HL Deb 18 January 1982 vol 426 cc416-31

3 p.m.

The Parliamentary Under-Secretary of State, Department of Health and Social Security (Lord Elton)

My Lords, I beg to move that this Bill be now read a second time. The primary purpose of this Bill is to finance the many benefits that will be available to people in the coming tax year. It therefore has to provide that the income to the national insurance fund from contributions will be sufficient to meet the likely demands made upon the fund in the coming year without leaving an unnecessarily large surplus. It is a function of the Government Actuary to estimate what that demand is likely to be. This estimate is published in the report of the Government Actuary on the financial provisions of the Bill which was presented to Parliament by my right honourable friend the Secretary of State in December of last year. From this it will be seen that we are likely to be paying out very substantially more in national insurance benefits during the year 1982–83 than during the current tax year.

Total expenditure from the fund on benefits next year will in fact be little short of £19 million. That is rather more than £1.6 billion above what will be expended this year. It is also a very striking fact that, of the total expended—which will be just under £19 billion—no less than £13½ billion will go on retirement pensions. Retirement pensions now account for over 70 per cent. of national insurance fund expenditure on benefit. Indeed, they represent about one-eighth of the whole of Government expenditure in a financial year. Taken in conjunction with the current expectation that the numbers above the present retirement age which are expected to increase until the end of the century—which is now only 13 years away—and that we expect the number of people aged 75 and over to increase by a fifth within that time and the number of those aged over 85 to have gone up by a half, these figures will be seen to be of more than passing interest.

This Bill, however, is concerned only with the financial year immediately ahead of us. It makes provision for demands expected to be made upon the national insurance fund and it does so while preserving the traditional way of funding the national insurance scheme. This is known as the "tripartite arrangement. The three main sources of funds are respectively the employer's and the employee's contributions and the Treasury supplement. The employer's and employee's contributions are paid into the fund, which is run on what is termed a "pay-as-you-go "basis. It would perhaps be less confusing if it was called a "pay-as-they-go "basis, because what it means is that those now in work and their employers are paying for those no longer in work and it is their contribution which has to balance the demands made upon the fund in the year in which they pay them. Today's contributors are paying today's benefits in the confident expectation that when they themselves need to draw a benefit it will be paid from the contributions of people then in work.

The three sources of income that I mentioned are not, of course, the only sources from which money arrives in the fund. There are also Class 2 and Class 4 contributions by the self-employed and voluntary Class 3 contributions by other people wishing to preserve their contributions record for pensions purposes. In addition, there is the investment income of the fund. In spite of this investment income, however, and next year it is estimated to amount to nearly £6,000 million, it has always been accepted that, while employers, employees and other contributors may be expected to provide the bulk of the income to the national insurance fund, it would not be reasonable to expect them to do so unaided. It is for this reason that they are boosted by an addition from the Consolidated Fund. This is the so-called " Treasury supplement ".

The purpose for which the supplement was introduced has always remained the same but the way in which it has been applied has varied from time to time, as has its proportionate amount. Originally it was principally applied to enable benefits to be made available under the old flat rate scheme to people with contribution records which did not suffice to qualify for them. As the graduated scheme succeeded the flat rate scheme, and as in time the present fully earnings related scheme for employees came in, the changes have been reflected in the Treasury supplement. There is nothing new, therefore, in proposing changes in the rate of the supplement as this Bill does.

Lord Bruce of Donington

My Lords, I am most reluctant to interrupt the noble Lord, but when he spoke about investment income he mentioned £6,000 million. Should this not be £600 million?

Lord Elton

My Lords, I am advised that indeed it should and I misread the script. I am most obliged to the noble Lord for the close attention which he pays as well as for his very helpful intervention. To save me making a formal apology later I should like to apologise to the House now.

I am making this relatively simple explanation for my own benefit as well as for anybody else's. If any noble Lords find that I am being too simplistic, I apologise for pitching it at my level, rather than at theirs.

My description would be a good deal too simple if I left the impression that all the money paid by way of contributions actually arrived in the fund. As your Lordships will know, there are also elements which are specifically earmarked for other purposes. I refer, of course, to the National Health Service allocation and the employment protection allocation. All contributions—employers', employees', and others—contain the National Health Service allocation. It does not provide a great deal of money in relation to the overall expenditure on the National Health Service: the total for 1982–83 is expected to bring in a little over £1.6 billion. This means that of total NHS spending only 12 per cent. will come from national insurance contributions. But this does provide a worthwhile contribution towards the costs of the health service. The inclusion of the National Health Service allocation is a desirable means by which people in work and their employers, together with others paying contributions, help to fund benefits for all those who need them.

The same could be said about the employment protection allocation, although up to now it has been confined to the employer's contribution. The money raised from the employment protection allocation—and it will be some £584 million in 1982–83—is paid into the redundancy and maternity pay funds. What this means is that, through their contributions, employers and now employees collectively will provide income to the fund from which some help, although as I shall say later, only limited help, is given to individual employers towards the cost of the redundancy payments which they make to their employees.

Your Lordships will be aware that changes in national insurance contribution rates and in the earnings limits for liability are usually made by statutory instrument. This Bill contains a number of changes which could have been made in this way. But because a Bill was needed to provide for those changes which could not be made by order, the Government decided that it would be convenient for both Houses if all changes proposed for 1982–83 were contained in a single piece of legislation. To be specific, the total increase in the employee's contribution and the introduction of an employment protection allocation in the employee's contribution require legislation: the other changes could be achieved by order.

Baroness Wootton of Abinger

My Lords, may I intervene for one moment to ask the noble Lord whether after all these changes it is reasonable to describe this as an insurance fund in the normal meaning of that term?

Lord Elton

My Lords, I will leave that to the judgment of your Lordships when you have heard the end of my tale. I believe indeed that the purposes for which the fund is used and the means by which it is funded are fairly generally understood by those people who pay close attention to these matters, at least in general principle, and that it is proper to retain the name by which it has always been known.

This is a Bill which aims to strike a proper balance between general taxation and contribution revenue and aims also to apportion the burden of meeting the extra costs of benefits where they can most readily and fairly be met. I shall say more about the specific objectives of particular clauses in the Bill as I come to them. It is to the specific contents of the Bill that I now turn.

I shall look first at Clause 2 which proposes a reduction in the Treasury supplement. Next I shall consider what I might call the " non-national insurance " elements in the employee's contribution—the National Health Service allocation and the new employment protection allocation—which are dealt with in Clause 3 and to which I think the noble Baroness was referring in particular. Finally, I shall return to Clause 1 which covers national insurance contribution rates and earnings limits. In that context I shall deal with the overall effect on both employers and employees of the proposals in the Bill.

Clause 2 of the Bill provides for the Treasury supplement to be reduced from 14.5 per cent. to 13 per cent. I would remind your Lordships of what I have said about the nature of the supplement. It is a contribution from the Consolidated Fund to the national insurance fund, but there are no hard and fast rules about its size. The percentage is that of the amount of net contributions of all classes received in any one year, after deducting payments towards the cost of the National Health Service and into the redundancy and maternity pay funds. Contributions paid at a reduced rate by contracted out employers and employees are treated for the purpose of calculating the supplement as if they were paid at the full rate.

In deciding on the level of Treasury supplement that is appropriate for the coming tax year, the Government have looked at the amount of benefit expenditure in general that will fall to be met from the Consolidated Fund. This represents a straight burden on the tax-paper, and it is a burden that has tended to grow in recent years. The overall proportion of benefit expenditure—both contributory and non-contributory—which is met from general taxation has gone up from 37 per cent. in 1975–76 to 45 per cent. in the current year. The Government take the view that it is not reasonable to expect the general taxpayer to finance a significantly greater proportion of benefit expenditure in 1982–83, when total expenditure on social security benefits will be in the region of £30 billion. The reduction in the Treasury supplement will achieve a steadying of this proportion: it will still be about 45 per cent. I recognise, of course, that the reduction in the Treasury supplement will bring about a change in the relative amounts of expenditure met by, on the one hand, people in work—who are contributors—and, on the other hand, the general taxpayer. But the extent of that change should not be over-rated. We are holding the proportion of benefit expenditure financed by the general taxpayer steady: the change in the proportion of the national insurance fund funded from Treasury supplement will therefore result in a slightly greater emphasis on contributions to it made by people in work. That contribution is in itself the essence of the national insurance scheme: the idea that those in work pool their collective contributions to meet the costs of the contributory benefits for those who are not in work. The change in the rate of the Treasury supplement endorses this contributory principle and the idea of social insurance to which successive Governments have rightly attached such value.

I should also emphasise that the reduction in the percentage of the Treasury supplement will not in itself greatly reduce the actual amount of supplement going into the national insurance fund. The Government Actuary has estimated this as £2,591 million for 1982–83 —this is only £9 million less than in the previous year—a reduction of only 0–35 per cent. Nevertheless, the reduction in the Treasury supplement will achieve a saving in public expenditure of £260 million. This in itself represents a welcome relief, however small, of the pressure on the public sector borrowing requirement.

I turn now to the first part of Clause 3 of the Bill, which will increase the National Health Service allocation in the primary Class 1 contribution and in the Class 4 contribution by 0–1 per cent. I have already outlined the case for a National Health Service allocation, and the increase in its percentage will bring in an extra £104 million. This is, obviously, a useful contribution towards the increased expenditure on the National Health Service which we are planning for 1982–83. And that increase is a substantial one. We shall be spending just over £12 billion in England on the National Health Service in 1982–83 compared with rather under £11 billion in 1981–82. So we will be spending over £1,000 million more on health in the corning year.

Baroness Jeger

My Lords, can the noble Lord say whether that increase is due to inflation and rising costs, or whether it is an increase in real terms?

Lord Elton

My Lords, I was about to tell your Lordships that we have, in fact, increased expenditure in real terms by 5 per cent. since 1979. I am talking about real terms—one would not perhaps gather so by reading some of the media or listening to some of the speeches in this House.

The Government take the view that it is not unreasonable to look to those in work to pay towards the services they can get, and that part of the growth of the National Health Service should therefore be financed from an increase in the allocation. In general we believe that people are ready to pay more for health by way of a specific contribution than through general taxation. An increase in the National Health Service allocation recognises this preference. But it recognises it without imposing an unwarranted extra burden. As my right honourable friend the Secretary of State pointed out in the Second Reading debate in another place, the increase in the National Health Service allocation does not amount to more than an extra 15p a week for a man on average earnings.

One final point, however, to which I should draw your Lordships' attention, is that we have not increased the amount of National Health Service allocation in the Class 2 contribution. This is in recognition of the need, to which I shall refer again, to keep additional burdens on the small businessman to a minimum. The aim of keeping the burdens on industry in general to a minimum is also recognised in the second part of Clause 3 of the Bill. This introduces, for the first time, an employment protection allocation into the primary contribution—the employee's share. It will be 0.35 per cent. The employment protection allocation is, as I have already said, paid into the redundancy and maternity pay funds, from which payments are made to employers to help finance their redundancy payments. There is, of course, already an employment protection allocation in the secondary contribution—the employer's share. It is currently 0.2 per cent.

An increase in the employment protection allocation is needed to keep the redundancy fund within the statutory borrowing limit of £300 million which came into force on 7th December. There has been a sharp increase in redundancies over the past year, with correspondingly heavier calls on the redundancy fund. Even though we believe that we have now passed the peak, there will still be a need for extra finance for the redundancy fund next year. Cutting the size of the rebates given to employers would be no answer. Even a cut from the present 41 per cent, to, say, 35 per cent. would save less than £50 million. This would not be nearly enough to keep the fund within its borrowing limits. And for such a modest return, there would only be more troubles—most obviously, an immediate direct effect on the cash flow of firms who already have problems, leading in turn to even more redundancies.

I have already emphasised our desire to keep new burdens on employers to a minimum. The existing burden of redundancy payments is already a heavy enough one for them, and it is one which at present they shoulder alone. Employers can get only 41 per cent. of the redundancy payments which they make to their employees refunded to them from the redundancy fund: the remaining 59 per cent. is entirely a liability on them. And, of course, under existing arrangements the financing of the redundancy fund is a burden on employers alone. What this amounts to is that the entire cost of financing redundancy payments is at present met solely by employers as a group.

We have decided that it is right to ask employees to contribute to the cost of redundancy payments. There is an obvious—and, I believe, fair—analogy between asking people in work to contribute towards unemployment benefit to people out of work, as they already do, and asking for a similar contribution for payments for people who lose their jobs. It is an accepted principle that benefits should be funded primarily from contributions on the earnings of those who work. The contributions will bring in some £353 million in 1982–83, and this should be enough to keep the fund within its statutory borrowing limits. I should add that this will still leave employers meeting three-quarters of the cost of statutory redundancy payments.

I come now to Clause 1 of the Bill and the overall effects of what is proposed there. Clause 1(1) raises the lower and upper earnings limits for Class 1 contribution liability from £27 and £200 a week to £29.50 and £220 a week respectively. These changes are purely routine: the lower earnings limit is linked to the basic rate of retirement pension by the Social Security Pensions Act 1975, and the upper earnings limit has to be between 6½ and 7½ times that rate. The upper limit proposed in the Bill falls within that range: it is in fact 7.43 times the basic rate.

Clause 1(2) raises the employee's contribution from 7.75 per cent. of liable earnings to 8.75 per cent. This is, of course, the total amount by which the contribution is raised—it includes the additional National Health Service allocation of 0.1 per cent. and the new employment protection allocation of 0.35 per cent. that I have already dealt with. There remains 0.55 per cent.; of this 0.25 per cent. compensates for the reduction in the Treasury supplement and 0.3 per cent. is needed to keep the national insurance fund in broad balance. Your Lordships will find the detail of these changes set out in the report of the Government Actuary. What they will mean to a man on average earnings of £150 a week is £1.50 a week more in contributions if he is not in contracted-out employment and £1.57 if he is. The employer of a man on these earnings will have no more to pay if he is not contracted-out and 11p more to pay if he is—because a raised lower earnings limit increases the band of earnings on which the full rate of contribution is paid.

In proposing these changes, the Government have been at pains to afford the maximum possible protection to employers. They could only be spared the effect totally if those changes did not include raising the upper earnings limit for contribution liability; but this would in itself have the undesirable effect of distorting the shape of the national insurance scheme. It would also disappoint the legitimate expectations of low paid and high paid alike—of the low paid that earnings limits should rise with inflation, so that those at the upper end of the earnings scale meet their fair share of higher costs; and of the higher paid that their additional pension rights should not be impaired.

By sparing employers any increase in their contribution rates to meet the needs of the national insurance and redundancy funds and of the National Health Service we have gone as far as we reasonably can to protect them. And that is a long way: of the estimated £652 million increase in employers' contributions in 1982–83, only £140 million—21.5 per cent.—results directly from the higher earnings limits. The remaining £512 million will come from increased earnings and would have arisen anyway. So we have done all that we reasonably can in an earnings-related scheme to help bring about the recovery of industry and a drop in unemployment.

Some noble Lords may cavil at my decision to favour the employers in this. It is one of the curses of British industrial history that the politicians of at least one party traditionally think of employers and employees as having interests which always differ and always conflict. Never has it been a greater fallacy than now. The failure of a business does not assist its employees—it renders them unemployed. The unprofitability of a business does not assist the unemployed; it merely inhibits the creation of new jobs into which they could move. The success of a business is just as important to its employees as it is to its employers.

It is a principal object of Her Majesty's Government's policy to create conditions in which businesses can become both more efficient and more profitable. That is the way in which they can acquire the strength to expand and to sign on larger workforces. I make no apology, therefore, for the steps we have taken to limit the cost of our proposals to employers.

Lord Molloy

My Lords, will the noble Lord give way?

Lord Elton

My Lords, I ought to have injury time for interventions already. I think that I ought to continue. Clause 1(3) of the Bill raises the contribution payable by married women and widows who have the right to pay the lower rate from 2.75 per cent. to 3.2 per cent. In doing this, we are recognising that opted-out women should not be protected from the increase in the National Health Service allocation—which they already pay in full; this is because they benefit from the health service and it is fair that they should pay the new employment protection allocation as they can qualify for both redundancy and maternity payments. Nor do I think it unreasonable to expect them to contribute to the general costs of the national insurance scheme, though of course it is necessary to preserve a proper differential between their contribution and that of others who are eligible for the range of benefits that opted-out women have chosen to renounce. The difference between the reduced and full rate contributions will be 5.55 per cent.

The contribution rates for self-employed people are dealt with in Clause 1(4) and (7) of the Bill. Just as we have been concerned to protect employers from the full force of changes in contribution arrangements for 1982–83, so too the Government have been particularly anxious to build on the encouragement and stimulus that we have given, and are continuing to give, to small businesses by sparing the lower earner among the self-employed. If we had continued to apply in full the formula for calculating the Class 2 contribution which has been used since 1978, the new rate would be about £4. Instead the Bill proposes a rate of £3.75 a week. This represents a suspension of the formula for the coining year to provide a further modest encouragement to the small businessman, but not on such a scale that we have had to look for an extra weighting on the Class 1 contribution. A self-employed person with profits less than £3,450 will only have to pay £18.20 a year more—and if he expects to make less than £1,600, he will be able to obtain an exception from any liability at all.

While we have not been able to provide quite so much shielding for the higher earners among the self-employed, who have a liability for Class 4 contributions, we are nevertheless raising the Class 4 contribution rate by only 0.25 per cent. Application of the usual formula would have demanded an increase of 0.35 per cent. This again offers a further small stimulus to self-employed people. The level of profits at which these contributions will become payable will be raised in line with inflation, like the upper earnings limit for Class 1. This is required by the basic nature of the national insurance scheme, but your Lordships may feel that by and large the self-employed have got not a bad bargain at all in this Bill.

This Bill is rendered necessary by the changing and difficult economic conditions of our time. In it the Government have maintained the just balance which is an essential feature of the national insurance scheme and of our whole system of benefits. At the same time we have done everything within our power to see that the changes which we are making assist our present climb out of recession and our battle against unemployment. It is a Bill about financing benefits of various kinds—the national insurance benefits, the benefits of redundancy payments, and, of course, the wider benefits of the National Health Service. It will enable us to increase our spending on national insurance benefits by £1.6 billion next year. It will also mean that we raise an extra £104 million specifically for the National Health Service. To achieve, or rather to redress, the balance which I have mentioned, the Bill will make a very modest redistribution of the burden of financing social security benefits between people in work and the general taxpayer: this accounts for the reduction in the Treasury supplement.

Similarly, I have argued that it is fair also to ask employees now to carry a part—although still a very small part—of the other burden, of redundancy payments, which employers at present shoulder alone. With a heavy, though decreasing, load of redundancy payments next year and with employers needing every relief that we can give them, it is reasonable to ask people in work to contribute towards helping their colleagues who lose their jobs.

I have laid repeated emphasis on the two concepts of fairness and balance because they are what underlie this Bill. We are providing for increased spending on national insurance benefits—with the lion's share going to the retirement pension—and on the National Health Service and redundancy benefits. All of them provide help where it is needed—a basic requirement of fairness. We are also providing for this spending to be met in a way that maintains a fair distribution of the burdens which it inevitably imposes. I regret if I have spoken for too long; perhaps I should not have given way so often. On the other hand, the interventions were most useful.

Baroness Wootton of Abinger

My Lords, before the noble Lord sits down, I wonder whether he could now answer my question. An insurance, as it is commonly understood, means that the insured pay certain premiums in exchange for which in certain contingencies they have the right to certain benefits. Is this now still an insurance scheme?

Lord Elton

My Lords, I am anxious not to be drawn into a protracted argument about semantics at this stage. I shall merely say that this is the term that was coined to describe the " pay-as-you-go " scheme. It has always been based on that principle. I think that it is the right term. I beg to move that this Bill be read a second time.

Moved, That the Bill be now read a second time.— (Lord Elton.)

3.30 p.m.

Baroness Jeger

My Lords, this is clearly a Treasury Bill, and a bad Treasury Bill at that. No one could say worse of any piece of legislation that comes before your Lordships. In our view, it is a mean and regressive measure, the main purpose of which is to reduce the Treasury's contribution to social security and to load an increased burden on to contributors. For reasons of order, obviously we must concentrate today on this destructive little Bill, but I would remind the House that it has to be read in the context of other policies and other measures by which this Government are deliberately impoverishing increasing numbers of our people. It has to he considered against a back-ground of high inflation; intolerable unemployment; increased rates and rents; a decrease in the real value of many benefits; higher prescription charges; and increased charges for many social services. This Bill shows a totally insensitive approach to the casualties of this Government's policies.

The underlying difficulties are in fact much more fundamental than can be dealt with in this measure. In the first place, the problems are the result of the Government's economic policies, and, in the second place, the result of a failure to give the basic necessary thinking to the whole question of social security in the 1980s. I am not making a party point on this, because I think that neither this Government nor the previous Government have really taken on board the changing situation in this matter. We have stumbled on from Lloyd George to Beveridge, and since Beveridge we have not really had a fundamental rethinking of social security in the 1980s. So we have a series of stop-gap measures about social security which confuse applicants and even administrators. It is as though we—again I refer to both Governments—are running about putting our fingers in the dyke when we should be rebuilding the dyke itself.

It is more than time that we faced up to the need for a total review of the post-Beveridge situation. I believe that we have to balance between income tax and insurance contributions in a totally different way. The Government's policy of reducing income tax, which benefits the richest people, and increasing national insurance contributions, which is harmful to the poorest people, seems to me totally wrong. It reveals with clarity the social and economic prejudices of this Government.

I would remind noble Lords opposite that in the Conservative manifesto of 1979 these words were printed: We have muddled on from Lloyd George to Beveridge and it is time that we had a completely different attitude ". Then there is this sentence on page 27 which says: Our social security system is now so complicated that even some "— perhaps not all, but some— Ministry officials do not understand it ". We have certainly not done anything to make our social security system more understandable even to these clever Ministry officials, and certainly not to the people who queue up at the offices week after week trying to find out what benefits they are going to get.

Beveridge envisaged a tripartite scheme of contribution, and successive Governments upheld that decision. The Beveridge policy was that the Exchequer should pay one-third of the cost of unemployment benefit, and one-sixth of pensions, disability and maternity allowances. But now the Government are chipping away at these principles and increasingly transferring the nation's responsibility from income tax to individual national insurance contributions, which have infinitely less relevance to a person's ability to pay. In fact, if noble Lords ever meet any ordinary people they will find that most of them look on national insurance contributions just as a bit more on top of their tax. My friends just talk about their take-home pay, and they do not differentiate between the deductions for national insurance or for pay as you earn. It is just one lump taken out of the pay packet. In the practicalities of budgeting they certainly do not differentiate between tax and insurance. It is all just one big piece of deprivation.

I should like to ask the noble Minister who is to reply to this debate how much it would be necessary to increase income tax to take care of the increased contributions which they are asking for in this Bill. Would it be a penny in the pound on the standard rate, or what? It is the view of myself and my friends that where there is a need to raise more revenue it should be done on the fairest possible basis of asking those who earn most to give most. It would be interesting for us to know what addition to income tax would be necessary in order to block out this Bill.

Clause 1 of this Bill alters contribution liability and thereby increases, albeit silently, the inequitable switch from income tax financing to individual insurance contributions. I am not very good at figures but I have worked hard on this and I find—and I am subject to correction—that in 1979 a worker on average earnings paid about 6.5 per cent. of his income in national insurance and about 33 per cent, in income tax. Now the 6.5 per cent. to national insurance has gone up to 8.75 per cent., and the tax has shifted down to 30 per cent.

There was a reference to this in Hansard of another place on 17th December at column 469. This clause raises the lower limit in Regulation 7 of the Contribu- tions Regulations Class 1 from £27 to £29.50. I submit that this figure is far too low. It must be the very poorest people in this country whose income is £29.50 a week. It is below the basic retirement pension of £29.60. Even this Government have admitted that the calculation of that pension was wrong and that it should have been higher if it was to keep pace with inflation.

I ask, who are these people who earn £29.50 a week? I can tell noble Lords because I know many of them. It is usually part-time workers, very often women, who clean offices at dawn or do odd jobs, evening shifts, in factories, or shops or launderettes. Under this clause, as I understand it—I hope perhaps I may be corrected—if such an impoverished worker has the chance of, say, a £1 a week rise, he or she will have to beg the employer not to give the increase because, once a worker gets above £29.50, he or she will have to pay a contribution on the whole amount and not just on the amount above the threshhold. Somebody working hard—as I thought the Conservatives wanted us all to do—earning an extra £1 a week would then immediately have to pay £2.60 a week in insurance. What kind of sense does this make?

At the same time, there are the uneven contribution records of such persons who may be earning £29.50 at some time and then for a little while get a little more and come into the full scheme. What happens to their benefit entitlement when their contribution records are examined? This £.29.50 is far too low. It really ought to be a shame for any noble Lord to think that there are people in this country today earning as little as £29.50 a week. What sense is there in a policy which reduces the net income of the poorest and lowest paid people? What incentive have they to work harder if they end up taking home less pay?

From next April when all this comes into effect a person receiving five times the average earnings—say, £35,000 a year—will pay 2.9 per cent. of his income in national insurance. But a worker on £140 a week, which is about the average, will pay 8.5 per cent. of his income in national insurance. It seems that it would be infinitely fairer to increase the standard rate of tax so there was a more equitable distribution between different wage earners. Thus, we have at present an inequitable and irrational tax collecting scheme. I am not contesting the Government's need to raise more money. After all, we on this side want to see higher benefits, better conditions and more investment in the National Health Service, and of course we recognise the inevitability of the Government having to raise more money. But this Government are having to raise more money to pay for the bandages for the wounds of unemployment which they have themselves inflicted on the people of our country.

If we accept the need for more income for social security purposes, surely we can ask whether Clause 1 is the right way to raise funds. That clause raises the upper limit from £200 to £220 and I must ask whether that fully takes care of inflation. Does it mean that somebody earning £500 a week pays the same as a neighbour earning £220? Where is the social justice in that, if that is the case? And the greater the stoppages out of income and the lower the take-home pay, the more wage increases will be demanded, and reasonably so, so that at the end of the day the nation will have gained nothing because we shall have reduced the spending power of thousands of people and will have made it that much more difficult to get out of the recession, which must be the objective of all noble Lords.

I have a specific question to ask about Clause 1 in relation to contributions. What will be the position of young people who take part in the new scheme for youth training? I understand that young people under the YOP scheme are having some credits arranged for certain benefits. We understand that under the new scheme these young people are to be paid £15 a week. Have any arrangements been made for their social security contributions to be credited or for them to have cards that will be franked? If not, they will be in trouble in later life on the basis that their contribution records may be inadequate, and I hope we shall have an answer to that.

On the general question of contributions—I appreciate that this does not come strictly within the Bill but, because of the implications of Clause 1. I feel it is fair to raise the point—are the Government giving any thought (as I wish my Government had done) to computing these on an annual, rather than weekly, basis? We assess income tax on an annual basis but social security contributions are assessed on a weekly basis. I am sure that in these magic days of computers we should be compounding all the liabilities which the citizen has to contribute to national funds in a more reasonable and time and labour saving way.

Annual contributions would be fairer to many seasonal workers. For instance, a seasonal worker earning £50 a week for six months of the year pays more in national insurance than someone earning £25 a week throughout the year, although their annual income is the same. I will not press this point today, but it is one to bear in mind because I have never understood—I repeat, this applies to various Governments who have been in power—why national insurance must be on a weekly assessment and income tax on an annual one. The sooner we can get the two closer together, the better for all concerned.

Clause 2 provides for the Treasury supplement to be reduced to 13 per cent. of relevant contributions. In 1975 the Treasury contribution was 18 per cent. and in 1980 it was 14½, per cent. Now we are to go down to 13 per cent., which represents a reduction of £261 million. A fair question to ask is what the Treasury intends to do with this windfall of £261 million. If they said it was to go towards implementing the Mental Health Bill or the National Health Service or something useful, we should find it more acceptable. However, I read carefully the Official Report of the debates in the other place and no answer was given to the question what the Treasury intends to do with the additional £261 million which it is taking out of the pockets of the working people.

It is not a question of the Treasury saving that money; they are transferring it, and it will be the lowest Treasury contribution ever in the history of the national insurance scheme. It was accepted under the Social Security Act 1973 that 18 per cent. would be fair, and that was maintained for several years by successive Governments. I can find no trace of any Conservatives objecting to the figure of 18 per cent. What, therefore, is the basis of the calculation of 13 per cent.? Next year, will it be 12, 10 or 9 per cent.? Has someone just picked it out of the air? There seems to be no rational basis for the figure. In my submission, it is another indication of the balance being tilted the wrong way, away from general taxation, from which the Treasury gets its money, towards higher individual contributions.

The Government seem to take the view—the noble Lord, Lord Elton, also seemed to take it—that it would be unreasonable to expect the general taxpayer to meet higher costs of benefit. But surely most of the time the worker and taxpayer is the same person, except of course for a few lucky people living on unearned income. It is because the cost of benefits, especially non-contributory pensions, is rising that the Treasury supplement should not simply be maintained but should be increased. More old people are living longer, and I count myself among them and long may that last, and I say the same to colleagues on both sides of the House. Are the Treasury worried because they know there will be even more people unemployed? When they say their expenses are rising, it is clear that they are rising because they are putting people out of work and are then complaining because the numbers receiving unemployment benefit are going up. That is the rationale of the situation.

The Government have refused to make good the 2 per cent. fall in the value of unemployment benefit and at the same time have abolished the earnings-related benefit. A person becoming sick or unemployed now receives about £17.50 a week for 26 weeks less than he would have received had he been on average earnings. A lower paid worker—somebody earning, say, two-thirds of average pay, would have received £10.50 for 26 weeks. They have paid for that benefit, but the Government have abolished it. I suggest to your Lordships that if any private insurance company had behaved in that way it would have found itself in the dock very quickly. Nothing in the Government's manifesto suggested such drastic measures. In fact, in my reading of social history I have to go back to the May Committee in the 'thirties to find similar excesses.

The Minister said in another place (Hansard, 17th December, column 494) that abolishing the earnings-related benefit would save the Government £445 million. So that means that another £445 million has been taken away from contributors, taken out of their purchasing power, thus adding to the recession and increasing pressure for wage rises. So the Treasury—I that some noble Lord will help me if I get it wrong—has taken away £445 million which people have contributed in respect of earnings-related benefits, and has taken £261 million in relation to reduced contributions. I make that a total of £706 million loaded on to contributors.

People cannot accept that there is fairness in those arrangements, and I stress very sincerely that it is only on the basis of a sense of fairness that our social security system can really work. It must be based on a concept that the Government, employers and employees should share in the funding of the welfare state. Once a sense of fairness is eroded, people will feel resentful and unco-operative, and the compassion of a caring society will fade.

I should like to refer briefly to Clause 3, which deals with the allocation of contributions. I am sorry to take so long, but the Bill is more complicated than would appear at first sight, and its impact on our people is worse than has been previously understood. Clause 3 deals with the allocation of the higher contributions, and 0.1 per cent. of the increase is to help the National Health Service. Of course, we would all agree that the National Health Service needs more resources—which makes all the more harsh the fact that Clause 2 of the Bill cuts the Treasury contribution towards financing national insurance. I should have thought that it might be more acceptable had the money been given directly to the National Health Service.

But the most disastrous and unacceptable part of the clause is contained in subsection (3), which provides—and this for the first time in history—that workers are to contribute to the employment protection allocation, which of course includes redundancy payments. This benefit was introduced by the Redundancy Payments Act 1965. It was agreed by successive Governments that it should be funded by Government and employers, and that was confirmed in consolidation measures in 1973 and 1975. I can find no trace of any Conservative voting against that.

So why the change? Is it that the Government, for all their guarded optimism, know that next year more money than ever will be needed to help redundant workers, that increasing numbers of our people will be declared redundant? Will the Government have to look for more money and take it off other workers, so that they can meet the bills? As the recession deepens and both bankruptcies and factory closures increase, many people fear that there will be many more calls on the redundancy fund. In my view the very fact that these fundamental, novel changes, are being considered by the Government is incontrovertible evidence of the failures of the Government's economic policies. They are coming to the House this afternoon saying that things are going to get worse and so we must find some more money from somewhere.

The Government are saying to people who are in work that they must finance their own coming redundancy, they must bail themselves out of the disasters that the Government have created. It is as though a man condemned to death was to be asked to pay for the rope that was to hang him. That really is what the present situation is like. I understand that about £353 million a year will be taken from contributions for this purpose. I quote that figure from the House of Commons Hansard of 15th December, column 175. We believe that the basic principle is wrong. The main reason why we believe it is wrong is that workers do not usually have a share in the decisions which cause their unemployment. And the sense of injustice is enflamed by this new policy—which was certainly not mentioned in the Conservative manifesto.

It is all very well for the Government to say, as the noble Lord the Minister said this afternoon, that the lucky people in work should pay for those who are out of work. But it is not the worker who sacks his mate. It has to be the employer who sacks him, often forced by Government policies into painful decisions on reducing manpower, in regard to which the extra payment on national insurance is of course a salient point.

I must remind the House that redundancy payments are made only to workers who have been with one employer for a minimum of two years. Under the Bill a man or woman will be forced to contribute to the redundancy fund. But I must ask this: If they are sacked after, say, 18 months, will they get nothing? Will they not even get back their contributions? Again the sense of injustice will be bitter indeed. Lucky indeed are the people who nowadays can be sure of being in work, in the same job for two years. A Minister in another place invited people to get on their bikes and go around looking for jobs. If the jobs do not last two years, under the Bill those men and women will have contributed to the redundancy fund; but if they are sacked perhaps only a day or two before the two years is up, they will get nothing. I cannot see the fairness of that, and I hope that the Government will look again at this point. The people who change their jobs the most often are likely to be the lowest paid and the unskilled in depressed areas, people who must move from firm to firm to get jobs. And if people are made to feel that they are putting money into a benefit fund from which they will never get anything, there will be a great sense of injustice.

I must again apologise for having gone into so much detail on the Bill, but that seemed to me to be absolutely necessary. We have spoken a great deal about statistics, percentages and abstractions, but this Bill is about people. It is about how people, including some of the most impoverished and hard-up people in this country, are to manage over the coming years. If people are made to feel they are paying more and are receiving less and less there is a very real sense of injustice.

It has been said before that there is no sight more unacceptable than a fat man telling a thin man to tighten his belt. We are in a situation of increasing unemployment which diminishes the limits of people's tolerance, not only financially but in every ether way. This Bill has the very miserable effect of increasing the disfigurement of poverty in our society, of decreasing the efforts made by many of us on all sides of the House towards a greater degree of social justice. It is I believe an indication of the Government's total failure to come to terms with the economic problems of this country or to bring any element of compassion and social justice into their policies.