Social Security (Contributions) Bill

HL Deb 18 January 1982 vol 426 cc443-72

Second Reading debate resumed.

4.45 p.m.

Lord Banks

My Lords, perhaps the House may now return to considering the Social Security (Contributions) Bill. I should like to begin by thanking the noble Lord, Lord Elton, for his very thorough explanation of the contents of this Bill. As he stated, the Bill increases the employee's contribution from next April by 1 per cent. and reduces the Treasury supplement from 14½ per cent. to 13 per cent. of total contributions. There is no increase in the employer's contribution rate. Last year, a similar increase of 1 per cent. was imposed on employees and the year before a quarter of 1 per cent. So, since the Government took office the employee's contribution has increased from 6½ per cent. to 8¾ per cent. That is an increase in the percentage rate itself of 34.6 per cent. We have to remember, as the noble Baroness, Lady Jeger, pointed out, that national insurance contributions are much more regressive than income tax, having a lower threshold, and because once you pass the top limit in earnings the contributions which you make to national insurance become an increasingly smaller proportion of your earnings.

The employer's contribution to national insurance has risen from 10 per cent. to 10.2 per cent. That is a percentage increase in the rate of 2 per cent. So that is a 34.6 per cent. increase for employees and a 2 per cent. increase for employers, and we on these Benches disagree with increasing the employees' contributions without an appropriate increase in the employers' contributions. We appreciate that employers are hard-pressed at the present time because of the recession and as a result of some of the policies pursued by the Government. But we believe that the way to help them is by a reduction in the 3½ per cent. national insurance surcharge, which is pure taxation and does not go to national insurance at all.

The employees' contributions have gone up in real value, while some national insurance benefits have been declining in real value; and, as the noble Baroness, Lady Jeger, pointed out, earnings related supplements, except in relation to the retirement pension, are being abolished. So far as short-term benefits are concerned, the 5 per cent. abatement was followed by the 2 per cent. under-estimate, so that Pay More and Receive Less would seem to be the Government's policy for employees.

The noble Lord, Lord Elton, pointed out that the increase of 1 per cent. to be paid by employees is to be allocated 10 per cent. to the National Health Service and 35 per cent. to employment protection, and I share some of the views expressed about that by the noble Baroness, Lady Jeger. The question is raised as to whether employees should be expected to finance their own redundancy payments. Redundancy payments have been regarded in the past as compensation for loss of job and it is not customary for victims to be asked to contribute to their own compensation. Twenty-five per cent. of the increase goes to offset the reduction in the Treasury supplement and 30 per cent. towards balancing the national insurance fund. The Government Actuary has pointed out that the additional contribution receipts of the national insurance fund in 1982–83 are estimated to amount to £776 million and, as the noble Baroness, Lady Jeger, has emphasised, £261 million of that is necessary to offset the reduction in the Treasury supplement.

The Government's argument for reducing the Treasury supplement again and raising employees' contributions to offset it was put again this afternoon by the noble Lord, Lord Elton. It is that expenditure on social security, met from general taxation and including the Treasury supplement, has increased from 37 per cent. to 45 per cent. since 1975–76. It is important to remember that expenditure on noncontributory benefits is only 33 per cent. of the total and not 45 per cent., because the 45 per cent. includes the Treasury supplement which helps to finance contributory benefits through the national insurance fund. So non-contributory benefits do not represent so large a percentage of the whole as might at first be thought.

But of course I do not question that there has been an increase in the percentage of total social security expenditure represented by non-contributory benefits. That has increased from something like 24 per cent. in 1975–76 to 33 per cent. in 1980–81. However, the introduction of child benefit to replace family allowances, which was partly paid for by the elimination of income tax relief for children, was the major factor in this increase. The increase in the cost of child benefit in 1980–81 over the cost of family allowances in 1975–76 nearly equals the cost of the income tax allowances in 1975–76. So it is not really an additional cost for the Government to bear.

The second major factor is the increase in supplementary benefit allowances, due very largely to the increase in unemployment owing to the recession and due in part to policies pursued by the Government. If we take the cost of the increase in child benefit over family allowances and the cost of the increase in supplementary benefit allowances over the period we have just been thinking about, we find that they account for two-thirds of the increase in non-contributory expenditure. In other words, two-thirds of the expenditure increase in non-contributory benefits, the grounds on which the Government say that national insurance contributors must pay more, is caused by the replacement of the cost of allowances against tax by expenditure on a positive cash benefit and by Government economic policies, resulting in higher unemployment.

Why should employees be asked to pay more for national insurance benefits on those grounds? Further-more, while it is technically true that employees are being asked to pay more for contributory benefits derived from the national insurance fund, they are in effect, in my view, being asked to pay towards the cost of non-contributory benefits. So long as we have a contributory system I believe that that is wrong. I say " so long as we have a contributory system " because I hope that we shall move to a tax credit system which would replace the contributory system completely. I was encouraged by the remarks made by the noble Baroness, Lady Jeger, about the need for a thorough review of the whole working of our social security system. I hope that she will become an enthusiastic supporter, too, of the concept of a tax credit system.

To turn to one other aspect of the uprating, during the Second Reading debate on this Bill in another place on 15th December the Chief Secretary to the Treasury said, reported in Hansard at col. 225: If hon. Members consider the extra expenditure that we seek to finance, they will see that the overwhelming balance of that money will be spent on increased expenditure on retirement pensions. That is what we are talking about. The figures show that of a total increase in benefit expenditure between 1981–82 and 1982–83 of £1,632 million, about £1,450 million extra will be spent on retirement pensions ". Further on the Chief Secretary to the Treasury said: The overwhelming balance of the money that we seek to raise will be spent on retirement pensions ". It seems to me that these remarks are more than a little misleading because they appear to suggest that contributions are being increased, at least in part, to meet the increased cost of pensions. Yet the prediction for expenditure on retirement pensions for 1981–82 made by the Government Actuary in December 1981 was almost exactly the same as he made in November 1980—slightly less, in fact. But the prediction for unemployment benefit was £537 million more. If the assumption about unemployment had not had to be corrected in this way and if the Treasury supplement had been maintained, no increase in contributions would have been necessary to meet expenditure from the national insurance fund.

No problems of a serious nature arise with regard to pensions at this stage. That problems will arise in the early part of the next century seems inevitable. Future generations are expected to pay for the pensioners of their day more than we are prepared to pay for our pensioners today, but that is a problem which will arise in the future. The cost of pensions at the present time, although it is by far the largest single item in the national insurance fund expenditure, cannot be claimed as a reason for this year's increase in employee contributions.

For reasons which I hope I have made clear in the course of my remarks, my right honourable and honourable friends in another place voted against the Bill. According to custom, we shall not oppose it this afternoon, but we on these Benches certainly cannot express any support for it.

4.58 p.m.

Lord Boyd-Carpenter

My Lords, although in the economic situation which faces our country today it may well be that a measure of this kind is needed, I am bound to say that no one who has been associated with social security administration for any length of time is likely to welcome it with uncritical enthusiasm.

The noble Baroness, Lady Jeger—I am glad to be able to agree with her for a moment because I shall have one or two observations to offer to your Lordships about other parts of her speech—said one thing with which I agree: that this is a Treasury Bill. It is appropriate that a Treasury Minister—indeed, if he will allow me to say so, the best goalkeeper in this House—my noble friend Lord Cockfield is to wind up at the end of the debate. Although I have been an admirer of the noble Baroness both in another place and here for many years, I hope she will allow me to say that I was extremely disappointed with her speech. To begin with, to speak, as she did at the start of her speech, about the Government seeking deliberately to impoverish large sections of the community is claptrap. The noble Baroness must know that. She is entitled to argue that the effect of Government measures may adversely affect some sections of the community. It is difficult to envisage Government measures which do not have some such effect. But to say of a Government in the 1980s, in a Parliamentary democracy such as ours, that they have set out deliberately to impoverish large sections of the community simply confuses counsel and does not, with respect, help the careful analysis which this Bill requires and which one might have hoped that it would receive from that Box.

Perhaps I may just follow up a point which was made by the noble Baroness, Lady Jeger, which I do not think history will bear out. She said that no changes had been sought to be made in the general structure of national insurance since Beveridge. Only that natural modesty which is one of my more distressing failings prevents me from reminding her that in the National Insurance Act 1959 the significant step was taken of moving over from a system of flat rate contributons and benefits to a graduated system in respect of both. Although the measure in which that was embodied was of modest dimensions, it did in fact mark not only the result of some very hard thinking in the then Ministry of Pensions and National Insurance, but also was followed by successive Governments of all parties and has very much changed the structure of our scheme. Therefore, it is not really fair to suggest that those successively charged with responsibilities in this area have simply gone on repeating Beveridge up to this day.

Having said that, I should also like to follow up what was said by the noble Baroness when she suggested that instead of the increases in contributions which this Bill will effect, there should have been increases made in income tax. I do not want to widen this into a general economic debate but it is on the whole pretty well known that income tax above a certain level has a most damaging effect on enterprise, on savings, and on incentives. There are some of us who believe that to claim off any part of a man's earnings more than 50 per cent. of what he is earning is downright confiscation.

To follow that point a little further, the noble Baroness sought to contrast the proportion of the income of a man earning £35,000 a year and a man on £140 a week, and demonstrated to her own satisfaction that whereas the lower paid man paid (I think her figure was) a little over 8 per cent. in national insurance contributions, the higher paid man was having only some 2.2 per cent. extracted. That is the kind of statement which, although undoubtedly true, if confined to that is misleading, because the £35,000 a year man is paying not 8 per cent. but 60 per cent. of his earnings above certain levels. It is not possible to make a fair comparison unless the national insurance contribution and income tax are put together and the total impact on that man demonstrated. This is how the person concerned feels it, whether he is on £35,000 a year or £35 a week, because in practically every case both the national insurance contribution and income tax are deducted at source from his wage packet, be it weekly, monthly or three-monthly. When the income tax system, heavily graduated as it is, and still very heavy on the higher earnings, is taken into account, the picture really is totally different. It really is misleading to the House to make straight comparisons of national insurance contributions while excluding what is already deducted in respect of income tax.

5.4 p.m.

Lord Wells-Pestell

My Lords, if I may interrupt the noble Lord, Lord Boyd-Carpenter, am I correct in saying he advocates that national insurance contributions should be added to income tax to calculate the total burden on a taxpayer? Then the noble Lord talked about very high rates of tax on those earning high incomes. Did he not leave out of his calculation that national insurance contributions are only payable up to one and a half times average earnings, whereas the very high income tax rates only come into force for incomes which are more than one and a half times average earnings—perhaps three times or four times the average?

Lord Boyd-Carpenter

My Lords, the noble Lord, Lord Wells-Pestell, is only repeating what the noble Baroness has said; that national insurance contributions only fell—I will not say in the lower tranches of income because I believe that I am right in saying that they now go up to £220 a week, which are substantial earnings even these days. The noble Lord is only saying what the noble Baroness has said. I am glad he agrees with me that the crucial figures are the cumulative effect of the two. As the noble Lord himself said, it is a fact that on the higher tranches of income—leaving national insurance contributions aside altogether because those drop off, as he said earlier—60 per cent. and not 8 per cent. is taken in taxation. It is really not good enough, with respect, to deal with one while wholly ignoring the other.

I have one other remark to make about the noble Baroness and then I will have done with her. She referred in very critical terms to the provision in the Bill—one of the few parts of the Bill with which, on the whole, I agree—under which some small part of the employee's national insurance contribution should go to help to finance the redundancy funds. The noble Baroness made a remarkable observation, which I took down. She said: "No worker sacks his mates." I ask the noble Baroness to think again. Is that not precisely what many workers in British Leyland have done? Is it not precisely what many workers in British Steel have done? Indeed, is it not what some people in ASLEF are doing at this moment? It is really quite misleading to suggest that the responsibility for redundancies is solely that of employers. A trade union which by its strike action disrupts the working of a company or firm, perhaps sometimes to the point of bankrupting it—

Baroness Jeger

My Lords, if I might interrupt—

Lord Boyd-Carpenter

My Lords, may I just finish my sentence, and then I will give way with the greatest of pleasure? No trade union which disrupts the work of a company and perhaps bankrupts it, and no set of workers who extract as a result of certain action excessively high rates of pay so that others have to be dismissed can shrug their shoulders with regard to responsibility for dismissing their mates.

Baroness Jeger

My Lords, the noble Lord is very fair-minded, as I remember almost with affection from the other place. Would he apply what he was just saying to what has happened to the workers at Invergordon? Surely it was not the fault of any trade union activities at Ivergordon that we had the Statement we heard this afternoon.

Lord Boyd-Carpenter

My Lords, I am so sorry about the "almost" and I hope that upon reflection the noble Baroness will have that removed from Hansard. On Invergordon, I do not know enough of the facts of that situation, although it rather looks as if it is as the noble Baroness has said. It was not I who said that in every case the worker sacked his mates; it was the noble Baroness who made the generalisation, " No worker sacks his mates ". The examples which I quoted, and they are examples involving very considerable numbers, do show that that statement is invalid. No one would go to the same extreme in reverse as the noble Baroness has done and say that there is no other cause. There are many other causes, alas, in the present state of our economy—but plainly it is wrong to say that " No worker sacks his mates."

Now let us come back quickly to the main structure of the Bill. Its theme is fairly clear. It is not to make a reduction of public expenditure, although it would have, from the Chancellor of the Exchequer's point of view, the attraction of reducing certain sums of money required to be voted in the Estimates. But the expenditure is maintained, and maintained simply by putting a larger share of the cost of maintaining our enormous national insurance scheme onto the contributors.

That includes the employers. I am extremely sorry to see, from the Financial Memorandum to the Bill, that the Bill will have the effect of increasing the employers' national insurance contribution by £47 million. Several of us have complained about this levy, originally imposed I think by the Party opposite, as being a tax on employment, which is precisely what it is. It is almost as bad as the Selective Employment Tax—I was going to say imposed on the advice of the noble Lord opposite; it was imposed, as I understand it, on the advice of the noble Lord who was opposite a minute or two ago—and of course was a disaster. It really is not sense at this moment increasingly to tax the provision of employment.

I know it is difficult for my noble friend at this stage of the year, but I hope he can give us some indication that, although the Government feel bound in this Bill indirectly to increase by £47 million the national insurance contribution levied on employers, there is some hope in the forthcoming Budget that that process will be reversed. He knows that the Confederation of British Industry put this highest of all in their priorities for tax reduction. And surely it does not need the CBI, or the arguments of noble Lords in this House, to say that when you wish to encourage employ- ment, as we all desperately do, to impose high and increasing taxation simply on the provision of jobs really does not make sense.

I am sorry, too, that the Bill increases by a substantial sum the contribution made from national insurance contributions to the National Health Service. I concede at once that there has always been some such contribution. That indeed does go back to Beveridge. I suppose it is a residual trace of the old National Health Scheme, which itself goes back to that very remote age when we actually had Liberal Governments; that little residuum survived the Beveridge analysis. But it is quite illogical. The National Health Service is not an insurance benefit. There would have been a good deal to have been said if it had been made so, and I understand that the Labour Government in 1945 considered that but the late Mr. Aneuran Bevan did not like the idea. If it were an insurance benefit we would be able freely to charge foreigners who have not contributed to our national insurance funds, unless there were reciprocal agreements with their countries.

There would be much to be said for making the health service an insurance benefit. But simply to take a fairly small sum out of the national insurance fund and transfer it in release of the Treasury for payment to the National Health Service is not making it a contributory fund. It is simply introducing what in other circumstances the Treasury dislike, hypothecated taxation, which is exactly what it is. So that, and the reduction of the Exchequer contribution, which I am happy to think Social Security Ministers of my era would not have been disposed to accept, is another feature of this Bill about which I feel rather sad.

The noble Baroness referred to the insurance concept. A little more than 20 years ago when I was responsible for these things we attached great importance to the insurance concept, that people felt they were getting good value for their contributions. We did raise very large sums of money, with, I think, a great deal less pain and discomfort and difficulty than involved in raising any other sums of taxation, because people felt that this was a true insurance scheme. The trouble is that Bills like this, with relatively small changes against the whole vast expenditure of the scheme, carried on cumulatively year after year, nibble away at and erode the insurance concept. Possibly the abolition of the stamp and the deduction of National Insurance Class 1 contributions through the Inland Revenue helped also to do that. I do fear today that the insurance concept has gone, and this seems to me socially a great pity and one likely to add to the practical administrative problems of the Government.

Therefore, it seems to me, in view of the difficulties—and they are real ones—in view of the unhappiness which I myself and I suspect others feel at some aspects of this Bill, it is up to the Government to demonstrate that it is really necessary. I know my noble friend will say, and will be right to say, that the actual and prospective expenditure on social benefit is now enormous, that it has to be maintained, and in those circumstances this Government or any Government are driven to all sorts of shifts and expedients to secure the funds. But I hope my noble friend will accept that what a lawyer would call the onus of proof lies on him, and that to effect these changes in the national insurance scheme at this stage of its development is a matter tha causes—I will not say hostility but a certain measure of concern among many people, including, I suspect, some people who sit with him on this side of the House.

5.17 p.m.

Lord Kilmarnock

My Lords, this is a Bill about which we can have little enthusiasm. We understand the difficulties. The noble Lord, Lord Elton, referred to the changing and difficult economic conditions of our time, which we do not dispute. We understand that something in the region of £30 billion will have to be found in 1982–83 for social security benefits, of which about £13½ billion will go on retirement pensions. It is all too clear that the redundancy fund will also require additional finance. But we very much question the way the Government have gone about finding this money.

The Bill has two main prongs. The first is provision for an additional 1 per cent. levy on Class 1 contributions between the new lower and upper earnings limits of £29.50 and £220 respectively. The second—and I find this amazing—is a reduction in the Treasury contributions from 14½ per cent. to 13 per cent., which as far as I can discover is the lowest it has ever stood at since the inception of the national insurance fund in 1949. The noble Baroness, Lady Jeger, raised this point, and I am glad to hear that our homework came up with the same results.

If I may turn first to the employed person's contribution, the additional 1 per cent. is to be divided up as follows: 0.1 per cent. is for the National Health Service; 0.25 per cent. is to compensate for the reduction in the Treasury supplement, to which I shall return; 0.3 per cent. is to keep the national insurance fund broadly in balance; and 0.35 per cent, the largest proportion of all, is to go into the redundancy fund. Thus, employees, ordinary working people, are being asked, nay forced, for the first time ever to contribute a very large sum, in the region of £350 million, to the cost of their fellows' or indeed their own imminent redundancies, while the allocation from the employers' contribution for this purpose remains fixed at 0.2 per cent.

Of course, it is perfectly understandable that the Secretary of State should not want to saddle employers with any more charges. But again I ask, is this the way to go about finding the money that he needs?

From now on, if this Bill becomes law, those in work earning more than £29.50 per week will be contributing 8.75 per cent. of their earnings—and this means, of course, all their earnings, because there is no threshold—at a time when the value of short-term contributory benefits, and some long-term ones, is actually falling. One leg of the tripartite funding of the national insurance principle—employer, employee and Treasury—and of course I refer to the Treasury leg, is being so dangerously weakened that the original Beveridge scheme is in danger of collapse. Unemployment benefit was increased by 5 per cent. less than the rate of inflation last time round, and earnings-related supplement is being phased out. Despite the Government's undertaking to pensioners, retirement pensions are running currently about 3 per cent. behind inflation owing to the Government's clawback of 1 per cent. and underestimate of 2 per cent. for the current financial year. I know that the Government have undertaken to make this good next November, but it will be of little help to those pensioners who have died in the meantime.

I will not weary your Lordships with other instances, but it is hard to detect behind the Government's measures in this field since they came to power any principle other than that contributions should go up and benefits should fall. No insurance principle that I know of—and I worked in insurance for a brief period in my life—says that higher premiums mean lower benefits. The truth of the matter is that the social security system is simply being used as an additional tax gathering agency. Most people see this quite clearly. They are not fooled by the use of the word " contribution rather than " tax Indeed, the noble Baroness, Lady Jeger, made this point. The great objection to this is that it is an extremely regressive form of tax-gathering, as the noble Lord, Lord Banks, pointed out. It does not take a higher proportion from people with higher incomes, as progressive taxation does; it hits the lowest paid hardest of all. It simply clobbers the poor.

During the Second Reading debate in another place the Secretary of State spoke with some pride of having raised the upper earnings limit from £200 to £220. He said that it would be regressive to hold the upper earnings limit at its present level, as this would place a disproportionately greater burden on the lower paid. But, my Lords, this modest adjustment upwards of the upper earnings limit does precious little to change the essentially regressive nature of the additional 1 per cent. Can it possibly be right that someone on (let us say) half average earnings who gets a modest rise will have 38.75p deducted from every additional £1 that he receives, while anyone earning over £220, getting a rise, will only have 30p deducted from every additional £1? I fail to see how this can be just. It cannot, of course, be seen in isolation either. For just as the contributions have risen, the income tax threshold has shrunk from 45 per cent. of the average wage in 1979 to 38 per cent. today, bringing 1¼ million lower paid workers into tax. At the same time, higher earners have been given a £½ billion bonus.

There is, of course, a philosophy behind this. It is the supply-side or " trickle-down " philosophy, according to which additional incentives to the higher paid encourage investment and initiative with a beneficial spin-off effect on the jobs and living standards of the large majority. This, in fact, is the case which was advocated by the noble Lord, Lord Boyd-Carpenter. However, this approach is not working even in the United States, where Mr. David Stockman has had the honesty to admit to its failure. And it certainly is not working here, where some of the Government's other policies are in direct conflict with it.

No, my Lords, this is not the way to go about it. Getting the relatively poor to pay for the very poor is not the right way out of our difficulties—or rather, I should say, of getting the Treasury out of the mess it has got itself into. There are better ways I can think of to spread this national burden—the burden of our old and sick and unemployed—more fairly and more evenly through society. In the first place, the Treasury contribution should not be cut from 14½ per cent. to 13 per cent. At this of all times it should have been maintained, or if anything restored to something like 17 or 18 per cent. where it stood in, I think, 1975. In this way general taxation would properly relieve the lowest paid workers of some, if not all, of this burden.

If, on the other hand, the Government remain determined to raise additional revenue through a so-called national insurance contribution, then I cannot for the life of me see why the upper earnings limit should be pegged between 6½ per cent. and 7½ per cent. of the basic pension rate. I realise of course that this is the requirement of current legislation—the Social Security Pensions Act 1975—but there is no earthly reason why this should remain sacrosanct for all time. Why should the contribution of those earning above £11,000 per year suddenly flatten out on to a plateau where it remains up to any income you care to name? Why on earth should those earning £30,000, £40,000, £50,000 or even £100,000 a year make relatively less—I should say progressively less—sacrifice than those struggling to get by on £30, £40, £50 or £100 a week?

If the Government will undertake to introduce a Bill to right this injustice I—and I hope to carry my noble friends with me—will undertake to support it. Perhaps the noble Lord, Lord Cockfield, when he comes to wind up will tell me whether the Government will consider this, and if not, why not? And to take up the point which the noble Lord, Lord Boyd-Carpenter, made that the higher taxpayers are already shouldering a large part of the burden, it is surely the case that their tax liability has been decreased while that of the lower paid has been progressively increased.

Finally, I am left with the feeling that always afflicts me after each and every of our debates on social security questions; namely, that our system which was the finest in the world and the envy of many other nations is breaking down, and possibly reaching a stage beyond repair. I am certainly not alone in this feeling. Time and again I noted from the Second Reading and Committee stage debates in another place that Members referred to the national insurance fund as a " farce ". This word and the adjective " farcical " occurred again and again. And it came from all political parties. In fact, it was a Conservative Back-Bencher—I paraphrase him of course—who pleaded urgently for the reform of a system that was getting worse and more opaque and more complex and more unpopular as the years went by.

The Conservatives themselves have been responsible for some good reformist thinking in the not so far distant past. If I am not wrong, it was from the Bow Group stable that the negative income tax idea emerged in the early 1970s. I believe that the noble Lord, Lord Cockfield, had something to do with that. But now all that has been forgotten and we are faced with the present sorry spectacle of the Government scraping the barrel and coming up with a large slice of the earnings of the very lowest paid workers in our society.

In the Explanatory and Financial Memorandum to the Bill the Government set out the financial effects of the Bill on the Treasury's book-keeping. What is not pointed out with such clarity is the financial effect on the ordinary people which is, if my arithmetic is correct, to take something over £700 million—I think that the noble Baroness, Lady Jeger, said £760 million—out of the pockets of people who are already very hard pressed indeed.

It is therefore some consolation to me that our Liberal allies appear to attach very considerable importance to their tax credit scheme—which was mentioned by the noble Lord, Lord Banks, who is, of course, a great expert on it—which would go a long way to removing some of these appalling anomalies and righting these injustices. I was also delighted that our party's spokesman in another place stressed the importance of considering the questions of poverty, social security, pensions and taxation together as a coherent whole and not in the piecemeal fashion in which we are obliged to swallow the Government's measures in this field. I look forward to the day when a genuinely reforming Government will, as a matter of high priority, address the task of bringing both sense and sensibility to this very important realm of public policy, which is in my view one of the principal tests, if not the principal test, of a civilised society.

5.27 p.m.

Lord Spens

My Lords, I think that most of us accept the fact that all of the 22½ million people still in work should contribute a bit more towards the three million who are out of work. In that 22½ million still in work there are very nearly 2 million self-employed people. I was very pleased to hear the Minister say that the Government realise that they must still offer incentives to small businesses and that therefore they have not increased the contributions for the self-employed by possibly the full rates that they should have done actuarially.

But the self-employed have a grievance. They believe that they are being seriously discriminated against by the present system of national insurance contributions. All of the self-employed pay a Class 2 contribution which is a flat rate of, at the moment, £3.40 a week which will rise to £3.75 a week. The only people employed who may not have to pay that contribution are those with incomes of, at the moment, less than £1,475 a year rising to £1,600 a year under this Bill. But, of course, if those people do claim an exception not to pay their contributions, they are missing out on the establishment of contributions towards their pensions. Therefore, it is not really advantageous to them not to pay their contributions, even if their incomes are as low as those limits. However, I think that we all accept that the Class 2 contribution is fair and should be paid.

It is when we come to the Class 4 contribution that the self-employed raise their objections. The Class 4 contribution is assessed in arrears on the taxable profits of the self-employed's business between the lower limit of, at the moment, £3,150, which will rise to £3,450, and an upper limit of £10,000 a year, which will rise to £11,000 a year. At the moment those contributions are assessed at the rate of 5.75 per cent., which will increase to 6 per cent. Therefore, as soon as the self-employed, starting their businesses, find themselves earning taxable profits of more than £3,450, to look into the future, they will find themselves being assessed to this additional tax.

They complain about it for two reasons. First, it is a pure tax. No insurance benefits are offered for paying it. It is just like the national insurance surcharge on employers; it has to be paid and they get nothing out of it. But even more so, they complain because they are not allowed to charge it to tax when it is assessed, whereas all employers can charge their element of the Class 1 contribution to tax and have it deducted before the tax is assessed. In the self-employeds' situation the tax is assessed on their profits and they are not allowed to deduct that assessment from the profits before they pay.

The problem here is not only this discrimination, but rather more than that. An employer can recoup his increased Class 1 contribution by increasing his prices and he still charges it against tax, and that is that. The customer has to pay. However, if the self-employed does a similar thing and raises his prices—and he cannot charge it against tax—to the extent that he is successful in persuading people to pay those higher prices, he is increasing his taxable profit and, therefore, he is increasing the amount of Class 4 contribution that he will have to pay, and he is also increasing the amount of income tax that he will have to pay. So there is a very serious discrimination here about which the self-employed are very unhappy.

A year ago, when I raised these points, the noble Lord the Minister who is to reply today sought to draw my attention to a discussion document issued by the Department of Health and Social Security in October 1980 called, The Self-Employed and National Insurance. In that document the Minister asked for proposals for other ways of dealing with the self-employed and asked that those proposals should be sent in by 31st March 1981. Nine months later I want to draw the Minister's attention to that same document and ask him what has happened about it. Has any progress been made? Are useful discussions being held to help the self-employed get away from this feeling of discrimination?

First, I should like to see the Class 4 contribution abolished altogether. I understand that that is most unlikely to happen in the near future. But what about allowing the self-employed to contract out of the insurance scheme and make their own arrangements? I believe that they would be very pleased to be allowed to do that, and I think that it is a possibility. If not, what about allowing them to charge the Class 4 contribution against tax?—so that they can deduct it from the tax that they pay rather than pay it in addition to the tax that they have to pay. Finally, in order to help those unemployed people who may start up new businesses and thus become self-employed, what about giving them a tax holiday from the Class 4 insurance contribution for the first three or five years, or something like that?

It is a great blow to anyone who has made a modest profit of, say, £5,000—and a profit of £3,450 is less than £70 a week net pay—suddenly to find that he is assessed at 6 per cent. on the difference between £5,000 and £3,450. It comes out of the blue, in arrears, and he has to pay it with his income tax. I hope that the Minister will ask his colleagues to consider the special plight of the self-employed.

5.37 p.m.

Lord Wells-Pestell

My Lords, when I looked at the list of speakers at 2.30 p.m. to see which noble Lords were to participate in this Second Reading debate I came to the conclusion that by the time it was my turn to speak there would be nothing to say, because it is the first time for a long time that I have seen a list in which each Member of your Lordships' House down to speak has a recognised competence in this particular field.

It was my intention to say very little, but the intervention of the noble Lord, Lord Boyd-Carpenter, gave me something of a blood pressure. That being the case, I do not think that I can sit down quite so soon as I intended. Sometimes it is a great pity when the noble Lord—who has unrivalled experience in this field in this House—gets up and spends a disproportionate time defending, the Government, when he acknowledges, as he did at the very beginning today, that he has reservations—my word rather than his. I hope that he does not think I am being too presumptuous when I say that, with his unrivalled experience, I think he would serve this House and his own party much better if he went for his party, in the nicest possible way, and pointed out to them from time to time the error of their ways. As he acknowledged, they have an excellent goalkeeper; of course, he has a shocking team in front of him so he needs to be a good goalkeeper. I think that the goalkeeper to whom he referred is very capable of dealing with any points that arise.

I had a sense of satisfaction when I saw that the noble Lord, Lord Cockfield, was down to speak, because it led me to believe that the Government had a guilty conscience about this particular Bill, and therefore, had imported the one person—and they have imported him on more than one occasion into various debates, and I am not thinking of when he attends this House in his official capacity as a Minister from the Treasury—who is so plausible (and I use that term in the best possbile sense). " Plausible " means persuasive, and the noble Lord is a persuasive speaker, but it is backed, as we all know, with a great deal of knowledge, even if we sometimes disagree with his economic approaches. There are other economically able noble Lords in this House who also disagree with him.

The noble Lord, Lord Boyd-Carpenter, took exception to my noble friend on the Front Bench saying, or implying, that the Government deliberately do this. Most of us on this side of your Lordships' House are balanced, integrated persons. We do not blow hot and cold. We do not go up and down. But we have been forced into the situation in the last two and a half years of believing that this Government have deliberately set about the lower earning group. There have been abundant examples of it: the abatement in the unemployment benefit and in other social security benefits; the shortfalls in the retirement pension. Is it not deliberate? If they did this, was it not a deliberate act on their part? Does it not affect only a particular section of the community? The noble Lord expects—and I say this kindly; he knows I am not cross—

Baroness Gaitskell

I am.

Lord Wells-Pestell

One must not get cross in that sense. Angry, yes. The noble Lord expects us to have a certain amount of sympathy for the poor individual earning £35,000 a year who he says is subject to 60 per cent. taxation. Of course, it leaves the £35,000 a year man with only £300 a week to live on. Poor soul! Does the noble Lord really think that that group of people earning that amount of money and more are having a lower standard than the people who are now to be asked to pay 8¾. per cent. of their earnings up to £220 by way of national insurance? Of course they do not.

Lord Boyd-Carpenter

My Lords, would the noble Lord allow me? I am so glad to hear that he is not cross. Would the noble Lord address his mind to this aspect of the matter? Does he not accept that experience has shown that very high levels of taxation on persons whose earnings are apparently high because they are regarded as valuable people has resulted again and again in one of two things happening? Either they have gone abroad and we have lost their services, or alternatively the incentive and the vigour that they ought to be putting into leading our economy and the rest of us into prosperity has been weakened. Surely if there is anything to be learned from the experience of the Governments which the noble Lord supported it is that, and it has a great deal to do with the mess they left the country in.

Lord Wells-Pestell

My Lords, I thought they were the patriots who support the Conservative Party. Is the noble Lord really saying that they arc doing this? If this is so, then we can do without them, and we are in a bad way if we cannot. If that is their idea of patriotism and of supporting the country, then, as I say, we can do without them. But I want to get back, because I want to ask the noble Lord for some help in this particular matter. We are asking a very substantial number, millions, of men and women who are working in this country to pay 8¾ per cent. of their earnings up to £220 a week. They already represent a declining labour force, and as things are going at the moment they are going to get less and less and less. Are they always going to be expected to carry the burden of those who are unemployed and those who, through no fault of their own, have to go for social security benefits?

I know that the noble Lord will say, " Yes, this is all very well, but it does not all come from national insurance; it comes from taxation as well ". But they too are taxpayers, and here we are, a group of people who earn up to £220 a week, paying 8¾ per cent. They are the very people who are suffering from the effects of inflation and, if I may say so, the group to which the noble Lord, Lord Boyd-Carpenter, referred have got far more money left to meet inflation than the group that we are talking about today.

Furthermore, they are men and women who, although inflation stands at something like 12 per cent., are also denied a reasonable increase in wages to meet that 12 per cent., and consequently—I do not think that anybody is going to deny this—for the last three years their standard of living has fallen. Now we are going to impose an added burden upon them. What I do not understand—and this is probably entirely due to ignorance on my part; I believe there are other ignorant people in the House as well, from an aside I overheard—is why cannot those earning more than £220 a week be expected to pay 8¾ per cent. of what they earn?

It seems to the uninitiated, the uninformed, like myself, grossly unfair to say to one man that when you reach £220 a week you pay 8¾ per cent. all the way up, but when you get to £320 and £420 you will still pay the same amount of national insurance as the £220 a week person will pay. There must be an answer to this, and I hope that the noble Lord will feel able to give me one. Would it not be possible to band the earnings of those earning above £220 so that the higher up they go they pay more than they are doing at the present moment and more than they will do under this Bill?

I want to refer to some remarks made by the Secretary of State for Social Services in another place on 15th December last when he introduced this Bill at Second Reading. He said: Of this, about 19 billion will come from the national insurance fund and the rest from general taxation. Of the estimated spending from the national insurance fund of about £19 billion, £13½ billion will be spent on the retirement pension—about £1½ billion more than this year. This will enable us to fulfil our pledge to pensioners that their pensions will keep up with the cost of living. It recognises our obligation to the pensioners which The Times set out fairly in a recent editorial when it said: 'The elderly contain the largest single area of poverty and sickness in Britain. They lack the strength and mobility to adjust to the inflationary gale '.". I think most of your Lordships—certainly a large number of us on this side, who perhaps have a great deal more contact with the elderly in one way or another—realise what a tremendous burden is placed upon them. They find making ends meet rather difficult.

In recent weeks I have been appalled at the conditions of some of the elderly people in the area of Oxford where I live. I know it has been an unusual period, but I have been appalled to find how some of them are having to live. A large number of them live in one room and there is no possibility of their buying even one cwt. of coal; it is difficult to get and if they are able to purchase one cwt. of coal there is nowhere to put it.

It may surprise your Lordships to hear that I live in a small house, which has not been built many years, and there is not a single place where I could keep one cwt. of coal. True I have central heating, but an open fire is nice from time to time. I have to go out and do exactly the same as the old age pensioner, which is to buy a bag of 44 lbs. of coal. That coal gives off an awful lot of smoke, but I do not live in a smokeless zone. That bag of 44 lbs. costs £2.6, which works out at £123 a tonne. If I want to buy fuel which does not not give off smoke, I can buy 22 lb. bags of smokeless fuel for £1.65, which works out at £165.50 a tonne. Anyone who can afford to buy a tonne of fuel—while the people about whom I am speaking have nowhere to put it, many people have places—can obtain smokeless for £122 a tonne, whereas buying it by the bag works out at £165. Smoking coal can be bought for £90 a tonne, whereas buying it by the bag costs £123 a tonne.

I do not know whether the Government have any control over coal prices, or indeed if they have ever looked into the matter of the cost of coal. I sincerely ask them to look into it. It seems perfectly scandalous that elderly people, because they live in one room and have nowhere to keep coal, should have to pay 50 per cent. more for their fuel, be it smokeless or not. Some pensioners have told me that a 44 lb. bag of smoking coal or a 22 lb. bag of smokeless can be made to last three or four days provided it is not burnt for more than three of four hours a day.

If the Government want to do something to help the elderly—I gather that the Secretary of State has shown grave concern about the issue—I hope they will inquire into the whole question of coal prices. I know the Government want to do something to help with additional fuel bills. That I understand and appreciate, but it does not alter the fact that for the remainder of the winter (for every winter, for that matter) these people are paying a disproportionate amount. We on this side of the House feel that a substantial section of the community obtain a disproportionate consideration compared with those who receive and earn a great deal more, and that is why I am in complete agreement with my noble friend Lady Jeger and the noble Lords, Lord Banks and Lord Kilmarnock. Noble Lords opposite have not yet come to grips with the conditions in which a large section of people in this country live. The sooner they do so, the more charitable they will be towards them.

5.55 p.m.

Lord Molloy

My Lords, having read the Official Report of the debates in the other place on the Bill and having listened to the debate today in your Lordships' House, I—and any fair-minded person—must come to the conclusion that in the view of the majority of those who have contributed there is very little to find in favour of the Bill. The question which must therefore be posed is why the measure has been introduced, and in my view the answer is simple. It is that the Conservative Party have always hated the concept of the welfare state. When the National Health Service was introduced in the other place they voted against it tooth and nail at every stage. The principle of decent and compassionate welfare has been accepted by them only because the mass of ordinary people have the vote and want it to continue.

As a result of that, we have a very strange attitude on the part of noble Lords opposite, an attitude which I thought was exemplified by the noble Lord, Lord Elton, who was frightened by the increase in longevity among our fellow citizens. He pointed out that it would mean more and more pensioners. I should have thought that was a good thing, because it would also mean that before becoming pensioners they would have lived long enough to make a contribution to the economy. Unfortunately, we are now in the position when even upon leaving school people are not able to make a contribution to the economy. It is clear where the finger is pointing; Saatchi and Saatchi did not know what they were doing with their fake advert. The Conservative attitude to the youth of the country is to tell them to join the dole queues, and because they are not contributing the Government are having to look at ways of saving money, and they save it by introducing nasty little measures like the one before the House today.

The noble Lord, Lord Elton, went on to say in effect that we should overcome the fact that one great party in this nation favours the workers and the other great party favours the employers. That is no longer the case, at least so far as the Conservatives are concerned; they have no time either for the workers or the employers. The rate of bankruptcies and the ever-increasing length of the dole queues prove that beyond peradventure.

In view of the way in which the noble Lord, Lord Boyd-Carpenter, with his great experience and ability expressed what I thought was some grave apprehension about what is proposed in the Bill, that should be a sign to the Government. There are not many among the extinct volcanoes in the other place who can compare for knowledge and ability with Lord Boyd-Carpenter. I hope the Government have taken careful note of what he said. The only criticism I would make of the noble Lord's speech was when he tried to draw some analogy between a family living on £25 a week and a family on £20,000 a year. I ask noble Lords to imagine for a moment trying to live on 25 quid a week. Even the thought could almost cause a few heart attacks. To try to put that in juxtaposition with someone on £20,000 a year is almost too ludicrous to contemplate.

I would say this, too, if I may, to the noble Lord, Lord Boyd-Carpenter. He makes contributions in this House that I always enjoy. However, the noble Lord always seems to get worked up whenever he talks about trade unions on the one hand and employers on the other. So I would say to him and to the Front Bench Opposite that if only we could garner the billions over which the rich cheat in not paying their income tax, there would he no need for this Bill. I would hope that the Government might entertain this idea. They could have a mind as shrewd as that of the noble Lord, Lord Cockfield, to look into this, and I should love to help him. I am quite sure that he has the ability and the earnestness to block some of the gaps which allow the extraordinarily rich in this country to take full advantage in not paying their way. These are the people on whom we ought to concentrate, not the broad mass of the working men and women in this country who belong to trade unions.

The fact of the matter is that the extra payments are required because of the Government's economic policy. This point was illustrated not in any extreme, left-wing socialist journal, but in the " Thunderer " itself, in The Times of 15th December. I quote what The Times had to say: The plight of the unemployed is the worst it has been in the past decade ". Consider those few words, my Lords. Think what the situation means to the family of those who are unemployed. If we could take a cross-section of them, even the Front Bench opposite would not merely heed the words of the noble Lord, Lord Boyd-Carpenter, and of my noble friend Lady Jeger, and indeed of myself, but would join with us in seeing that this evil little measure was done away with.

What has happened is that all benefits were cut last year—even unemployment and invalidity benefits. So the philosophy seems to be this: you shall be punished for being sick and out of work. Are we going to approve that in your Lordships' House? I do not believe that we can. Long-term supplementary benefits have been slashed and so, too, have injury benefits, child benefits, and even mobility allowances. I hope that we shall recognise the ploy of the Government in the statistics that we were given this afternoon and which were given in the other place to justify this measure. I would sum them up by describing them as arid statistics, designed to strangle compassion.

I should also like your Lordships to understand that the Bill affects millions of our fellow citizens. It is not a bit of use members on the Front Bench opposite talking about Government spending. It is a fact—we have always said it—that it is the people who are doing the spending. I. should have thought that the average British citizen does not mind giving up some of his money so that those who have nothing shall have something and can spend, so that mothers can spend, and so that those on the dole can spend. As Keynes pointed out in the 'thirties, even by simply spending they are making a contribution towards easing the economic difficulties now facing us.

If the disabled could not buy all the aids that they require, if the 3 million people on the dole could not buy food and clothing for themselves and their children—if they could not do that from Social Security and other benefits, then there would be less produced, there would be more unemployment, and round and round we would go. Indeed, this measure itself could make a contribution to increasing unemployment.

There is so much that I should like to say about this measure arising from personal experience of 13 or 14 years in local government and a similar number of years in another place. visiting people, talking to them at our surgeries, meeting them in times of distress, and understanding the anguish and the agony that they go through. I know, too, of the same kind of agony and anguish that the small businessman goes through when he is forced to become bankrupt. All these things concern the human attitudes that I believe it behoves us in your Lordships' House to take note of.

I wish very briefly to turn to a suggestion that I should like to make concerning the Department of Health and Social Security and local government. It seems to me that under successive Governments we have never really tackled this particular problem, and, if I may, I shall explain to your Lordships what I think it is. It causes irritation among ordinary people, and I would ask the noble Lord, Lord Cockfield, to take it on board. I do not ask him necessarily to answer the point at the end of this debate, but I am sure that he will be prepared to consider it. There is a need for much closer-knit liaison between local government at perhaps borough level and the local DHSS office. So many people are not quite sure where they have to go. Very often the town hall is a mile or two away from the Department of Health and Social Security office. The civil servant has to say, " I am afraid that this is a local government problem, you will have to go to the town hall ", or, conversely, the town hall official has to say, " You will have to go to the office of the DHSS ". I should have thought that it would not be beyond the wit of administration to have some form of liaison so that that kind of situation could be entirely avoided, or so that ordinary people could at least be saved much trouble, tribulation and trudging, particularly in weather such as we are at present experiencing. I hope that that idea might be looked at.

I find the situation of the lower paid and the poorer people terribly distressing. With this Bill we are behaving in the way that the nations behave one to another: the richer nations are becoming richer, and the poorer nations are becoming poorer. This measure will mean that the poor of our country will become poorer, and if we do not do anything about tax evasion, the rich will become richer. As I have already said—it is worth reiterating—I should like to see someone such as the noble Lord, Lord Cockfield, given the particular task of closing all the loopholes of tax evasion—I am quite sure that a number of noble Lords on this side would love to aid him—and then there would be no need for this measure.

The Government must have a brand-new policy overall if they are to avoid stooping to implementing this distasteful, nasty, little measure. The Government need a brand-new policy. I do not want to use the term " U-turn ", but there is nothing wrong in the Government saying bluntly, " Our policies have not turned out as they ought to have turned out. It is time to change them ". That would show courage and, what is more, it would be beneficial to the nation. The Government themselves claim to be a Government of businessmen, but all they will do with measures such as this will be to put their customers out of business.

The 1908 Act was bitterly opposed in this Chamber. That Act marked the laying of the foundations by Lloyd George of the great welfare state, which the world has since admired, and in these terribly difficult times in which we live surely it is this principle above all that we must hang on to. I noted that in regard to the introduction of the 1908 Act, which was bitterly opposed in both places, a noble Lord said that the scheme was so prodigal of expenditure that it might be dealing a mortal blow to the Empire; and other noble Lords went on to say that it would weaken the moral fibre of this country. We all know what a lot of rubbish that was. We all know of the gallant efforts of those who were not even born then, in 1908, to save this nation from the evil clutches of fascism. What is more, we saw our chidren becoming healthier and healthier; they, in turn, became healthier and better parents; and, consequently, the nation was enriched.

I hope that this debate in your Lordships' House will make Her Majesty's Government think again. If I could appeal to Lord Cockfield, I hope that at least he will take back to the Government some of the views and some of the ideas that have been expressed on both sides of this House; because, if I may say this in conclusion, the real answer to all the problems that we face—and it will stop measures like this having to be brought before us—is a return to full employment, so as to build up our economic strength, from which we can succour the less fortunate.

6.11 p.m.

Lord Bruce of Donington

My Lords, I think few of us would dissent from the view which has just been expressed by my noble friend Lord Molloy that, in general, this Bill is not one (to put it mildly) that has aroused any profound enthusiasm in your Lordships' House. Indeed, speaker after speaker has got up and made very valid points that go right to the root of the Bill's validity. My noble friend Lady Jeger has already covered in detail much of the ground that was put forward with great clarity by the noble Lord, Lord Elton; and she has therefore made it unnecessary for me to cover it again. I prefer, with your Lordships' permission, to deal with some of the matters that have been raised in the course of this debate itself.

I am bound to say that I hope the noble Lord, Lord Cockfield, when he comes to reply, will be able to deal fairly and succinctly with what the House may consider to be the excellent contributions from the noble Lord, Lord Banks, and the noble Lord, Lord Kilmarnock, as well as with the points that were made in regard to the self-employed by the noble Lord, Lord Spens, whom I was very tempted to ask, when he was pursuing his taxation questions, whether he would be in support of individual employees being entitled to deduct their National Insurance contributions from their gross income before assessment for tax. I still wonder what his answer would he to that. Then, as usual, we had a very moving speech, indeed, from my noble friend Lord Wells-Pestell, who, as always, brings these matters into the human perspective and draws so much on his very rich experience in the fields about which he talks.

Last but not least, there was the contribution of the noble Lord, Lord Boyd-Carpenter, which brings me to the theme of my speech to your Lordships this evening. He said, " This is a Treasury Bill "; and he also said that it was fairly replete with what he described as shifts and expedients. I could not have put it better myself, although (to use a cricketing as against a football metaphor) he allowed himself a long-stop in what he was going to say by half expressing the hope that his noble friend Lord Cockfield would act as an effective goalkeeper. I gather he had misgivings himself but that he hoped that, in so far as his misgivings were shared by the House, the noble Lord, Lord Cockfield, would be able to dispose of them when he came to reply.

My Lords, it will be within the recollection of your Lordships' House that the noble Lord, Lord Cockfield, very often speaks last as well as first, when of course he cannot be answered; and I would remind him that on this occasion there is a Committee stage to follow. If his observations this evening have the usual mechanistic quality which has become associated with many of his replies of a mathematical nature, then they can at any rate be reviewed in Committee. One issues that by way of warning to the noble Lord in case we have the very slick answer this evening that all the sums are absolutely correct, the principles are right, QED and that is the end of the matter. As I say, these matters will be subject to review in Committee.

My Lords, one thing which emerges from this squalid little measure, which one hopes the Government may still see fit to withdraw before it goes any further, is, of course, that it takes away from the poor for the sake of saving the rich. My noble friend Lord Molloy made that point, I thought, very well. But if there is any doubt about it in its generality, let me say this. The noble Lord, Lord Boyd-Carpenter, himself posed the question when he said that an employee's contributions by way of income tax and by way of national insurance should be taken together. Fortunately, the sums have been done for us in the other place by an Answer to a Written Question on 21st December, at columns 301 and 302, where the whole array of increases in the proportions of net incomes at various levels—half of the average income, three-quarters of the average income, average income, one-and-a-half times average income and twice average income—has been set out in taxation categories, which should commend itself to the noble Lord, Lord Cockfield.

He will find, as the House will find, that, in every grade and at every level of the incomes that I have mentioned, the proportion of income paid out by employees in that category, taking taxation and national insurance combined, has increased, and in some cases has increased significantly. This, of course, is what one would expect, because your Lordships will remember that, in a fit of optimism which has now frittered away into despair, the Government established a new taxes and prices index on August 29th, 1979, which according to them was to be a much more reliable indicator than the retail price index, and as we all know—and I do not need to remind the noble Lord—the taxes and prices index has now gone very much above the ordinary retail price index. What is more, that in itself has gone up by an unconscionable amount since, notwithstanding anything that the noble Lord said—and he will recall that when, about three months ago, he said that the rate of inflation was going down, I ventured to query it and gave him a warning—the inflation rate is still running at 12 per cent., or above what it was when the Government took office.

All that this miserable little Bill does is once again to put an extra burden on the employees generally in this country, on those whom we will call, broadly speaking, the workers of this country. That is all it does. This is a little odd because the whole story at the time of the general election—and it is enshrined in all Conservative philosophy—was that people ought to have more money in their pockets and that they ought to have much more incentives. This lay at the whole base of it: that taxation was going to be reduced and that all kinds of things would happen so that the amount of money left in a person's pocket was going to be more and would fructify and give the necessary incentives. In fact, what has happened since this miserable Administration took office is that the ordinary worker in this country has a less proportion of his earned income in his pocket than ever he has had before.

I am afraid that the noble Lord will not be able to get round this one—no matter with what mathematical dexterity or quirk of what he would term logic he may care to answer. This is the truth. But the Government will say that, really, this is nothing to do with them at all; that it is all part of the working of the national insurance scheme, that the reduction in the Government's own contribution to the national insurance fund is not deliberate—just to make the point of the noble Lord, Lord Boyd-Carpenter, who seems to think that the Government may occasionally act by accident—but it was all because of the necessity of maintaining a balance in the national insurance fund. And to that, with your Lordships' permission, I should like to turn, because there arc one or two things that mystify me about it.

The noble Baroness, Lady Wooton, in the course of her speech ventured to query the existence at all of the national insurance fund. I have no doubt that the noble Lord will be able to prove that it existed. Well, in due course we shall see whether it exists or not. I should like to draw your Lordships' attention to the fact that, according to the Government Actuary's Department, apparently the balance of the fund at 31st March 1981 was of the order of £5,000 million. That point struck me as a little odd; because " of the order of " implies a lack of precision, that they did not know quite how much it was but that it was of the order of £5 billion.

Where does that £5 billion come from? If it exists at all, surely it must have come about because of an excess of income into the fund over the expenditure. One has instances of this phenomenon on page 6 of the Actuary's report where it shows a deficit of £153-million for 1981–82 and a deficit for 1982–83 amounting to £9 million. Yet here is that figure of £5,000 million. If one also refers to page 6 one comes, in the income column, to investment income of £570 million in 1981–82 and £595 million estimated for 1982–83. As it says " income from investments it means that the fund holds investments. One would like to know what the investments are that make up this £5,000 million.

I am bound to say that on the basis of the investment income yields disclosed for 1981–82 and projected for 1982–83 and on the assumption that the whole of the £5,000 million is invested, as distinct from lying about somewhat amorphously in the Consolidated Fund, the projected income represents about an 11 per cent. return in both cases. The interest rates in this country have been running at between 14 per ent. and 15 per cent. for a year. If there is £5,000 million in the fund, would they not have done better to leave it on deposit? There would have been sufficient in it then to have avoided the contribution by the workers of this country into the redundancy fund; because that would be about the extra amount of money that would be available if the money had been put on deposit.

Or perhaps the money does not exist at all. Perhaps it is merely another form of bookkeeping entry. Perhaps the investment income is an assumed figure of an amount that the Consolidated Fund is deemed to have paid into the insurance fund by reasons of the book-keeping accumulated surplus over the years. These are all things on which the noble Lord, Lord Cockfield, doubtless can expatiate at some length. But it will be interesting to know. Also one sees—and I am surprised to find this in the estimate and income of the national insurance fund—an item called, under " Outgoings ", " other outgo " amounting to £3 million for 1981–82 and £4 million for 1982–83. What is " other outgo "?

On the whole, I am bound to say that the nature of the accounts presented to us today, which is supposed to be explanatory, is something which, if a company laid it before its shareholders or if a company tried to get a quotation on the Stock Exchange on the basis of it, it would never get past first base. In short, all that has really happened is that the Government Actuary has been told what the Government want to do and—no doubt very accurately on the basis of his expertise in his profession and taking into account the expectation of life of the individuals involved, particularly on the retirement pensions side and the other assumptions he was given—he has produced an answer.

A Parliamentary Question was asked in another place as to what assumptions had been given to the Government Actuary? On 21st December Mr. Ray Powell asked the Chancellor of the Exchequer what criteria he had used in making the working assumptions of the level of unemployment in 1981–82 and in 1982–83 which were used by the Government Actuary in drawing up his report on the financial provisions of the Social Security (Contributions) Bill 1981— (Cmnd. 8443). Mr. Brittan replied and his reply must commend itself to all who believe in frank answers to questions and in open government. His reply was: As usual, the working assumptions took account of recent trends in unemployment ". This is frankness taken to an embarrassing extreme. Fortunately, the Actuary stated the assumptions upon which the calculations were made.

The House will be interested to learn the assumptions on which he was instructed to work: the number of unemployed, including school-leavers, was 2,600,000 in 1981–82 and 2,900,000 in 1982–83. We already know now that the working assumptions on which the Actuary was instructed to work predicted the rise in unemployment which has already been adumbrated in other parts of the country by other economists who at the time when they made their predictions of over 3 million or 3½ million unemployed were called " dismal Jimmies " and were repudiated at the time.

The other assumption upon which the paper was drawn up was that average in earnings in the tax year 1981–82 are 11.3 per cent. higher, and the average in the tax year 1982–83, 7½ per cent. higher. In other words, the Government Actuary was told to assume that there would be a cut in the standard of life of the ordinary working-class during these two periods, because the rate of inflation, owing to the miserable and asinine policies of the Government, has maintained itself steadily around 12 per cent. as distinct from the 10.3 per cent. when they took it over.

The noble Lord, Lord Boyd-Carpenter, took exception to the use of the word " deliberate " by my noble friend in regard to the Government's action. The Government are composed of the wonderful people, the people who are really expert in every field, and who were going to put things right. It would be unjust to them to say that they do anything by accident. It is all carefully calculated, as no doubt the noble Lord, Lord Cockfield, will prove when he replies.

One must assume that those that will the means, will the ends. The fact of the matter is that all this Bill does—this miserable little Bill—is to put an extra burden on people who can least afford to bear it.

6.32 p.m.

The Minister of State, Treasury (Lord Cockfield)

My Lords, perhaps I may start by giving the noble Lord, Lord Bruce of Donington, a measure of reassurance on one point. The Government have no intention whatever of withdrawing this Bill, which they regard as right, necessary and proper. The noble Lord will therefore be able to look forward to the Committee stage when we will debate with him many of the points which have been raised today which in fact are essentially Committee stage rather than Second Reading points.

The debate has ranged very widely indeed. The Bill itself is a very limited one, dealing with the level of contributions. It does not deal with the price of coal. I realise that the noble Lord, Lord Wells-Pestell, has very strong feelings on this matter. I think it is only right when he gives expression to those feelings that he should also bear in mind the heating allowances which have been provided to help people in that situation.

Nor does the Bill deal with the general state of the economy, although a very great deal was said about that. I listened of course to all the points that were made with very great interest. I listened in particular to the speech of the noble Baroness, Lady Jeger. If I may say so with respect, never have I heard a speech in which so many fallacies were so elegantly woven together to form a skein of such elegance, sincerity and lack of substance. The noble Baroness referred to the Government's policy as being one of impoverishing large sections of the community. This point was dealt with very completely in a speech of great force by my noble friend Lord Boyd-Carpenter. I do not wish to add very much to what he said. It has never been the policy of this Government or any previous Government to set out to impoverish large sections of the community.

Baroness Jeger

My Lords, will the noble Lord allow me to intervene? He said that he did not wish to add to what the noble Lord, Lord Boyd-Carpenter, said, but I do. What is it other than deliberate impoverishment when we know that the unemployment pay has not kept pace with inflation and that retirement pensions on the Government's own admission are below what they should be and the Government have agreed that these should be increased to take care of this mistake? I do not think that the word " deliberate " is amiss in that context.

Lord Cockfield

My Lords, the noble Baroness had ample opportunity to make her point; but as she raises it again, may I deal with it? The same point was also raised by the noble Lord, Lord Wells-Pestell. If both of them care to search their memories they will remember that in the time of the Labour Government a change was made in the basis on which retirement pensions were uprated. The change was from a past basis to a future forecast basis. The effect of that change, if I may dare use the noble Baroness's own phraseology, was to impoverish the pensioners by the sum of £500 million. The next thing that happened—again in the lifetime of the Labour Government—and I hate to mention these things and, unless provoked, I never do—was that in all good faith at the end of their term of office they underestimated the rate of inflation. One of the first things that we did was to make good that shortfall in the retirement pension. A similar underestimate occurred this time. These are estimates made by both Governments in perfectly good faith. We have made it abundantly clear that so far as the retirement pension is concerned that shortfall will be made good next year. That disposes altogether of that point.

Lord Wells-Pestell

My Lords, will the noble Lord give way?

Lord Cockfield

My Lords, the noble Lord has had ample opportunity; we cannot go on all night on this matter.

Lord Wells-Pestell

My Lords, if the noble Lord wants to attack this side, let him do so; but let us remind him that only a short time ago pensions were increased after 54 weeks and not 52, and the pensioners were robbed of two weeks' increase of pension as a result.

Lord Cockfield

This Government, my Lords, have behaved towards the pensioners with perfect propriety and perfect fairness. The noble Lord is accusing me of attacking noble Lords opposite. Nothing is further from my thoughts. It is quite unnecessary for me to do so. They stand convicted out of their own mouths. I only expanded on this point because the noble Baroness herself intervened and I felt that out of all courtesy it was therefore necessary for me to reply to her intervention.

The next point that I want to make is this: we entirely reject the accusation that the present difficulties of the British economy are entirely or primarily the result of Government policy. On the contrary, this is the first Government which have had the courage to tackle these deep-seated problems. Those noble Lords opposite who listened to the speeches of their noble friend Lord Kaldor will realise how deep-seated these problems are. The 3 million unemployed is due to the increasing uncompetitiveness of the British economy which have been building up over a long period of time. At each successive turn of the trade cycle noble Lords will find that the levels of unemployment and the levels in inflation were higher than they had been in the previous turn of the trade cycle.

We propose facing up to these deep-seated problems. We propose to tackle them and to persist with our measures until they reach ultimate success. I simply do not accept the pessimistic view put forward by the noble Lord, Lord Wells-Pestell, in which he talked of an ever-decreasing number of people shouldering these great burdens. We must as a country look forward to the time when, in common with the other industrial nations of the world, we come out of the present recession—which has been a great contributory cause of the problems that we now face—and when employment in this country expands once again. I know there is a phrase which appears, I think, in Dante: Abandon hope all ye who enter here ". That may be the policy of the Labour Party but it is certainly not the policy of Her Majesty's Government, who look forward to the opportunities rather than bewail the troubles.

Now, may I take the next point. The Bill was represented by the noble Baroness, Lady Jeger, with the support, I am sorry to say, of my noble friend Lord Boyd-Carpenter, as a Treasury Bill. This is not the position at all. It is perfectly plain—the figures are set down in the Government Actuary's report—that, of the increase of 1 per cent., 65 of 1 percentage point is a direct reflection of the rising level of unemployment. And 1 per cent., making a total of three-quarters of 1 per cent., is the additional contribution to the National Health Service; and we have increased expenditure on the National Health Service in real terms, as my noble friend Lord Elton pointed out. It is only the one-quarter of 1 per cent. which is a reduction in the Treasury supplement.

The amount of the Treasury supplement has fluctuated very greatly from one year to another. In the early years of the present scheme—that is after 1948—the Treasury supplement was at a very high level because the people who came into the scheme without a complete contribution record were drawing benefits substantially greater than those they had contributed to, and the Treasury came in and made good the deficit. As the years went by the amount of the Treasury supplement was adjusted, and in 1975 it was in fact fixed at 18 per cent. But there is nothing sacrosanct about that figure. It needs to be reviewed in the light of circumstances, and the circumstances are these. In 1975–76 non-contributory benefits accounted for 24 per cent. of total benefits; last year the figure was 35 per cent., and this coming year it will increase still further to 37 per cent. The share of the total cost of all benefits, contributory and non-contributory, borne by the Treasury was 37 per cent. in 1975–76, 45 per cent. this year, despite the reduction that was made last year in the amount of the Treasury contribution, and this coming year it will still be approximately 45 per cent. despite the further reduction proposed in the Bill.

The noble Lord, Lord Banks, suggested that the change from child tax allowances to child benefit was a major factor in this change. It was a factor but not the major factor. May I draw his attention to two points? First, of course, the child benefit went much more widely than the old child tax allowances and indeed one of the purposes of introducing the child benefit was to give support to families with children who were not income tax payers. So that in fact was a genuine expansion of the non-contributory benefit; and our record on child benefit, I may say, is an extremely good one and does not in any way justify the strictures expressed by the noble Lord, Lord Molloy. The other point is that a very large part of the increase in benefits is the increase in supplementary benefit and that goes not only to the unemployed but also of course to the elderly.

Lord Banks

My Lords, I wonder whether the noble Lord could give the comparative figures. It would be most helpful if he could. He said that while child benefit was a factor it was not the main factor. Would he not agree that it was a factor of something around £1,700 million and that perhaps the supplementary benefit was somewhere around £480 million? Would that not suggest that the child benefit was a major factor?

Lord Cockfield

My Lords, the child benefit was a factor. I will certainly see whether the figures can be obtained and I will send them to the noble Lord. But in addition to the child benefit there was a whole range of other non-contributory benefits introduced in this period. I think it is also relevant to point out to the noble Lord, as I did earlier, that part of the cost of the child benefit is itself a non-contributory benefit. It is not just a replacement of the child tax allowance.

One of the major themes that ran through the speech of the noble Baroness, Lady Jeger, was a desire to abandon the principle of insurance and to change over to financing the scheme entirely through taxation. I was sorry to see that in this respect she was joined by the noble Lord, Lord Banks, who now wishes to cast aside the only tattered remnant of the heritage the Liberal Party has received from Mr. Lloyd George. We believe ourselves that the contributory principle is an important one. The Bill reinforces that principle—it does not abandon it. This, of course, is a major issue on which people are perfectly entitled to hold different views. We note the fact that the official Labour Party view is now that national insurance as such should be abandoned and that it should be financed entirely out of taxation. We do not accept that such a view is valid. The noble Baroness spoke as though the only difference between the two was that the income tax would fall upon people with investment income while the National Insurance contribution fell upon the workers.

Baroness Jeger

I am sorry, my Lords, I must interrupt because I did not use the words " investment income " in my contribution at all.

Lord Cockfield

My Lords, I am grateful to the noble Baroness. I was merely trying to help her to marshal her thoughts in an understandable fashion. If it does not fall on investment income and does not fall on earned income, perhaps at some stage she could explain to me what it is she is endeavouring to tax. The fact of the matter is, of course, that the income tax does fall, for example, on the incomes of the elderly and the retired. I hope the noble Baroness is not seriously suggesting that we ought to tax the retired in order to provide benefits for those in work, because if that is her proposition it seems to me to be a most extraordinary one. The noble Baroness and others also suggested that the upper earnings limit, as it is described, should be removed altogether. To do so would obviously weaken the contributory nature of the scheme, because benefits are also linked to the upper earnings limit. The abolition of the upper earnings limit would also have a serious effect in increasing still further the contributions paid by employers.

May I deal very briefly with that point? There was objection raised by a number of noble Lords opposite—by the noble Lord, Lord Banks, in particular—to the way in which the increase in contributions has been charged on employees and not on employers. Perhaps I may remind the noble Lord that for many years the contributions paid by employers and employees were approximately equal, and that remained the position right up until 1974. In 1974 and 1976, a dramatic change was made and the ratio of employer to employee increased from approximate parity to 1 to 1½ times. After the change that we have made this year, the employer will still pay rather more than the employee; in fact, the ratio is 1.09 to 1. So we have done no more than move part of the way back to what had been the position accepted over a long period of years. That is the first point.

The other point is this. If one looks at the way in which incomes and profits have moved over the last four years, there has been a substantial increase in net disposable incomes in the personal sector. There has correspondingly been a very large reduction in the level of the profits of industry. One of the major problems that this country faces is the low level of profitability: and we shall get adequate investment in this country, leading to the creation of new employment opportunities, only when there is an improvement in the level of industrial profitability. This, therefore, would be the worst possible time at which substantially to increase burdens on employers, so we have done everything we can in this Bill to avoid such an increase occurring.

It was impossible to do this—if I may say this in reply to my noble friend Lord Boyd-Carpenter—in relation to the employer's contribution as a result of the increase in the upper earnings limit. If we were to reduce, or not to increase, the upper earnings limit, it would have a depressing and downward effect on the amount of pension that people would be earning under the state pension scheme, and I am sure that that is something which none of us would want to see—

Lord Boyd-Carpenter

My Lords, would my noble friend allow me to intervene at this point? It would, would it not, have been perfectly possible, as an alternative, simply to have reduced the rate of the surcharge on the employer's national insurance contribution?

Lord Cockfield

My Lords, I am grateful to my noble friend for his intervention, because he has raised the next point that I proposed dealing with in my reply. The question of the national insurance surcharge is entirely a budgetary matter, and, as a former distinguished Treasury Minister—perhaps I may rephrase that and say, as a distinguished former Treasury Minister—my noble friend will realise that on matters of that kind I can make no comment at this time of the year—

Lord Boyd-Carpenter

I can take a hint.

Lord Cockfield

My Lords, we do, of course, note all the opinions that have been expressed on this matter. I am grateful to the noble Lord, Lord Spens, for his expression of appreciation of the way that the Government had endeavoured to temper the wind to the shorn lambs, if he will forgive the use of such a phrase in relation to so vigorous a section of our national economy. So far as the discussion document which was issued in 1980 is concerned, as my noble friend the Secretary of State for Social Services, said in another place, consideration of this issue is still continuing and I understand that he now hopes to make an announcement in the near future.

The noble Lord, Lord Molloy, among many other statements to which I took the strongest possible exception, said that the Conservative Party have always hated the idea of the welfare state. There is no substance at all in that statement. Indeed, over the years the Conservative Party have contributed as much as, or more than, anybody to the development of the welfare state.

There was considerable support expressed in your Lordships' Chamber for the tax credit scheme. As the original author of that scheme, perhaps I may make a very brief comment on it, although, in fact, it has nothing to do with the Bill which is in front of your Lordships. The scheme was, of course, advanced by the Conservative Party, and the people who killed it at the time were the Labour Party. I hope that this will always be remembered to their credit. The problem that we face at present, of course, is that while in the golden days of Conservative rule we could well have afforded the £1,300 million that the scheme would have cost, the cost has now greatly escalated and the financial difficulties that we face are much greater. Of course, the scheme has obvious attractions, but I should not like your Lordships to draw any inference from that beyond that, as the original deviser, as it were, of the scheme, I not unnaturally have a certain affection for it.

There were views expressed in various parts of your Lordships' Chamber that the time had come when a thorough-going review of the whole of the national insurance system was required. I can do no more than note the expression of such opinions. My own experience—and a rather better experience, if I may say so—is of the very great difficulties that beset radical reform, and if radical reform is not possible there is everything to be said for the process, to which my noble friend Lord Boyd-Carpenter referred, of making improvements in an existing system as and when one can.

The noble Baroness also suggested that the national insurance scheme might be brought into line with the income tax scheme and dealt with on an annual basis. I feel some hesitation in having to inform her that many of the great difficulties to which the PAYE scheme gives rise are in fact, the result of its being on an annual basis, and, far from simplifying matters, it would greatly complicate them. The present position is, of course, that the operation of PAYE is not computerised. We are now taking the first step in that direction, but it will be some years yet before the whole of the PAYE scheme is on a computerised basis.

I have spoken for 25 minutes. As I indicated earlier, very many of the detailed points which have been made are essentially Committee stage points. We look forward to debating them in due time. The Government regard this measure as an essential one in present circumstances, to meet the regrettable rise in the cost of providing benefits, most of which is due to the rising level of unemployment. Our policies are directed towards ensuring that the economy is put on a sounder basis in the long term.

Despite the somewhat gloomy prognostications of noble Lords opposite, there are already a number of encouraging signs. Output is increasing. Output for the last quarter of 1981 was, in fact, higher than for the second and third quarters, which suggests that the view that the bottom of the recession was reached in the middle of last year has now some support. The retail price index, which was announced a day or two ago, indicates a stabilisation in the rate of inflation and we look forward in the not too distant future to a resumption of the decline in the level of inflation. These are all encouraging signs from which we all ought to take heart, rather than denigrate them. But, because this is an essential measure to deal with a problem which must be dealt with, I commend it to your Lordships.

Baroness Jeger

My Lords, before the noble Lord sits down—I am sure the whole House will be grateful for the way he has replied to this very full and detailed debate—may I ask him to deal with two points which I raised earlier. I will accept it if he says he will write to me about them. Replies on these two points will help us at the Committee stage. First, may I ask the noble Lord what is to be the social security status of young workers who go into the Government scheme, for which I understand they are to be paid £15 a week. Is there to be any system of crediting or franking their cards so that they come into social insurance? Secondly, when people have paid into redundancy funds and are themselves declared redundant before the end of the two-year period, will it be possible for them to get back their contributions? Will the Government at least give some attention to this point? I shall be quite happy to receive a letter from the noble Lord, but I should like to hear from him before the Committee stage.

Lord Cockfield

My Lords, I am grateful to the noble Baroness. So far as the first point is concerned, the details of the new scheme have not yet been worked out. However, the benefit position of those young people who are at present participating in the Youth Opportunities Programme is not affected by their participation. We expect this to be true of those involved in the new, extended programme. So far as the other point is concerned, I will write to the noble Baroness.

On Question, Bill read a second time and committed to a Committee of the whole House.