HL Deb 28 January 1982 vol 426 cc1064-99

3.37 p.m.

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

My Lords, I beg to move that the House do now resolve itself into Committee on this Bill.

Moved, That the House do now resolve itself into Committee.—(Lord Elton.)

On Question, Motion agreed to.

House in Committee accordingly.

[The LORD ABERDARE in the Chair.]

Clause 1 [Increase in contributions]

Lord Bruce of Donington moved Amendment No. 1: Page 1, line 13, leave out ("8÷75") and insert ("8÷4").

The noble Lord said: I beg to move the amendment on the Marshalled List which stands in my name and in that of my noble friend Lady Jeger. It may be convenient if Amendments Nos. 1, 2 and 3 were taken together since they all refer to the same point. I should like to direct your Lordships' attention to Amendment No. 2, the text of which ends with the figure 3. That figure should be 2÷85. This was so notified to the Public Bill Office, but unfortunately has been reproduced as "3÷0". With the leave of the Committee, I should like permission for that figure to be altered to 2.85.

The purpose of this amendment is to eliminate from the increase in contributions that part of the increase that relates to a proposed contribution to employment protection by the employee who pays at Class I rate. The reasons for moving this are clear. The Redundancy Payments Act which was passed by a Labour Government in 1965 was one of the most revolutionary measures to be passed in Parliament. It removed a very great sense of insecurity, of which those who remember the pre-war years will be very well aware. In the pre-war years unemployment, in addition to bringing that sense of despair, futility and frustration that still attends it today, also carried with it a very considerable financial hardship indeed. To be unemployed in those days meant being dependent on unemployment benefit as it then existed; and I think it has been universally agreed since the end of the war that that did not meet the justice of the situation.

It involved physical hardship. In many cases it involved the imposition of means tests and all those measures that the state at that time thought it necessary to impose upon those whose bad fortune it was to become out of work. Following the war my own party and the party opposite as well—at any rate in the initial stages—took a different view altogether. In the first place, both the great parties of the state pledged themselves. I do not like to use the words "pledged themselves", because these days people pledge themselves to do a number of things which they subsequently repudiate; but in those days I think they meant it. They pledged themselves to work for the maintenance of full employment.

Even so, unemployment following redundancy could still be a grave financial hardship, and it was therefore decided, and was so enshrined in the Bill in those days, that people who became redundant after a certain period of service—and there was much debate in another place and this place as to how long that time should be—should he entitled to a redundancy payment fixed in accordance with certain rules that were set out in the original Act. It was quite right that that should be so, and it is quite right that it should continue to be so.

Over wide sections of industry there are those who are not liable to Class 1 contributions in the same way or subjected to the same harsh financial disciplines. We have the phenomenally modern times of the golden handshake: when people become redundant at board level or at very high executive levels in the company or concern of which they happen to be members, it has now become almost the rule for them to be awarded astronomical sums because the company is deprived of their services. When one looks at some of the figures in recent press reports of proposed redundancy payments one wonders how industry can stagger along at all without the wizardry that these people must have imparted to the managements of their companies while they were still on the board. Indeed, measured by the level of redundancy payments —because that is what they are—one wonders whether British industry can be inefficient at all. These very large sums have been awarded over the past few years. I mention this point to put the whole question of redundancy payments as it applies to this Bill in perspective.

In moving the amendment, we are not asking for the moon; we are asking merely for justice. It was a cardinal principle of the original Act that the contributions towards redundancy should be made in part by the employer and in part by the state—in part by the Government. The employee, himself or herself, should not bear any part of that cost, save of course in the role as a payer of income tax, of a one-time payer of purchase tax and now of course of value added tax, of excise duties and all the rest of it, by which one contributes directly to the funds of the state. It was not anticipated at that time to be a matter of justice that employees should contribute as part of their national insurance contribution any money towards what is sometimes euphemistically referred to as the redundancy fund. The noble Lord will undoubtedly explain to us in due course the whereabouts of this redundancy fund and its constitution.

The original rules were passed at a time when unemployment was very largely what we would normally term in the economic sense as of a frictional kind.

There was no very large core of unemployment and no prospect of the levels of unemployment that we have today. So the principle was—and in our view should remain—that the employee, not being responsible for his own redundancy should not have that responsibility laid on him. Redundancy is a matter which is directly in the hands of his employer and, in the sense of the direction of state policy that has a bearing on redundancy, the responsibility of the state.

Now we have the new principle that the employee shall be required to contribute to the redundancy fund out of which eventually, should he become redundant within the terms of the Redundancy Payments Act 1965 and therefore subject to its sections, he may be paid. I should like to hear from the noble Lord what justification there now is in imposing a burden on the employee which did not exist before. What has changed in the principle itself? It is still true that the employer, either the employer or the firm, is responsible for the redundancy.

It is still true that the Government of the day, of whatever political complexion, in its direction or lack of it creates the climate in which firms may find it necessary to make people redundant. Why now should the employee be required to pay? What great new moral and social principle is involved? What is the justification—and it will have to be a detailed and reasoned one—for the departure from the original principle? It is one of some significance. According to the Actuary's Report (Cmnd 8443) at page 6, some £402 million is going to be raised from employees during the tax year 1982–83 for this purpose. It is therefore not a matter of insignificance.

We from our point of view can see no justification for this, and of course there is the political aspect of it as well. The political aspect is that the stated policies of' Her Majesty's present Government, as set out in their own election manifesto, enlarged upon very picturesquely by most of the media in their support and further elaborated by very vivid speeches from the right honourable lady the Prime Minister and many of her supporters, advocated a policy of the wage-earner being left a greater proportion of his weekly wage in his pocket. The term used was "fructify". That was a prospect that I must say must have commended itself to the great mass of employees throughout the country.

Indeed, as I indicated on Second Reading—and I am quite prepared to elaborate on it in some detail if required—even before this latest impost, the position was that, whatever the marital status, whatever the number of children below and above 16 in a family, whatever the level of earnings—whether they were half the average, average, one and a half times the average or twice the average—whatever the grade or the type of family, even now before this impost comes into operation, every grade of Class I employee is in fact, taking taxation and national insurance contributions together, paying a far greater proportion of his income into taxation and national insurance contributions than he or she did when the Government came into office.

There are no exceptions; and so there is a question of honouring the election manifesto which is waved in front of our eyes at all convenient opportunities. I should have thought there would have been some very red faces and much sincere argument at Cabinet level, whatever the degrees of humidity of Cabinet members, as to whether it would be proper and indeed honourable to introduce a measure of this kind. But so it is, and we on this side of the Committee take the view that this is an impost that should not be made. It lacks any equitable justification; it lacks any moral justification; it lacks any sense of justice; and above all it has been expressly repudiated by direct inference in the manifesto of the party opposite. I beg to move.

Lord Banks

I should like briefly to support the amendment. The noble Lord, Lord Bruce of Donington, has made it clear that employees have not previously been required to contribute to the redundancy fund, and I believe there is a clear distinction and difference between a national insurance scheme and compensation. Redundancy payments are not an extension of unemployment benefit, and the victim or potential victim is not usually expected to contribute to his own compensation or potential compensation. If the Government were to say they wanted to make redundancy payment a part of the national insurance scheme, we could then discuss that proposition. I would wish to oppose it, but I would regard it as more logical than the present proposal. I think it is wrong to exact a contribution in this way.

Lord Elton

Amendments Nos. 1, 2 and 3 together are designed to remove from the increased contribution proposed in the Bill that proportion intended to go to the redundancy and maternity funds, and the noble Lord, Lord Bruce of Donington, has made that abundantly clear. In the Bill, Clause 1(2) applies an increase of 1 per cent. to the employee's share of Class I contributions and 0÷35 of this, as I said on Second Reading, is intended for the fund. This applies to the generality of employed people. Opted-out married women and widows are separately dealt with by regulation, and the noble Lord's second amendment, to which he spoke but which he did not, I think, elucidate, is intended to apply a similar reduction to their contribution—and in effect it does apply, because the noble Lord has corrected the figure in the Marshalled List.

The first two amendments strike at that part of the Bill which raises the money. Amendment No. 3 strikes at Clause 3(3), which is the part of the Bill which allocates it. The loss of revenue to the redundancy fund which would be caused by the amendments would be £353 million in 1982–3. The very sharp increases in redundancies over the past year or so have meant heavy calls on the redundancy fund. The total number of payments made in 1981 was about 888,000, including insolvency payments, as compared with 552,000 in the whole of 1980. Although the indications are that the peak has now passed, our estimates show that 0÷35 per cent. is the minimum increase needed to bring about a reasonable reduction in the fund's deficit during 1982.

The noble Lord asked where and what the fund was. The Department of Employment receives income from the Department of Health and Social Security which it pays out to employers when claims are made. The question of what happens to a surplus, to which I was about to address myself, does not at the moment arise because at present the Department of Employment has regularly to borrow to be able to cover the payments. So, if the fund exists, it is in deficit, if the noble Lord wants to look at it in concrete terms. Without additional funding from contributions, the fund would not keep within the statutory borrowing limits within which it is already operating.

During Second Reading I emphasised the need to restrict to a minimum additional burdens upon employers. At present 59 per cent. of the redundancy payments made to employees is borne by the individual employer and the remaining 41 per cent. is made up from the redundancy fund, which is itself entirely funded by employers, with no assistance at present from employees.

The redundancy fund is an insurance scheme. It insures employed workers against the loss of their work. It provides them with a useful capital sum at a time of very great difficulty. It does not operate for the benefit of employers as a group; it protects their employees. Yet up till now 100 per cent. of the money has had to be found by the employer. The law has required him to do so.

The Bill changes the law and requires the worker to contribute to that protection. The protected person is being required to contribute to his own protection—not to pay for it, but to contribute to it. The lion's share of the contribution will still come from the employers, and the employees are being asked to pay a smaller share: about one-quarter.

Noble Lords opposite speak as if this were the introduction of some great new principle. Indeed, the noble Lord, Lord Bruce of Donington, almost used those exact words. He asked what was the great new principle or philosophy involved. I can see none. They speak as if to pay even part of the premium of a policy of which one was the beneficiary was new to their experience. On Second Reading it was said that employees would he paying for their own redundancy. That is a colourful and captivating phrase, but it is utterly misleading. In so far as their contribution will reduce the burden which employers would otherwise have to bear, it is to that small extent the exact opposite of the truth. Their contributions make their redundancy, by that fractional amount, less likely—not more.

To describe paying a part of one's own insurance premium in the terms which noble Lords opposite have used may seem odd. What I find odder is their whole reaction to this issue. If it is all right for employees to contribute towards their benefit during unemployment and throughout unemployment, I do not see the logic, to which the noble Lord, Lord Banks, appeared to allude, in objecting to their contributing towards a larger benefit at the beginning of unemployment. It seems to me that there is neither morality nor logic in what noble Lords opposite are trying to convince us of—

Lord Davies of Leek

The noble Lord has used the word "logic". I cannot see any logic in a man having to contribute towards a redundancy for which he himself is not responsible.

Lord Elton

It is always a pleasure to give way to the noble Lord, because it throws a new perspective, if I may so put it, on an argument. I was not aware that most of the catastrophes against which I personally insure myself were ones to which I had contributed either. I do not, therefore, see the force of the argument.

I think that I should mention very briefly the opted-out married women and widows, if only to say that, even after the increases proposed in the Bill, of which noble Lords opposite would have us remove a proportion, the difference between the standard Class 1 rate and the reduced rate will be 5÷55 per cent., compared to the difference of 4÷5 per cent. which applied from April 1978, from which point women had to consider their position in the light of the new pension scheme. They do not have a worse position than they had before.

The last leg of this composite amendment, as I understand it, is to remove from the Bill the exemption which it provides to the Secretary of State from making a review of the level of contributions. The logic of that, I understand—the noble Lord will correct me if I am wrong—is that noble Lords opposite think that the work should be done again. They may wish to link this with their next amendment, in which case the noble Lord will, perhaps, signal to me. But as he mentioned the first three amendments, it is worth saying that the Act provides for the Secretary of State to review the level of contributions. If you provide an exemption, as the Bill does, then the Bill has to carry out the review and that it has done. The noble Lord wishes to sabotage this review and, therefore, to require the Secretary of State to make one at a later stage. But the three issues hang together. What the noble Lord is saying is that people should not contribute to their protection against redundancy. I think that the way in which it is proposed in this Bill is proper, reasonable, just and, above all, necessary. I advise your Lordships to reject this amendment.

Lord Underhill

Before my noble friend replies, would the noble Lord the Minister agree that there are a number of benefits which are now payable and which are not on the insurance principle? We have discussed in this House the question of disablement benefits. If one accepted the Minister's logic, then all of us should contribute towards a disablement fund, but we do not. The redundancy payment was introduced in order to cushion the effects of possible long-term unemployment. I see no reason whatever why we should try to adopt logic in this case, when the principle has been agreed in respect of quite a number of other deserving cases.

Lord Elton

The noble Lord and I are arguing on opposite sides of the same coin. It is not necessary that a benefit should be contributory. There are many that are not. Equally, it is not necessary that an insurance policy should attract no payments of premium from those who benefit from it. There is no new philosophy involved. At the outset, when the Redundancy Payments Act was brought into force, it was expected to be self-financing from contributions. The noble Lord, Lord Bruce of Donington, was saying that it would be largely supported by the state. We are not changing anything dramatically. I accept that noble Lords feel that these are very hard times and that they have to speak out, but we are not making a fundamental departure of principle and I again urge your Lordships to resist this amendment.

4.5 p.m.

Lord Bruce of Donington

In response to the first point which the noble Lord put to me, I would much prefer, with his co-operation, to discuss Amendment No. 6 on its own, rather than mix it with this one. The noble Lord said that the taxing—because that is what it amounts to—of employees for the first time in connection with redundancy payments is not particularly revolutionary or unique. I should have thought that even he would have realised that the imposition of this extra burden on employees for the first time was rather unique. By definition, the first time always tends—I hope that I have the noble Lord, Lord Boyd-Carpenter, with me—so long as it is not followed by another one, to be unique. The noble Lord ought to explain why there has been a departure from the principle, but this he has not done at all.

I observed that in the course of his remarks— and the noble Lord always puts his points most courteously —he rather gave the impression that employers bore the whole burden of redundancy. I think that on reflection, and after taking into account the rebates which an employer receives from the Government, the noble Lord will agree that that was an impression which was slightly short of accurate. He bears it in the first instance, but, ultimately, he does not bear the whole. The Government and the state bear a proportion. It is quite clear from what the noble Lord has already said, that there is no intention on the Government's part to concede any part of the case that has been put forward by my noble friends and myself. In those circumstances, we shall have no alternative but to divide the Committee upon the amendment.

Lord Boyd-Carpenter

Before the noble Lord does that, I wonder whether he would answer a question which has been puzzling me throughout this short debate. He seems to see here a great question of principle. He has a gift for identifying questions of principle, which are not always so clearly apparent to other noble Lords. He accepts, as I understand it, that it is right that the Class 1 contributor should contribute some part of his national insurance contribution to pay for unemployment benefit, to help him should he have the misfortune to become unemployed. Having accepted that, why is it so wrong that that Class 1 contributor should also contribute towards the cost of another benefit which is also directly related to the contingency of becoming unemployed; that is, to the redundancy payment?

Unemployment benefit and redundancy payment are both humane and civilised methods of cushioning the impact of the misfortune of unemployment. For many years, it has been accepted that unemployment benefit is something for which you contribute. It is perfectly true that when the redundancy fund was set up, it was set up on a different basis. But the two payments have basically—if not the same—a concurrent objective, and it is certainly difficult to see why, accepting the contributory basis for the one, applying it to the other is apparently such a terrible outrage.

Baroness Phillips

In so far as the noble Lord who has just spoken is an expert, would he not agree that employees certainly feel—and I assume wrongly—that the redundancy payment which they receive, as distinct from unemployment benefit, is, generally, physically given by the employer? It literally is paid by the employer, so they surely assume—quite wrongly, apparently—that this is coming from a contribution directly from the employer and the state.

Lord Boyd-Carpenter

The noble Baroness is kind enough to attribute to me expertise which I certainly do not claim. Surely, with very great respect to her, that is a very weak argument. She is admitting that the employee is under an illusion in believing that his redundancy payment comes solely from his employer. Surely the existence of that illusion is one of the weakest possible arguments against making a provision of this sort and making this benefit contributory. The point is very easily dealt with by explanation. In most well-run companies with which I have any connection I know that the general systems of social and other benefits are explained with considerable clarity, sometimes with reiteration, to those concerned. And those I have dealt with understand it perfectly well.

Baroness Wootton of Abinger

It can well be argued that the whole financing of the national insurance system is grossly unjust. The tax upon the employee is a poll tax. It takes no account whatever of his income. It is a poll tax merely because he is an employed person. Therefore it is extremely undesirable to extend this form of taxation to more and more ultimate compensations or benefits. It should be strictly confined to the things for which it was originally introduced. Even then it was not a good method.

Lord Elton

I ought to remind noble Lords that the calculations which we have been discussing are made on the basis of a percentage of income.

Lord Banks

In answer to the noble Lord, Lord Boyd-Carpenter, is not the difference that people regard redundancy payment as compensation for loss of their jobs, which varies according to the length of their service, whereas a national insurance payment is designed to provide the minimum to live on if you should be in that unfortunate circumstance? The earnings-related supplement has now gone, but even the earnings-related supplement was merely designed to cushion the immediate effect of unemployment. The idea of a redundancy payment is that there should be some compensation for the fact that you have lost your job. To have to contribute to it seems to undermine that principle of compensation.

Lord Elton

I should like to put one other answer to the noble Lord, Lord Bruce of Donington, because it would not be right to let the matter go by default. He referred to rebates, which puzzled me somewhat. However, I deduce that he is referring to what an employer gets back after he has made a redundancy payment to a redundant employee. That money comes from the redundancy fund, which at present is subscribed 100 per cent. by employers. It does not come from the Government. Everything I have said is right, and I stand on it.


On Question, Whether the said amendment (No.1) shall be agreed to?

Their Lordship divided: Contents, 65; Not-Contents 115.

Airedale, L. Kaldor, L.
Amherst, E. Kennet, L.
Ardwick, L. Kilmarnock, L.
Aylestone, L. Leatherland, L.
Balogh, L. Listowel, E.
Banks, L. Llewelyn-Davies, of Hastoe, B.—[Teller.]
Beaumont of Whitley, L.
Beswick, L. Longford, E.
Birk, B. Lovell-Davis, L.
Bishopston, L. McCluskey, L.
Blease, L. Milverton, L.
Boston of Faversham, L. Oram, L.
Briginshaw, L. Peart, L.
Brockway, L. Perry of Walton, L.
Bruce of Donington, L. Phillips, B.
Byers, L. Ponsonby of Shulbrede, L.—[Teller.]
Cledwyn of Penrhos, L.
Collison, L. Roberthall, L.
Cooper of Stockton Heath, L. Seear, B.
David, B. Sefton of Garston, L.
Davies of Leek, L. Shinwell, L.
Donaldson of Kingsbridge, L. Stewart of Alvechurch, B.
Stewart of Fulham, L.
Ewart-Biggs, B. Stone, L.
Foot, L. Strabolgi, L.
Gaitskell, B. Tordoff, L.
Gladwyn, L. Underhill, L.
Gosford, E. Wade, L.
Hampton, L. Wedderburn of Charlton, L.
Hanworth, V. Wells-Pestell, L.
Jacques, L. White, B.
Jeger, B. Winstanley, L.
Jenkins of Putney, L. Wootton of Abinger, B.
John-Mackie, L. Wynne-Jones, L.
Abinger, L. Effingham, E.
Airey of Abingdon, B. Ellenborough, L.
Alport, L. Elton, L.
Ampthill, L. Ferrier, L.
Auckland, L. Fortescue, E.
Avon, E. Fraser of Kilmorack, L.
Bathurst, E. Gainford, L.
Bellwin, L. Glanusk, L.
Belstead, L. Glenkinglas, L.
Boyd-Carpenter, L. Gormanston, V.
Caccia, L. Greenway, L.
Campbell of Alloway, L. Gridley, L.
Cathcart, E. Grimston of Westbury, L.
Cockfield, L. Haig, E.
Cork and Orrery, E. Hailsham of Saint Marylebone, L.
Cowley, E.
Craigavon, V. Harvey of Prestbury, L.
Cromartie, E. Harvington, L.
Cullen of Ashbourne, L. Hayter, L.
Daventry, V. Henley, L.
Davidson, V. Hives, L.
Denham, L.—[Teller.] Hornsby-Smith, B.
Derwent, L. Hunt of Fawley, L.
Dilhorne, V. Hylton-Foster, B.
Drumalbyn, L. Inglewood, L.
Duncan-Sandys, L. Jessel, L.
Dundee, E. Kinloss, Ly.
Kinnaird, L. Rankeillour, L.
Kinross, L. Redcliffe-Maud, L.
Lane-Fox, B. Renton, L.
Lindsey and Abingdon, E. Rodney, L.
Linlithgow, M. St. Davids, V.
Long, V. Sandford, L.
Lucas of Chilworth, L. Sandys, L.—[Teller.]
Lyell, L. Savile, L.
Mackintosh of Halifax, V. Selbourne, E.
Macleod of Borve, B. Selkirk, E.
Mancroft, L. Sempill, Ly.
Mansfield, E. Shannon, E.
Marley, L. Skelmersdale, L.
Massereene and Ferrard, V. Soames, L.
Mersey, V. Spens, L.
Monckton of Brenchley, V. Stamp, L.
Strathspey, L.
Mottistone, L. Sudeley, L.
Mowbray and Stourton, L. Terrington, L.
Thomas of Swynnerton, L.
Moyne, L. Thorneycroft, L.
Murton of Lindisfarne, L. Trumpington, B.
Newall, L. Tweedsmuir, L.
Noel-Buxton, L. Vaux of Harrowden, L.
Norfolk, D. Vickers, B.
Northchurch, B. Vivian, L.
Nugent of Guildford, L. Wakefield of Kendal, L.
Orkney, E. Westbury, L.
Orr-Ewing, L. Willoughby de Broke, L.
Pender, L. Wynford, L.
Platt of Writtle, B. Yarborough, E.
Portland, D. Young, B.

Resolved in the negative, and amendment disagreed to accordingly.

[Amendment No. 2 not moved.]

On Question, Whether Clause 1 shall stand part of the Bill?

4.23 p.m.

Baroness Jeger

I will speak as briefly as is consistent with the importance of this clause and explain why we arc moving to leave out Clause 1. In the first place Clause 1 increases workers' contributions at a time when there are many other increases in the cost of living for working people in this country. We accept that the Treasury needs more money and we all know why the Treasury needs more money; because the unemployed under this Government's policies have now reached the figure of 3 million and it looks like going higher. Therefore, we are all the time narrowing the income base for social security benefits, because the fewer the number of people we have at work, the Government are saying, the more per head they have to pay, at the same time as Government policies are increasing the number of those people who are not at work.

I have to ask the noble Lord the Minister this. Are we to expect that when unemployment goes up to 4 million the contributions will have to go up again from those fewer and fewer people who remain at work? It would be quite right for the noble Lord the Minister to ask us what the answer is, but I would be out of order to expand on the economic policies which I believe could improve the situation. In so far as it is relevant to this Bill, most of us think that increases in income tax are much fairer than increases in national insurance contributions, because the former arc more closely related to income, including unearned income. I take the noble Lord's point regarding the partial relationship between contributions and earnings, but in our view it is not as fair as the relationship between income and income tax. I would remind noble Lords opposite, if they want to know where we would get the money from, that in their first budget £1,400 million was given in tax relief to the richest 5 per cent. of the people in this country.

There has been a creeping increase, and the importance of this clause, it seems to me, is that it creates a precedent for further increases in the contribution to national insurance which workers are having to make out of their own earnings. In 1979 a worker on average earnings was paying 6÷5 per cent. of his income in national insurance. Now, and before this Bill comes into effect, the figure is 8÷75 per cent. It is the fact that we see this figure creeping up all the time that makes us feel that this is a very invidious and objectionable clause. It is also regressive and discouraging to the lowest paid.

I made the point on Second Reading, and will not labour it again, that Class I contributions has its minimum raised from £27 to £2950, which is infinitely too low to be fair. This means that if somebody on the very low wage of £29÷50 gets a rise of £1 or earns £1 a week in overtime, he suddenly has to pay out £2÷60 in national insurance contributions, which makes him worse off. As I understand the effect of Clause I, after next April anyone earning more than £35,000 a year will he paying 2÷9 per cent. in national insurance contributions, whereas a man earning £140 a week will be paying 8÷5 per cent. I know that the argument can be made that the man with the higher income will be paying more in income tax, but this Bill is about national insurance contributions and I have already tried to field that argument from the boundary; we think it is much fairer that the higher proportion of payments should be based on total income.

We are against this clause because it raises the upper limit from only £200 to £220. That is not enough, even to take care of inflation. When I asked at Second Reading whether it was a fact that someone earning £500 a week would be paying the same contribution as a neighbour earning £220 a week, I did not get an answer. I believe that I did not get an answer because the answer is, yes. The effect of Clause 1 is bound to increase these anomalies and disparities, and I hope that your Lordships' House will throw it out.

Lord Banks

The noble Baroness has pointed out that the employee's contribution has gone up 6÷5 per cent. to 8.75 per cent., if we include the Bill's proposals, during the time of this Government. I would oppose the 1 per cent. increase to which this clause gives effect for three reasons: first, because I do not think there should be an increase in the employee's contribution in a scheme of this kind without a balancing contribution from the employer. I think the way to help employers, if it is felt they need special attention, is through a reduction in national insurance surcharge. Secondly, I do not agree with a contribution being made by employees to the redundancy fund, and we have just discussed that. Thirdly, I do not agree with a contribution being extracted from employees to offset a reduction in the Treasury supplement, and I imagine we shall discuss that when we come to the question of whether Clause 2 should remain in the Bill. So for those reasons I would support what has been said by the noble Baroness, Lady Jeger.

Lord Boyd-Carpenter

In moving this amendment or objecting to Clause 1 standing part, the noble Baroness opposite really repeated, rather more briefly, what she said on the Second Reading of the Bill. I think we know her views. I would only, if I may, put this to her. Her view is quite simple; given the heavy calls on the fund at the moment, the additional money required—and she accepts of course that additional money is required—should be raised out of national taxation, and particularly out of direct national taxation. I wonder if she has considered this thought. The essence of the national insurance scheme from the beginning has been that it has been a basically contributory scheme that because people contribute they have been entitled to their benefits as of right. There has always been an Exchequer contribution, and we may come to another amendment dealing with the quantum of that. But it has basically from the beginning, back to Lord Beveridge, been a contributory scheme, and that has been the justification for the payment of benefits as of right without means test. If the noble Baroness pushes too hard the idea that the national insurance scheme should become taxation supported, she will undoubtedly generate a demand for the erosion of the" benefit as of right " concept. She will succeed in destroying—I agree with her it has been damaged, but it has not been eliminated—the insurance concept. I think she will have done a great deal of harm to the whole social security system of this country.

I only add one other comment. I think she suggested in an aside that, apart from financing the additional costs from taxation, she would like to see the level of income which attracts contribution moved even further up the income scale than the Bill proposes. I wonder whether she has thought that out. Certainly as regards the retirement pension that would carry the corollary of increasing the retirement pension of the better-off. First of all, that is a rather doubtful proposition from the point of view of a national scheme. Secondly, it would be considered a very serious erosion into the private pensions schemes which all progressive companies maintain, because if people are having to contribute more by way of national insurance—and the bulk of the contribution is to pay for the retirement pension; that is where the weight of the cost lies—it becomes more difficult to maintain the private or occupational or company pension schemes, the development of which has been, I hope she will agree, one of the good and wholesome developments of the last few years. Therefore, though I can understand her feeling of anxiety about an increase in these contributions—which undoubtedly are heavy, there is no getting away from that—I wonder whether she has really thought out what would be the very serious damaging consequences of doing what she has suggested as an alternative.

Baroness Jeger

I hope the noble Lord is not chiding me for saying things that I said on Second Reading. That just proves the consistency of my argument, and it would be remarkable if I said something different today from what I said then. I feel it would tire the House if we were to go into a long philosophical debate about the relationship between income tax and national insurance. There is a great deal of academic thought going into it. There is thinking going on in all the political parties about the relationship between these contributions. I do not think it is within the scope of this Bill, and certainly not of this amendment, to deal with it further. I would just leave the noble Lord with a repetition of my last point, that I find it unacceptable that somebody earning £500 should pay into the national insurance fund the same as somebody earning £220.

Baroness Gaitskell

May I remind the House that when this Government were elected they set a pattern regarding taxation and which sections of the community had to pay. They said they would cut taxes. They therefore proceeded to cut the taxes of the rich and followed this up by taxing the poor. This is absolutely true—it is no good the noble Lord shaking his head. I often shake mine. But I take issue with him. That is exactly what they did. They cut the taxes of the rich and followed it up by taxing the benefits of the poor. The pattern is still maintained in this Bill.

Lord Elton

If I may start with the jumping-off ground of the address of the noble Baroness, Lady Jeger, the point was made that the Treasury needs more money because of unemployment. To put this debate into its proper perspective, I should remind the Committee that in the year 1982–83 it is expected that only £13 million extra is going on unemployment and nearly £1,500 million more will be spent on retirement pensions. I think that statement puts this issue in the right context.

The second thing I would say is that the gravamen of her speech—and how could it be otherwise this week?— was directed at the unemployment figures. These are sad figures; they are indeed bad figures. I do not seek to disguise the fact. It does not perhaps, in that context, matter that in Germany, in the United States, in the Netherlands, in Sweden, in Canada, the rate of unemployment is increasing faster than it is here. In the United States they lost 1 million jobs in the three months up to December. But that is not our tragedy; it is the 130,000 jobs lost in this country since the December count that this House and this Government are concerned with. We should not entirely forget the others; we are all in the same economic ocean if not the same economic boat. Anybody who thinks that recessions in another part of the world do not affect us is like somebody who last week thought that the snow fell on his back garden but not on his neighbour's. Let us, therefore, look at our own predicament. It is a bad one.

However, noble Lords who are concerned with the redundancy fund are concerned with the future. Those who sit opposite say, almost in so many words, that we are living in a nightmare and should therefore be looking for the door. There are signs—short-time working is down; the numbers are less than one-third of last year's low. Overtime working is up, one-sixth higher than in the first half of last year. The number of unfilled vacancies is up. Our industrial performance and our levels of employment are linked, rather like a tractor and a trailer; the one leads the other wherever it goes, uphill or down. The figures I have given are statistics about the work people are doing now. The work they are going to do depends on the way industry is performing, and it is beginning to improve. Output is rising; it is 2 per cent. up on last year's low. The tractor has begun to climb the hill ahead; the trailer, of course, is still coming down the hill behind. Yes, there will be more unemployment. Yes, there will be more redundancies. But we do need this provision in this Bill. To take it away would be a cruel deprivation.

So I believe that the strangest thing about noble Lords opposite is that at one and the same time they are saying that we are heading for permanent, multiplying, apocalyptic unemployment and seeking to exclude working people from contributing to their insurance against that eventuality; and complaining in the person of the noble Baroness, Lady Wootton of Abinger, that the contributions are not entirely related to income and in the person of the noble and charming Baroness, Lady Jeger, both that they are linked because of the incident of contributions at lower rates and that they are not linked because of the same rates paid by her two neighbours earning £200 and £500 a week. She is right in that—I am sorry that I did not rise to that bait on Second Reading. Falling employment is a difficulty for the nation and a tragedy for many individuals. We are seeking to provide for that and for many things in this Bill and this clause must remain a part of it.

Lord Bruce of Donington

I want to ask noble Lords opposite whether they still seriously think that it is right, in all the circumstances, that an increased burden in this respect should be placed upon employees, particularly in the light of the taxation implications which sometimes tend to get overlooked? It is, of course, I believe, generally realised that employers are entitled to deduct their proportion of the employees' national insurance contribution for income tax purposes and a tax relief is therefore obtained upon it. I do not complain of that. However, when it comes to the question of old age pensions we find that these—and as from, I believe, April 1983 unemployment pay—will be subject to taxation even though under Clause 119 of the Income Tax Act 1970, as amended by subsequent Finance Acts, the contribution that the employee pays is not allowed for tax purposes, is not deductible for tax purposes even though ultimately—as of now—the retirement benefit is taxed. Perhaps the noble Lord, Lord Cockfield, will correct me but I think that as from April 1983 the present intention is to tax unemployment benefit as well.

Let us contrast that situation with the other situation that obtains. Let us take the provisions of Section 127 of the Income Tax Act 1970 by virtue of which the premiums paid by better-off employees for annuity policies can be deducted 100 per cent. from their tax assessments. Their annuities, which they ultimately receive and which substitute in effect for pensions, are taxed, but unlike the contribution of the employee towards his retirement pension, and as from April 1983 his unemployment pay, he is not permitted to deduct the national insurance contribution for the purposes of determining his tax liability. So with a person on, for example, a current income of £10,000 per annum, on the assumption that he is of the average age and is not in one of the older age groups, he is entitled to take out an annuity policy and pay £1,750—in fact, 17½2 per cent. is the normal figure. There are grades according to age which I believe are determined by Section 128 of the Income Tax Act 1970 as amended by subsequent Finance Acts. Such a person can deduct from his total income during the year in which he pays the premium £1,750 and he can deduct that at the highest rate of tax that he pays; on the assumption that he has investment income in addition to his £10,000 salary he can in fact deduct it at a higher rate. That does not seem to me—I do not know how it seems to your Lordships—to be quite fair.

I look forward to an intimation from Her Majesty's Government, when we are considering this clause that puts the extra burden on employees, as to whether, when the Budget resolutions come up and when the Budget is being prepared and all kinds of pre-election largesse is being handed out, they will seriously consider whether it can be done, whether they will bring forward proposals for employees' national insurance contributions to be an allowable deduction for tax purposes. That would make it absolutely fair. In the meantime, I do not think—and we on this side of the Committee do not think—that the situation is fair at this stage and for the reasons that have been so admirably outlined by my noble friend Lady Jeger we do not think that this clause makes any sense or is in any way justified and we shall vote against it as a whole.

4.46 p.m.

On Question, Whether Clause 1 shall stand part of the Bill?

Their Lordships divided: Contents, 112; Not-Contents, 61.

Abinger, L. Ellenborough, L.
Ailesbury, M. Elton, L.
Airey of Abingdon, B. Ferrier, L.
Alport, L. Fortescue, E.
Ampthill, L. Fraser of Kilmorack, L.
Avon, E. Gainford, L.
Balfour of Burleigh, L. Glanusk, L.
Bathurst, E. Glenarthur, L.
Bellwin, L. Glenkinglas, L.
Belstead, L. Gormanston, V.
Bessborough, E. Gowrie, E.
Birdwood, L. Gridley, L.
Boyd-Carpenter, L. Grimston of Westbury, L.
Caccia, L. Haig, E.
Campbell of Alloway, L. Hailsham of St. Marylebone, L.
Campbell of Croy, L.
Cathcart, E. Halsbury, E.
Clitheroe, L. Henley, L.
Cockfield, L. Hives, L.
Colwyn, L. Hornsby-Smith, B.
Cowley, E. Hunt of Fawley, L.
Craigavon, V. Hylton-Foster, B.
Cromartie, E. Killearn, L.
Cullen of Ashbourne, L. Kinloss, Ly.
Daventry, V. Kinnaird, L.
Davidson, V. Kinross, L.
Denham, L.[Teller] Lane-Fox, B.
Dilhorne, V. Linlithgow, M.
Drumalbyn, L. Long, V.
Duncan-Sandys, L. Lucas of Chilworth, L.
Dundee, E. Lyell, L.
Mackintosh of Halifax, V. Sandys, L.[Teller].
Macleod of Borve, B. Savile, L.
Mancroft, L. Selborne, E.
Mansfield, E. Selkirk, E.
Marley, L. Sempill, Ly.
Massereene and Ferrard, V. Skelmersdale, L.
Soames, L.
Melville, V. Spens, L.
Mersey, V. Stamp, L.
Monckton of Brenchley, V. Strathspey, L.
Mottistone, L. Sudeley, L.
Mowbray and Stourton, L. Swinfen, L.
Murton of Lindisfarne, L. Terrington, L.
Newall, L. Thomas of Swynnerton, L.
Noel-Buxton, L. Thorneycroft, L.
Norfolk, D. Trumpington, B.
Northchurch, B. Tweedsmuir, L.
Orkney, E. Vaux of Harrowden, L.
Orr-Ewing, L. Vickers, B.
Pender, L. Vivian, L.
Platt of Writtle, B. Wakefield of Kendal, L.
Portland, D. Westbury, L.
Rankeillour, L. Willoughby de Broke, L.
Renton, L. Wynford, L.
Rodney, L. Yarborough, E.
St. Davids, V. Young, B.
Airedale, L. Kaldor, L.
Amherst, E. Kennet, L.
Ardwick, L. Kilmarnock, L.
Aylestone, L. Leatherland, L.
Balogh, L. Llewelyn-Davies of Hastoe, B.
Banks, L. Lockwood, B.
Beswick, L. Longford, E.
Birk, B. Lovell-Davis, L.
Bishopston, L.[Teller.] Milverton, L.
Boston of Faversham, L. Oram, L.
Briginshaw, L. Peart, L.
Brockway, L. Phillips, B.
Bruce of Donington, L. Pitt of Hampstead, L.
Byers, L. Ponsonby of Shulbrede, L.[Teller.]
Cledwyn of Penrhos, L.
Collison, L. Roberthall, L.
Cooper of Stockton Heath, L. Sefton of Garston, L.
Crowther-Hunt, L. Segal, L.
David. B. Shinwell, L.
Davies of Leek, L. Stewart of Alvechurch, B.
Donaldson of Kingsbridge, L. Stewart of Fulham, L.
Elwyn-Jones, L. Stone, L.
Gaitskell, B. Strabolgi, L.
Gladwyn, L. Wade, L.
Gosford, E. Wedderburn of Charlton, L.
Gregson, L. Wells-Pestell, L.
Hanworth, V. White, B.
Houghton of Sowerby, L. Winstanley, L.
Jeger, B. Winterbottom, L.
Jenkins of Putney, L. Wootton of Abinger, B.
John-Mackie, L. Wynne-Jones, L.

Resolved, in the affirmative, and Clause I agreed to accordingly.

Clause 2 [Alteration of Treasury supplement to contributions]:

4.55 p.m.

On Question, Whether Clause 2 shall stand part of the Bill?

Lord Bruce of Donington

I beg to move that Clause 2 be deleted from the Bill. We on this side of the Committee made it quite clear on Second Reading that we objected to the percentage contributed to the fund by Her Majesty's Government being reduced from 14.5 per cent. to 13 per cent. I shall not elaborate on the arguments that we used then. But the noble Lord will remember that on Second Reading I pointed out that the whole structure of the fund to which these contributions are supposed to be made was to some extent shrouded in mystery.

According to the report of the Government Actuary, there was approximately £5,000 million in the fund, and I pointed out that there were certain notional or actual interest payments made in respect of the fund. The noble Lord, Lord Cockfield, had an opportunity of considering the points that I raised on Second Reading and said that he himself thought that these were proper points to be dealt with in Committee.

Quite clearly, if there are actual funds of £5,000 million in the national insurance fund, then at first sight it may appear odd on the face of it that we should not be using them. Why make more demands on the Class I employees and, indeed, upon the self-employed if there is £5,000 million or thereabouts already in the fund? I did hazard a view, although I did not express it in very strong terms, seeking enlightenment from the noble Lord, Lord Cockfield, on this matter; I cast some doubts as to whether this fund existed at all, or as to whether it was purely a bookkeeping device, which was of assistance to the Actuary in making calculations. If there is £5,000 million in a fund—and I am talking of the term "fund" in the straight, ordinary meaning of the term—then that fund is represented by assets that are either in the form of cash held on deposit or in the form of investments. If that is so, I merely inquired what the investments were.

My inquiry as to what the investments were led directly from a reference in the Actuary's report—Command 8443, at page 6, Table 2—to investment income. I am quite sure that the noble Lord, Lord Boyd-Carpenter, who always contributes so constructively on these occasions, will agree with me that if you have an amount in an account under "income" which says "investment income", a reasonable inference to draw from that is that the income comes from investments. I think that I would carry the noble Lord with me that far.

So the question is, what are the investments? Or is it merely a device? Is it merely the case that this surplus of £5,000 million that has been built up—because it must have been a built up surplus—has not gone in a physical cash form into a fund, but has merely been paid into the Consolidated Fund and has therefore relieved the PSBR consistently over the years? I make no complaint about a particular party. I am not accusing the existing Government of any sleight of hand in this. It would apply equally to former Governments of my own political persuasion. But, if a fund has been built up of £5,000 million and there is investment income from it, and it has not been put in investments but has been put into the Consolidated Fund, then it has operated presumably —the noble Lord at the Treasury is expert on these matters—to relieve the public sector borrowing requirement in the past, and therefore has been of enormous benefit to the PSBR. I did heighten the point a little by saying that I thought that a return of 11.1 per cent. at a time when the base rate has varied between 14 and 16 seemed on the face of it to be a bit low. If this surplus existed to produce an investment

income, then somebody has not managed it too well to produce an income of only 11 per cent. These are all questions that require some answers.

I have no doubt at all that the noble Lord, Lord Cockfield, will have a perfect series of replies that fit jigsaw mathematically into position; that he will be entirely convincing about the whole matter. But if it emerges, as I think it may well emerge, that the whole thing is a series of book-keeping entries, it does of course cast doubt, to put it at its lowest, upon the insurance concept to which the noble Lord, Lord Boyd-Carpenter, has made such reference, and indeed which he holds in much reverence.

If the truth really be that the fund is merely a matter of mathematical calculation, then the harsh facts of the matter are that the contributions that come in one year are merely used for the payments that are made during that year, and that any question of funding into the future backed by tangible reserve assets for them is entirely out of the question. If, on the other hand, they are represented by tangible assets, then it seems that we are getting rather a poor return on them. The noble Lord can have it whichever way he likes.

In the suspicion, however, that it is the former, may I suggest to the noble Lord that a time when the funding has shown a £5,000 million surplus appears to be an odd time for the Government to cut down their own contribution? We ourselves on this side of the House do not think it the correct thing that the Government, who are themselves largely responsible for the creation of large-scale unemployment on the scale we now have it, should relax their own contributions. In fact, there might even be a case for increasing them. I beg to move the deletion of the clause.

5.5 p.m.

Lord Banks

The Government argument for the reduction of the Treasury supplement is that expenditure on social security met from general taxation, including the Treasury supplement, has increased from 37 per cent. to 45 per cent. since 1975–76. It is true, of course, that expenditure on non-contributory benefits is only 33 per cent. of the total because the 45 per cent., as I mentioned, includes the Treasury supplement which goes towards financing contributory benefits. But there has, of course, been an increase from some 24 per cent. of the total in 1975–76 to about 33 per cent. of the total in 1980–81 in the proportion of the whole which is represented by non-contributory benefits.

During the Second Reading debate I said that 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. I said that 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 income tax allowances in 1975–76, so it is not really an additional cost for the Government to bear. The noble Lord, Lord Cockfield, challenged that when he came to reply. He said that the introduction of child benefit was certainly a factor, but that it was not the major factor.

The noble Lord said that he would write to me and he has done that, and I am greatly obliged to him for doing so. But I noticed that the figures which he had sent me were not at constant prices, and I think it is rather essential to have figures at constant prices if we are going to compare the situation as it was with tax allowances and family allowance in 1975–76 with the position today with child benefit.

The noble Lord raised a number of other points which I should like to go into with him, and I shall write to him. I am sure he will forgive me if I do not take up those points now, but I should like to explain to the Committee how I came to my own conclusion. I looked at the White Paper issued in March 1981, which set out the Government's expenditure plans. On page 121 there is a review of social security expenditure over the years at 1980 survey prices. That table shows for 1975–76 total non-contributory benefit expenditure of £3,673 million, and for 1980–81 a similar expenditure of £6,205 million. In other words, an increase over that period of £2,532 million.

The table also showed that child allowances in 1975–76 were £870 million; that child benefit in 1980–81 was £2,579 million. The increase there was £1,709 million out of a total increase of £2,532 million. It seemed to me in those circumstances that it was reasonable to say that child benefit was the major factor. If one looks at the similar White Paper issued a year earlier in March 1980, at page 111 we see that the value of child tax allowances in 1975–76 is shown as £1,600 million. That is at 1979 survey prices, so it is slightly different, one year different, but I felt that that was sufficiently close for one to say that that £1,600 million approximately equalled the £1,709 million, the difference between child allowances in 1975–76 and child benefit in 1980–81.

If we revert to the more recent of the White Papers, the one published in March of this year, we see with regard to supplementary benefit allowances, as distinct from supplementary benefit pensions, that as between 1975 and 1980–81 they increased by £426 million. That is largely due to the increase in unemployment, which we on these Benches would argue is at least in part due to the economic policies pursued by the Government.

If you add £1,709 million increase for child benefit and £426 million increase for supplementary benefit, you see that out of a total of £2,532 million increase, those two items contribute £2,135 million. So they form the greater part of the increase which is given as the reason why the Treasury supplement must be reduced. But why should the Treasury supplement he reduced and national insurance contributors be asked to pay more as a consequence of an increase in noncontributory benefit expenditure, the bulk of which was not really increased expenditure at all and a considerable further part of which may be said to derive from the Government's economic policies? It is because of the arguments which I have just put to the Committee that I would argue that the clause should not stand part of the Bill.

Lord Kilmarnock

I do not want to make a Second Reading speech, but before the Committee decides whether to accept or reject the clause I wish to go back a short way over recent history. The clause reduces the Treasury supplement from 14½ to 13 per cent. with a resultant benefit or saving of £260 million to the Exchequer. But that is not the whole of the story because reference to the preceding year suggests strongly that it must be part of a general strategy.

In the Social Security Contributions Act 1980, which this Bill very much resembles in its general thrust, the supplement was reduced by a whopping 3½ per cent. from 18 per cent.—at which it had stood since, I think, it was fixed at that rate by the Social Security Act 1973—to the 14½ per cent. from which it is sought to remove another 1½ percentage points today. That is a reduction of 5 per cent. in two years of this vital third leg of the tripartite system of contribution. I think we must, and have a right to, register once again our protest over this in so far as it departs even further from the Beveridge principle under which the national Exchequer would provide one-third. We are entitled to ask the Government how they are proposing to use the money they are getting in this way as they rapidly move in the direction of reducing the Treasury supplement to zero.

I cannot believe, or I prefer not to believe, that this is not just a desperate ad hoc measure to raise or save a bit of cash by hook or by crook. It has therefore occurred to me—possibly because I was feeling in a rather charitable mood—that the Government do have a strategy and that what they may be gearing themselves up to do, or paving the way for, may possibly be a reduction in the employer's surcharge. In other words, by progressively lessening the Treasury supplement to the fund, they are giving themselves some elbow-room for making a reduction in the employer's surcharge, which is of course a direct tax on employment. I realise of course that the cost of making a reduction of, say, one percentage point in the surcharge would be in the region of £1 billion. However, the £ ½billion the Treasury are saving under the Bill would certainly provide a useful tranche of any projected cut in the employer's surcharge.

I raise this not out of idle curiosity but because I am trying to understand what the Government aim to achieve by this substantial cut of 5 per cent. in the Treasury supplement to the national insurance fund over two years. We know they do not want to tax employers of labour any further, which is perfectly understandable in the present lamentable state of the labour market. It seems at least possible that they may want to listen to the CBI and other organisations which have raised their voices time and again against this straight 32 per cent. payroll tax on the employment of labour—for that is what it is; the employer's surcharge is collected along with the employer's contribution under the Social Security Act 1975, but it is paid straight into the Consolidated Fund.

The Government may well in the circumstances want to find a way of reducing this payroll tax, in which we would sympathise with them; in fact, we would welcome it if they did. We would not, I hasten to say, have gone about it in this way, by making heavier demands on the very poorest sectors of the community in order to ease the pressure on the Treasury. We would have tried to spread it more evenly. If that is what is in the Government's mind, perhaps they will tell us, as it would at least help us to understand their motives and help us on this Bench to decide whether we can regard Clause 2 in a slightly more favourable light than we are inclined to at the moment. It would help us in fact to decide whether to support the Opposition in their Motion to delete the clause. I should be grateful if the Minister would enlighten me when he replies.

Lord Cockfield

The noble Lord, Lord Bruce, followed up the point he raised on Second Reading about the balance in the fund, which currently stands at approximately £5 billion. There are two separate documents that we need to look at. The first is the report of the Government Actuary, and that is the document from which he quoted. The objective of the report of the Government Actuary is to deal with the balance of the fund and to indicate to what extent contributions may need to be changed in order to maintain that balance. Inevitably in talking about these matters it was relevant that he should refer to the balance.

But quite separate from the Government Actuary's report there are the audited accounts of the national insurance fund. These accounts are audited by the Comptroller and Auditor General himself, a man who, as the noble Lord, Lord Bruce, will agree, is of high repute and great standing. Those accounts are published each year. The last published accounts were for the year 1979–80, which were published on 26th February 1981, and therefore we might expect to see the accounts for the year 1980–81 published in the near future. I agree with the noble Lord that it is perhaps rather a pity that we did not have the accounts in front of us at the time of discussing the Bill, but the preparation of the accounts has been a little delayed by problems due to the Civil Service dispute. So, if I refer to last year's account, rather than this year's, he will understand the reason why.

Those accounts set out in detail every single investment held in the fund. In the 1979–80 accounts, the list of investments appears at page 13. This is in fact an actual fund; it is not a notional one. The money is invested in Government securities, local authority stocks and so on. The noble Lord asked why the investment income produced by this fund was only approximately 11 per cent. against rates of interest in the region of 14 or 15 per cent. commonly available today in the money market. The answer depends on a number of factors. First of all, there is a certain amount of money in transit. That is, there are balances which are held by various people; the contributions are originally collected by the Inland Revenue, they are handed over to the fund—the fund must have a certain amount of money as a buffer for paying out benefits—so there is a certain amount of money which is in transit, and therefore the total reserves exceed the amount which is actually invested, and that acts as a slightly depressing influence on the rate of return secured.

Secondly, the securities appear at cost and not at market price. I can say—without disclosing the contents of the accounts, which have not yet been audited and therefore not yet presented—that the market value is expected to be slightly more than cost. Nevertheless, the return is the return on cost and not on market value. If you buy a Government security which has a low or relatively low coupon, part of the return appears as an income yield and part as capital appreciation on redemption. Therefore, the running yield is commonly less than the redemption yield, and it is that differences between the running yield and the redemption yield which largely accounts for the fact that the average return on the fund appears to be somewhat over 11 per cent., instead of the 14 or 15 per cent., to which the noble Lord quite rightly refers.

The noble Lord then asked, why is it necessary to have such a reserve at all? First, such a reserve has always existed in the fund. It is a common feature in all insurance funds. Five billion pounds is in fact a large amount of money, but one has to bear in mind that the amount of benefit which is expected to be paid out in the coming year is of the region of £18.9 billion. Therefore, the reserve represents little more than a quarter of the annual flow of payments of benefit, and it has always been felt that this is a reasonable level of reserve. If one spent the reserve by not increasing the contributions, the effect would be that in the coming year one would lose the investment income, which would then have to be made good by a higher rate of contribution. But spending the reserve would protect one for only a very limited period of time, and as a matter of financial prudence we believe that the present level of reserve is a perfectly reasonable one.

I should now like to come to the general point raised by the noble Lord, Lord Banks. As he said, I have written to him in some detail about the point that he raised. We treated his argument very seriously. In fact, I spent a whole day on this matter myself going through the figures. I mention that only to indicate that we treat these matters very seriously. But, if I may say so, with respect, the noble Lord seems to be shifting his ground a little. If we take precisely what he said in the Second Reading debate, we see that he was talking in cash terms, and there is no doubt that in cash terms the income tax allowances which have now disappeared do not represent the major part of the growth in the non-contributory benefits. The noble Lord is now talking in terms of constant prices. This is all very well, but in fact both benefits and contributions are made in current cash, they are not made in terms of constant prices.

When one is looking at matters of this kind, one needs to look at what in fact is happening, not what might have happened in other circumstances. Nobody can tell what the position would have been had the child tax allowances not been abolished and had they not been replaced by child benefit. Underlying the whole of the noble Lord's argument is an assumption that the child tax allowances would have risen either pro rata to prices or pro rata to total non-contributory benefit. But if the noble Lord looks at what has happened to income tax allowances over the period that he is talking about—namely, 1975–76 to 1980–81 or to 1981–82—he will find that income tax allowances have gone up very much less than prices have gone up.

So that once one gets into this field where one is arguing about what might have happened in different circumstances, it is really frightfully theoretical, and what I really want to do is come down to the hard facts of the situation. I should like to do this by taking as my starting point the year 1978–79, which is the year before the present Government took office. I take that as a starting year as much as anything because it was the year when the transition from child tax allowances to child benefit had been completed, and therefore that particular problem is no longer with us.

The total benefit in 1978–79 amounted to £15.3 billion. In the current year they will have risen to £26.6 billion, and they are expected to rise to £30 billion next year. Non-contributory benefits have risen from £4.6 billion in 1978–79 to £9.3 billion this year, and they are expected to rise to a figure of the order of £11 billion next year. There has therefore been an increase in non-contributory benefits of some £4.7 billion between 1978–79 and the current year, and we anticipate an increase of £5.4 billion between 1978–79 and next year.

If one looks at the total share of this cost that the Treasury will bear, one will see that even when the amendments proposed in the Bill have been made, in 1978–79 the Treasury would have borne 43 per cent. of the total cost, and in 1982–83 it will bear 45 per cent. So despite two reductions in the Treasury supplement, the Treasury will, nevertheless, be bearing next year, as it is this year, a higher proportion of the total cost as compared with what it bore in 1978–79.

I want to leave this erudite area of figures in order to go to the much broader issue which was touched upon by the noble Lord, Lord Kilmarnock, and which really underlines the whole of the present debate. The noble Lord, Lord Kilmarnock, referred to the tripartite basis on which the national insurance fund was established, and he was no doubt referring to the words of Sir William Beveridge in his epoch-making report. But if your Lordships look at that with care, you will see that "tripartite" did not mean three equal shares, as the noble Lord supposes. Indeed, if your Lordships go back to the days of Mr. Lloyd George (as he then was) you will find that the share borne by the Government was considerably less than one third.

A number of things have happened since then. In Mr. Lloyd George's day the number of income tax payers was very small indeed, and a large number of people were brought into the national insurance scheme. He had two schemes in fact an unemployment benefit scheme, and a sickness benefit scheme. The number of people in those two schemes was very much greater than the number of people who were income tax payers. So in effect by asking the Treasury to contribute to his fund he was transferring money from one group of people, the income tax payers, to another group of people, the contributors to the fund.

If I take my mind forward to the time when Sir William Beveridge's report began to be implemented —that is, in the 1940s—I well remember Mr. Hugh Dalton (as he then was) saying that he had relieved 3 million people from paying income tax, thereby reducing the number of people liable. The number of people now paying income tax is approximately 26 million. So we have moved over this period of 70 years from having two different sets of people—income tax payers and contributors—to having two groups of people who largely overlap one another. So the Treasury supplement to a large degree has become a question of transferring money from one pocket to another pocket of the same pair of trousers. That is the first point.

The second point is that as benefits and provision for benefits have increased in the last few years, the tendency has been for new benefits and for increases in benefits to come on the non-contributory side. By their very nature, of course, the non-contributory benefits are paid for entirely by the Treasury—in this respect, of course, "the Treasury" simply being a synonym for the general body of taxpayers: it does not mean the particular individuals who happen to be Commissioners of the Treasury, it is simply a synonym for the general body of taxpayers—and as the Treasury has paid for this rising amount of non-contributory benefits, it is perfectly reasonable and perfectly proper that the Treasury contribution towards the contributory benefits should be reduced.

I could well understand noble Lords opposite protesting very strongly if the position was that the Treasury was now paying a smaller proportion of the total. If that were the position I could well understand them saying that this was wrong. But as I said in reply to the specific point made by the noble Lord, Lord Kilmarnock, the fact of the matter is that the Treasury will still be paying a larger proportion of the total amount. It is really on the basis that we believe that the provision is a perfectly fair and a perfectly reasonable one that it has been included in the Bill.

The noble Lord, Lord Kilmarnock, in fact suggested that underlying all this was a subtle strategy to enable the Treasury to reduce the national insurance surcharge. He attributes perhaps far more skill and cunning to the Treasury than the Treasury has possessed at least during the 30 or 40 years that I have been associated with it; and I see the noble Lord, Lord Roberthall, agreeing with me on that particular point. As far as the national insurance surcharge is concerned, this is a matter for my right honourable and learned friend's Budget. I have said that he will of course pay due regard to everything that has been said in your Lordships' Chamber, but I assure your Lordships that there is no subtle or devious plot underlying this.

The proposal which is included in Clause 2 is a perfectly simple and a perfectly straightforward one: in our view it reinforces the general contributory nature of the scheme. I entirely accept that the noble Baroness, Lady Jeger, feels that we ought to have an entirely different sort of scheme. She herself said at the beginning (which saves me from having to say it) that this is a subject which lies outside the narrow scope of this Bill. It is a subject of enormous interest and fascination, and one which one could discuss and debate at great length. There are solid arguments on both sides, but they do rather transcend this Bill.

As my noble friend Lord Boyd-Carpenter said (if I may use the words that he used on Clause 1 in relation to Clause 2) this is not essentially a matter of principle: it is simply a matter of arithmetic. We feel on this that we have the arithmetic right, and it is on that basis that I commend the clause to your Lordships.

On Question, Whether Clause 2 shall stand part of the Bill?

5.34 p.m.

Their Lordships divided: Contents, 109; Not-Contents, 53.

Abinger, L. Long, V.
Airey of Abingdon, B. Lucas of Chilworth, L.
Alport, L. Lyell, L.
Avon, E. Mackintosh of Halifax, V.
Bathurst, E. Macleod of Borve, B.
Bellwin, L. Mancroft, L.
Belstead, L. Mansfield, E.
Boardman, L. Marley, L.
Boyd-Carpenter, L. Marshall of Leeds, L.
Campbell of Alloway, L. Massereene and Ferrard, V.
Campbell of Croy, L. Mersey, V.
Cathcart, E. Milverton, L.
Cockfield, L. Monckton of Brenchley, V.
Colwyn, L. Mottistone, L.
Cork and Orrery, E. Mountevans, L.
Cowley, E. Mowbray and Stourton, L.
Craigavon, V. Murton of Lindisfarne, L.
Cromartie, E. Newall, L.
Cullen of Ashbourne, L. Noel-Buxton, L.
Daventry, V. Norfolk, D.
Davidson, V. Northchurch, B.
De La Warr, E. Orkney, E.
Denham, L.[Teller.] Orr-Ewing, L.
Dilhorne, V. Pender, L.
Drumalbyn, L. Platt of Writtle, B.
Dundonald, E. Portland, D.
Ellenborough, L. Rankeillour, L.
Elton, L. Renton, L.
Ferrier, L. Robbins, L.
Fortescue, E. Rodney, L.
Fraser of Kilmorack, L. St. Davids, V.
Gainford, L. Sandford, L.
Gisborough, L. Sandys, L.
Glenarthur, L. Savile, L.—[Teller.]
Glenkinglas, L. Selbourne, E.
Gormanston, V. Selkirk, E.
Greenway, L. Skelmersdale, L.
Grimston of Westbury, L. Spens, L.
Haig, E. Stamp, L.
Henley, L. Strathspey, L.
Hives, L. Sudeley, L.
Hornsby-Smith, B. Swinfen, L.
Hunt of Fawley, L. Terrington, L.
Hylton-Foster, B. Thorneycroft, L.
Inglewood, L. Trumpington, B.
Ironside, L. Vaux of Harrowden, L.
Killearn, L. Vickers, B.
Kinloss, Ly. Vivian, L.
Kinnaird, L. Wakefield of Kendal, L.
Kinross, L. Westbury, L.
Kitchener, E. Willoughby de Broke, L.
Lane-Fox, B. Wynford, L.
Lauderdale, E. Yarborough, E.
Linlithgow, M. Young, B.
Amherst, E. Gaitskell, B.
Ardwick, L. Gosford, E.
Banks, L. Gregson, L.
Beswick, L. Hanworth, V.
Birk, B. Houghton of Sowerby, L.
Bishopston, L. Howie of Troon, L.
Boston of Faversham, L. Jeger, B.
Briginshaw, L. Jenkins of Putney, L.
Brockway, L. John-Mackie, L.
Bruce of Donington, L. Kilmarnock, L.
Cledwyn of Penrhos, L. Listowel, E.
Collison, L. Llewelyn-Davies of Hastoe, B.
Cooper of Stockton Heath, L.
David, B. Lloyd of Kilgerran, L.
Davies of Leek, L. Lockwood, B.
Elwyn-Jones, L. Longford, E.
Ewart-Biggs, B. Lovell-Davis, L.
Fisher of Rednal, B. Noel-Baker, L.
Foot, L. Oram, L.
Peart, L. Stewart of Fulham, L.
Phillips, B. Stone, L.
Pitt of Hampstead, L. Strabolgi, L.
Ponsonby of Shulbrede, L. [Teller.] Underhill, L.
Wade, L.
Roberthall, L. White, B.
Sefton of Garston, L. Wootton of Abinger, B.
Shinwell, L. Wynne-Jones, L.
Stewart of Alvechurch, B.

Resolved in the affirmative, and Clause 2 agreed to accordingly.

[Amendment No. 3 not moved.]

Clause 3 agreed to.

5.42 p.m.

Baroness Jeger moved Amendment No. 4: After Clause 3, insert the following new clause:

("Redundancy payments for employees otherwise disqualified by lack of continuous employment. 1965 c. 62

.Employees liable for increased contributions under sub-sections (2) and (3) of section 1 of this Act who become disqualified from receiving redundancy payments under the provisions of section 32 of the Redundancy Payments Act 1965 solely because at the time of their redundancy they have not been in the same continuous employment for one hundred and four weeks as required by section 8 of that Act shall be repaid out of the Redundancy Fund an amount equivalent to 0÷.35 per cent. of their earnings in respect of which National Insurance contributions were paid in the employment which has been terminated by redundancy.").

The noble Baroness said: I beg to move this new clause standing in my name and in the name of my noble friend Lord Bruce. I dare say there is a great deal wrong with the drafting of it, and I hope that noble Lords will be lenient in understanding what we are trying to get at, even though we may not have got it all quite right textually. We are in some difficulty, of course, because what we really need to do is to look again at the Redundancy Payments Act 1965. Of course, that would be out of order this afternoon; so all we are trying to do today is to seek some protection for people who are disqualified from receiving redundancy pay because under the terms of the 1965 Act they will not have completed 104 weeks with the same employer.

I should like to remind the Committee that the Redundancy Payments Act was passed in 1965, that successive Governments accepted the principle both of the two-year limit and also that the workers should not be involved at all in making any contribution. I have been carefully through all the references in the Library and I cannot find one instance where any Conservative Minister from 1965 onwards has ever questioned those arrangements. Therefore, it is a very new principle which suddenly has been thrust into this Bill—and thrust in sideways, I would submit—and it seems to me quite proper that we should be spending some time this afternoon asking what made the Conservatives change their minds. Over the years, they had maintained the principle of no contribution from the workers; and now it is we reactionaries on this side who are asking, "Why not leave things as they are?—not all innovations are good.

I should like to remind the Committee of the different circumstances in which that 1965 Act was passed and which included the two-year rule. In June 1965, total unemployment was 269,929. That is a totally different atmosphere from that in which we are having to work today. Moreover, there was a more stable employment picture and it seemed quite fair to put this two-year rule into that Bill. Now we have a much more volatile situation, with more people falling out of jobs—and I wish I could say that they were getting into new ones. But there is a much greater movement of labour and it is much harder to stay in the same job for two years.

The relevance to this Bill is that all workers are to be expected to make this contribution to the redundancy fund. If, through no fault of their own, their job disappears and they become redundant—and, tragically, this is happening in many parts of the country—they will have paid for a redundancy benefit which they will never be entitled to claim. It could happen that a man loses his job after 18 months and that perhaps his next job lasts only for one year. Throughout those jobs he will have paid these contributions. I wonder how many people there are at Invergordon who face this problem and who may not have had worked there for two years. I wonder how many workers in the De Lorean motor works have been in their jobs for two years. Not many of them can have been, because of the newness of the firm. I would remind the Committee that under Clause 4(5) this Bill is to be applied to Northern Ireland, where the question of redundancies is even more stressful than here.

Thinking that this Bill might at least provide some concession for people who do not fulfil the two-year limit in the main Bill, I raised this matter on Second Reading, and I should like to thank the noble Lord, Lord Elton, who, with his usual courtesy, wrote to me a long letter about it. It would be discourteous of me not to refer to one or two things that he said but with which I must take issue. The noble Lord wrote If we allowed them refunds should we not do the same for people who leave their jobs of their own accord or because they had reached the normal retirement age or were dismissed for reasons other than redundancy?

The answer to this question is, No. People retire voluntarily. That is their decision. We are talking about people who have no choice and not about people who leave their jobs of their own accord. The opposite is true. I can understand—the noble Lord explained it to me—the thinking behind the redundancy payments, which were intended to compensate for the loss not simply of jobs but of all the accrued benefits, and that it seemed fair to take the two-year limit so that workers would have got some record in the firm.

I am not seeking to alter the two-year limit; in fact, it would be outside the power of this Committee so to do. I am only asking the Committee, through this amendment, to give consideration to the refund of amounts which have been contributed by people who, through no fault of their own, may never be able to make a claim. I do that because we on this side insist that the redundancy money should be totally different from the national insurance money. That was the intention of the Act when it was passed in 1965. It cannot be regarded as an insurance benefit. It is only in human fairness that people who are likely to fall foul of this new impost should have some consideration. If I do not have the wording right, I apologise. I beg to move.

Lord Elton

My Lords, the noble Baroness, with her customary charm, has disarmed the criticisms of draft ing—which were legion—which I had marshalled before me. I accept the difficulty of drafting in this case. The noble Baroness—if I can say it without sounding condescending—has done extremely well. It would not have worked as drafted. That is not the issue that we are concerned with. There are serious objections to the principle of refunds and there are practical difficulties of such a scheme.

First, the refunds to those made redundant before they had qualified for redundancy payment would be entirely at odds with the social insurance basis of the statutory redundancy scheme. It is intended to spread the risk and the cost of redundancies and concentrate the benefits on those longer service employees who lose most when they lose their jobs in terms of accrued rights, seniority within the firm in which they are working, status among their colleagues, and security to which they have become accustomed. The scheme never was intended to provide compensation for people who lost jobs before they had built up any such accrued rights, nor to provide benefits pro rata to contributions like a personal savings scheme.

Secondly, it is wrong to think that employees with fewer than two years' service cannot draw any benefit from the redundancy fund. The fund meets claims not only for redundancy payments but also for back pay, holiday pay and notice payments when employers become insolvent owing to debts to their employees. People with less than two years' service are as entitled as others to these insolvency payments which totalled over £31 million in 1981. This is a part of the scheme which benefits those who lose their jobs under two years' service and it does so significantly.

Thirdly, the cost of processing refund claims—and one is apt to overlook this when devising schemes of administration—would be very high indeed in relation to the amount refunded to employees. No employee could get more than £80. The great majority would get less than £50. Some would get less than £10. Administrative costs, which are at present some £6½ million a year, could be doubled, as could the numbers of staff required.

The money lost by this means to the redundancy fund as a result of refunds and extra administrative costs would aggravate its deficit and might mean that contributions have to be raised even further. Employers would also be saddled with extra costs because they would have to keep a record of the contributions of everybody in their firm until they had served for two years in order to establish the appropriate payment.

The fourth point—and one which may weigh with those who put their names to this amendment and may consider voting for it—is that refunds to redundant employees with less than two years' service would create further anomalies and leave other groups of employees at a disadvantage. I phrased that before the noble Baroness replied to my letter. It does not carry as much weight as the other arguments in my letter which I hope I have summarised. It is not a question of defective drafting, which makes it essential that this amendment is rejected in any case. It is a matter of the principle on which it is founded that would render the scheme very expensive and torpedo it.

Lord Bruce of Donington

It is quite clear from what the noble Lord has said that the idea of making Class I contributors pay anything towards the redundancy payments fund has been misconceived from the outset. It should never have been done at all in the first place because of course he knows perfectly well that there are bound to be a very large number of people who are paying amounts into the redundancy fund who under no circumstances are going to be able to get them out. There is no point in fudging the issue by saying that of course if they did not pay, other people would have to pay more. There is already facility in the Employment Protection (Consolidation) Act 1978, Clause 104. Schedule 1 to the present Bill refers to additional powers to be given to the Secretary of State to make refunds. If he looks at Schedule 1, paragraph 2, he will find: 2.—(1) In section 105 of the Employment Protection (Consolidation) Act 1978 (payment to employers out of redundancy fund in respect of certain employees who are not entitled to redundancy payments), after subsection (4) there are inserted the following subsections— '(5) Where the Secretary of State has determined a class of employees under subsection (3) above he may also make payments out of the fund to employees of that class and may determine, with the approval of the Treasury, the amounts of the payments which may be so made. (6) The payments made to an employee by virtue of this section shall not, in respect of any period, exceed the amount appearing to the Secretary of State to be equal to the amount paid into the fund from the appropriate employment protection allocation from all primary Class I contributions paid by or on behalf of that employee under Part I of the Act of 1975'.". It seems as though the noble Lord in moving this Bill has already anticipated setting up the administrative apparatus in order that this part of the schedule may be complied with. What is the objection under those circumstances to accepting the amendment? He has to set up the apparatus. He has given the Secretary of State powers. Why does he not do something about it?

Lord Elton

I can only reiterate the remarks which I have already made. The principle which the noble Lord presses is not congruent with the legislation that we have before us. The schedule gives power to make redundancy payments to certain categories of people who are excluded from payments such as mariners. It would not allow payments to people disqualified because of length of service. It would not have been possible to have adduced that without looking at the principal legislation. I am sorry that I hesitated at the beginning. We sometimes depend upon the "carrier pigeons" and it was rather a swift flight on this occasion I think. I counsel the Committee, for all the reasons I have given, to reject this amendment.

On Question, amendment negatived.

Lord Spens moved Amendment No. 5: After Clause 3, insert the following new clause:

("Tax-relief on contributions of self-exmployed earners

.After subsection (9) of section 9 of the principal Act there is inserted—

"(10) The total of the Class 2 and Class 4 contributions of a self-employed earner shall be divided in a similar proportion to the total of the primary and secondary Class 1 contributions made by an employed earner and by his employer; and the proportion of such total equivalent to the secondary Class 1 contribution of an employer shall be wholly allowable against tax.".").

The noble Lord said: At Second Reading, I drew attention to a positive discrimination which self-employed earners consider they suffer at the moment from the way in which their contributions are assessed and collected. I am not going into all the details that I discussed then, but the noble Lord the Minister who replied to that debate did not refer to my point at all, and so I put down this amendment in oder to get a positive answer in one way or the other from the Government on this point.

Most self-employed earners contribute in two ways to the national insurance scheme. They all have to pay a flat rate Class II contribution and then those who make profits above a minimum have to pay a percentage of those profits later, collected by the Inland Revenue at the same time as their tax is collected. The total amount they have to pay has been calculated, so we are told, to take account of the fact that they are not entitled to claim unemployment benefit or industrial injuries benefits, but that otherwise they are, of course, entitled in due course to claim their pensions and certain other short-term benefits.

The way their contributions are calculated relates not only to the Class I contribution of an employee but also to the Class I contribution of his employer; and in the Second Reading debate I drew attention to the discussion document which was issued by the Department of Health and Social Security in October 1980 and which I was told by the Minister is likely to come to fruition in the fairly near future. Almost at the beginning of that document there are a couple of sentences which I want to quote to establish the fact that I am right when I say that the self-employed earners contributions are related both to the Class I contribution of the employee and the Class I contribution made by his employer. I quote: One very important point must be made. Some people seem to argue that self-employed contributions should be compared with the employee's share of the Class I contribution without taking account of the employer's share. But this would be unfair. Although the Class I contribution is divided into employee's and employer's shares, they must be looked at together as a single contribution. This is because the employer and the employee are jointly contributing towards the employee's national insurance. For this reason, the Class II and Class IV contributions must be compared with the whole—employers plus employee's' Class I contributions ".

That establishes the point that the self-employed contributions are compared with the whole of the Class I contributions, and the discrimination arises because the employer is allowed to set off his portion of that contribution against tax, whereas the self-employed person is not allowed to do so. The fact that this point must have been in someone's mind, I think, appears in Schedule 1 to the Act, where in paragraph 6(1)(g) we see that regulations may provide without prejudice to sub-paragraph (f) above, for enabling the whole or part of any payment of Class II contributions to be treated as a payment of secondary Class I contributions;".

It is the secondary Class I contribution which is the employer's portion of that contribution.

I have made inquiries and, so far as I know, no such regulations have been made; but the thought is there that they could be made, and if my amendment is not appropriate to this Bill perhaps it might be put into a regulation of that kind. There is this very positive discrimination. The employer can set his contribution against tax whereas the self-employed person cannot; and so I have drafted my amendment to try to break up the total of the Class II and IV contribution so that a proportion of it may be allowed to be set against tax. I beg to move.

Lord Roberthall

I rise to support the amendment now proposed by the noble Lord, Lord Spens. He set out in the Second Reading debate the case that he has just been elaborating. I have always thought that was a most extraordinary feature of the tax system, for the reasons he has given. The stamp contribution that the self-employed person makes is a benefit and it is reasonable that you should pay for benefits out of your income. But the other part is a pure cost on any definition—I cannot remember the ones one gets in connection with one's personal income, of "wholly necessary" and so on—but clearly this falls under that very strict one. The self-employed person has to pay this tax and he gets no benefit from it at all. Yet he is not allowed to charge it as a cost. It is quite illogical. I remember when a Labour Government, I think, actually introduced this, and I was attacking the noble Lord, Lord Wells-Pestell, about it. All he could say at the end was, "Well, we need the money". And that is what happens. But for a Conservative Government, who go round the country saying what great things are going to be done for the self-employed person and that they are looking to the activities of the self-employed person, to persist in this is something that I cannot understand.

I am not sure, but I do not think the noble Lord, Lord Spens, is going to press this to a Division and I believe in fact it would be improper for your Lordships to pass something of this nature, because it seems to me to have all the aspects of a money Bill. Nevertheless, it gives us a good opportunity to say how wicked we think it is, even if we cannot do anything about it.

Lord Banks

I should like to add just a brief word to what has already been said, and I shall be interested in the reply Lord Spens receives to this amendment of his. It seems that the principle is sound. It seems reasonable; the self-employed man pays a single contribution in lieu of the employer's and employee's contributions. He is the employer, but also, by inference, he employs himself, and it seems reasonable that his contribution should be divided in the proportion suggested in the amendment and what we might call the employer's element should be allowed as an expense. As I say, it seems a very reasonable proposition, but I shall be interested to hear whether there are any grave administrative difficulties which would prevent its being put into practice.

6.10 p.m.

Lord Cullen of Ashbourne

As the noble Lord has explained, the purpose of this amendment is to enable self-employed people to be given some tax relief on their own national insurance contributions to correspond with the relief given to employers in respect of the contributions which they are obliged to pay on behalf of their employees. I am sure that the Committee will be grateful to the noble Lord, Lord Spens, for having initiated this debate. The subject has been discussed on several occasions in another place, but I do not believe ever before in your Lordships' House.

As the noble Lord has said in moving this new clause, the argument for making a proportion of the Class I and Class IV contributions, which self-employed people have to pay, tax deductible is that employers enjoy tax relief on their share of the Class I contribution which they pay for their employees. He has rightly said that the contribution rates for self-employed people are derived ultimately from the total Class 1 contribution; that is, from the employers' and employees' shares combined. So, the argument runs, it is only fair to allow self-employed people tax relief on that proportion of their contribution which corresponds to the employers' part of the Class I contribution. At present, neither the flat-rate Class II, nor the profits related Class IV, contributions paid by self-employed people is tax deductible.

I should tell your Lordships at the outset that the change in the taxation arrangements which is proposed in the new clause would cost in the region of £65 million. I do not need to spell out to your Lordships at this time what the effects of this loss of revenue would be. But, quite apart from the cost of the proposal, your Lordships may think that there are objections to the new clause of both principle and practice.

The first consideration must be whether it is fair to compare the tax treatment of contributions paid by employers, on behalf of their staff, with that of contributions paid by self-employed people. It is utterly reasonable for an employer to get relief for his share of Class I contributions for his employees, because he pays it, like the other wage costs of the employee, wholly and exclusively for business purposes. But the same cannot be said of the self-employed man. Of course, the contribution which he pays is a statutory obligation on him, just as it is for the employer. But that does not mean that it is a comparable expense. The self-employed man is contributing on his own behalf for benefits to which he himself will be entitled. I doubt, therefore, that the comparison which the noble Lord, Lord Spens, has drawn is altogether a fair one.

The conclusion of the argument which I have just been putting to your Lordships is that, in terms of tax relief, the self-employed man's contribution is a personal expense and it is right that it should be treated as such. Because the self-employed man gets the benefits which accrue from his contributions, they are a personal expense in exactly the same way as his own tax liability, for which, of course, he gets no tax relief. The reason why I labour this point is that the type of expense which the self-employed man is incurring in paying his contributions should be compared not to that of the employer in paying his share of the employee's contribution; it should be compared to the employee's own contribution on which, of course, no tax relief is available. Indeed, if we were to allow tax relief on the contributions which self-employed people pay, it could be difficult to justify refusing it on the employees' share of the Class I contribution, and to allow that relief would cost an additional £2,000 million a year.

Nor could we justify tax relief on the grounds that self-employed people are currently paying a dis- proportionate share in their contributions. On the contrary, the present rates of contribution of self-employed people are calculated in a way that is more than fair. As I mentioned a few moments ago, the rates are derived from the combined employees' and employers' Class I rate, which is adjusted to take account of the fact that self-employed people are not entitled to certain benefits. This calculation is in accordance with a formula agreed between the political parties in 1975 as a fair way of working out contribution rates for self-employed people. And in approving Clause 1 of the Bill a short while ago, your Lordships have endorsed contribution rates for the coming year which are even more favourable to self-employed people than the strict application of that very fair formula.

I have so far dwelt on the arguments of principle against the new clause. Perhaps briefly I may say something about practical difficulties; and I think that the noble Lord, Lord Banks, suspected that there might be some. It is not clear to me, even after the lucid explanation of the noble Lord, Lord Spens, what form the tax allowance which he has in mind would take. If it is to reflect the employers' relief, it should be a deduction from profits. But this would be difficult to administer since the Class IV contribution is determined by the size of the net profits. A deduction from profits of a percentage of the contribution would reduce the profit on which the contribution should be calculated and so on, giving rise to an absurd and endless process. So I hope your Lordships will accept that the new clause would create very real problems of administration.

I have considered at some length the principles and practicalities behind the new clause which the noble Lord has moved. I have done so, because it has been ruled that the new clause falls technically within the scope of the Long. Title of the Bill and, therefore, I felt that it would be less than courteous to your Lordships to respond to it in any perfunctory way. Essentially, my noble friend Lord Elton reminded your Lordships on Second Reading that this is a Bill with a very narrow purpose. It is a Bill about paying for benefits during 1982–83 and the new clause takes us a long way beyond that.

In going into this matter, I have not used any argument as to whether this is a right matter to be debated on this Bill. There was some question as to whether it was outside the scope of the Bill, but technically it is not. However, I am resting my case not on that, but purely on the practicalities and the administrative details that I have gone into. I hope the noble Lord will feel that he has had a good run for his money in this debate, and that he will now feel able to withdraw his amendment.

Lord Boyd-Carpenter

If the noble Lord, Lord Spens, were to press this matter to a Division, I would certainly vote against him, simply on the basis that I do not think it is within the conventions governing the relationship of this place and another place to legislate on matters of taxation; and I think, from the indications which the noble Lord had given, that he shares that view. But I should not like for that reason to let his amendment be withdrawn, without one expression, at least, from this side of the Committee, of sympathy with his general purpose.

My noble friend Lord Cullen of Ashbourne will allow me to say that he is always persuasive, but he is sometimes more persuasive than at other times and this was one of the other times, for he did not seem to me to get to grips with what is a real grievance of the self-employed. When I was involved with the administration of these matters, I always had great sympathy with the self-employed—some noble Lords may remember that I was able, to some extent, to modify their contribution rates in comparison with those paid by those in Class I—because I have always felt that they have not had as much benefit as the employed from the national insurance scheme. I feel that the noble Lord, Lord Spens, is on to a very practical point, in as much as they are not allowed to set any of their national insurance contribution against tax. With very great respect to my noble friend Lord Cullen, it is all very well to say that this is a personal payment of theirs. Of course, in a technical sense, it is, but it is a personal payment which is obligatory by law. It is not the result of any decision of theirs. I think it is a fact, from my own contacts, that some of them feel, for the reasons which the noble Lord, Lord Spens, set out so fully and clearly, that they are rather badly treated from a tax point of view.

As I say, I do not think that this Bill is a proper vehicle for the admittedly very difficult legislation which will be required to put the matter right, but I should not like my noble friends on the Government Front Bench to feel that there is not also—at any rate, from one example on this side of the Committee—a good deal of feeling that there is here a genuine grievance and that it ought to be looked at by responsible Ministers.

The fact is that the party to which my noble friend and I belong has always particularly claimed to be concerning itself with the interests of that admirable section of the community, the self-employed. They are a section of society which perhaps makes almost a disproportionate contribution to the well being of our national economy in relation to their numbers and their remuneration.

I agree with my noble friend that the difficulties would be considerable. I am not sure that they would be insuperable. The cost of doing exactly what the noble Lord, Lord Spens, wants would be £65 million. In these days, that figure is all within the inevitable errors of judgment on any Budget. No Chancellor of the Exchequer would say for a moment that he was able to budget with that degree of precision. And if he did say it, nobody in either House would believe him. It is well within the errors of it. So the financial burden directly is not insuperable. More difficult, I agree with him, is the precedent that it might, and would, set for the more generous tax treatment of the Class I contributor. I believe that there are some merits in that, though there the cost figure is prohibitive.

I hope that in due course, either now or later, the noble Lord, Lord Spens, will withdraw his amendment because, for the reasons I have given, it is not one which I personally could support. However, I should like my noble friends on the Front Bench to give some indication that they feel there is a certain amount of merit in this point which is worth further investigation by a humane and kindly Government.

Lord Drumalbyn

May I add a very brief word to what my noble friend has said. Some of your Lordships may remember that I was my noble friend's immediate successor. I found that he had done his very best to contain the contributions from the self-employed, and I certainly did the same. But one of the difficulties which has arisen is the enormous increase in contributions since that time. If I remember rightly, at that time the weekly contribution was below one shilling. I think I raised it to one shilling. It was something like ls. 4d. for the self-employed. It is the enormous extent to which since then benefits have increased (and therefore contributions have increased) which has borne so much on the self-employed, many of whom are on a very low rate of remuneration. They do not make very much. One tends to think of the self-employed as people with enormous businesses all over the world. In fact, many of them are among the low paid workers. That is one point which has to be borne in mind.

Lord Elton

Perhaps I should say that the Government hold the self-employed in very high esteem. They regard them as an innovative and important element in the British economy. They recognise that they are not all very wealthy men. Some of them are like little acorns which grow into great economic oak trees, while others remain small men throughout their lives. And they are the salt of the earth and of the economy.

I would not like your Lordships to forget what my noble friend Lord Cullen of Ashbourne said earlier: that the rate at which the contributions are made was agreed originally between the parties as being fair in discounting benefits which the contributors could not expect to receive, and that in the recent review they were re-rated at a rate lower than that formula, if it had not been adjusted, would have justified.

We are considering the position of the self-employed. My noble friends need have no fear that we do not wish to favour them as we can. What I am saying at the moment, however, is that to favour them in this way has practical as well as philosophical difficulties. With the greatest and most real respect to my noble friend Lord Boyd-Carpenter, junior Ministers are not in a position to throw away £65 million on the nod, however large the overall figures of the Treasury may be. So I must ask your Lordships to indulge the Government on this point this evening and to reject the amendment.

Lord Spens

I am most grateful to all noble Lords who have taken part in this little debate. It gives me a lot of heart to hear the noble Lord, Lord Boyd-Carpenter, speaking up on behalf of the self-employed in this way. I am very grateful for his support. I agree with him that the noble Lord, Lord Cullen of Ashbourne, did not really make out a very good case against my point. Certainly arithmetically it would be quite easy to make the calculations for which I have asked. However, I realise that it is not something which the Government can give away quickly. I hope that they will bear it in mind for the future.

May I give this final warning: that if nothing has happened by this time next year and we get a Bill similar to the present one, I shall put down this amendment again. With that, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 4 [Supplemental]:

6.27 p.m.

Baroness Jeger moved Amendment No. 6: Page 3, line 16, leave out subsection (4).

The noble Baroness said: I beg to move this amendment which would leave out subsection (4), and I do so for one very simple reason that I cannot understand subsection (4). When one cannot understand anything, I feel that one should leave it out. The old journalist rule when I worked on the Guardian was, "If in doubt, leave out". Noble Lords will be even more surprised to know that my very numerate noble friend Lord Bruce of Donington does not understand it, either. We thought that if there is no good reason for keeping it in we should propose to leave out subsection (4). However, we should be interested to hear why the Government would rather have it in. I beg to move.

Lord Elton

I hope that the noble Baroness does not apply the same principles to her modes of transport as she does to legislation. The effect of the amendment is to impose a duty on the Secretary of State to carry out a review under Section 120 of the Social Security Act 1975 of the general level of earnings and, if necessary, to produce an order to alter the rates of Class 2 and Class 3 contributions: the figure of earnings below which the small earnings exception may be granted and the profit levels between which Class 4 contributions are calculated. The Bill which the noble Baroness seeks to amend—or, rather, does not seek to amend—provides for the suspension of this duty this year because the Bill itself includes the increases which can be made under that order as well as the increase of 1 per cent. in the Class 1 contribution rate and the increase of 0÷25 per cent. in the Class 4 rate.

In short, and I mistakenly alluded to this in our opening debate, the Act requires the Secretary of State to carry out a review every year. This year that review has been incorporated in this Bill and has been done. If one takes out the bit in the Bill which the amendment proposes to take out, then one is taking out the bit which says that the review has been done and need not be done again. We should have to embark at once upon a second review. And having seen how the present one is going down with the Opposition, I am sure that they would not want that!

Baroness Jeger

I thank the noble Lord for his courteous explanation. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 4 agreed to.

Remaining clause and the schedules agreed to.

House resumed: Bill reported without amendment.