§ 10.35 p.m.
§ The Parliamentary Under-Secretary of State, Department of Health and Social Security (Lord Glenarthur)
My Lords, I beg to move that the draft Social Security (Contributions Re-rating) (No. 2) Order 1984 be agreed to. With the leave of the House, I should like at the same time to speak to the draft Social Security (Treasury Supplement to Contributions) (No. 2) Order 1984, both of which were laid before this House on 13th November.
With your Lordships' permission, I will also refer to the Social Security (Contributions) Amendment (No. 2) Regulations 1984 which my right honourable friend the Secretary of State made on 8th November, These regulations, which set Class 1 earnings limits, are not part of the Motion before us because they are subject only to the negative resolution procedure. However, the Class 1 earnings limits are inseparable from the matters under discussion and all three instruments deal with the amount of contributions to be paid next year.
Your Lordships will know that that the Social Security Act 1975 requires my right honourable friend to carry out a review each year of the general level of earnings. At the same time, he reviews the state of the National Insurance Fund, as he is empowered to do by the same Act. The purpose of this exercise in good housekeeping is to make sure that the money coming into the fund is sufficient to pay for benefits, while maintaining an appropriate level of balance to guard against unexpected adverse contingencies. The report of the Government Actuary on the effect of the proposed changes was laid before this House by my right honourable friend the Secretary of State on 13th November, as required by the Act.
Currently the National Insurance Fund is in surplus. This is because earnings have been higher than were estimated at the last re-rating and because there has been a welcome increase in the number of people in work. Earlier forecasts of the increase in jobs took a cautious view but the latest evidence shows an accelerating and encouraging rise in the numbers in employment. The Government have had to decide the 876 best way of apportioning the surplus. In managing the National Insurance Fund we try to achieve a broad balance between expenditure and income. How the income should be split between contributions and general taxation is a question which has to be considered in the wider context of the burden of taxation generally. Claims to benefit from unemployed people over the last year have been met, not so much by unemployment benefit payable from the National Insurance Fund, but rather by supplementary benefit which is payable from the Consolidated Fund. In view of the increasing costs of social security which are being met by the taxpayer, we felt it right to propose a reduction in the Treasury supplement from 11 per cent. to 9 per cent. of gross contributions; that is, before contracted-out reductions and recoveries of statutory sick pay.
The Government Actuary's report shows the estimated effect of this and the other changes detailed in the orders. The Government Actuary estimates that the balance in the fund at the end of 1984–5 will be £5,265 million and that this figure will increase to £6,099 million by the end of 1985–6. These balances are expected to represent 25.2 per cent. of benefit expenditure in 1984–5 and 27.5 per cent. in 1985–6—both well above the minimum level of one sixth, or 16.6 per cent., recommended by the Government Actuary. It is necessary to maintain a balance of this size for working purposes. It represents about 13 weeks of benefit payments. It is needed as a reserve against any unexpected increases in benefit expenditure or falls in contribution income and as an operation margin to fund the payment of benefits by the Post Office on time. The minimum recommended working balance for the fund is nine weeks benefit expenditure.
The reduction in the Treasury supplement will mean that the national insurance contributor will bear a slightly increased proportion of the cost of contributory benefits. However, despite this reduction, the proportion of benefit expenditure met by general taxation is estimated to be 48½ per cent. in 1985–86, compared with 40 per cent. in 1976–77 under the last Labour Government. The tendency in recent years with regard to total social security benefit expenditure has been for the balance to move from the contributor towards the taxpayer. This reduction will reverse the trend.
I am pleased to be able to tell your Lordships that for the second year in succession there is to be no change in the rate of Class 1 national insurance contributions. This is in keeping with the Government's determination to keep the tax and contributions burden to as low a level as possible.
This will also be the first year in which employers will receive the full benefit of the abolition of the national insurance surcharge. The surcharge, introduced by the last Labour Government, acted as a disincentive to employers who might otherwise have sought to create jobs. The surcharge is now abolished and the Government are proud of their achievement in doing this.
Although the Class 1 rate remains the same, there is change to the lower and upper earnings limits for employees' and employers' contributions, and I will 877 explain the reasons for this. The Social Security Pensions Act 1975 requires the lower earnings limit to be equal to, or not more than 49p below, the basic rate of retirement pension, and the upper limit to be between 6.5 and 7.5 times that rate. A pension rate of £35.80 next year therefore points unavoidably to a lower earnings limit of £35.50, if we are to follow the usual practice of dealing in multiples of 50p. The upper earnings limit permits a little more discretion: it would be possible to extend it to £268.50. However, we have chosen a figure of £265 because this represents a six per cent. increase on the current limit of £250 and is broadly the same as the general increase in the level of earnings. This is equivalent to 7.4 times the basic pension rate and towards the top of the permitted range I mentioned earlier of 6.5 to 7.5 times.
Of course, most people have earnings between the lower and upper earnings limits and so will be virtually unaffected by these changes. Their contributions will rise only in so far as their earnings rise. The contributions of employees with weekly earnings of over £250 per week will increase by up to £1.35 per week—up to £1 05 per week in the case of contracted-out employees. Similarly, employers will have to pay increased contributions for employees on high earnings; the maximum increase will be £1.57 per week—£1.01 for contracted-out employees.
However, employers will benefit from the proposal of my right honourable friend the Secretary of State to relieve employers of the cost of the secondary contributions they make on payments under the Statutory Sick Pay Scheme. This will be introduced prior to the introduction of the extended scheme, and it will result in a saving to them of up to £40 million a year on their payments for spells of sickness up to eight weeks and will mean that they will not bear the cost of contributions on the payments which they will make from the ninth week onwards as from 6th April 1986.
I now turn to the self-employed. Your Lordships will be aware that self-employed people pay their contributions in two parts: the flat rate Class 2 contribution and the profits-related Class 4 contribution. As it is not proposed to increase the Class 1 rate, it follows that no increase is needed in the Class 4 rate which is derived from it. The profits limits for Class 4 contributions rise automatically each year, like the earnings limits for Class 1 contributions. The figures proposed for next year are £4,150 and £13,780, the latter figure being 52 times the upper earnings limit.
The formula for determining the Class 2 rate gives a figure of £505 a week. However, for the last few years we have set the rate at a figure 20p below that given by the formula, and not only do we intend to continue the practice next year but to increase the abatement to 30p, as a modest incentive to small businessmen. This gives a weekly rate of contribution of £4.75—an increase of only 15p a week. The effect of these changes is that for self-employed people who only pay Class 2 contributions there will be an annual increase of £7.80, but for those with profits between £4,150 and £13,000 there will be a reduction of £4.80 a year assuming the same level of profits as in 1984–85. Like employees who earn more, those self-employed who make higher profits will pay more, too. For those with 878 profits of, or above, £13,780, the new upper profits limit, the increase will be £44.34 a year.
The small earnings exception from Class 2 liability also rises automatically—in this case from £1,850 to £1,925 a year. The proposed voluntary Class 3 rate is, as usual, l0p below the Class 2 rate, giving a figure of £4.65 a week from next April.
I have described in some detail the changes that we are proposing and, with your Lordships' permission, I will summarise them briefly. For the second consecutive year it is not proposed to increase the Class 1 or Class 4 contribution rates, and the various proposals made affecting employers will mean that the total burden on employers in 1985–86 is expected to be significantly less in real terms than in the current year, 1984– 85, despite a rising labour force. I believe that this will be as welcome to the majority of Members of your Lordships' House as it is to employers and employees.
Throughout the exercise we have sought to maintain a fair balance between all the contributors to the fund, while at the same time structuring things in such a way that employers can see that we are genuinely seeking to reduce the burdens on them and to create a climate in which entrepreneurial activity can flourish. Inevitably, a debate on contributions re-rating centres mainly around matters of concern to employers and employees, but we have sought in this re-rating exercise to propose measures conducive to encouraging growth in jobs—something to which this Government attach the highest importance.
These two orders and one set of regulations are the result of the annual exercise in care and maintenance which is essential if the national insurance contributory system is to be kept up to date, with sufficient money available to pay for benefits. I am satisfied that both criteria are met and it is on this basis that I commend the orders to your Lordships. My Lords, I beg to move.
§ Moved, That the draft order laid before the House on 13th November be approved.—(Lord Glenarthur.)
§ 10.46 p.m.
§ Baroness Jeger
My Lords, I am sure that we are all grateful to the noble Lord the Minister, who has set out this very complicated situation as clearly as possible. I want to ask him only a few questions. I understand that under Section 1 (5) of the 1975 Act there has to be a Treasury supplement that is agreed. The noble Lord the Minister has told us that the contribution of 11 per cent. has been reduced to 9 per cent., and I have to ask him: why? Is this reduction in order to balance the books, and is he balancing the books?—because there are many old people, especially old people over 75 years of age, who are to lose their heating allowances. How many reductions is he making in housing benefits in order that he can make this reduction from 11 per cent. to 9 per cent? How many strikers' families are going to be worse off, so that he can reduce the contribution from 11 per cent. to 9 per cent? I hope he will tell the House how he can explain the invention of a 53-week calendar year. This 53-week invention saves £35 million a year, and this really cannot be acknowledged to be for social security purposes.
879 On the other question of the Class 4 benefits, which comes under Sections 9(2) and 10(1), there is a change from £3,950 to £4,150. Is that in line with inflation? There is now an upper class which has changed for contributions from £13,000 to £13,780. Should this not go higher? Surely, people who are earning £13,780 should be able to pay a greater contribution to national insurance. Why not? The best source of more income is to increase the insurance contributions of people who are better off. Already they are the main beneficiaries of reduced tax. I understand that between 1979 and 1982 the most wealthy 25 per cent. of the adult population increased its share of marketable wealth from 77 per cent. to 81 per cent. Why do the Government not increase the national insurance contribution to this higher level and make matters easier for the poorer people in our society?
I do not intend to go into a great deal of detail, but these are a few thoughts which I wish to leave with the Minister. There are difficulties about raising the amount of social insurance income that is needed. This income should be raised by increasing the amount of insurance paid by those who are better off. I have already told the Minister that I do not intend to put before him tonight many of the problems, because I hope that the House will be provided with another opportunity to deal with all the problems relating to social security. Nevertheless, I hope that he will be able to provide us tonight with answers to the problems I have mentioned.
§ 10.50 p.m.
§ Lord Banks
My Lords, I should like to join in thanking the noble Lord the Minister for his very clear exposition of the content of these two orders. We learn from the Government Actuary's report which accompanies them that the surplus in the National Insurance Fund, estimated for the current year, is reduced by £271 million to £661 million. That is quite a reduction, although the surplus remains considerable.
The Government Actuary gives two reasons for this; first, that he has been instructed to assume a higher level of unemployment. Does the noble Lord feel that that level is high enough, at 3 million, particularly when one considers that every additional 100,000 of unemployed knocks £190 million off the surplus? In these estimates it seems that we are always lagging behind reality. Does not the Minister feel that that applies in this case, too?
The second reason given by the Government Actuary for the decline in the estimate of surplus is the extra cost of administration. Is this due entirely to the industrial action which has been taken within the department? Can the Minister indicate the current situation regarding that action?
The top limit for Class 1 contributions has been raised, as the Minister said, from £13,000 per annum to £13,780 per annum. Therefore those earning £13,780 per annum and above, not contracted out, will pay an extra £70.20 per annum. This additional tax will hit hardest those earning precisely £13,780. 880 The more you earn above that figure, the lower is the percentage of your earnings which national insurance contributions take. That underlines the point which was made by the noble Baroness.
There is greater uncertainty in the figures this year. The Government Actuary's report says on page 5, at paragraph 9:The estimates for the amounts of statutory sick pay to be recovered by employers from contributions are based of necessity on the sickness experience of the National Insurance Fund prior to its introduction. The first data relating to statutory sick pay is expected early next year, but until it becomes available there remains a special degree of uncertainty in the estimates".In these circumstances, is it not surprising that the Government have already introduced a Bill to extend the term of statutory sick pay from eight weeks to 28 weeks? Would it not have been wiser to get first the information on how the present arrangement is working? Will not the uncertainty underlying the Government Actuary's figures be much increased by the introduction of this Bill at this stage?
The Treasury supplement, as the noble Lord said, is to be reduced further—to 9 per cent. from 11 per cent. I regret that, under this Government, the Treasury supplement has been reduced from 18 per cent. of contributions to 9 per cent. In fact, it has been halved. If the Treasury supplement had been maintained at 18 per cent. and at the present level of contributions, then in 1985–86 the National Insurance Fund would be better off by £2,295 million—or 10 per cent. more. This could have been used to improve benefits or to introduce new benefits—or contributions could have been reduced. After all, employees' contributions have been raised from 6.5 per cent. to 9 per cent. since 1979.
The Government's argument which the noble Lord put for a reduction in the Treasury supplement and for an increase in contributions is that non-contributory benefits not financed by the fund have increased in scope and cost. That means in effect—not technically, but in effect—that contributors are made to pay for non-contributors whose benefits are paid from a different fund. That is not the insurance principle as we have always understood it.
I should like to ask whether it is the Government's intention to phase out the Treasury supplement altogether. Once they have done that, perhaps they would be prepared to privatise the fund. If they were to hand over the fund to, say, the Prudential and to enforce contributions to be made to them on the same basis as now, then £23 billion would disappear from public expenditure although the situation would remain exactly the same—which perhaps suggests some absurdity in our methods of calculating social security accounting.
Then there are the problems of finding the funds to supplement the retirement pensions of those who have little or no earnings-related pension—and of course there is the problem of meeting the cost of the state pension scheme in the second and third decades of the next century. I have raised these problems before and I have suggested a solution. I cannot say that I had a very satisfactory reply on any occasion, but I shall not elaborate on those problems again tonight. I am sure that the noble Lord will remind me once again of the special reviews which are being conducted by his 881 department. We await with great interest the outcome of those reviews, and we hope the result will be comprehensive proposals for the integration and reform of the income tax and social security systems.
§ 10.58 p.m.
§ Lord Kilmarnock
My Lords, I too should briefly like to thank the noble Lord for explaining these orders with his usual lucidity. I must first take him to task on the question of unemployment. My noble friend Lord Banks referred to this and suggested that it would have been prudent in the actuary's report to allow for more than the 3 million unemployed for whom allowance has been made both in the years 1984–85 and 1985–86. The noble Lord talked about the encouraging rise in the number employed but took no account of the fact that the number of those seeking employment is rising even faster, that ought to be put on the record.
I have one suggestion to make to the noble Lord. I do not expect an answer from him this evening but I hope that the Government will consider this point. One notices from Table 1 on page 4 of the Government Actuary's report that there is an element of 0.75 per cent. in the primary contribution rate for the National Health Service. In previous years and on other occasions, I believe it has been suggested that there should also be an equivalent or comparable allocation for the personal social services.
The noble Lord, in his capacity, is well aware of the transfer of many responsibilities from the National Health Service to the personal social services, and I wonder whether this suggestion is not worth considering again; for example, if the National Health Service element was raised to 1 per cent., and one-quarter of that was allowed for contributions to personal social services. This is a very real point, with the increasing pressure through the demographic trend on personal social services. I do not expect the Minister to respond to that tonight, but I shall be raising it again on other occasions. I am simply putting down a marker for that thought.
The final point I want to put to the noble Lord, which in a sense is parallel to that made by the noble Lord. Lord Banks, relates to statutory sick pay. One notices from Appendix 3 that the amount of sickness benefit paid out in 1984–85 is estimated at £274 million, and in 1985–86 at £286 million, as opposed to the corresponding figures for statutory sick pay of £602 million and £639 million respectively. Is it the intention of the Government to eliminate sickness benefit altogether? What savings do the Government envisage from this? What will be the effect on those who would previously have received sickness benefit and will now receive statutory sick pay, not just for the eight weeks which is the present rule but for the 28 weeks referred to by the noble Lord, Lord Banks, under the extended scheme, as I think it is called, which will come to us shortly in the social security Bill? I know that that is something we shall be discussing on a later occasion. Can the noble Lord give me an indication of what the effect will in fact be on those who would have received sickness benefit but who will now, from the eighth to the 28th week, actually be receiving statutory pay?
§ 11.3 p.m.
§ Lord Glenarthur
My Lords, there are a number of questions to be answered which were raised by those who have spoken, and perhaps I may deal with them in turn. The noble Baroness, Lady Jeger, was concerned particularly with the Treasury supplement Perhaps I can elucidate a little on this. In managing the National Insurance Fund, which is not like a normal insurance fund as she and I might understand an insurance fund to be, we try to achieve a broad balance between expenditure and income. How the income should be split between contributions and general taxation is a matter to be looked at in the wider context of the burden of taxation generally. In view of the other increasing costs of social security which are being met by the taxpayer, we felt it right to make an adjustment.
The noble Baroness referred to housing benefit, heating additions and benefits for strikers' families, but those are all supplementary benefit matters and are nothing to do with national insurance. I am sure the noble Baroness is aware of that. The taxpayer is already meeting the cost of the items I have just mentioned—housing benefit, heating additions and benefits to strikers' families—and so it is fair that the Treasury supplement to the fund should be reduced.
The noble Baroness took me to task about the fact that we appear to have a 53-week year. The difficulty arises from the fact that a year is not exactly divisible into 52 weeks. If we were to stick to what the noble Baroness would like, we would eventually have the up-rating creeping forward from November, when it should take place, right through to October. Added to the complexity that a year is not exactly divisible into 52 weeks, this year, 1984, is a leap year with 52 weeks and two days. I should not like to baffle either the noble Baroness or myself with science at this time of night, but this is a fact of life and we had to legislate in 1980 to avoid what is known in the trade as "creep". In future we would normally expect the up-rating to take place in the last full week of November, whether this results in a 52-week or 53-week interval.
The noble Baroness asked further about the upper earnings limit. She thought that there should perhaps be a greater charge on those near the top of the upper earnings limit. In my earlier remarks I described how there were limits on this, and that at 7.4 per cent. we are very close to the top, anyway. The noble Baroness seemed to indicate that perhaps the upper earnings limit should be abolished and that the scheme would therefore become less regressive. The fact is that the upper earnings limit provides a ceiling, not only for contributions but also for earnings-related pensions and the guaranteed minimum pensions provided by contracted-out occupational pension schemes. This link is an essential feature of the contributory principle. Removing the ceiling, if we were to go that far, would be prohibitively expensive and would involve contracted-out employers in much greater guaranteed minimum pension commitments to their employees than they had bargained for in reaching the decision to contract out of the state scheme. To remove the limit for contributions only would mean breaking the present link between contributions and benefits and would be a major departure from the pension arrangements agreed in 1975.
883 The noble Lord, Lord Banks, asked me a number of questions. With his great expertise as an actuary, I find that I might have to study very carefully some of the remarks that he made and respond in writing, as I nearly always seem to do. The noble Lord asked particularly about extending the employers' liability for statutory sick pay to 28 weeks. There are three main reasons: first, the further reduction in the overlap of provision of income to employees during short-term sickness; secondly, a further reduction in anomalies arising because a sickness benefit is not taxable although it is generally accepted that it should be; and further savings in public expenditure plus a saving in DHSS staff. There is also the reason that employers have shown that they can operate SSP successfully. It is sensible now to extend their responsibility so that SSP is payable for the whole period of short-term sickness rather than as at present for just a part of it.
§ Lord Banks
My Lords, I am grateful to the noble Lord. I did not ask the reason for proposing the extension from eight weeks to 28 weeks. I asked why the proposal was put forward now when the actuary's report says that full information as to the effect on the fund of the eight weeks' provision is not yet known and will not be known until early next year.
§ Lord Glenarthur
My Lords, perhaps in a minute I can respond more fully to that question. I am sorry if I got the noble Lord wrong. He also asked why the Treasury supplement has been reduced over the years to only half of what it was in 1979. The contribution by the taxpayer, of which the Treasury supplement forms part, towards total social security expenditure has increased over the years. Although the supplement of the National Insurance Fund has lessened, the proportion of social security expenditure that is paid directly from the Consolidated Fund has grown. This elaborates upon the answer that I gave to the noble Baroness. Lady Jeger, just now.
It is misleading to think of the Treasury supplement as some kind of extra source of income totally separate from contributors as employees and employers. The number of contributors who are also taxpayers has been increasing over the years. The majority of people who pay contributions pay tax. To make the National Insurance Fund more dependent on direct revenue income would not necessarily relieve the burden on the contributor. There is in the end, as I am sure the noble Lord will realise, only one source of finance for public expenditure, and that is the tax and contributions people pay on their earnings.
The noble Lord asked, I think, what would be the effect on the national insurance contributions if the Treasury supplement was abolished. Indeed, he went so far as to ask whether or not there was any intention to abolish it. Perhaps I may say there that Beveridge did in fact recommend, I understand, phasing out the Treasury supplement over 40 years, but there is no clear Government intention to do so. I think that answers that particular point.
With regard to the effect if the supplement were abolished, to maintain the current balance in the fund for 1985–86 contributors would have to find some additional £2.3 billion revenue, compared with their 884 present contributions which bring in an estimated £20.7 billion. That is after deducting recovery by employers of statutory sick pay. To produce that level of additional revenue it would be necessary to raise the rate of Class 1 contributions by about 1.7 per cent. of earnings. This would mean raising the contribution rates for either the employee or the employer, or both. There would be commensurate changes for the self-employed and voluntary contributions as well.
So far as the assumptions on unemployment are concerned, which both the noble Lord, Lord Banks, and the noble Baroness, Lady Jeger, raised, last year the Government Actuary's Department overestimated; hence the surplus in the fund. Assumptions are of course always liable to be inaccurate, although the best efforts are made to get them right. However, 3 million unemployed was the Treasury figure given to the Government Actuary's Department.
The noble Lord asked about the strike at Newcastle and asked whether the administrative costs were those related to the strike. If the noble Lord refers to Paragraph 9 of the Government Actuary's report, he will see there the statement that the administrative costs include an allowance for the effects of industrial action within the DHSS. It does not cover the whole lot, as I think he thought it might. With regard to the latest position on the strike, I have not got the latest facts today on this particular issue. It is a matter which certainly we in the department all deplore. We are doing our very best to bring it to a speedy conclusion. I have not any up-to-date, immediate information to give to the noble Lord, but I shall certainly write to him to let him know.
Reverting to the last question that the noble Lord raised, about the eight weeks climbing to 28 weeks for statutory sick pay, I understand from the National Audit Office and others that it has worked well so far. It was always intended to extend it if it was a success, and that it has been. Uncertainties about the estimates on statutory sick pay do not I think in any way affect the principle of extending it. The CBI has given its blessing, as well as the National Audit Office, and so I do not think that the concern which the noble Lord expresses is valid. It has, in the view of many employers, been a success. But I note the remarks the noble Lord makes. I shall study them and perhaps I can respond to him again after reading the Official Report.
The noble Lord, Lord Kilmarnock, asked me a number of questions. One of the questions that he raised which relates to the question that the noble Lord, Lord Banks, asked, was whether the jump from eight to 28 weeks was too great for employers to cope with. That seemed to be the drift behind the question. I may have misunderstood.
§ Lord Kilmarnock
My Lords, I did not ask the noble Lord that; and he has said that apparently the CBI are not too worried about that. What I asked him was about the effect on the employee who would be moved off sickness benefit on to statutory sick pay for that period of from eight to 28 weeks.
§ Lord Glenarthur
My Lords, I note the noble Lord's comment. I am sorry if I misunderstood him on that point. I do not have an immediate answer to that 885 question, but I hope to get it in due course. The noble Lord was kind enough to say that he did not expect me necessarily to answer these points now. I should like to study carefully the remarks he made and write to him.
As the noble Baroness was kind enough to say, these are complicated orders. I fear they are even more complicated at this time of night. I shall, of course, study very carefully the remarks that have been made by all those who have taken part in this short debate, and I shall write to try to clarify any particular points that I do not think I have clarified adequately now. I hope that noble Lords will feel satisfied that at least we have had a chance to debate them. I beg to move.
§ On Question, Motion agreed to.