§ 4.31 p.m.
§ Lord Trefgarne rose to move, That the draft order laid before the House on 9th November be approved.
§ The noble Lord said: My Lords, I shall go through my remarks on this Motion as quickly as prudence will allow because we have other important business to follow this matter, and I hope your Lordships will bear with me if I speak at a reasonable rate, therefore. I will, with permission, speak at the same time to the Social Security (Contributions) Amendment (No. 2) 1165 Regulations 1982, which, again, were laid before your Lordships on 9th November.
§ These instruments are essentially about finding the money to pay for the benefits that will be paid out of the National Insurance Fund in the coming year. These benefits amount to nearly £20 billion, of which the retirement pension accounts for the overwhelming proportion, nearly £14½ billion. The instruments which are the subject of tonight's Motion represent the outcome of the review by my right honourable friend the Secretary of State. With your Lordships' permission, I will also refer to the Social Security (Contributions) Amendment Regulations, which my right honourable friend made on 4th November. Although these regulations, which set Class 1 earnings limits for 1983–84, do not form part of this Motion, they are nevertheless inseparable from it and themselves spring from the same review. The reason why they are not part of the Motion is that they are subject only to the negative resolution procedure.
§ We propose to increase the rate of Class 1 contributions—those paid by employed earners—by a net 0.25 per cent. both for employers and for employees. For two main reasons, we do not need an increase as great as in the past two years. First, the drop in the number of claims for redundancy payments has made it possible for my right honourable friend the Secretary of State for Employment to reduce the employment protection allocation within the employee's contribution by 0.1 per cent. This means that, although we are imposing a net increase of only 0.25 per cent. on the employee's contribution rate in the coming year, the National Insurance Fund will benefit by this extra 0.1 per cent.
§ The second reason lies in the reduction from April of next year of 0.75 per cent. in the rebate allowed in the contribution rate on earnings between the lower and upper levels for liability in respect of employees in contracted-out schemes. This was announced by my right honourable friend in March of this year. Again, this will result in increased income to the National Insurance Fund of the order of £400 million in 1983–84.
§ For married women and widows who retain the right to pay reduced rate contributions, the employee's contribution rate will rise by 0.65 per cent. This is because these women will benefit from the statutory sick pay scheme which comes in next April, even though they do not at present qualify for sickness benefit. The National Insurance Fund will bear the cost of this scheme and we have at all times made it clear that these opted-out women will have to bear an increase in their contributions to cover their inclusion in it. The Government Actuary has calculated that the cost of their inclusion would be compensated by an increase of 0.75 per cent. in their contribution. However, we have thought it right to allow them to benefit from the reduction of 0.1 per cent. in the employment protection allocation, which they pay in full. Their rate will, therefore, go up by the net 0.65 per cent. to which I referred, to 3.85 per cent.
§ The other changes which we propose that directly affect employees and employers are those to the lower and upper earnings limits for Class 1 contributions liability. The Social Security Pensions Act 1975 provides that the lower earnings limit must be equal 1166 to, or just below, the basic retirement pension rate. As this will be £32.85, the lower earnings limit of £32.50 is inevitable, given the customary rounding to the nearest 50p.
§ The same Act requires the upper earnings limit to be in the range of 6½ to 7½ times the basic pension rate. That means that, for 1983–84, the choice lies in the range £215 to £245 a week. There will be no disagreement among your Lordships that the upper earnings limit should be increased from its present level of £220, which effectively rules out the figures towards the bottom of the range. On the other hand, we believe as a Government that we should keep the extra contribution burdens on employers and employees to the minimum necessary. We therefore propose to increase the limit by 6.8 per cent. to £235, which is in line with the movement in earnings and means that the upper earnings limit will stand at about 7.2 times the basic pension rate.
§ I make no apology for our keeping the upper earnings limit below the maximum permitted by the law. The maximum should not be regarded as a norm, and our proposal of an upper limit of £235 strikes what we believe to be the right balance. It shows a proper degree of buoyancy in the income to the National Insurance Fund, while allowing employers and employees to benefit from our achievement in keeping inflation down.
§ When it comes to looking at what these changes will mean in cash terms to employers and employees, the picture is complicated by two factors. First, there is the reduction in the rebate for contracted-out contributions; similarly, the reduction in the National Insurance surcharge which my right honourable and learned friend the Chancellor announced in another place in his autumn Statement must form part of the reckoning. In making comparisons, therefore, between what will be paid from next April and what is being paid now, I include in the present figures the surcharge of 2 per cent. which employers have been paying since August. I recognise that this does not represent the rate for 1982–83 as a whole, but it makes for ease of comparison. Nor do I take account of the extra relief for the current year which my right honourable and learned friend also announced at that time.
§ All employees will pay more, except for those whose earnings lie below next year's lower earnings limit. For example, non-contracted-out employees with weekly earnings of £60, £170—the expected average for next year—£220 and £235 will pay an additional 15p, 43p, 55p and £1.90 per week respectively. Those in contracted-out schemes with similar earnings will respectively pay an additional 31p, 98p, £1.27 and £2.30 per week. The extra amounts for married women and widows paying at the reduced rate—reflecting, as I said, their new eligibility for statutory sick pay—will be 39p, £1.10, £1.43 and £2.01.
§ The position of employers is rather more complicated. Those who are not contracted-out will pay less, except in respect of employees earning close to the upper earnings limit. On weekly earnings, for example, of £60, £170 and £220 there will be decreases of 15p, 43p and 55p. Where earnings are £235 or more, there will be a maximum increase in employers' liability of £1.24 a week. For those who are contracted-out, more 1167 will be payable by employers on earnings at any level, except obviously those below the proposed lower earnings limit. This is because of the reduction in the contracted-out rebate to which I have referred. For earnings of £60, £170, £220 and £235, the respective increases will be 9p, 25p, 33p and £1.50 a week.
§ I turn to the self-employed. Your Lordships will know that the Government are anxious to give every possible encouragement to this economically vital sector of the community. Last year we suspended the application of the established formula for calculating their national insurance contributions and again this year my right honourable friend feels it right to continue to give some modicum of relief. Strict application of that formula would suggest a weekly Class 2 rate of £4.60 and a Class 4 rate of 6.3 per cent. For 1983–84, we propose to abate the Class 2 rate to £4.40. This will be of direct help to smaller businessmen, and we believe it right to concentrate what assistance we can give in such ways that they can benefit, although the benefit will, of course, apply to all self-employed people paying contributions.
§ We do not propose any remission of the Class 4 rate, as this is paid only on higher profits and would be contrary to the concentration I have just mentioned. We are, in addition, proposing to raise the lower profits limit for Class 4 contributions from £3,450 to £3,800 a year and the upper profits limit from £11,000 to £12,000 a year. The small earnings exception below which exception from Class 2 liability may be granted rises automatically from £1,600 to £1,775. The last change of rate to which I must draw your Lordships' attention is the voluntary Class 3 rate. As usual, this is being set at 10 pence a week less than the Class 2 rate; that is, £4.30.
§ Those are the proposed changes. Increases in contribution rates are always unwelcome, and these will be no exception. However, in our judgment they are the minimum that would be consistent with protecting pension and other benefits against inflation, while at the same time exercising what I might call our household management function of the National Insurance Fund. The order and regulations are therefore part of a routine exercise—something, indeed, that your Lordships might feel is an annual chore which stems from having a system of buoyant benefits. It is not a system that I believe any of us would wish to discard, and we cannot therefore dodge the necessity of buoyant contributions to pay for those benefits.
§ I should like to conclude by reminding your Lordships that the purpose of the order and of the married women's regulations, which are the subject of this evening's discussion, is to enable the National Insurance Fund to meet the very substantial demands, amounting, as I have said, to nearly £20 billion, that we estimate will be made upon it next year. It is on that basis that I commend the order and the regulations to your Lordships. I beg to move.
§ Moved, That the draft order laid before the House on 9th November be approved.—(Lord Trefgarne.)1168
§ 4.42 p.m.
§ Baroness Jeger
My Lords, the House will be relieved to learn that I do not propose to follow in great detail the marathon explanation that we have just heard. The amendments are consequential on earlier legislation that we discussed very fully in the previous Session, and the noble Lord the Minister has made it quite clear that, with very few exceptions, the effect of the regulations is to increase as from April the contributions which employers and working people have to make.
I want to ask the Minister about one or two points. I heard him say that it was important to raise contributions so that we could keep benefits "buoyant"—I think that that was the word he used. I must ask him whether it is the policy of Her Majesty's Government to ensure that the buoyancy of the pensions and the benefits will continue to be related to the buoyancy of the contributions. I would remind your Lordships that not only are people being expected to pay greater contributions, but when they receive the "buoyant" benefits they are to be brought into taxation, for income tax purposes. It may be that at the end of the day a worker will be paying a higher contribution while benefiting less because of the taxation of the benefit that he receives.
I appreciate that the insurance fund has to be balanced—we all appreciate that—but I wonder whether the noble Lord the Minister can make clear that the income tax that will be payable on benefits will go to the National Insurance Fund; or is it to be paid direct to the Treasury, and therefore give no relief to the National Insurance Fund at the same time as the beneficiary receives a benefit which, in proportion to his contribution, is probably less than that which he received at the same time the previous year?
In particular, I want to ask the Minister about a point of detail in relation to paragraph 3 on page 2 of the order. With great respect to the Minister, I must say that the matter was very difficult to follow because he so often used percentages, whereas the order before us does not give the details in percentages, and I do not think that I am the only unnumerate Member of your Lordships' House. So I am sure that if I make a mistake the Minister will, as ever, be lenient. In referring to the exception for small earnings, paragraph 3(b) states that for £1,600 there is to be substituted the figure of £1,775. That is one of the few figures—at least, the only one in that part of the order—that appear in annual terms; and I return to a point that I made during the passage of the original Bill.
Does the annual figure apply in terms of weekly income? I am thinking in particular of the seasonal worker, or the worker whose earnings for the whole of the year amount to £1,775 though he might in fact earn the amount in only two or three months. Is he now to be entitled to spread the figure throughout the year for the purpose of gaining benefit? I ask that because my recollection is that during the passage of the Bill the position was that contributions were to be based on weekly earnings. I should be very glad if that is now to be the case, and that one can earn £1,775 either by doing a couple of deep-sea dives, looking for oil, or by picking grapes for two or three months. I think that point should be made clear.
1169 It is all very well to talk about the increased contributions that have to be faced, but I hope that I shall not be straying too far if I say that they will be even more unacceptable if at the end of the day the resulting benefits suffer from what is usually called clawback, or any form of reduction. People who feel that they are making contributions that are increased in order to take care of both inflation and high benefits will be very disillusioned if, when they ask for the help for which they have paid, some restriction is placed upon it.
Then I have a query on the Amendment (No. 2) Regulations. In the second paragraph of the first page of the regulations it is stated that the proposals have not been referred to the Social Security Advisory Committee,since it appears . . . by reason of urgency it is inexpedient to do so".I did not hear the noble Lord the Minister say why it was inexpedient to do so, nor explain the urgency. We passed the Act during the last Session, and it seems to me that the matter has been hanging about for quite a long time. Then when I turn over the page of the regulations I find that the final paragraph states:These Regulations will be referred to the Social Security Advisory Committee under subsection (7) of section 10 of the Social Security Act… unless the Committee agree that that subsection shall not apply".So there seems to be some confusion there. I apologise if it is my fault, but I shall be very interested to learn why it appears that on one piece of paper there are two contradictory statements.
§ 4.58 p.m.
§ Lord Banks
My Lords, I should like to thank the noble Lord, Lord Trefgarne, for his very clear explanation of the purpose and content of the order and regulations. Last year we had the reduction in the Treasury grant, which was reduced to 13 per cent. of contributions in the second of two stages which lowered it from 18 per cent., and we on these Benches opposed that reduction. There was also an increase for personal contributors, but there was no increase for employers, and we did not think that that was right, either. We said we thought there should be a cut in the national insurance surcharge, and that it was through such cuts that employers should be helped.
This year the Government's proposals are not so controversial. First, there has been a cut in the national insurance surcharge—though that is not dealt with by the order and regulations that are before us this evening—and we on these Benches look forward to the time when it will be abolished completely. The extra burden by way of contributions has been distributed evenly—a ¼ per cent. to employers and the same to employees—and there has been no further reduction in the Treasury contribution.
Nevertheless, the fact remains that during the lifetime of the present Government there has been an increase in employees' contributions from 6½ per cent. to 9 per cent., whereas employers' contributions to the National Insurance Fund have risen from 10 per cent. to 10.5 percent. In other words, there has been a 2½ per cent. increase for the employees and a 0.45 per cent. increase for the employers. During that time benefits have been reduced, in that almost all claimants are 1170 worse off than they would have been because of the cuts imposed by the Government. That increase of another 2½ per cent. from 6½ per cent. to 9 per cent. over the three years represents an increase of 38 per cent. in the employee's national insurance contribution for which the benefits have been reduced in the way in which I have described. This increase in NI contributions has made its own contribution to the increase in the tax for the lowest paid. The real increase in taxation, including NI contributions, for a married couple with two children earning 75 per cent. of the national average is 17 per cent. since 1978–79.
The noble Lord, Lord Trefgarne, referred to the fact that the contribution limits have as usual been raised. The upper limit, as he explained, has been raised only to £235 a week and not to the permitted limit of £245 per week. I know that it is not always the custom to raise it to the maximum but I think that the situation which I have described would have justified that and I believe that it would have brought in a further £87 million. I have in this House repeatedly complained of the cut-off which results in people earning over the upper limit paying progressively a smaller percentage of their income the higher their income is.
The Government have told the Government Actuary to assume that there will be a clawback next November amounting to £110 million. In view of the fact that the over-estimate this year would still leave benefits lower than they would have been but for the cuts earlier imposed by the Government, we have opposed the idea of a clawback next year. During our discussion last Wednesday my noble friend Lord Grey pointed out that we have argued from these Benches for some 20 years that the single person's pension should be 33 per cent. of average national earnings and the married couple's pension 50 per cent. He pointed out that in June 1982 the figures were 22.45 per cent. and 33.3 per cent. respectively.
The noble Lord, Lord Trefgarne, countered that by saying that it would cost a tremendous amount of money to achieve that particular target. But my noble friend was not suggesting that that target could be arrived at immediately; he was explaining that, with such a target in mind, we could not agree to the clawback of the amount overestimated. The over-estimate represented for us a small step towards our target. I should have preferred to see the extra revenue for the National Insurance Fund provided by restoring some of the cut in the Treasury grant from 18 per cent. to 13 per cent.
Had unemployment not increased as it has under the present Government to the levels it has, and had not the Treasury grant been cut, I am sure that the substantial increase in contributions from employees over the last three years would not have been necessary. I conclude by repeating the concern which we feel that employees pay increasingly higher contributions for benefits which have suffered the cuts which I have described.
§ 4.54 p.m.
§ Lord Kilmarnock
My Lords, I, too, should like to thank the noble Lord, Lord Trefgarne, for explaining the order and the regulations. I want to put one or two questions. On the order, in paragraph 4, we read that the flat rate of contribution, the voluntary rate, is to 1171 jump from £3.65 to £4.30 per week or about 16 per cent. Can the noble Lord tell me what the implications for eventual entitlement to pension are of that rather considerable jump in the contribution? I ask this because it appears from Appendix I that the National Insurance Fund is to benefit only by approximately £3 million from that source in 1983/84 and one wonders where the additional contribution money is going.
The second point is that, according to the Government Actuary's Report, he estimates unemployment at 2,900,000 in 1982/83 and 3,200,000 in 1983/84, excluding school-leavers. The Actuary says that he has used the registration basis, and not the old job centre count; and this is clearly right for his purpose. My question is this. Has he allowed enough for unemployment benefit? In Appendix 3 he has allowed only an additional £171 million for the year 1983/84. Even on the new statistical base which was explained in your Lordships' House the other day—and which is presumably the same as the Government Actuary's—we already had 3,040,000 unemployed in October of this year, or 13.1 per cent. of the workforce. Are the Government satisfied that the Actuary's ceiling for the next financial year is high enough?
The third point is that I note from page 7 of the Actuary's Report that the balance in the National Insurance Fund at the end of 1983/84 is expected to be only 16 per cent. of benefit expenditure during that year. It has been in a downward trend from 23 per cent. in 1981/82. Do the Government not think—and this is a point which was raised also by the noble Lord, Lord Banks; I should like to support him on this—that they should reconsider the reduction that they made from 18 per cent. to 13 per cent. in the Treasury grant. The Actuary himself says:DHSS are, with my advice, reviewing the appropriate level of balance bearing in mind the need to guard against unexpected adverse contingencies".Those are his words—"unexpected adverse contingencies". Can the noble Lord tell us whether he will report the result of the DHSS review to the House?
§ Lord Monson
My Lords, I am sorry to spring this on the noble Lord, Lord Trefgarne, without prior notice, but, following a point made by the noble Lord, Lord Banks, can the Minister say why, in principle, there has to be any upper earnings limit, or for that matter lower earnings limit, for NI contributions, given that these contributions are effectively a form of tax and are regarded as such by the vast majority of the population? What is paid in by a particular individual bears almost no relation to what is paid out, except by accident.
Why should those earning between £32.50 and £235 a week have to pay 9 per cent. of their salary in contributions whereas someone earning £470 a week pays only 4½ per cent. and someone earning £1,000 a week pays no more than just over 2 per cent. of his earnings in contributions? Is it not the case that, if there were no upper or lower earnings limits, the rate could be reduced from 9 per cent. to 8 per cent. for all contributors without any loss of revenue?
§ 4.58 p.m.
§ Lord Trefgarne
My Lords, I shall have to take some advice, if I may say so, on the arithmetical correctness 1172 of the points raised by the noble Lord, Lord Monson. It is possible to play all sorts of tunes on the figures that I have offered to your Lordships tonight; but the ones that I was describing are part of the long-established structure in these matters and there are good reasons for having things like upper earnings limits and lower earnings limits which I should be very happy to describe to the noble Lord on another occasion if he wishes.
I am grateful to your Lordships for the reception of these regulations. I will deal with one or two of the points, if your Lordships will forgive me for not dealing with them all because we have important business to follow. But I will do my best in these few moments. The noble Baroness, Lady Jeger, asked whether the small-earnings exception applied to the earnings of the self-employed. She pointed to the figures which are contained in Regulation 3 of those that we were looking at just now. As I understand it, the annual figure given in that regulation would be applied on an annual basis to those who are self-employed in that way; but for those who are ordinarily employed, it is applied on a weekly basis. The figure for the lower earnings limit is £32.50 a week.
The noble Baroness also asked why the Social Security (Contributions) Amendment (No. 2) Regulations were not referred to the Social Security Advisory Committee. That is because the Committee have agreed that since the regulations form an integral part of this year's re-rating, this will not be necessary. The noble Baroness will recall that the Committee is not required to look at specific levels of benefits, and they have accepted that these regulations form part of that movement this year.
The noble Baroness referred to the "buoyancy"—as I described it—of benefits and where the tax will go. It is the case that most recipients of these benefits, whether the benefits are nominally taxed or not, do not pay tax because for most cases the recipients need to be earning some other form of income to which the benefit is aggregated to come into the band of tax at all. But, as the noble Lord, Lord Banks was saying, some of the money paid in this way goes back to the social security fund by way of the Treasury supplement. There is room for more than one view certainly as to how large the supplement ought to be. The noble Lord, Lord Banks, expressed the view that it ought to be greater than it is. Every single charge on the Consolidated Fund has to be found from somewhere, and a greater Treasury supplement means in the end a higher rate of tax or perhaps a lower threshold, and I am not certain that that is the path down which the noble Lord would wish us to go.
The noble Lord, Lord Banks, asked me a number of other important points, particularly why the upper earnings limit is being set at £235 rather than £245 which it could be under the existing legislation. The figure of £245 is the maximum allowed under the present legislation which, as I described in my remarks, provides that the level is 6½ to 7½ times the basic pension rate. But it is not a norm, the limit of £235 for the year 1983–84 will be 7.15 times the pension rate and represents an increase of 6.8 per cent. on the present upper limit. This is in line with the rise in earnings. We think that it is right that we should use our achievement in reducing inflation to keep the extra 1173 contribution burdens on employers to the minimum needed for the good housekeeping of the National Insurance Fund.
In the interests of brevity I did not make any reference to the position of the National Insurance Fund during my opening remarks. I had better put that omission right. We are seeking to achieve an adequate flow of income into the fund while at the same time we are anxious to keep the extra burdens on contributors to a minimum. The changes provided for in the order and regulations will have the effect of leaving an estimated balance in the National Insurance Fund of £3,261 million at the end of 1983–84. This is very near to the working balance of about 10 weeks' benefit in expenditure which the Government Actuary's report on his quinquennial review recommended. I think that the noble Lord, Lord Kilmarnock, referred to that. We shall in any case be carrying out a thorough review of the right level for the balance in accordance with the recommendations in their 23rd Report of the Public Accounts Committee in another place. Your Lordships can rest assured that the increases proposed for 1983–84 are the minimum compatible with our proper protection of the fund.
If I may underline the point that the noble Baroness, Lady Jeger, made, we are not seeking to make a profit out of the fund. Everything that goes in comes out in the way of benefits, save of course the Treasury supplement which is added. I say "save"; that is an additional income to the fund. It is not possible to contemplate wholesale increases in benefit without at the same time having to propose to Parliament wholesale increases in contributions. That is not necessarily the way down which your Lordships would wish us to go. Having said that, I hope that your Lordships will now agree that these regulations should be agreed to.
§ Lord Kilmarnock
My Lords, before the noble Lord sits down, may I ask him to write to me on the point that I raised about the Class 3 contributions, and why they have been raised by the amount of approximately 16 per cent?
§ Lord Trefgarne
My Lords, I apologise for not answering that point. I shall certainly write to the noble Lord.
§ On Question, Motion agreed to.