HL Deb 26 January 1981 vol 416 cc582-99

4.9 p.m.

House again in Committee.

Lord Wells-Pestell moved Amendment No. 2: Page 1, line 15, leave out ("7.75") and insert ("7").

The noble Lord said: This amendment seeks to reduce the proposed increase by ¾ per cent. I do not contemplate that there is any need for the remaining amendments to take any great length of time. They are on the list of amendments because they raise, so far as we on this side of the Committee are concerned, a matter of principle. We do not like the way in which these increases are being effected. I made that perfectly clear on the first amendment. That is really what is behind these amendments, and it may well be that we shall want to test the opinion of the Committee on one or two of them. But, as I said, I am proposing to be very brief.

I move the amendment on the basis that this 1 per cent. cannot really be justified, other than on grounds of indirect taxation. I made this point on Second Reading. I have looked at it again, I have considered the matter and I see no reason to come to any other conclusion. As I understand the situation, the 1 per cent. increase is made up of ½ per cent. which is required to enable the Exchequer to reduce its contribution to the fund; ¼ per cent. which is required for the National Health Service—again, to save the Treasury; and ¼ per cent. which is required to meet the ever-increasing cost of unemployment.

If I may deal with each of those very briefly, I see no justification, even in a period of financial emergency or crisis, for the Exchequer to reduce its con tribution to the fund. Ever since I can remember, there has been a very good relationship between what is collected by way of national insurance, and what is given from the Treasury, which comes out of taxation. I see no reason why that kind of partnership, if I may call it that, should not continue. Merely to put an extra burden upon the lower income groups in order to save the Treasury seems to me to he a little reprehensible. I say no more than that.

With regard to the ¼ per cent. which is required for the National Health Service, as I said, again, it is to save the Treasury. There is no suggestion that it will be used for a better service. There is no suggestion, so far as I can see from anything that has been said in another place, that it will make improvements which are so badly needed. Therefore, I again see no reason for imposing ¼ per cent. upon a particular group of wage earners.

The ¼ per cent. which is required to meet the ever-increasing cost of unemployment is in a very different category. As I said at the very beginning, one recognises that there is more and more money being paid out to more and more unemployed. I shall not venture to suggest what is the cause of that, other than to say that this is an unpleasant fact which we must face. It seems quite reasonable that people who are in work should be encouraged and asked to make an extra contribution to help those who are out of work. Therefore, in the circumstances, the ¼ per cent. is necessary and justifiable.

The reason why I talk about ¼ per cent. is that I believe I am right in saying that, according to the Government Actuary, only ¼ per cent. increase is necessary to meet the additional cost of unemployment benefit. If the noble Baroness the Minister says it is true that the Government Actuary considers that only ¼ per cent. is necessary to meet the additional cost of unemployment benefit, then, by all means, let us have it. The ¼ per cent. is the only part that can be justified. Therefore, I beg to move.

4.15 p.m.

Lord Banks

I should like to support the amendment. It removes that part of the increase in the employee's contribution which is not designed to pay for national insurance benefits, but is designed to promote the Government's medium-term economic strategy. We on these Benches do not support the transfer of the burden from the Treasury supplement to personal contributors. I said on Second Reading that I disagreed with personal contributors being asked, in effect, to pay for non-contributory benefits.

The noble Lord, Lord Cockfield, has been good enough to write me a letter about some of the arguments which I advanced at that time. I much appreciate that and I am grateful to him, and I have informed him that I should like to refer to that letter this afternoon. In that letter he says, about the argument which I have just mentioned, You…said that the Government's decision to reduce the rate of Treasury Supplement because Exchequer support for social security (by means of the Supplement and provision for non-contributory benefits) had increased, indicated that the Government wanted the contributor to provide for non-contributory benefits. That is not so. The Government's view, and the reason for the Bill's provision, is that contributors should pay more for their contributory benefits, and the general taxpayer less. Non-contributory benefits will continue to be financed through general taxation". Of course, I realise that money contributed to the national insurance fund will be used to finance national insurance benefits. That is technically the position. But if the Treasury supplement is reduced because, among other things, expenditure on non-contributory benefits has gone up, and personal contributions are increased to make good that reduction, then, in effect, contributors are contributing to some extent to non-contributory benefits. So I stand by what I said, and I believe that it is wrong to advance increases in non-contributory expenditure as an argument for increasing the contributions to the national insurance fund, which is what the Secretary of State did in another place.

Baroness Young

As the noble Lord, Lord Wells-Pestell, has said, the effect of this amendment would be to increase the primary—that is, the employee's share—Class 1 contribution rate from 6.75 per cent. to 7 per cent., instead of to 7.75 per cent. as under the Bill; that is, a ¼ per cent. increase instead of a 1 per cent. increase. As the Committee will be aware, the 1 per cent. increase under the Bill is the sum of three elements: ½ per cent. is to offset the reduction in the Treasury supplement; ¼ per cent. is to provide for the increases in the National Health Service contribution and ¼ per cent. is to ensure that the national insurance fund will be kept in broad balance.

I am glad that the noble Lord, Lord Wells-Pestell, and the noble Lord, Lord Banks, have recognised that the ¼ per cent. required for the national insurance fund would be maintained by this amendment. But I must make it quite clear to the Committee that this is not an amendment that we could accept. It does, in fact, cut across the whole principle of the Bill, for the fact is that the loss of revenue, were the amendment to be carried, would be £450 million to the national insurance fund and £225 million to the National Health Service; that is, assuming that the ¼ per cent. which remains went into the national insurance fund.

I think that the noble Lord, Lord Wells-Pestell, intends this amendment to be linked to further amendments which stand in his name, and in the name of the noble Lord, Lord Wallace of Coslany, both on Clause 2, which provides that the Treasury supplement would not be reduced and that the National Health Service contributions would not be increased, as proposed in Clause 3. The total effect, therefore, is to strike out the principal effects of the Bill. I have no doubt that we shall be returning to both of these points on later amendments.

Perhaps I may conclude by saying, as I indicated on Second Reading, and as my right honourable friend the Secretary of State for Social Services has explained in debates in another place, that the Bill is a coherent package with important economic effects. As your Lordships know, the Government regard it as vital to their economic strategy to restrain the growth in the public sector borrowing requirement. This amendment, if carried, would make that objective far more difficult to achieve, for it attempts to cut the heart out of the Bill. It is for that reason that I must ask the Committee not to approve it.

On Question, Whether the said amendment (No. 2) shall be agreed to?

Their Lordships divided: Contents, 66; Not-Contents, 131.

Airedale, L. Hall, V.
Amherst, E. Hampton, L.
Amulree, L. Henderson, L.
Avebury, L. Howie of Troon, L.
Aylestone, L. Jacques, L.
Bacon, B. Janner, L.
Balogh, L. Jeger, B.
Banks, L. Kilbracken, L.
Barrington, V. Kilmarnock, L.
Beaumont of Whitley, L. Leatherland, L.
Beswick, L. Llewelyn-Davies of Hastoe, B. [Teller]
Birk, B.
Blyton, L. Lloyd of Hampstead, L.
Boston of Faversham, L. Lovell-Davis, L.
Brockway, L. Melchett, L.
Brooks of Tremorfa, L. Peart, L.
Bruce of Donington, L. Phillips, B.
Byers, L. Ponsonby of Shulbrede, L. [Teller]
Cledwyn of Penrhos, L.
Collison, L. Sainsbury, L.
Cooper of Stockton Heath, L. Sefton of Garston, L.
David, B. Segal, L.
Davies of Leek, L. Shinwell, L.
Davies of Penrhys, L. Stamp, L.
Denington, B. Stone, L.
Diamond, L. Strabolgi, L.
Donaldson of Kingsbridge, L. Strauss, L.
Elwyn-Jones, L. Taylor of Mansfield, L.
Fisher of Rednal, B. Underhill, L.
Gaitskell, B. Wells-Pestell, L.
Gladwyn, L. Whaddon, L.
Goronwy-Roberts, L. Wigoder, L.
Greenwood of Rossendale, L. Willis, L.
Hale, L. Winstanley, L.
Abercorn, D. Dundonald, E.
Abinger, L. Ebbisham, L.
Ailesbury, M. Eccles, V.
Airey of Abingdon, B. Effingham, E.
Allerton, L. Ellenborough, L.
Ampthill, L. Elliot of Harwood, B.
Armstrong, L. Elton, L.
Auckland, L. Exeter, M.
Avon, E. Faithfull, B.
Balfour of Inchrye, L. Falkland, V.
Beilwin, L. Ferrers, E.
Belstead, L. Fraser of Kilmorack, L.
Berkeley, B. Freyberg, L.
Bessborough, E. Gage, V.
Boardman, L. Gainford, L.
Bolton, L. Geoffrey-Lloyd, L.
Boyd-Carpenter, L. Gibson-Watt, L.
Brentford, V. Gisborough, L.
Bridgeman, V. Glasgow, E.
Carrington, L. (A Principal Secretary of State.) Glendevon, L.
Glenkinglas, L.
Cathcart, E. Gore-Booth, L.
Chelwood, L. Gormanston, V.
Clancarty, E. Gowrie, E.
Clwyd, L. Gridley, L.
Cockfield, L. Grimston of Westbury, L.
Colville of Culross, V. Grimthorpe, L.
Cork and Orrery, E. Haig, E.
Cottesloe, L. Hailsham of Saint Marylebone, L. (L. Chancellor.)
Cross, V.
Cullen of Ashbourne, L.
Daventry, V. Halsbury, E.
Denham, L. [Teller.] Harmar-Nicholls, L.
Drumalbyn, L. Hatherton, L.
Hawke, L. Onslow, E.
Henley, L. Orkney, E.
Hornsby-Smith, B. Orr-Ewing, L.
Hylton-Foster, B. Peel, E.
Ilchester, E. Pender, L.
Kemsley, V. Porritt, L.
Keyes, L. Radnor, E.
Killearn, L. Redmayne, L.
Kilmany, L. Romney, E.
Kinloss, Ly. St. Aldwyn, E.
Kinnaird, L. St. Davids, V.
Kinnoull, E. Salisbury, M.
Knutsford, V. Saltoun, Ly.
Lauderdale, E. Sandys, L. [Teller.]
Lindsey and Abingdon, E. Savile, L.
Long, V. Sempill, Ly.
Loudoun, C. Sharples, B.
Lucas of Chilworth, L. Skelmersdale, L.
Lyell, L. Soames, L. (L. President.)
McAlpine of Moffat, L. Spens, L.
Malmesbury, E. Stradbroke, E.
Mansfield, E. Strathcarron, L.
Margadale, L. Strathclyde, L.
Marley, L. Strathspey, L.
Melville, V. Sudeley, L.
Merrivale, L. Swinfen, L.
Montgomery of Alamein, V. Tenby, V.
Morris, L. Trumpington, B.
Mowbray and Stourton, L. Vickers, B.
Murton of Lindisfarne, L. Vivian, L.
Noel-Buxton, L. Wakefield of Kendal, L.
Northchurch, B. Willoughby de Broke, L.
Nugent of Guildford, L. Young, B.

Resolved in the negative, and amendment disagreed to accordingly.

4.30 p.m.

Lord Spens moved Amendment No. 3: Page 2, line 10, leave out sub-paragraph (a).

The noble Lord said: My three amendments deal with the plight of the self-employed. If I may give a little background to cover all three amendments before going into specific details about the first amendment, the self-employed are liable to pay two separate contributions for national insurance: one is a flat rate Class 2 contribution which all self-employed have to pay unless they are earning a very small income indeed, and that flat rate contribution will be increased under this Bill from £2.50 to £3.40—an increase of 90p per week, or an increase of 36 per cent. on the £2.50. That is a very much larger percentage than the increase in the Class 1 contribution, which works out at just under 15 per cent.

The Class 2 contribution is paid direct to the Department of Health and Social Security but, in addition to the Class 2 contribution, those in business earning profits of more than £3,150 per year under this Bill will be charged a Class 4 contribution of 5 per cent. on the balance of their profits between £3,150 and £10,000. That contribution is assessed by the inspector of taxes. They are not allowed to deduct their own personal allowances when having that assessment made. They have to pay that contribution with their taxes.

The self-employed have had a grumble about this Class 4 contribution ever since it was introduced in 1975. It was then introduced with a rate of assessment of 8 per cent. The band on which the assessment was made was very much lower. The increase in the band is the result of inflation. It remained at 8 per cent. until 1978. It was then reduced to 5 per cent. of the relevant profits.

The complaints got to the ears of the Government party. Although I have not studied their manifesto, I believe they undertook to do something about the Class 4 contribution. They have done something about it. They issued a consultative document in the autumn. It suggests that there might be other ways of assessing the self-employed. However, there is a very nasty caveat in the introduction: In the present economic climate we shall not be able to accept any proposal which would increase social security spending or require us to employ more staff". That cuts down the type of proposal which might be made.

The Government also argue that the self-employed ought to pay an element of the employer's contribution as well as that of the employed person's contribution. Noble Lords will find that in paragraph 26 of the discussion document. We consider that argument to be quite invalid. The employer can charge his element of the contribution to tax whereas the self-employed cannot.

Another aspect is that the self-employed's Class 4 contribution is levied on his net profits. You cannot compare the self-employed's net profit with an employed person's salary. The self-employed has got to be in a position to leave sonic of those profits in the business if ever he is going to expand it. Therefore, any comparison with the employed person's salary should be at a very much lower level. If these points are introduced—£3,150 is about £60 a week, rising to £10,000 at the top end—it is not a very high salary upon which to pay extra tax.

The other point about Amendment No. 3, my first amendment, is that the rate of tax—5 per cent.; it started at 8 per cent., stayed there for three years and came down to 5 per cent. in 1978—has nothing to do with inflation. Why should there be any increase in the rate of this tax, as is proposed? My first amendment is to remove the words "5.75 per cent." from the Bill, which would leave the tax at 5 per cent. 1 believe this to be fair to the self-employed. I beg to move.

4.37 p.m.

Lord Cullen of Ashbourne

The noble Lord, Lord Spens, has drawn attention to the document The Self-Employed and National Insurance. All noble Lords who are interested in the subject should certainly study it. It is very good and gives a number of options to those who are interested to get in touch with the department and make their views known. Some of the options are quite radical and would make quite a change in the way that the contributions are now made. I think all noble Lords agree that it would be a mistake to try to make any changes in the present system until such time as this document has been digested, until the recommendations of different people have been made and until the Government have had time to consider them.

Turning to the noble Lord's amendment, the reduction in the Treasury supplement is reflected in the Bill in a rise of ½ per cent. in both the Class 1 employee rate and the Class 4 rate paid by the self-employed, while the increase in the National Health Service allocation results in a further increase of .25 per cent. The Class 4 rate, unlike the Class 1 rate, is not being raised by a further ¼ per cent. in respect of increased demands on the national insurance fund. These are occasioned by higher unemployment, and the self-employed are not eligible for unemployment benefit. Thus the relationship between the Class 1 and the Class 4 contribution rates is being maintained.

The effect of the proposed amendment would be to leave the Class 4 contribution at its present level. This would shield better off self-employed people from the effects of the reduced Treasury supplement and from paying their share towards the rising cost of the National Health Service. It would also destroy the present relationship between the Class 1 and Class 4 contribution rates. As the noble Lord will know, this relationship has existed since the Government Actuary's report of 1977 recommended the present method of calculating the rates of contribution of the self-employed, and, as I suggested earlier, it would be quite wrong to make any changes in advance of the review of the position of the self-employed in the national insurance scheme. I therefore ask the Committee to reject this amendment.

Lord Spens

No one has supported me. I am surprised because I thought some noble Lords would support a plea for the self-employed but, as no one has done so, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

4.41 p.m.

Lord Spens moved Amendment No. 4: Page 2, line 14, leave out ("£3,150") and insert ("£10,000").

The noble Lord said: With the leave of the Committee, I shall deal with Amendments Nos. 4 and 5 together. What I am asking for here is that the band on which this Class 4 contribution is assessed should be raised from the miserably low level at which it is proposed to have it—that is, on profits between £3,150 and £10,000—so that the provision reads, "on profits between £10,000 and £20,000". That would take a number of small businesses out of the system. It would be a great relief to them, it would not cause anyone else to pay any more, except that on Amendment No. 5 perhaps the upper figure should be £16,850, which would give exactly the same result as the present band does for individual persons paying this surcharge.

We consider that this is a direct tax on the self-employed; it is particularly hard in the case of the small businessman who is just starting up and, if one can imagine someone earning a profit of £3,150 and then finding that if he goes above that profit he will suddenly be assessed with an additional tax, it is clearly not encouraging to the small businessman. Let us raise that band quite considerably. I beg to move Amendment No. 4.

Lord Banks

I wonder whether I may give the noble Lord, Lord Spens, a little encouragement by saying that certainly I was in support of his previous amendment but it was so obviously a follow-on from the amendment which had preceded it that I thought it would be wrong to take up the time of the Committee by repeating the same arguments.

I am not quite clear what the effect of this amendment would be in terms of revenue. Reading through the discussion document to which the noble Lord, Lord Spens, has referred it would appear that what is now being paid by the self-employed has been actuarily arrived at and is the correct amount. If this change should result in less revenue that would mean an increase in the flat rate and an increase in the flat rate would be undesirable because obviously it would have an impact on the poorest. But if the change in the limits which the noble Lord proposes would not in fact mean any loss in revenue and nor any increase in the flat rate, then I think there is a good deal to be said for it.

One of the problems with this whole question of National Insurance and the self-employed is that the self-employed do not get an earnings-related pension. This is taken into account, of course, in deciding what their contribution should be, but if something could be done in that direction it might well remove the feelings which self-employed people have, that they are discriminated against in this respect. It is clear, again from the discussion document, that it would not be easy to include the self-employed in the present arrangements for earnings-related pension. But the Government might well consider the possibility of themselves matching a contribution to a retirement annuity of a kind which now qualifies for complete tax relief, up to a certain level, to a contribution made by a self-employed person, so that the self-employed person would have to make a contribution himself in the first place and then have a similar contribution, up to a limit of, say, 3½ per cent. of earnings within the limits on each side. I do not think that that would be administratively difficult to incorporate. It would certainly be easier than attempting to bring the self-employed within the existing earnings-related pension system. I do not think that it would be extremely difficult to do, but of course it would be a concession and it would cost money. I calculate that if half the people who would be eligible were in fact to take advantage of the full rate it would probably cost about £40 million. I am sure the Government will say that they have not got £40 million for anything at the moment but they might well consider this in the future. In the meantime, provided there is no increase in the flat rate, I have a good deal of sympathy in what the noble Lord, Lord Spens, is suggesting.

Lord Roberthall

I, too, should like to give some support to the noble Lord, Lord Spens. I do not know anything about the technicalities involved, but I think that a Government which says that it wants to encourage small businessmen and is very anxious to do things for them ought to look at the bearing of the exemption limits. Of course it is much more noticeable with VAT, where I think the lower exemption limit is quite ridiculously small. It seems extraordinary that with inflation going on so fast the lower limit has moved up only by £500 on £2,650. I do not know whether the noble Lord, Lord Spens, intends to press this amendment to a division, but the point I want to make is that there is a strong feeling among small businessmen that there is a disparity between what the Government say about small businessmen and what they actually do.

Lord Cullen of Ashbourne

I am sure that my right honourable friend will be grateful for the comments generally made on the subject of the self-employed, and those views will come into the discussion which will arise from the result of this document.

I think perhaps I should make clear that the self-employed contributions are based on the Class 1 contributions. They are set at a similar level and the increase from £2,650 to £3,150 is on the same lines as the increase in the Class 1 contribution from £23 to £27. The arrangement between the two groups has been accepted by both parties. As the noble Lord, Lord Wells-Pestell will remember, it was the Government Actuary who, in 1977, laid down the method by which these contributions would be made, and I do not think we should depart from that until the discussion document has been properly looked into.

So far as the amendments are concerned, taking the two together, the purpose of having Class 4 contributions is to introduce some relationship between the contributions of the self-employed and their earnings, thereby spreading the burden of contributions over the range of earnings in a way which was not possible under the pre–1975 system of purely flat rate contributions for the self-employed. The upper profits limit parallels the upper earnings limit for Class 1 contributions. The Bill proposes limits of £10,000 per annum and £200 per week respectively, which of course are identical. The lower profits limit is fixed at a level which ensures that the total self-employed contribution, for Class 2 and Class 4, remains at a fairly constant percentage of earnings for all contributors with earnings from the Class 4 threshold to the upper profits limit.

The effect of the amendment would be to increase the lower profits limit for Class 4 contributions from £2,650 to £10,000 per annum, instead of to £3,150 as under the Bill, and to raise the upper profits limit from £8,300 to £20,000, instead of to £10,000 as under the Bill. This would both destroy the parallel with the Class 1 upper earnings limit and result in a scheme where the percentage of earnings paid in contributions fell to 1.8 per cent. for a contributor with earnings of £10,000 a year and 3.7 per cent. for a contributor with earnings at the upper profits limits. This would be a quite irrational and unjustifiable pattern of rates. If there is to be any change in the basis of the Class 4 contribution, this should be properly considered during the review of the position of the self-employed in the national insurance schemes. I must ask the Committee not to accept this amendment.

Baroness Phillips

I notice that the Minister refers constantly to the similarity between employed and self-employed. Certainly it would not be fair if the self-employed entered the scheme at the same point as the employed. But I think we must remember that the self-employed not only do not receive the benefits to which the Minister referred, they do not receive unemployment benefit and they do not receive sickness benefit. So we have to be very careful when we talk about the correlation of payments, because the benefits drawn are totally different.

I noticed that the Minister referred to the fact that Governments of both parties have not been very kind to the self-employed, and that I would wholly endorse. I attacked my own Government, just as I am quite gently chiding the present Government. The only difference is that the present Government have rather suggested that they are on the side of the self-employed, and it seems that the self-employed are not going to get any better treatment under this Government than they did under the last.

This class of person is always referred to as the "small businessman". The taxicab driver and all sorts of people are self-employed and they are not any longer very wealthy people; they are people with quite small earnings. I think they are a very much neglected group in our affairs. They are growing in numbers. They feel a sense of grievance, particularly about the benefits that they cannot collect. I should like the noble Lord, Lord Spens, to feel that he has got support for this amendment; the self-employed do need a spokesman.

The Minister referred several times to the review which is to take place. Is it convenient to ask when this review is to be dealt with? If it is to be soon, why do we bother to have a Bill now? Perhaps it would be better to leave the matter until latter.

Lord Cullen of Ashbourne

I am sure the noble Baroness knows that we must have these rates organised in time for payments in April of the next year. Regarding this document, the representations are asked for by 31st March of this year; after that the Government will obviously consider the recommendations on the matter and come to decisions to put before Parliament. I doubt whether I actually said that I did not think the self-employed were fairly treated; I do not think I did say that.

Baroness Phillips

No, I said that.

Lord Cullen of Ashbourne

I do know that over a very long period of time the self-employed have felt that they have been badly treated, and it is in order to find out whether or not they are that this discussion is to take place. I think that most self-employed feel that they do not get a fair crack of the whip. I am not sure whether that is true. The noble Baroness's first point is that the contributions take account of the fact that they do not receive all the benefits. That is actuarially looked into.

Lord Spens

I am most grateful to the noble Lords and the noble Baroness who have supported me. I think it has been useful to have had this little debate; we have at least got some arguments down on paper in Hansard. I do contest the view that the upper limit of this band, £10,000, should be the same as the upper limit for the employee, because the self-employed person does not have the same benefits, and, as I said, the self-employed person has to keep some of his profits as reserves in order to help him to expand. Therefore, I should have thought that the upper limit for the self-employed might have been increased to £12,000 or something like that, and the lower limit similarly increased to relieve the very small business. However, I do not propose to divide the Committee on this amendment. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 5 not moved.]

Clause 1 agreed to.

Clause 2 [Alteration of Treasury Supplement to contributions]:

4.57 p.m.

Lord Wells-Pestell moved Amendment No. 6: Page 2, line 17, leave out subsection (1).

The noble Lord said: I beg to move Amendment No. 6. As this amendment deals with Clause 2(1), and the next amendment deals with Clause 2(2), with the consent of your Lordships and of the Minister, I should like to speak to both together, although they are in different fields. I do not really want to say anything about Amendment No. 6 because it would mean repeating what I said a short time ago about the Treasury contribution which the Government seek to reduce from 18 per cent. to 14½ per cent. I think I expressed myself fairly firmly about that and what we feel about it. I do not think there is any need for me to go over that again, except to say that we are entirely opposed to the proposed reduction.

What does concern us—and I would hope that it would concern noble Lords opposite—is that in Clause 2(2), the intention is to provide means whereby the Government can vary that situation whenever they want to. We take the view that this is a power that ought not to be given to the Government to use as and when they think fit. A suspicious person like myself suspects that the Goverment want it in because every year they will seek to reduce the 14½ per cent. That is my suspicious nature. If they want to change it year by year, the facility for them to do so will be found in this Bill.

This is not just a technical matter, and I am sure the Minister is not going to say it is a technical matter. This is a matter of principle. If the Government are proposing to do this, they ought to do it by principal legislation and not by order. As I have said, we feel strongly about it. We certainly would not consider dividing the Committee on Amendment No. 6, but I think we should be sorely tempted to do so on Amendment No. 7. That is in no way intended to be a threat, but I merely mention it to indicate to the noble Lord the Minister that we feel rather strongly about this particular method of seeking to make increases.

Lord Drumalbyn

I should like to put a matter to my noble friend before she replies. I quite understand the suspicion of the noble Lord opposite as regards this matter, but I would not credit him with a suspicious nature. I am bound to say that there is some logical reason for withdrawing the Treasury supplement over the years. But I think that the noble Lord is entitled—and I should also like to know this—to get some idea of what the Government have in mind now. I can visualise the circumstances in which they would wish to increase the contribution. Indeed, if we take it historically, I think that was the reason for maintaining the Treasury supplement after the time when the Treasury supplement was being used—as it originally was—to compensate for the fact that contributors were reaching retiring age before they had anything like paid for their contribution. There is a perfectly good argument in that regard for gradually withdrawing the supplement to the point where the fund is regarded as self-supporting—but self-supporting in principle: there must be a flexibility about it.

There may be times when a Treasury supplement is required in order to keep the fund in balance or to ensure that the fund is kept in balance (because it probably has to be done prospectively). On the other hand, as the noble Lord, Lord Houghton of Sowerby, said earlier, the fund might be in very good form because we had had something like full employment and so forth, and it might be expedient to reduce the contribution.

Secondly, I should like to know why the Government are deciding that there should be a limit of 2 per cent. either way. Are they so sure that that will be enough in some circumstances, if they do have to increase the contribution? There might be some fairly calamitous economic situation and they might have to increase it by more. Are they so sure that this will do? Those are the two points that I should like my noble friend the Minister to tell us about, because I think that she should allow us to see into the Government's mind in this regard. I immediately concede the need for flexibility, but what direction do the Government see themselves going in; and, secondly, is it flexible to have only a 2 per cent. option, so to speak?

Lord Banks

I should like to support Amendment No. 6 for the reasons which I gave when discussing Amendment No. 2. But, in addition, the argument has been put forward by the Government that Government expenditure on non-contributory social security benefits and on the Treasury supplement has increased between 1975–76 and 1980–81 by 27 per cent. in real terms, whereas all contributions, including those of employers, have increased by only 7.8 per cent. in real terms.

During the Second Reading debate I pointed out that the figures given by the Secretary of State in another place showed that expenditure on non-contributory benefits had increased by 26 per cent. and expenditure on the Treasury supplement had increased by 30 per cent. It was clear, therefore, that there had been no greater increase in expenditure on the Treasury supplement than on non-contributory benefits, so, it was somewhat irrelevant to bring in non-contributory benefits at all.

I further pointed out that the apparent disparity between a 30 per cent. increase in the Treasury supplement and a 7.8 per cent. increase in contributions was the result of introducing in April 1978 the new pension scheme incorporating an earnings-related pension as well as the basic. Those who were contracted out had their contributions and those of their employers reduced because the occupational scheme, of which they were members, undertook to provide the earnings-related pension.

The Treasury supplement is related to the gross premiums before reductions for the contracted-out. If gross contributions were taken there is no disparity. Net contributions were what the Secretary of State used for his comparison. The increase for gross contributions was approximately the same as for Treasury supplement. I argued that it was right to take gross contributions into account since the reduction was given to people who were contributing to a pension scheme which would relieve the national insurance fund of the burden of providing them with an earnings-related pension.

I should like to refer just once more to the letter from the noble Lord, Lord Cockfield. He said: It is true that on the assumptions you make gross contributions would have risen by much the same or indeed slightly more than support by the Exchequer. But this comparison is not a valie one. If you include notional gross contributions in such an equation you would in effect be adding payments to private pension schemes to one side of the balance only. For a true comparison you should add contributions to private schemes in 1975 to the other side. This comparison is as follows: Contributions to pension schemes and the National Insurance Fund—in real terms—in 1975—£20,100 million. Estimated contributions to pension schemes and the National Insurance Fund in 1980—£22,715 million. This is an increase of 13 per cent., which is of course considerably less than the 27 per cent. increase in Exchequer support for social security over the period". I do not accept the noble Lord's argument. He is saying in effect that the reductions in contributions to those contracted out have not resulted in a corresponding increase in contributions to private schemes. But it was not to be expected that employers and employees, already contributing to private schemes, would increase their contributions to such schemes because their membership of such schemes entitled them to a reduction of contribution to national insurance. As a result of their existing membership of a satisfactory pension scheme providing them with the equivalent of the earnings-related pension at least, they ceased to be eligible for the earnings-related pension. There was a reduction of contribution in exchange for a reduction in benefit. What else they may or may not have contributed to private schemes is irrelevant.

My point is as follows: the apparent difference in the increase in the real value—30 per cent. for the Treasury supplement and 7.8 per cent. for contributions—arose only because the new pension scheme with its contribution reductions for the contracted out, came into force in the middle of the period under review. You take a figure for contributions in 1975–76, which has no reductions taken off, and compare it with a figure in 1980–81 after reductions have been made; you link the Treasury supplement to gross contributions, and the result is bound to show an apparent disparity. But once the change in the system is made, as it was in 1978, future comparisons work out differently. If you compare the net figure for any year after 1978 with the net figure for any subsequent year, you will be comparing a net figure with a net figure, and you will find no disparity with the Treasury supplement unless you change the percentage of the Treasury supplement.

My calculation is that between 1978–79 and 1980–81 net contributions and the Treasury supplement have both increased by about 43 per cent. before allowing for changes in the real value of money. I repeat that there is no real disparity and that the argument in favour of the reduction in the Treasury supplement and the increase in contributions, on which the Government have heavily relied, is baseless.

The Minister of State, Treasury (Lord Cockfield)

Although formally only Amendment No. 6 has, at this stage, been moved, as the noble Lord, Lord Wells-Pestell, has suggested, it is for the convenience of the Committee if we deal with both Amendments Nos. 6 and 7 together. That is what I propose doing. The Bill logically falls into two parts. Clause 1 provides for an increase of 1 per cent. in contributions and, in effect, the remainder of the Bill deals with the allocation or the distribution of the additional money so raised.

Your Lordships have already agreed, on a Division, to the increase in the contributions by one percentage point. Therefore, we are now concerned, not with the amount of the contribution, but only with where that increased revenue goes. In fact, it goes in three directions. A quarter of it goes to the national insurance fund itself in order to make good what would otherwise be an actuarial deficiency, and the noble Lord, Lord Wells-Pestell, has said that he does not challenge that. The remainder goes as to roughly one half of one percentage point to reduce the Treasury supplement, and the final one quarter, of course, goes to the National Health Service. It is the reduction in the Treasury supplement with which we are now concerned.

There is objective or actuarial basis for determining the amount of the Treasury supplement. It was set at 18 per cent. in 1975, largely because that was the level at which the figure had settled down over a period of years. There had been fluctuations in the figure, but by 1975 it had settled down at about 18 per cent. However, we believe that circumstances have now changed sufficiently for that figure to be reviewed, and we believe that there are firm grounds on which it should be reduced to 14½ per cent., as provided in the Bill.

There are two reasons for this. The first is that the balance between contributory and non-contributory benefits has changed significantly over the years; that the non-contributory benefits, which of course by their very nature are paid for by the taxpayer, have increased much faster than contributory benefits. Because it is the taxpayer who pays the whole cost of the non-contributory benefits, we believe that it is only right that within the field of contributory benefits there should now be a re-assessment of the contributions made by employees, employers and the Treasury. That is the first reason.

The noble Lord, Lord Banks, disputes the argument underlying this. This is a straightforward difference of opinion. He takes the view that by increasing the contributions paid by employees towards contributory benefits, we are thereby making them pay towards noncontributory benefits. This is a view that we totally reject. The scheme itself remains a fully contributory one. Indeed, one could argue that the smaller the Treasury supplement the more contributory is the scheme. We cannot, therefore, accept the noble Lord's main argument.

As regards the other point he raised, as he himself said, both earlier in our deliberations and also in speaking on this clause, I have in fact already written to him about this. But I shall endeavour to explain the matter again in perhaps a slightly different and more philosophical way. In the case of people who are contracted out, the contracted-out benefits are not provided by the national insurance fund. That, of course, is axiomatic. Correspondingly the fund does not receive the contributions which would have provided those benefits. Therefore, the correct comparison must be between what the fund actually pays by way of benefits—that is, excluding the benefits that it does not pay—and what the fund actually receives by way of contributions—that is, excluding the contributions that it does not receive. In real terms, the contributions actually received by the fund have increased over the past five years by 7.8 per cent.

At the same time the Exchequer contribution to the social security system—that is, the Treasury supplement plus non-contributory benefits—in real terms has increased by 27 per cent. That is simply a question of fact. The 27 per cent. represents the increase in the actual amount of money that the Treasury has handed over to the fund or spent on increased benefits, expressed in real terms.

However, when one asks: why has the amount contributed by the Exchequer risen in this way? part of the answer lies in the fact that the Treasury supplement is calculated, not on the amount of contributions that the fund receives, but on a notional figure consisting of actual contributions plus the contributions that would have been paid had people not contracted out. Therefore, the existence of these notional contributions provides, in part, an explantaion of why the amounts provided by the Exchequer have, in real terms, increased much faster than contributions. It does not in any way alter the fact that the correct comparison is and must he between what the contributors actually pay and what the Exchequer also actually pays.

The noble Lord, Lord Wells-Pestell, directed his remarks primarily to subsection (2) of the clause, which provides a power for the Treasury supplement to be increased or reduced by two percentage points. We believe that this is a necessary degree of flexibility. In fact, it merely mirrors what is already contained in the 1975 Act—the principal Act—relating to contributions. There is a power by regulation enabling the Government to alter the rates of contribution by 0.25 percentage points on either side; that is, for employers and employees. A change of 2 percentage points in the Treasury supplement would have an effect of approximately £350 million. That is, the amount of the supplement could be increased by £350 million or reduced by £350 million. That in fact in financial terms is a rather smaller degree of flexibility than was incorporated in the 1975 Act in relation to contributions, because an increase or decrease of 0.25 per cent. in contributions on each side—that is, employers and employees—would produce a change of approximately £500 million, which is substantially greater.

My noble friend Lord Drumalbyn put two questions. The first one was in many ways much the same as the one expressed by the noble Lord, Lord Wells-Pestell. He asked what do the Government have in mind now. The noble Lord, Lord Wells-Pestell, not unnaturally, thought that there might be some dark plot to eliminate the Treasury supplement altogether. My noble friend Lord Drumalbyn suggested, in the opposite direction, that there might be good grounds for eliminating the Treasury supplement. We in fact, while noting these expressions of opinion, have no specific plans in mind for the future. We believe that this degree of flexibility is highly desirable. What happens will have to depend on circumstances as they exist in the future. Neither I nor anybody else in the Government can at this stage say whether it will be necessary to use the power, and, if it is necessary, whether it should be used in one direction or the other.

The second question that my noble friend put was, do the Government regard a limit of 2 per cent.—that is, up or down—a sufficient degree of flexibility? The answer is that we do regard it as sufficient. It provides an ability to change the Treasury supplement by a substantial amount of money; a sum which is much in line with the degree of flexibility provided in the case of the contributions themselves.

Finally, I would say this. There is, of course, always anxiety, not only in your Lordships' House but perhaps even more in another place, that too much power ought not to be delegated to Governments. In general, of course, we as a party very much support the view that too much power should not be delegated to Governments. This is why first of all this power has been limited in the way that it has; and, secondly, it is subject to the Affirmative Resolution procedure. This appears on page 4 of the Bill in Clause 4(5). Because it is the Affirmative Resolution procedure, it means that proper parliamentary control is maintained over any change in the amount of the Treasury supplement. For all these reasons, therefore, I would advise your Lordships against acceptance of either and both of these amendments.

On Question, amendment negatived.

Lord Wells-Pestell moved Amendment No. 7: Page 2, line 23, leave out subsection (2).

On Question, amendment negatived.

Clause 2 agreed to.

Clause 3 [Allocation of contributions]:

Lord Wells-Pestell moved Amendment No. 8: Page 2, line 35, leave out subsection (2).

The noble Lord said: I beg to move Amendment No. 8, standing in my name, and, again with your Lordships' permission and the permission of the Minister, I should like to also speak to Amendment No. 9. These two amendments deal with Clause 3 and refer to the allocation of contributions. I can deal with this briefly because it is really on a matter of information that I want to direct my question to the Minister.

If one looks at the destination of contributions of Treasury supplements in Section 134 of the Social Security Act 1975 on pages 112 and 113, the Government in the Social Security Bill now before the Committee seek to increase the percentages. I note that it is suggested that, in Section 134 paragraph (c) on page 113 of the principal Act, the words "8 per cent." should be replaced by the words "11.5 per cent.", and that, in paragraph (d), again, "8 per cent. "is to become "11.5 per cent.".

I wonder whether the Minister can give any indication as to why there should be such a marked increase in the percentage. I do not wish to raise the matter of the smaller increases from 0.4 per cent. to 0.65 per cent., and from 0.6 per cent. to 0.85 per cent.

Baroness Young

May I answer directly the noble Lord on that point? I think there is some misunderstanding about this clause. In Clause 3(2)(a), which has the sets of figures to which the noble Lord referred, that is the Class 1 40 per cent; but (b) is of course the self-employed, the Class 2 contribution, just as paragraph (d) is also the self-employed. It is important to know that we are talking about two quite separate categories of people; one the self-employed and the other Class 1 contributors.

Lord Wells-Pestell

I am much obliged to the noble Baroness. This has dealt with a confusion in my own mind, and there is no point in my saying anything more. With the leave of the Committee, I ask permission to withdraw this amendment.

Amendment, by leave, withdrawn.

[Amendment No. 9 not moved.]

Clause 3 agreed to.

Clause 4 [Supplemental]:

5.30 p.m.

Lord Wells-Pestell moved Amendment No. 10: Page 3, line 28, leave out ("before") and insert ("except").

The noble Lord said: The Bill does not apply in respect of any tax year before the tax year beginning 6th April next. We seek by this amendment to remove the word "before" and insert "except", which would mean that the Bill would operate for only one year. I suppose it is not reasonable to expect the Government to agree, but we feel that the Bill is in many respects unsatisfactory; if it is to come into operation its life should be no longer than one year, and the Government should look afresh at many of its provisions.

Baroness Young

It is clear that the noble Lord, Lord Wells-Pestell, sees the Bill as a temporary expedient, a measure devised by the Government to overcome immediate economic problems. That is not the case. The Bill is an essential feature of the Government's medium-term economic strategy and it achieves what we regard as these desirable effects: first, it helps to reduce Government spending and eases the pressure on the public sector borrowing requirement; secondly, it collects the balance of responsibility for financing the social security system as between the contributor and the general taxpayer, something to which we attach great importance; and thirdly, it restores the value of the National Health Service contributions.

These measures are not temporary; they are intended to carry forward into future tax years. Adjustments up or down may of course prove necessary in time, and that is why powers are being taken to amend National Health Service contributions—which was the subject of the second of the two amendments the noble Lord withdrew on Clause 3—as well as the rate of the supplement, a matter which was dealt with fully by my noble friend Lord Cockfield.

For those reasons the Government could not accept the amendment. There is always an opportunity to review, as in the case of this Bill, by primary legislation, if that were thought necessary and if the degree of flexibility, to which reference has already been made, both over NHS contributions and the Treasury supplement should not prove in future years to be flexible enough to meet a particular requirement. I therefore advise the Committee not to accept the amendment and I hope the noble Lord will be prepared to withdraw it.

Baroness Phillips

Before my noble friend considers withdrawing the amendment, there is a point I must raise. Having listened to the noble Lord, Lord Cockfield, who, with all the magic of Paul Daniels could have sawn the lady in half having first convinced her that he was doing it for her own good, may I draw to his attention a reference he made which I suggest should be put right for the record? He suggested that people opting out made no contributions, or if he did not say that, he used a similar phrase. He will he aware that they opt out of only one part of the contribution, and that is in respect of the retirement pension—in other words, those who pay for a private scheme—and perhaps when the noble Lord reviews what he said (I am glad I taught maths because I could almost understand what he said) he will bear in mind that everybody contributes, although they do not necessarily contribute to one particular section.

Lord Cockfield

I very carefully referred to contracted-out benefits.

Baroness Phillips

Yes, but they are contracted out of only one part.

Lord Drumalbyn

May I ask the Minister to say for the record whether there is any precedent in the national insurance fund for duties or obligations being imposed for only one year?

Baroness Young

I have no reason to think that has ever been done before, but if that information is not correct I will write to the noble Lord. My understanding is that it would be quite exceptional if the amendment were carried.

Lord Wells-Pestell

Am I to understand from the noble Lord, Lord Drumalbyn, that that is a good and sound reason for taking a contrary course on this occasion?

Lord Drumalbyn

So far as somebody might imitate it in the future, yes.

On Question, amendment negatived.

Clause 4 agreed to.

Clause 5 agreed to.

House resumed: Bill reported without amendment; Report received.