Social Security (Contributions, Re-Rating) Order 1985

HL Deb 17 December 1985 vol 469 cc728-35

7.38 p.m.

Baroness Hooper

My Lords, I beg to move, that the draft Social Security (Contributions, Re-Rating) Order 1985 be agreed to.

With your Lordships' permission, I will also refer to the Social Security (Contributions) Amendment (No. 6) Regulations 1985. The report of the Government Actuary on the effect of the proposed changes was presented to Parliament by my right honourable friend the Secretary of State on 12th November. The draft order and the regulations taken together constitute the annual adjustments in national insurance contributions needed to ensure that there will be sufficient money in the National Insurance Fund to pay for the benefits and to maintain a margin for unexpected contingencies. Although this is a routine event in the social security calendar, it takes place against a far from routine background.

As your Lordships will be aware from my noble friend Lady Trumpington's Statement to this House, my right honourable friend yesterday published his White Paper on social security, reflecting the Government's considered proposals in the light of all the comments received on the Green Paper. Beyond saying that the structure of national insurance contributions will remain substantially the same, I do not propose to comment on the White Paper or to debate its other, far-reaching proposals tonight.

I cannot however avoid one important principle in the White Paper, nor would I wish to do so—that benefits have to be paid for. That is why we have this regular, annual exercise in good housekeeping which requires the Government to bring before Parliament their proposals for national insurance contribution rates and related matters for the forthcoming tax year.

I shall begin this brief account of the proposals by considering their effect on employers and employees. I am pleased to be able to tell your Lordships that for the third successive year there is to be no change in the rate of Class 1 national insurance contributions. This is a considerable achievement, particularly in view of the 7 per cent. increase in main benefit rates effective from 25th November last which will add £2 billion to social security spending in a full year, bringing it to £41 billion. This freeze in contribution rates helps both employees and employers and reflects this Government's determination to keep the tax and contributions burden as low as possible.

Although the rates of Class 1 contributions remain constant, there are, as usual, changes in the lower and upper earnings limits. In carrying out these changes we are simply fulfilling the requirements laid down in the Social Security Pensions Act 1975, which requires the lower earnings limit to be equal to or no more than 49p below the basic rate of retirement pension. A pension rate of £38.30 next year—representing a real increase in the value of retirement pension during the period in which this Government have been in office—points inevitably to a lower earnings limit of £38 a week.

The statutory requirements affecting the upper earnings limit, which now applies only to employees, permit a little more discretion. It would have been possible to extend it to £287.25, but the figure of £285 that we have chosen represents a 7.5 per cent. increase on the current limit of £265, which is broadly the same as the general increase in the level of earnings. This maintains its relationship with the basic pension rate and is within the range of 6.5 to 7.5 times that limit—again, as laid down in the Social Security Pensions Act 1975.

This is the first annual rerating since the important changes in contribution structure announced in last April's Budget. As your Lordships know, we implemented these changes in the Social Security Act 1985 by introducing a graduated system of contribution rates. This substantially modified the cause of the "cliff edge" effect of the lower earnings limit. The new graduated rates, based on three bands of earnings for employees and four for employers, soften the previous sudden onset of full rate contributions once the lower earnings limit is reached. The purpose of this new system is to foster the creation of new jobs by reducing the cost of employing some 8.5 million workers and for the lowest paid in particular reducing employers' contributions by more than half.

We propose building upon this by increasing, under the terms of this order, the range of weekly earnings on which reduced rates of contributions will be payable. These are set out in the order. The effect of extending these reduced rates higher up the earnings scale means, for example, that an employer employing someone at £139 a week will have his employment costs reduced by over £2 a week. Similarly, for someone earning £94 a week his weekly take-home pay will be increased by £1.88 and his employer's costs reduced by a similar amount. Only employees earning between £265 and £285 per week have any significant change to their contributions, and there the maximum additional contribution will be £1.80 a week.

7.45 p.m.

So far I have dealt only with employers and employees. I should now like to turn to our proposals for the self-employed. As your Lordships will be aware, self-employed people pay their contributions in two parts: the flat-rate Class 2 contribution and the profits-related Class 4 contribution. Because we do not propose to increase the Class 1 rate for employees, it follows that no increase is needed in the Class 4 rate which is derived from it. The profits limit for Class 4 contributions rises automatically each year broadly in line with the earnings limit for Class 1 contributions. The figures proposed this year are £4,450 and £14,820, the latter figure being exactly 52 times the weekly upper earnings limit.

So far as the flat-rate Class 2 contribution is concerned, as a deliberate and positive incentive to small businesses we are continuing the large abatement given to self-employed people earlier in the year. Consequently, we propose only a modest increase of 25p a week in the contribution, making it £3.75 a week from next April.

The effect of these changes is that for the majority of self-employed people there will be an overall reduction in their contributions of £38.40 a year in 1986–87 compared with 1985–86. Only those earning above the upper profits limit of £14,820 will pay more, and then only a maximum of £27.12 a year.

The small earnings exemption from Class 2 liability also rises automatically—in this case from £1,925 a year to £2,075 a year.

Lastly, the proposed voluntary Class 3 contribution rate is, as usual, being set at 10p below the Class 2 rate, giving a figure of £3.65 a week from next April.

Your Lordships will have noticed that we are not this year proposing any change in the Treasury supplement to the national insurance fund.

Finally, I turn to the effect on the national insurance fund of the changes we have proposed. The Government Actuary in his report estimates that the order and associated regulations that we are debating this evening will cause expenditure from the national insurance fund in 1986–87 to exceed income by £80 million. This will have only a very marginal effect on the working balance in the fund, which at the end of 1986–87 will stand at an estimated £4,755 million. This balance represents 20 per cent. of the estimated benefit expenditure during the year, which is still well above the prudent minimum balance of 16.7 per cent. recommended by the Government Actuary.

My right honourable friend the Secretary of State has considered these estimates and is satisfied that the changes we have proposed will maintain a proper working balance in the fund, consistent with advice from the Government Actuary, while at the same time reducing, wherever possible, the burden on employers, employees and the self-employed alike.

This leads me to end as I began, by stressing that the order and regulations are a matter of routine good housekeeping. We shall be paying out just under £24 billion from the national insurance fund in 1986–87—nearly £18 billion of it in retirement pension. The purpose of the annual rerating of contributions is always to ensure that there are sufficient funds to pay for those benefits.

We believe that the changes contained in the order and regulations provide this guarantee and place the minimum extra burden on contributors. In particular, we have sought in this rerating to maintain the real value of the new graduated contributed structure to lower paid people and their employers, in order to continue the encouragement to the vitally important growth in their employment prospects. Our aim with these proposals, which we think we can achieve, is to strike a balance between the protection of the national insurance fund, with the huge benefit calls upon it. and the protection of those who contribute to that fund. It is on that basis that I commend them to your Lordships' House.

Moved, That the draft order laid before the House on 12th November be approved. [3rd Report from the Joint Committee.]—(Baroness Hooper.)

Baroness Jeger

My Lords, I am sure we all want to thank the noble Baroness for what she herself described as a routine good housekeeping process. She has certainly succeeded so far as I am concerned in making the opaque almost translucent, though not quite. She was so right to remind the House that benefits have to be paid for, and that is common ground between us.

We welcome the fact that Class 1 contributions are to be kept the same. It would have been quite wrong for them to have been increased. But I must point out that paragraph 10 of the Government Actuary's report refers to inflation and states: I have been asked to assume that the retail price index will be about 5½ per cent. higher in the final quarter of 1985 and the same level will hold for January 1986". If inflation is taken into account, the lowest paid workers in Class 1 would not be better off. We have to look forward to making some connection between national insurance contributions and the rate of inflation. However, I assure the noble Baroness that I am not suggesting that we do that tonight. In the minds of most workers the national insurance contribution is not separated from PAYE. People talk about their "take-home pay" and look on both national insurance contributions and income tax deductions as something that the Government take away. The two have to be brought much closer together. As with pensions, there ought to be an ongoing consideration for inflation.

The noble Baroness said that the Government Actuary thought that it was prudent that the balance in the National Insurance Fund should be 16.6 per cent. Why is it now proposed to keep 21 per cent. in the fund? Can we not find further scope to reduce contributions so that the 16.6 per cent. is maintained instead of shifting the figure up to 21 per cent. and, I understand, to 20 per cent. next year? That is shifting the burden of taxation around in a quite unnecessary way. I wait to see what other changes in taxation can be brought about. Insurance contributions and income tax have to be looked at together and much more closely. I am glad that the Treasury supplement is not being reduced, but I wish that it was being raised. That is a much fairer way to provide benefits for those in the greatest need.

There are one or two points which I do not understand and which I am sure the noble Baroness does. Paragraph 13 of the Government's Actuary's report states: If the average number unemployed is 100,000 higher (lower) than has been assumed the surplus in 1986–87 will be £215 million lower (higher) than shown in table 2. If the actual increase in earnings in 1985–86 or 1986–87 is higher or lower than has been assumed, the 1986–87 surplus will be increased or decreased as shown in table 3". I shall be interested if anyone can tell me what that means. The paragraph should go into the plain English competition, where Government departments have to try to explain what they mean.

My second question relates to unemployment. Appendix 3 states: The estimated outgo"— that is the actuary's word and not mine; I do not think it is a very good one— of the National Insurance Fund 1985–86 on unemployment benefit is £1,597 million". He estimates that for 1986–87 it will be £1,632 million. Does that increase suggest that the Government and the Government Actuary are presuming an increase in benefits to the unemployed—and I certainly should like to see an increase in benefits for the long-term unemployed—or do they accept that unemployment will go up in the next year? There must be a reason for the actuary's estimate that more money will have to be paid in unemployment benefit.

I do not propose to go on about the self-employed or the other proposals in the order. We know that this is an annual business that we have to get through. We shall not make difficulties tonight. But we should ask the Government whether they feel it possible to relate inflation to contributions; what steps they are taking to connect contributions more closely to income tax; and why the estimate for unemployment benefit is to go up in the next year? With those queries, I inform the noble Baroness that we do not propose to divide the House or to do anything else to increase her difficulties tonight.

Lord Banks

My Lords, I too thank the noble Baroness, Lady Hooper, for her clear explanation of the contents of the order. As she says, there is not much change introduced this year. As she pointed out, there is no increase in the rates. She felt that that was creditable because there had been a 7 per cent. increase in prices. We have to bear in mind that contributions are linked to earnings and that earnings have been increasing faster than prices, so that we would anticipate a buoyant revenue.

The noble Baroness said that there was no further reduction in the Treasury supplement. I should hope not. It has been reduced from 18 per cent. to 9 per cent. of contributions during the lifetime of this Government. As she pointed out, the order consists mainly of adjustment of upper and lower limits and also deals with the flat rate self-employed contribution. That is done to take account of inflation. We have the reduced rates now for lower earners, and the limits with regard to those have been raised similarly. We debated the reduced rates in the summer when we had the social security legislation in front of us. We on these Benches agreed with the aim of the Government, but we suggested another way to achieve it which we felt would avoid the series of poverty traps.

The upper limit for employers was removed in order to pay for those lower rates. I should like to ask once again about the upper limit for employees. It always seems unfair that once a person is over the upper limit, national insurance contributions constitute a declining percentage of earnings as income increases. What we on these Benches would like to see is employers' contributions becoming a social security tax and employees' contributions becoming merged in income tax. With the removal of the upper limit for employers, I suppose that we could say that we are perhaps half-way towards that.

Looking at the Government Actuary's report, I observe that the assumption given to him is that earnings will continue to rise faster than prices. On page 6 of the Department of Health and Social Security document, Population, Pension Costs and Pensioners' Incomes, it shows how on similar assumptions and if pensions continue to be linked to prices, the basic pension will fall from 100 per cent. of the lower earnings limit in 1984–85 to 56 per cent. in the year 2025–26. Eventually the total pension, so the document says, would be largely composed of the earnings-related pension. I wonder what government thinking is about that. The need to increase the real value of the basic pension is clear, and that is one reason why yesterday I regretted that there was no provision for doing that in the reform which was then announced. If pensions are not linked to earnings, then pensions must surely fall behind. The Government say, "Oh, but at some convenient point, we will increase pensions in order to give them an increase in real value." But they are going to do so at a suitable time. I wonder what would be the conditions of such a suitable time. At the moment earnings are increasing faster than prices. The Government clearly anticipate that this will continue. What will be the moment when it is thought right to increase the real value of the basic pension?

In the Government Actuary's report, there is reference to industrial action which apparently led to delays in the provision of some of the required statistical information. I should like to ask whether that industrial action has now resolved itself and also whether the Government wish to say anything further about the recent advertisement in the press indicating that the staff of the Department of Health and Social Security are worried that they are unable to cope with the amount of work that now falls upon them, particularly in view of the great increase in the number of those on supplementary benefit. Perhaps the noble Baroness can say something about the current position. Apart from those remarks, we on these Benches are content that approval should be given to the order.

8 p.m.

Baroness Hooper

My Lords, until today there were only two facts about national insurance contributions of which I was at all certain. The first was that I had to pay them and, second, that, as in other matters whose complexity is legendary, your Lordships' House could proudly point to Members whose expertise is equally legendary. I should like to thank those experts who have made a contribution to this debate. I shall try to answer some of the points that have been raised. The noble Baroness, Lady Jeger, left me with three basic questions. She raised also a couple of points on the drafting of the actuary's report. I can perhaps start by saying that I endeavoured in my opening remarks to paraphrase and to simplify some of the terms that had been used.

The noble Baroness asked why we did not spend the balance of the national insurance fund. The reason is that the balance is necessary for working purposes. It is needed as a reserve against any unexpected increases in benefit expenditure or falls in contribution income and as an operating margin to fund the payment of benefits by the Post Office on time. It is estimated, as I said in opening, that at the end of the 1986–87 year the balance in the fund will be 20 per cent. of the year's benefit expenditure. This compares with the minimum recommended working balance in the actuary's report of 16.7 per cent. The difference would cover about one and a half weeks' benefit payments. So it certainly appears to the Government that it is a prudent precaution to hold this slightly higher level.

The noble Baroness also asked about blending national insurance contributions and tax contributions. I think that I should perhaps point out again that national insurance contributions are not a tax. They earn benefit rights. This contributory principle has long been a cornerstone of the national insurance system. We have reaffirmed our support for this in the Green Paper. However, integration of tax and national insurance will be discussed in the forthcoming Green Paper on personal taxation. I feel sure therefore that the noble Baroness's comments will be taken into account on that occasion.

The noble Lord, Lord Banks, asked when the moment was going to come when we could expect an increase in the real value of pensions. I can only say to him that we must wait until we can afford it. He also asked why we did not abolish the upper earnings limit for employees, too. It was, I believe, explained in the Green Paper, in paragraph 11.7, why we are opposed to this. If I may quote, as I happen to have the appropriate section of the Green Paper before me, it states: Some may use this"— that is the abolition of the employers' upper earnings limit to argue that the upper earnings limit for employees should also be abolished. But the circumstances are very different. Employers generally will gain more from the graduated rates of contribution than they lose from the upper earnings limit going; but there cannot be a similar trade-off for individual employees. We have made it clear that the high marginal tax rates which abolishing the upper earnings would create would make it unacceptable". I am finding the same problems in reading this as did the noble Baroness, Lady Jeger.

The noble Lord, Lord Banks, also referred to the question of staffing in DHSS offices. I believe that this has been raised recently in your Lordships' House both in question form and also yesterday in the course of replies to the Statement. The Government are certainly reviewing the position in respect of staffing requirements.

I apologise if I have not responded fully to the various individual points that have been raised. I can perhaps end by saying that the beleaguered taxpayer may gloomily suppose that paying money to the Government is not an end in itself. National insurance contributions are in fact a means to an end—the financing of a range of specific benefits. My right honourable friend's White Paper contains important proposals to ensure that the best possible benefits that the taxpayer and those paying contributions can reasonably afford are targeted where they are really needed. This Government have sought to contain and reduce the burden on wage earners.

The fact that, despite rising benefit expenditure, the draft order now before your Lordships holds contribution rates steady for a third year is evidence of our commitment. But the fact that only six months after the new reduced contribution rates came into effect the draft order extends further up the earnings scale the advantages they offer to employers and employees is also evidence of our wish to produce a more responsive and better targeted system. The draft order is not only the straightforward fulfilment of an annual routine to balance the books. It is also consistent with our aims to improve social security, and for these reasons I commend it to your Lordships.

On Question, Motion agreed to.

Lord Brabazon of Tara

My Lords, I beg to move that the House do now adjourn during pleasure until 8.30 p.m.

Moved accordingly, and on Question, Motion agreed to.

[The Sitting was suspended from 8.9 until 8.30 p.m.]