes—can throw some light on this we shall be grateful. We look forward to what he has to say on the question of the public sector borrowing requirement, because it is being used by the Government time and time again as an excuse—a plausible excuse—to raise money.
For 18 months we have seen cut after cut, affecting in the main people who can ill afford to make the sacrifices they have been called upon to make on a scale laid down by the Government. This Bill is no exception from some of the other pieces of very questionable legislation we witnessed last Session. Surely, the Government must realise that by trying to limit the rise in the public sector borrowing requirement during a recession they are getting themselves into a bigger hole with every step they take. That is how it seems to us and, if I may say so to the noble Lord the Minister who is to reply, there has been no evidence to the contrary. We seem to be getting further and further into difficulty; and if the noble Lord can throw some light on the future I am sure that most Members of the House will be glad to have it.
I want to resist the temptation to spell out all my objections, although I find it extremely difficult not to 16 take this opportunity once again of calling attention to the effect of Government policies on the people of this country. All I want to do is to remind the noble Lord the Minister that unemployment puts a very heavy burden on the public sector borrowing requirement. We just do not understand how the Government can continue to pursue a policy which is causing hundreds of thousands of men to lose their work, knowing that every new unemployed worker will cost the country £5,000 a year in lost revenue and benefits, which, with 2 million unemployed, means £10,000 million a year. Surely, there must be some competent group of people in the community who could advise the Government how to use so many idle people to do productive work, which would turn a debit of £5,000 a year for every newly unemployed worker into a credit balance.
The noble Baroness the Minister has quite rightly said that the Bill has three main objects. It increases employers' and employees' national insurance contributions, it decreases the Treasury supplement to the fund from 18 per cent, to 14½ per cent. and it increases the contributory element in the National Health Service funding. This means, as we have been told, that employers' national insurance contributions will be increased from April 1st next from 6¾ per cent. to 7¾ per cent. on earnings between £27 a week and £200 a week. I am aware of the scope and function of the 1975 Act, which seeks to impose limits which the noble Baroness has quite properly set out for our information. But this legislation means that, at £200 a week and over, employees will pay the same contribution, regardless of their level of earnings. This seems to us to be quite wrong, and if the noble Lord the Minister can help us on this when he comes to reply I shall be sincerely grateful.
It seems to us that it would have been helpful and would have made more sense, if the Government are really concerned about the low-paid, had the ceiling on contributions by employees earning over £200 a week been lifted. Two hundred pounds a week amounts to £10,000 a year, but when employees reach that figure their national insurance contribution is to remain the same. Action such as I have suggested would have brought in a great deal more money which would have come from a section of the community which, as I have already said, is in receipt of an annual income in excess of £10,000 a year.
The noble Lord the Minister may well say that this is not permitted under the principal Act, the Social Security Act of 1975, which clearly sets out these limits. I accept that. But this Government have a reputation, as we saw last Session, for amending all kinds of legislation—even to the extent of amending legislation before it was on the statute book, as we saw in the case of the Social Security (No. 1) Bill and the Social Security (No. 2) Bill. Therefore, had they been minded to do this, they could have done it by some appropriate amendment.
Our view is that the Bill imposes a serious burden on the low paid worker, in as much as the increase is a hidden surcharge. I go so far as to say that it is a form of direct taxation upon the lower paid worker. It means a very substantial increase in the national insurance contribution for all those earning between £27 and £200 a week. I believe I am right in saying. 17 that a person receiving £200 a week will be paying nearly £10 a week in national insurance. It is not that that I am complaining about. What I am complaining about is the surcharge which has been inflicted on the poorest workers.
I believe I am right in saying that it has been customary for the exemption limit to be equivalent to the single person's pension which, if it had been calculated in line with earnings and not prices, would have been £28.50 a week and not £27.15. It means that those earning between £27 and £28.50 a week will now pay national insurance on every penny that they earn. I hope that that is clear. I think the Minister will agree that the extra revenue going to the Exchequer will be infinitesimal, so far as the lowest paid workers are concerned.
Perhaps the Minister will confirm that the lower earnings limit is lower than the tax threshold, so that we shall have young people paying national insurance on their earnings when they are not liable for income tax because it is considered that they do not earn enough to pay income tax. There is an absurdity, whichever way you look at it. So it seems that, if the Government cannot get it in one way, they will get it in another.
This amounts, as I said a moment or two ago, to a new form of tax and will possibly lead to action by employers to reduce the number of hours worked by young people in order that their wage is less than £27 a week, so that employers—and, in consequence, workers—do not have to pay national insurance. Psychologically, that would be a bad and a harmful thing to happen to an employee. But it is possible and we have known of circumstances like that in the past. I find myself in sympathy with the view expressed by Professor David Metcalfe, who is Professor of Economics in the University of Kent. He said: The Department of Health and Social Security is no longer running an insurance system but has opened a bucket shop for the Treasury". Employers will have to pay an extra £971 million a year in national insurance contributions. What impact will this have on the small employer? What impact will it have on his profits, which are important, and on his ability to maintain the number of staff that he wants? Is there not a very real danger that this will create extra unemployment? While on the matter of the cost to employers, I would ask the Minister—and I am glad that he is to reply, because there are a number of things that need his skill and his expertise— whether it is true that the Cabinet was not aware of the full implications of the Chancellor's action. I recall it being said by the Chief Secretary that the Cabinet was not aware of the implications. It seems clear that the Chancellor himself, to quote one comment, was plainly as puzzled and shocked as anyone else when he found out what he had done.
One thing emerges most clearly: that the whole picture was not given either to the Cabinet or, for that matter, to Parliament. I do not want to put the noble Lord the Minister in a difficult situation. I do not want him inadvertently to disclose any secrets. The last thing we should like him to do is to lose his job, and of course he would not. But this is much too serious a matter to let go. Did the Government, did the Cabinet, did the Chancellor of the Exchequer 18 know what he was doing? There is abundant evidence that he did not. This is a measure which does not reflect credit.
Perhaps the Minister will indicate how the accumulated surplus in the National Insurance Fund, estimated by the Government Actuary to be £5,308 million at the end of 1980–81, is to be used. Is it to be used to finance improvements in national insurance benefits, always assuming that the Government have not already misappropriated it? I ask this question having regard to the reduction of the Treasury supplement from 18 per cent. of contributions to 14.5 per cent., a saving to the Treasury of something like £529 million.
I end where I began: we recognise that the Government have got to raise money to meet the commitments which are of supreme importance to people in this country. But what we on this side say is that, however desirable this may be so far as the Bill is concerned, the Government have put too much on the lower paid and not enough on the higher paid.

§ 3.42 p.m.

§ Lord Banks
My Lords, I should like first to thank the noble Baroness, Lady Young, for the very thorough explanation which she has given us of the purpose and content of this Bill. As she made clear, the Bill increases national insurance contributions from employees, from the self-employed, from the non-employed, and from married women and widow optants who pay the reduced rate. For employees, the increase will be one per cent. The noble Baroness explained that it will be divided in this way: one-quarter of it will go towards paying for the increased cost of unemployment, one-quarter towards the National Health Service to increase the funding from contributions to the National Health Service from 8.3 per cent. to 10 per cent., and one-half to enable the Treasury supplement to be reduced from 18 per cent., the level at which it has remained for the past five years, to 14.5 per cent. So it follows that three-quarters of the increase is not necessary to fund the national insurance benefits. It is, as the noble Baroness said, part of the Government's overall economic strategy to restrain the growth in the public sector borrowing requirement.
I think the noble Baroness said that the changes in the Bill will reduce the public sector borrowing requirement next year by £1 billion. At the same time as the measures in the Bill were announced, the Chancellor of the Exchequer announced a further cut in expenditure of £1 billion. The first question which arises is this: do we need to seek to reduce the public sector borrowing requirement in this way? That raises the whole question of the Government's medium-term economic strategy. The transfer from Treasury supplement to contributions is in effect a cut in Government expenditure—a change from Government financing to self-financing. We are entitled to question the extent to which cuts in expenditure are required and the wisdom of implementing them in a time of recession.
This is clearly not the occasion to debate in detail the Government's overall economic strategy. However, the Government's decision to transfer expenditure from the Treasury supplement to contributions does emphasise that contributions to the National Insurance 19 Fund are not really part of Government expenditure in the ordinary sense, any more than Government-compelled contributions to motor insurance are part of Government expenditure. This has a significant bearing on the alarm expressed by the Government about the size of the social security budget. We should remember that about half the social security budget is largely self-financed by contributors.
The second question which arises is this: if the public sector borrowing requirement must be reduced, is this the proper way to do it? The Government say that the Treasury supplement to the National Insurance Fund—the amount paid from the Treasury to the National Insurance Fund—plus Government expenditure on non-contributory benefits has risen in real value (the noble Baroness made this point) since 1975 by 27 per cent., whereas contributions paid by employers and employees and other contributors to the National Insurance Fund have grown by only 7.8 per cent. in real value. That is the figure given by the Secretary of State in another place. The Secretary of State, during the Second Reading debate in another place, made this disparity an argument in favour of putting a greater burden on contributions. He was obviously impressed by the argument, because he repeated it three times.
I make two comments on that disparity. The Secretary of State gave separate figures for the increase since 1975 in the Treasury supplement to the National Insurance Fund and in Government expenditure on non-contributory benefits. From these it is apparent that the Treasury supplement has increased by 30 per cent. since 1975 and non-contributory expenditure by 26 per cent. That is in real terms in both cases. So non-contributory expenditure has not increased at a greater rate than the Treasury supplement. But the Treasury supplement increasing at 30 per cent. and contributions increasing at 7.8 per cent. appears at first sight to be a contradiction. How is that possible, we are entitled to ask, since the Treasury supplement was fixed at 18 per cent. of contributions throughout the period? The answer is simply this.
In April 1978 the Government of the day introduced the new pension scheme which provided for the earnings related pension in addition to the basic pension. It also provided for reduced contributions from those who are contracted out. The Treasury supplement bears a relation to gross contributions— that is, contributions before the contracted out reductions are taken away. The National Insurance Fund ends up only with the net contribution. The net contribution figure is the one which has been used to arrive at the 7.8 per cent. figure for the increase in the real value of contributions to the National Insurance Fund. If gross contributions are taken— and in my view they ought to be, since the reduction in contributions is only given because employers and employees are contributing separately to an occupational scheme which is relieving the National Insurance Fund of the burden of providing the earnings related element of pension—the increase in real terms is approximately the same as the increase in real terms in the Treasury supplement and non-contributory expenditure. There is no disparity.
So the argument for putting an extra burden on 20 contributions falls. But even if non-contributory expenditure had increased disproportionately—and we have seen that it has not—I believe it would be wrong to increase contributions to the National Insurance Fund to pay for it. The Government are arguing in effect that contributors must contribute towards non-contributory benefits. I believe that is utterly wrong. The contributory scheme finances certain benefits and what the various parties contribute should relate to those benefits only. If the Government wish to make some benefits contributory and dependent on a contribution record then bring them into the contributory scheme. If that is not possible nor desirable, then finance them quite separately. If it is right that contributions should be increased on the scale and for the purposes proposed by the Government—and I question that—should the burden be put entirely on the personal contributors rather than on the corporate contributors? We all know the economic pressures to which the corporate contributors have been subject and to which the noble Baroness referred, but surely the way to help them is by reducing the national insurance surcharge, which does not go into the National Insurance Fund, rather than by altering the balance of contribution between employers and the rest within the National Insurance Fund.
In another place on 8th December 1980 it was reported at column 1070 of the Official Report that Mr. Biffen, then Chief Secretary to the Treasury, said: I am by no means convinced that a remission on the surcharge is self-evidently the most helpful way to benefit industry because only one third of that benefit would go to manufacturing industry which, by general acquiescence, is most adversely affected in the current economic circumstance". But of course a reduction in the national insurance surcharge would benefit exactly the same employers as benefit from the proposed exemption from increase in the national insurance contributions under this Bill. So I do not think that Mr. Biffen's argument will stand.
The further argument which has been put forward, that the balance of national insurance contributions designed to finance specific benefits should be altered to the disadvantage of employees and other personal contributors on the grounds that personal contributors have received greater benefit from the Government's policy of high interest rates and a high exchange rate, seems to me to be not only far-fetched but irrelevant. We cannot compensate for the effects of Government policy in other spheres by manipulating the contributions to the National Insurance Fund.
Another point is that this Government have made considerable cuts in income tax. Now they are imposing on the personal contributors an increase in national insurance contributions; in other words, a shift from income tax to national insurance contributions; yet income tax is not paid on the first slice of income and the rate increases for higher incomes. National insurance contributions are paid on the first slice of income and this has poverty trap implications. The percentage of increase paid in national insurance contributions, as the noble Lord, Lord Wells-Pestell, pointed out, will decrease steadily after £200 a week on the basis of the Bill before us.
Taking the last point further, I would underline the question put by the noble Lord, Lord Wells-Pestell. 21 Why should the Government not remove the upper limit for contributions? The Government would raise the same amount with a rather lower percentage rate, which would help those at the bottom of the scale. We are told that this would upset the 1975 settlement. I do not believe that it need do so. I believe that it would be quite possible to retain the top limit for determining the earnings-related pension and for reduced contributions for the contracted out while removing it for contributions generally. That would be redistributory but it would spread the burden more fairly.
Removing the top limit for contributions would get rid of the situation where each time the limit is raised those earning between the old and the new upper limit receive a caning. When the top limit goes up to £200 per week, as provided for in this Bill, the effect will be to increase the amount on which contributions are charged at the upper limit, for both employer and employee, by over 21 per cent. The individual on £200 per week will be paying as much as 39 per cent. more than at present in national insurance contributions after allowing for the extra one per cent. It is equal to a growth pay amount of 3 per cent. The combined extra from employee and employer at this level—that is £200 per week—equals 1½p on the standard rate of tax. The removal of the top limit for contributions would prevent this sort of situation arising.
My right honourable and honourable friends in another place voted against this Bill. We on these Benches, in accordance with custom, will not oppose its Second Reading this afternoon, but I have sought to make clear that we do not accept many of the arguments which are advanced in its favour.

§ 3.57 p.m.

§ Lord Boyd-Carpenter
My Lords, as I am afraid I shall have one or two criticisms of this Bill to suggest to the House, perhaps I should maintain an appearance of balance by beginning by crossing swords with the noble Lord, Lord Banks, who has just sat down and the noble Lord, Lord Wells-Pestell, to whom the House listened, as always, with the greatest of pleasure and interest, on their suggestion that the £200 a week ceiling should have been extended upwards as an alternative means of raising more income for the National Insurance Fund. I would ask both noble Lords to try to look at the picture as a whole. If they do they will recall that when one reaches earnings levels of that kind, in excess of £10,000 a year, one's earnings attract—even since Sir Geoffrey Howe's Budget of the year before last—relatively high rates of income tax. If one is—as I hope the Government are—still determined to restore incentives, in my submission to the House it would be a retrograde step to increase the quite substantial burden of income tax now carried by such relatively high earners (and in contempory terms they are only relatively high earners) by adding substantially to their national insurance contribution. So on this point at least I am on the side of my noble friends on the Government Front Bench.
In introducing the Bill, the noble Baroness said that it was important and significant. I wholly agree with her, but I must confess that I do not have much enthusiasm for some of the significance. I must concede that it is a logical progression along a course of policy 22 which successive Governments have followed in national insurance matters for the last 10 to 15 years. Over that period the insurance concept, the contributory principle, has been probably fatally eroded and in my view that is a great loss.
Some of your Lordships may recall that about 20 years ago I had some responsibility in these matters and at that time the insurance concept was a reality. People paid their contributions as cheerfully as anybody ever pays anything, because they felt they were getting something for it, as indeed they were; they were getting an extremely good bargain. What is more important, they were conscious of the fact that they were getting an extremely good bargain. And as those who were involved in these activities at that time will confirm, there was hardly any difficulty in collecting the contributions, even though at that time they were not collected through the convenient machinery of the Inland Revenue but were collected by the card and stamp, now obsolete.
I believe that something has been lost over the years, because successive Governments—and I think the blame probably lies even more heavily on the shoulders of noble Lords opposite than on those of my noble friends, though they must take some of the blame—have changed the machinery of the National Insurance Fund from a gigantic insurance scheme, such as was conceived by that wonderful man the late Lord Beveridge, to a considerable degree into an instrument of taxation. One can almost say—I would say it if it would not recall to my noble friend Lord Cockfield one of the distinguished episodes of his past—that the insurance fund has really been turned into a third of the unholy Trinity of tax collectors, together with the Inland Revenue and the Board of Customs and Excise. This Bill, logical, consistent with the past policies of noble Lords opposite, none the less takes us probably irreparably far on that road. I very much doubt whether the ordinary contributor, who sees his national insurance contribution as a deduction from his pay packet, really in his mind relates that to the provision from the National Insurance Fund for his old age and the other changes and chances of life. This seems to be a pity.
Looking at this Bill, too, with some experience of what sometimes happens in these matters, it clearly indicates a victory for the Treasury over the Department of Health and Social Security. As I spent roughly the same time overall in those two departments, I can look at that outcome with perhaps a greater measure of objectivity and balance than some other noble Lords. It is perhaps significant in this context that the normal representative of the DHSS in this House is, to our loss, not taking part in this debate, and the wind-up is to come from that formidable representative of Her Majesty's Treasury, my noble friend Lord Cockfield. It is right perhaps that the victor should justify his spoils.
My Lords, the public sector borrowing requirement will of course be substantially relieved by the outcome of this Bill, by the reduction in the Exchequer contribution to the National Insurance Fund and by the increase in what I have always regarded as the quite illogical contribution of the National Insurance Fund to the National Health Service. There has never been much logic in it. I accept at once that the figure 23 has been fixed arbitrarily. It is illogical because the National Health Service has never been an insurance benefit with its benefits confined to contributors, as is the case today in a number of other countries. It may well be that if previous Governments had taken another course we should have had such a system today, which would have had many benefits. It would have given the National Health Service perhaps a rather firmer grip on expenditure than it has shown in recent years, at any rate, and would have involved some saving, since foreigners would not have been entitled to free treatment under the National Health Service, except where there was a reciprocal agreement for the benefit of our own people with the countries from which the foreigners came.
The public sector borrowing requirement will be substantially reduced. From the Treasury point of view, and, I think from the point of view of this House so far as it goes, this is a satisfactory outcome. But, my Lords, we should remember that this is a reduction in the PSBR not effected in the way that some of us would like to see, by cuts in expenditure, but simply by a transfer of the method of raising funds from one form of taxation to another. It is no good noble Lords opposite suggesting that this is in the nature of a cut. It is indeed the consequence—I hope my noble friend will not mind my saying this—of a failure adequately to cut, because it is in order to sustain the public revenues and so reduce the amount the state requires to borrow that this increase in funds is being organised through the machinery of the National Insurance Fund. I hope my noble friend will not take it amiss if I say that there are some of us who would like to see cuts in expenditure pursued more vigorously as the true and effective method of reducing PSBR.
If I may digress for a moment on that, particularly as the noble Baroness who opened the debate speaks for the Department of Education and Science, I hope that she will have in mind, if she is looking for cuts—and if one suggests cutting I think one should suggest directions—that whereas in 1960 there were only 81,000 people who were not qualified teachers employed in education, this number had risen by 1970 to 181,000, and on our latest figures to 201,000. I am not talking of teachers; I am talking purely of ancillaries in the education service. Surely, with the will and determination there could have been cuts there. Lest my noble friend who speaks for the Department of Health and Social Security should feel that he is being ignored, it is a fact that the number of people employed in the National Health Service has doubled since 1960, and very few of those additional people have been doctors or nurses. So I hope that this apparently easy way of tackling the real problem of the PSBR will not lead my noble friends to relax in any way their efforts to effect the true solution of our national problems in this respect, the determined cutting out of public expenditure and in particular of over-staffing which still exists in very substantial measure, as the figures I have quoted indicate, in the public service.
My Lords, from the point of view of the national economy, the main quarrel that certainly I have with this Bill is the additional burden on the employer, because that burden is a straight addition to industrial 24 costs; it raises the costs of production of every activity in this country and it makes British industry less competitive, both abroad and with imports at home. It is a fact that the consequence of the Bill will be to increase by little short of £1,000 million the burden payable by employers in respect of national insurance contributions. My Lords, £291 million of that, if I may quote my right honourable friend the Secretary of State in another place, is the consequence of the increase, automatically resulting from the other changes, in the surcharge on the employers for national insurance contribution.
Noble Lords opposite have nothing on which to criticise the Government over this. This particular device, the national insurance employers' surcharge, was invented, as I recall, by Mr. Denis Healey, and it imposes a very considerable burden upon employment and upon employers. My noble friend can say—he probably will—that this was not a deliberate increase in the burden of surcharge; it was the automatic consequence of raising the ceiling and raising the rates. But there was nothing whatever to prevent my noble friend, if he was concerned, as I am sure he is, with the burden on employers, making a compensating reduction in the employers' surcharge so that the surcharge itself should not automatically be increased as a result of the other steps he was taking.
A tax on employment is surely at this moment the craziest tax of all. Again, noble Lords opposite have nothing really to say on this matter. When they were in Government they invented an even worse employment tax, the notorious SET—selective employment tax. I cannot remember for the moment whether that was evolved under the malign influence of the noble Lord, Lord Balogh, or the noble Lord, Lord Kaldor. I gather that neither has been awfully keen in recent years to claim responsibility for it—responsibility perhaps rather than credit. The employers' surcharge, perhaps because it is non-selective, is a little less harmful. But it is really quite serious to impose a tax of this sort not only—and I do not want to labour the point—because of the increase which it causes in costs of production and costs of goods which we market at home or abroad, but also because it amounts to quite a substantial disincentive to employers to take on more new workers rather than perhaps to work overtime with their existing staffs.
I hope that my noble friend will be able to indicate some understanding on the part of the Government of the dangers at this moment of all moments of imposing a tax which falls directly on employment. I hope that he will be able to explain why, in these circumstances, a compensating reduction in the surcharge was not made to offset the otherwise automatic increase resulting from the other changes. From the point of view of the British economy and of the employment problem, about which we are all desperately concerned, that surely is the very important point which arises from the Bill.
I have seen only one gleam of wintry sunshine behind the Bill. It is plainly a trailer for the Budget. The changes are not, as I understand, to operate until the forthcoming financial year and therefore it will be possible for my right honourable friend the Chancellor of the Exchequer to make compensating adjustments both on personal and on company taxation which 25 could have the effect of offsetting the additional burdens which the Bill seeks to impose. I realise as well as anybody that no Minister speaking from that Bench can foreshadow the Budget, because if he does so he ceases very quickly to speak from that Bench! I know, too, that my noble friend is the acme of discretion. But perhaps it would be possible for him to give just an indication that the Chancellor of the Exchequer, in coming to the decisions—some of which no doubt he has come to by now and others of which are still no doubt being mulled about in Whitehall—will at least take into account the fact that unless compensated for in the forthcoming financial year, industrial costs will be increased as a result of this heavy surcharge. I know my noble friend too well to believe that he will use the argument which I am afraid was used in another place that in real terms the burden of the surcharge is being reduced because the increase is less than the level of inflation.

§ Lord Davies of Leek
My Lords, will the noble Lord give way?

§ Lord Boyd-Carpenter
My Lords, not at this moment, because I am just about to finish. Any trade union leader could use that argument if he wanted to do so. The fact remains that it is the additional payments in cash which an employer has to find out of his limited and strained resources which is the factor that operates on prices quite regardless of the level of inflation. I shall say with great respect to my noble friend: it is a noble effort to try to get down the PSBR, but getting down the PSBR will not check inflation if industrial costs are being artificially inflated.

§ Lord Davies of Leek
My Lords, before the noble Lord sits down after having made an excellent speech I should like to ask him a question. Indeed those of us who know him will know that he spent a considerable time in this Ministry and was an expert and an excellent Minister who probably in the end knew more than some of his civil servants. When seeking other alternatives, will he agree with me that there may be a possibility as regards the Industrial Injuries Fund? I do not know at this moment—I was in the Ministry for a while—what that fund is. However, I think that it could be an avenue that could help us out of the present dilemma. What does the noble Lord think about that?

§ Lord Boyd-Carpenter
My Lords, I am a little astonished and a little nervous that the noble Lord opposite should be drawing my noble friend Lord Cockfield's attention to the Industrial Injuries Fund. His intervention may have more effect than he altogether anticipates or would wish.

§ 4.16 p.m.

§ Baroness Gaitskell
My Lords, I find it very difficult to understand this Bill and it is no good pretending, having listened to the contributions that have been made, that I can understand it better now. I can only see a great divide between some of us on this side or at any rate between myself and what has been said so far. In my view, to call this Bill a social security Bill is a misnomer; it should be called the Social Insecurity Bill. That is the proper title for the Bill. It is a nasty Bill, 26 as several Members of Parliament said in the Commons. In fact, it had a pretty good thrashing in the other place. So I do not find myself very much in sympathy with anything that is contained in the Bill, and I shall briefly point out what I believe has come out of the Bill.
We have had recent changes in social security. One of those was the decision to raise national insurance contributions by 1 per cent. for employees. That is where the first divide occurs between us and the Government. The noble Lord, Lord Boyd-Carpenter, implied that the great tragedy was the increase for employers. I believe that the tragedy is the 1 per cent, increase for employees. National insurance contributions are a tax, but one that is less fair than income tax for a number of reasons. One reason is that national insurance contributions are levied on earnings below the level at which tax begins to be paid—the tax threshold. The Government will be raising the lower limit—the limit below which no contributions need to be paid—next April, but not by the amount needed to maintain the link with rises in earnings. What that means is that many low paid workers—mainly the young and women part-time workers—earning between £27 and £48.50 per week, who previously paid no contributions, will now have to pay 7¾ per cent. on all their earnings; that is about £2 a week more unless their hours are cut, bringing them below the exemption limit. The failure to raise the lower limit in line with the rises in earnings will not bring in much revenue, but it will have a considerable impact on those who must pay the contributions.
Whereas higher incomes attract higher tax rates in a progressive tax system, which is regarded as fair, above an upper limit—which is now £165, to be raised to £200 from next April—no progressive contributions are payable; that is, national insurance contributions cease to increase on earnings above £200—that is, £10,000 a year—benefiting the richest earners. This is where I cannot understand the speech of the noble Lord, Lord Boyd-Carpenter, for his sympathy lies entirely with the employers.

§ Lord Boyd-Carpenter
My Lords, the noble Baroness, Lady Gaitskell, has twice referred to that point which I raised. I hope that I was not expressing particular sympathy with the employers; I was expressing particular sympathy with the working of the national economy and with those people in particular who might become unemployed unnecessarily because the financial burden of employing them had been made excessive.

§ Baroness Gaitskell
My Lords, I thank the noble Lord. As I understand it, income tax is paid on unearned as well as on earned income. If the Government decide to raise more revenue by increasing national insurance contributions, they do not need to raise as much from taxation of unearned income. But it is precisely because national insurance contributions are levied on very low earnings which are exempt from tax, that the yield from an increase in national insurance contributions is much greater than the same percentage increase in income tax. For the Tories to raise the standard rate of tax would be a major reversal of policy, whereas increases in national insurance contributions are likely to cause less fuss politically.
27 I have very little more to add. It has always been assumed that the fact that national insurance benefits are financed by contributions means that they are somehow "safer"—less likely to be tampered with—than if they are financed out of general taxation. But it looks as though that is no longer the case. The Government are cutting the real value of benefits—breaking previous commitments to national insurance contributors—while at the same time increasing the contribution rate for workers.

§ 4.24 p.m.

Lord Spens
My Lords, I apologise for intervening in this debate, and I would not have done so except for the fact—and I have tried to listen very carefully—that I do not believe that anyone has mentioned the plight of the self-employed in this connection. Therefore, briefly, I should like to draw the attention of the Minister to this point.
The Class 2 contribution will be increased from £2.50 per week to £3.40 per week, which I believe is an increase of 36 per cent. That, perhaps, is not so serious, but what is bad is the change in the Class 4 contribution. The self-employed consider that the Class 4 contribution is not a national insurance contribution at all, but a straight tax on their profits. It is levied on the profits between two limits—a lower limit and an upper limit—and those limits are not very high. I think that they are to be increased, with the lower limit increasing from £2,650 to £3,150, with no Class 4 contribution paid on profits below that. But between £3,150 and £10,000 a Class 4 contribution will have to be paid, not of 5 per cent., as was previously the case, but of 5.75 per cent.—an increase in the percentage at a time when as recently, I think, as last autumn the Government had given the impression that they were considering the whole basis of the Class 4 contribution, with the possibility of abolishing it altogether.
Instead of that, these self-employed people—and they are the people in the small businesses; those making a profit of £10,000 a year are small businesses, not big businesses—are being made to pay an extra amount of tax at a time when we are trying to encourage small businesses to expand in order to take on more employees. Finally, I should like to ask the Minister one short question to which I ought to know the answer myself, but I am afraid that I do not have it in my head. There is a small earnings exception to the Class 2 employed; in future those who earn less than £1,475 need not pay the contribution. If they claim that exception, will that affect the amount of pension that they will receive in the end?

§ 4.27 p.m.

§ The Minister of State, Treasury (Lord Cockfield)
My Lords, I think that the whole House will appreciate the extremely restrained and responsible way in which noble Lords on both sides of the House have raised points on which they obviously feel very deeply. This is a commendably short Bill. It extends to only four pages and five clauses, and its scope is considerably narrower than many of the contributions made to the debate might have suggested. It does not attempt to reconstruct the whole of the national insurance 28 scheme. Its objective is limited—as stated by my right honourable friend the Chancellor of the Exchequer in his original announcement on 24th November 1980—to raising an additional amount of revenue amounting to approximately £1 billion.
In that respect, of course, it is a measure of great importance, and it is an integral part of the list of measures announced by my right honourable friend which are designed to bring the economy back on course after the disappointing developments of the summer. The public sector borrowing requirement, which at the commencement of the year was estimated at £8½ billion, may well show an outturn of £11½ billion. The noble Lord, Lord Wells-Pestell, referred to four estimates of the public sector borrowing requirement. I can assure him that only two estimates have been given by the Government: the one given at the time of the Budget and the revised estimate given under the terms of the Industry Act in November.
Inevitably, of course, speculation has appeared in the press, but that is something quite different from an estimate produced by the Government. So far as any further revision of the figure is concerned, should that be necessary, I fear that the noble Lord will have to wait until my right honourable friend the Chancellor of the Exchequer opens his Budget in due course.
There is, in fact, little that can be done in the current year to reduce the prospective level of the public sector borrowing requirement. The proposals of my right honourable friend were, therefore, primarily directed to meet the circumstances of next year; that is, 1981–82. The measures that he announced included reductions in public expenditure amounting to more than £1 billion and increases in revenue amounting to some £2 billion. These revenue increases comprise increases in tax on North Sea oil and the changes in national insurance contributions which are covered by the present Bill. Each of these measures accounted for about £1 billion in additional revenue. In the normal way, changes in revenue are dealt with in the Budget, a matter to which I shall return when dealing with the question raised by my noble friend Lord Boyd-Carpenter of the national insurance surcharge.
But, in the two particular cases of North Sea oil and national insurance contributions, early announcement without waiting for the Budget was appropriate—in the case of the taxation of North Sea oil because the new tax will take effect from 1st January and consultation with the industry is needed, and in the case of national insurance contributions because the new rates have to take effect in April and time is needed for new tables to be printed and for employers to take the necessary steps to ensure that deductions on the new scale start on the due date.
If one is looking for additional revenue, national insurance contributions are a very appropriate source, and I noticed that the noble Lord, Lord Wells-Pestell, did not in principle quarrel with that. On the latest figures available, earnings in the last 12 months have increased by more than 20 per cent, compared with an increase in prices of 15 per cent. Those in employment have therefore enjoyed an increase in real income at a time when other members of the community may be suffering considerable hardship, and at a time when the profits of industry, and particularly manufacturing industry, have been seriously eroded. It is only right 29 in these circumstances that those in employment should make an extra contribution to the additional public expenditure which is being incurred at the present time.
At the same time, it is only right—this point was raised by my noble friend Lord Boyd-Carpenter—that the Government should have decided not to increase the rates of contribution paid by industry. The position here was clearly stated by my right honourable friend the Chancellor of the Exchequer in his Statement and was fully understood by everybody with a knowledge of these matters. In the past, whenever the rates of contribution paid by employees have been increased, so too have the rates paid by employers. To the extent therefore that on this occasion the rates of contribution payable by employers have not been increased, this represents a valuable measure of assistance to industry in relation to what would have been the normal pattern. In short, industry has been relieved of a burden which would normally have fallen on its shoulders.
It is of course true, and I acknowledge it, that the total contributions paid by employers, including the surcharge, will increase in cash terms next year. This increase in total will be somewhat less than £1 billion. The figure reflects both the expected rise in earnings and the increase in the ceiling for graduated contributions from £165 to £200 a week, and both of these factors are a reflection of changes in the level of prices and earnings. If one has a scheme where the major part of the contributions is related to earnings, it is inevitable at a time when earnings increase that contributions should correspondingly increase in cash terms. What the Government have done has been to relieve industry of the further burden that would have arisen had precedent been followed and the rate of contribution increased as well. The position is that the £1 billion increase payable by industry in cash terms represents an increase of about 8 per cent., a figure which is below the forecast rate of increase in earnings and prices. As a result, the sizeable cash increase in the contributions paid by employers next year is likely to reflect a decline in contributions in real terms.
Attention was drawn by a number of noble Lords on both sides to the increase in the top earnings limit from £165 to £200, but opinions on this differed sharply. The noble Lords, Lord Wells-Pestell and Lord Banks, and the noble Baroness, Lady Gaitskell, felt the ceiling should be abolished altogether. My noble friend Lord Boyd-Carpenter felt the ceiling should be maintained. The ceiling has existed throughout the time that contributions have been graduated and it is a reflection of the essentially contributory nature of the national insurance scheme. The upper limit provides a ceiling not only for the contributions but for the earnings-related benefits and the guaranteed minimum pension provided by occupational pension schemes. There could be no question of removing the ceiling for benefits. Quite apart from the agreement reached with the occupational pension funds at the time of the introduction of the principal Act in 1975, it would be wrong for the Government to take on an open-ended commitment for benefits without any upper limit. To remove the limit for contributions only would mean breaking the present link between contributions and benefits and would be a 30 major departure from the arrangements agreed in 1975. The proposal raises issues, therefore, which go way outside the scope of the Bill.
There was also some criticism from the noble Lord, Lord Wells-Pestell, and the noble Baroness, Lady Gaitskell, about the lower earnings limit, which is now being raised to £27 a week. The principal Act itself specifically relates the lower earnings limit to the amount of the single pension, and by increasing the limit to the present figure the Government are simply implementing the provisions of that measure. This has an importance of its own. The simple truth of the matter is that the payment of contributions also determines the entitlement to benefit. Apart from the provisions of the Act, which virtually determine what the lower limit should be, if one were to raise the lower limit beyond its present figure, it would prevent the employees who were left out in this way from paying contributions and thus remove them from entitlement to sickness, unemployment and injury benefit, and it would impair their pension entitlement. I do not think that anyone would really want to do that, and therefore I commend to the House the approach that has been taken by the Government of maintaining strictly the line laid down in the 1975 Act.
That brings me to a very much wider question—namely, the comments made by a number of noble Lords opposite, and by my noble friend Lord Boyd-Carpenter, which suggested that the national insurance scheme had essentially ceased to be a contributory scheme. We do not at all accept that view. In the Government's view, the contributory principle is of great importance. It is true that, as a result in particular of the changes made in 1975, we have moved more in a direction of ensuring that people with higher incomes pay a greater part of the total cost, and that is why the contributions are graduated up to the earnings limit.
Nevertheless, basically the contributory principle remains, and this comes out with great clarity in the table which appears on page 6 of the Government Actuary's report on the financial provisions of the Bill. After allowing for the changes proposed in the Bill, total contributions—that is, by insured people—will amount to £14,598 million, but benefits will amount to £17,067 million. The scheme therefore remains essentially contributory in nature and it is also still a considerable bargain for the contributor. We believe therefore that this principle should be maintained.
This is also essentially the answer to the points raised by the noble Lord, Lord Spens, in relation to the self-employed. The self-employed are being asked to pay no more by way of increased contributions than are employed persons. Indeed, the Class 4 contribution increases by only three-quarters of 1 per cent., while the increase in the case of the employed person is a full 1 per centage point, the difference reflecting the fact that the self-employed do not receive unemployment benefit. But it is not the case that the provisions of the Bill in any way discriminate against the self-employed. With regard to the general question of contributions by the self-employed, a discussion document entitled The Self-Employed and National Insurance was issued recently by my right honourable friend the Secretary of State, and I commend this document to the noble Lord.
Before I leave these matters of detail I must return 31 to the question of the national insurance surcharge, since this point was raised by the noble Lord, Lord Spens, as well as by my noble friend Lord Boyd-Carpenter. The Bill does not at all set out to deal with the question of the national insurance surcharge, and it would be outside the scope of the Bill to include in it amendments of the surcharge. The surcharge is a question of the general level of taxation, which is a matter for my right honourable friend the Chancellor of the Exchequer to decide in relation to his Budget, and as noble Lords on both sides of the House will appreciate, there is nothing further that I can say on that particular matter at the present juncture.
However, I wish to assure the noble Lord that the Government fully appreciate the very considerable problems that industry and of course the self-employed face at the present moment. In one particular respect the Government have taken measures to help them. The new stock relief scheme announced by my right honourable friend the Chancellor of the Exchequer will in fact give considerable assistance to industry, in particular manufacturing industry, next year. But, so far as any further measures are concerned, I can only ask your Lordships to await with patience the statement by my right honourable friend the Chancellor of the Exchequer when he opens his Budget.
Now, despite all the difficulties, we are in fact making progress. The rate of inflation has fallen very significantly from the level of 21.9 per cent. reached last July to 15.3 per cent, in November. As the months go by the rate of inflation will continue to fall. A much greater sense of realism in pay settlements is evident in almost all sectors of the economy, and settlements are being reached at figures which are much more reasonable and more realistic than those reached last year. There is still a long way to go, but we are moving in the right direction.
The Government for their part are determined, despite all the difficulties, to keep their own expenditure under control, and I can give my noble friend Lord Boyd-Carpenter an assurance on that point. We realise the immense importance of the level of Government expenditure, and we shall not only keep it under control, but we shall also restrain our borrowing requirement within the limits that the nation can afford. It is only in this way that we can ensure that the rate of inflation continues to decline, and it is only in this way that we can construct the foundation on which the future prosperity of the British economy and future prospects for employment can be built. The proposals in the present Bill are an integral part of this strategy. I therefore commend the Bill to the House—

§ Baroness Gaitskell
My Lords, I should like to ask the Minister a very brief question before he sits down. Will unemployment fall with the fall in the rate of inflation? So far it has risen.

§ Lord Cockfield
My Lords, the only way to secure a long-term reduction in the level of unemployment is to bring inflation down below the level which obtains in other countries which are our competitors. This is the main objective of our policy, and we shall pursue that policy through to success. What has happened in the past—and I am not trying to be critical of any 32 particular Administration, because this goes back a very long way—has led to increasing levels of unemployment at each turn of the economic cycle. We must now reverse that long-term decline in the British economy. This requires a reduction in the rate of inflation, and the measures proposed in the present Bill are part and parcel of the Government's strategy directed to that end.

§ On Question, Bill read 2^a, and committed to a Committee of the Whole House.