HL Deb 28 March 1988 vol 495 cc502-11

6.59 p.m.

The Parliamentary Under-Secretary of State, Department of Health and Social Security (Lord Skelmersdale) rose to move, That the draft order laid before the House on 9th February be approved [16th Report from the Joint Committee].

The noble Lord said: My Lords, in moving the first Motion standing in my name on the Order Paper I hope it will be convenient if I speak also to the following two Motions.

The Government's proposals for national insurance contributions in the coming financial year were announced in another place by my right honourable friend the Secretary of State on 3rd November last year. A further announcement was made on 17th February about the reduced rates of contributions paid by mariners, registered dock workers and the armed forces. The lower earnings limit for Class 1 contributions, which are paid by employed people and their employers, will be £41 per week from next April. Your Lordships will be aware that the lower earnings limit is linked to the basic retirement pension rate rounded down to the nearest pound. The upper earnings limit, which is also derived from the basic retirement pension, will be £305 per week from next April, nearly seven and a half times the basic pension level of £41.15 per week. The regulations which bring these changes to the earnings limits into effect have already been made. Although they are not being debated today the actuary's report, which we will discuss later, relates in part to their effect on the National Insurance Fund.

First, I turn to the main re-rating proposals which are contained in the first of the three orders. Your Lordships will recall that in 1985, in order to help lower paid workers and to reduce employment costs, we cut the Class 1 contribution rates paid by lower paid workers and their employers. The reduced contribution rates cushioned significantly the impact of national insurance contributions on those on lower earnings but did not affect benefit entitlement in any way. We now propose to increase each of the earnings limits below which the lower contribution rates are payable by £5 per week.

I am sure that this change will be welcomed. For example, the 9 per cent. bracket will now start from £105 per week and end at £154.99 per week for employers and at £305 per week for employees. Employers will pay contributions at a rate of 10.45 per cent. where a person's earnings are at or above £155 per week. There will be no change in Class 1 contribution rates: 1988–89 will be the fifth successive year they have remained unchanged. Class 1 contributions, paid by employed earners and their employers, are expected to yield £28.3 billion in 1988–89. These proposals will be of interest to very many people.

Let me turn now to self-employed people and their contributions. The number of people who are self-employed has been growing (a growth which the Government welcome) and I want to say something about their contributions. Your Lordships will be aware that self-employed people pay their national insurance contributions in two parts—the fiat rate Class 2 contribution and the profits related Class 4 contribution. We do not propose any change to the Class 4 rate, which will remain at 6.3 per cent. in 1988–89—also unchanged for the fifth successive year. The profits limits for Class 4 contributions (the range of profits within which contributions are payable) are increased each year, broadly in line with the earnings limits for Class 1 contributions.

The order brings new profits limits into effect and also an increase in the Class 2 contribution rate. This contribution will go up by 20p to £4.05 per week in the coming tax year. The small earnings exception level of earnings, which is linked to the Class 1 lower earnings limit, will also rise, to £2,250. The self-employed are expected to contribute about £812 million in Class 2 and Class 4 contributions in 1988–89.

Your Lordships will be aware of a fourth category—voluntary contributions which enable people with breaks in their contributions record, or who do not earn enough, to protect their entitlement to long-term benefits such as retirement pension. The proposed voluntary Class 3 rate will be £3.95 per week in 1988–89; an increase of 20p which will maintain the present difference between the Class 2 and the Class 3 rates. The yield from Class 3 contributions is expected to be £25 million in 1988–89.

National insurance contributions pay for only a part of the total cost of social security. In 1988–89 the Government plan to spend over £46 billion on benefits; £25.7 billion will be spent on contributory benefits which are paid for by the National Insurance Fund which is largely financed by national insurance contributions. Taxpayers also have to pay for the whole of the cost of the non-contributory benefits on which the Government plan to spend £20.4 billion in the next financial year. This leads to our proposals which are contained in the draft Social Security (Treasury Supplement to and Allocation of Contributions) (Re-rating) Order 1988.

The National Insurance Fund receives the bulk of its income from contributions, but it also receives part of its income from general taxation—the Treasury supplement. The Government propose to cut the supplement from 7 per cent. to 5 per cent. of gross contributions in 1988–89.

At present the National Insurance Fund income from contributions is buoyant and there is less need for a subvention from the taxpayer to help balance the fund's books. In view of the substantial expenditure on non-contributory benefits which is wholly met by taxpayers, we believe that they should be relieved of some of the cost of contributory benefits and the Treasury supplement to the fund will therefore be reduced.

This draft order also increases the amount of Class 1 contributions which are allocated to meeting the costs of the National Health Service. We believe that, because of the great increases in the expenditure on the National Health Service over recent years, those in work, and their employers, should pay slightly more from contributions towards the costs of the NHS. Therefore, in the next financial year gross expenditure on the NHS in Great Britain is planned to be £22 billion. Our proposals mean that in that year £3.3 billion of this expenditure will be raised by the NHS contribution; that is, 15 per cent. of total planned expenditure on the NHS. We propose to increase from April 1988 the employees' NHS allocation to 0.95 per cent. and the employers' allocation to 0.80 per cent. of the earnings in respect of which Class 1 contributions are paid.

I now turn to the Employment Protection Allocation (EPA); a small supplement to Class 1 contributions which is paid into the Redundancy Fund. The Redundancy Fund now has enough resources to meet foreseeable demands without the annual income provided by the EPA. The Government have therefore decided to reduce the EPA to zero, and the draft order brings this proposal into effect.

Next, I refer to the Social Security (Contributions) Amendment (No. 2) Regulations, which have also been laid in draft. Your Lordships will be aware that about 70 per cent. of mariners are excluded from the Redundancy Payments Scheme, by the terms of the Redundancy Payments (Merchant Seamen Exclusion) Order 1973. In recognition of their exclusion, these mariners and their employers did not have to pay the Employment Protection Allocation, so their contribution rates were reduced by 0.25 per cent. for employees and 0.15 per cent. for employers. I am sure that your Lordships will agree that it would be absurd to abate mariners' contributions in respect of the EPA after it had been reduced to zero. The Government have therefore decided to abolish this rebate in the coming year.

I remind those noble Lords who are concerned about the future of the British shipping industry that, like other UK-based industries, it has benefited from the Government's previous actions on national insurance contributions; in particular, the abolition of the national insurance surcharge on employers' contributions and the cut in rates of contributions paid by lower paid employees and their employers in 1985. Noble Lords will recall that the contributions of employers of foreign-going mariners are reduced by 0.5 per cent. to compensate them for the costs of providing health care facilities on board ship. We do not propose to change this rebate in 1988–89.

A report by the Government Actuary on the effect of our proposals on the National Insurance Fund has been laid with the re-rating orders. It would be inappropriate to refer to that now, but the three orders to which I have been speaking and their accompanying regulations will affect all employed people in this country and their employers. They provide the resources for contributory benefits. We believe that they strike a fair balance between the contributors and benefit recipients and I invite your Lordships to endorse these Motions. I beg to move.

Moved, That the draft order laid before the House on 9th February be approved [16th report from the Joint Committee].—(Lord Skelmersdale.)

Baroness Jeger

My Lords, the orders and regulations now before us follow on the new changes in social security and I do not propose to go into them in detail or at length because we oppose many of the principles of these changes. These regulations only underline the fact that they are based on principles which are unacceptable in fairness to many of our people.

I take first the Social Security (Contributions, Re-rating) Order. I read the 16th report from the Statutory Instruments Committee and I must ask the noble Lord why it is considered a good idea to increase national insurance contributions more than is needed to keep the fund in good order? As the noble Lord has said, the Treasury supplement to the National Insurance Fund is to be cut in 1988/9 to 5 per cent. of those contributions. The report by the Government Actuary states that the income of the National Insurance Fund under these changes will be £28.54 billion. He states also that expenditure will be £26.77 billion. I make that a surplus of £1.77 billion. What are the Government doing with that sum, which is about double what the actuary says is prudent?

We hear so many various figures about the "more or less" cost of social security benefits under the new regulations. The Government have said that £1,300 million is being added to social security benefits. However, even that leaves a profit for the Government. I make that a surplus of £1.77 billion.

If we are putting up national insurance contributions and not increasing benefits commensurate with those increases, then we are not being fair to the people who are making those contributions. If the Government insist upon putting up national insurance contributions, why could not this extra money be used to increase benefits, be spent on the National Health Service or perhaps be used to set aside the £10 examination charges for teeth and spectacles or the prescription charges. It seems to us that the Government are using national insurance contributions to subsidise income tax reductions. This only underlines the fact that the Government will not come to terms with the relationship between income tax and national insurance contributions. Working people feel that their national insurance contribution is a tax. The sooner the Government recognise that fact, the better.

I wonder whether the Minister can tell me tonight if it is true, as I have read, that a 2 per cent. cut in the basic rate of tax is worth about 4p a week for a family on family credit? I cannot help but press him on this fact. Would not a reduction in national insurance contributions be of more help to the poorest families? I am told that a worker receiving very low wages of about £40 a week would pay 10 per cent. of that on national insurance, whereas somebody earning £16,000 is only paying 2.64 per cent. in national insurance contributions. Therefore one is forced to the conclusion that the Government are using increased national insurance contributions to subsidise tax cuts at the top of the scale. We believe that that is totally wrong.

With regard to the Treasury supplement, we do not understand the sense of that at all, because it does not help those who the Government Ministers keep saying are the poorest and in most need of help.

With regard to the fourth item, the State Scheme Premiums (Actuarial Tables) Amendment Regulations 1988, I understand, in my almost total ignorance, that the provision for the buy-back of a personal pension should apply to widowers as well as to widows. I hope that that is correct. With my sense of egality, that is one point I would welcome.

Lord Skelmersdale

If the noble Baroness will allow me, I specifically did not speak to that order, but I am perfectly happy to reply to it if the House so wishes.

Baroness Jeger

I only mentioned it because it seems to be on the Order Paper. I thought I ought not to let it be thought that I had not read everything that was on the Order Paper.

This is not the occasion for us to go into any greater detail. The main point that I should like to make tonight is that we feel that there is a gross social injustice in increasing national insurance contributions and not using the increase for the benefit of those people who are most in need. Those people who the Government say, in their current in-phrase at the moment, "should be targeted upon" are not being targeted upon so far their national insurance contributions are concerned. Until we have a comprehensive understanding of the connection between national insurance contributions and income tax, we shall never get that right. I do not think we are going to get it right tonight.

7.15 p.m.

Lord Banks

I am assuming that we shall come on to the State Scheme Premiums (Actuarial Tables) Amendment Regulations subsequently, so I will not say anything at all about them at the moment.

I should like to thank the noble Lord, Lord Skelmersdale, for his explanation of these orders. I have to say at the outset that I was astonished to see an advertisement in the Guardian on 29th February issued by the Department of Health and Social Security, which stated, Every tax year national insurance contributions are changed in line with increased social security benefits. These are the rates which come into effect on 6th April I988.". There then followed the rates which are before the House this evening. There was no mention of the fact that the approval of both Houses of Parliament was necessary. Similar advertisements appeared in other newspapers. I took that as an indication that our discussions on these orders are regarded as a mere formality, and I protest against that. In addition, it is quite absurd for us to be discussing these orders today when they are due to take effect next week. What chaos the Department of Health and Social Security would be thrown into if we rejected these orders today, as we are perfectly entitled to do. In my view, Parliament ought not be treated in this way.

As the noble Lord has explained, the orders raise the limits of the various bands of national insurance contributions to allow for inflation. The noble Lord pointed out that there is no increase in the Class 1 rates themselves and indeed mentioned that there had been five consecutive years without any increase in those rates. Of course earnings have increased and therefore one would expect the same percentage to produce a higher revenue in successive years. We should remember that in the early years of the present Government there was a very considerable increase in Class 1 contributions. They rose from 6.5 per cent. to 9 per cent. This increase was eventually mitigated for those at the very bottom of the scale by the reductions to which the noble Lord, Lord Skelmersdale referred.

The Government Actuary's report indicates that the National Insurance Fund is in a healthy position. The estimated balance for 1988–9 will represent 33 per cent. of annual expenditure, an increase from 24 per cent. in two years. Lower unemployment has meant less expense and more contributors, which is one of the significant reasons for this increase in the balance.

It seems to me that two questions arise. First, is the right balance being struck between the national insurance contributions and the Treasury? The Treasury supplement has been reduced from 18 per cent. of contributions to 7 per cent. of contributions during the lifetime of the present Government. Now, as a result of one of the orders before the House, it is to be reduced to 5 per cent. for 1988–9. Therefore, in spite of increased numbers of contributors, which would tend to increase the Treasury supplement, since it is a percentage of contributions, it is estimated that the Treasury supplement will fall from £2,135 million to £1,589 million.

The argument has always been advanced in favour of the policy of gradually reducing the Treasury supplement, although some of the reductions have not been very gradual, that expenditure on non-contributory benefits has increased and it is right that the Treasury payment should go to that rather than to the National Insurance Fund. If they are non-contributory benefits, they should remain so. It is not right to expect contributors to the National Insurance Fund to pay towards non-contributory benefits. That may not be what they are doing technically, but it is the effect of the policy pursued by the Government and continued in these orders.

We have to bear in mind the nature of employee national insurance contributions as compared with income tax. They commence much lower, at £2,132 per annum, and that £2,132 once reached is not excluded. For income tax the first £2,605 is excluded altogether for a single person, and £4,095 is excluded altogether for a married man. Some reduction in employer contributions will be welcome to reduce the cost of employing people and thus help to reduce the still very high unemployment figure.

The first question is whether we are getting the balance right between the Treasury and contributors. The second question is whether the balance between contributors themselves is fair. The noble Baroness, Lady Jeger, has drawn attention to the fact that once earnings pass £305 per week—£15,860 per annum—the percentage of earnings paid in national insurance contributions by the employee actually declines. It was thought that the Chancellor of the Exchequer might announce in the Budget the abolition of the top limits on national insurance contributions at £15,860 per year so that those above that figure would pay 9 per cent. on all their earnings, as do those below that figure. That would have modified the effect of the drastic cut in top income tax rates.

Taking tax and national insurance contributions together, it means that the highest rate would have been 49 per cent. instead of 40 per cent. That would still be modest when compared with the 60p or over in the pound which, even after the new regime is introduced next week, will be lost by over 800,000 households through the incidence of income tax and the withdrawal of benefits.

I regret that the Chancellor did not follow the course of abolishing the upper limit. He has left us with a combined tax and national insurance contributions rate that rises to 34 per cent., drops to 25 per cent. between £15,860 and £21,905 and then rises again to 40 per cent., which is absurd. I regret that the policy of transferring the burden of national insurance to contributors continues and that the incidence of national insurance contributions is still allowed to fall progressively on those earning over £15,860 per annum. I should like to see the merging of national insurance and income tax into one standard rate, with the appropriate joint higher rates as part of a move towards a tax credit system.

Lord Kilmarnock

My Lords, I do not have much to add to what has already been said. These occasions inevitably give rise to thoughts of how such matters might be better ordered and how a more rational and fairer system might be brought into place in this country.

I agree almost word for word with what the noble Lord, Lord Banks, said about the great opportunity that the Chancellor missed in the Budget when reducing the top rate of tax, for which I think there was quite a good case, to abolish the top earnings limit of the national insurance contribution and to bring these two taxes—and they are taxes, as the noble Baroness, Lady Jeger, said—into some more rational relationship with each other.

I think that the Chancellor might have taken a further step at the same time to start moving up the threshold for national insurance contributions to the income tax threshold so that they too should enter into a rational relationship with each other. One would then be able to get rid of the very regressive nature of national insurance contributions. As we all know, they produce the absurd situation that people pay higher marginal rates of tax and national insurance combined at the lower end of the income scale than they do at the higher end. There can be no justification in a rational and fair social security system for the continuance of these anomalies. It is a pity that the Chancellor did not take the opportunity to start moving towards a rationalisation of them.

This is not the time for a debate on social security principles, though I know that we are all interested in the subject, particularly the noble Lord, Lord Skelmersdale. However, there is one specific point that I should like to ask. The Minister said he thought that it was not appropriate for him to refer to the government actuary's statement. I hope that he will not feel it inappropriate if I do; indeed, I believe that the noble Baroness has already done so. Can the Minister tell me why there has been an increase in the administrative costs of the National Insurance Fund from £803 million to £897 million, which appears to be an increase of 11 per cent. to 12 per cent.? Is this because of the new arrangements being introduced? Has the department had to take on more staff to bring the new arrangements into operation?

7.30 p.m.

Lord Skelmersdale

My Lords, your Lordships' House is renowned for being unisex. I am therefore grateful to noble Lords for their comments on the three orders.

I believe that the noble Baroness, Lady Jeger, is owed an apology. I was editing on my feet, which in social security matters is always dangerous. Since she and the noble Lord, Lord Kilmarnock, mentioned the report of the government actuary on the effects of our proposals on the National Insurance Fund laid with the re-rating orders, I confirm that the total income received by the National Insurance Fund is estimated to be £28.54 billion in the next financial year, and the total expenditure is estimated to be £26.77 billion, giving an expected surplus of £1.77 billion. This amounts to some three and half weeks expenditure of the fund. To say the least, I think that it is cautious to have a small surplus in fund in any one year.

This projected surplus has to be seen in the context of the introduction of personal pensions and the easing of contracted-out rules for occupational schemes, which means added uncertainty about the number of people who will contract out of the state earnings-related pension scheme and hence the fund income from contributions.

The purposes for expenditure from the fund are: the National Health Service, to the tune of 11.3 per cent.; retirement pensions, to the tune of 66.2 per cent.; sickness and invalidity benefit, to the tune of 11.6 per cent.; and unemployment benefit, to the tune of 5.1 per cent. The take-up of unemployment benefit is falling as the employment rate increases. There are some smaller fund-financed benefits, including widows' benefit and industrial injuries benefit. The noble Baroness suggested that this was a tax. That is not so. On balance, it makes no sense to consider questions of progressivity or regressivity without taking account of the benefits to which contributions bring entitlement.

Why not eliminate the surplus by cutting the contribution rates, an idea which has an obvious attraction for the noble Baroness? As can be seen from these orders, the Government decided that they should not do this. We must adopt a strategic rather than a merely reactive approach to the surplus. We should not make judgments about the level of the surplus solely on the basis of projections for the fund's surplus for a single year. As I said in my opening speech, the Government have a good record on national insurance contributions. We eliminated the national insurance surcharge as soon as it was prudent to do so and we cut contribution rates of lower paid workers in 1985. Indeed, 1988–89 will be the fifth successive year when national insurance contribution rates have not been changed.

The noble Baroness said that there was another opportunity open to us. She asked why we do not increase the basic rate of pensions. We plan to spend nearly £19.5 billion on retirement pensions, which is 40 per cent. of all planned spending on social security. Most pensioners do not depend solely on social security benefits. More than 85 per cent. of recently retired pensioners have income from other sources besides state benefits. Lower inflation, the steady development of occupational pension schemes and the healthy state of the economy generally led to a dramatic growth of pensioners' private incomes. Indeed, pensioners' incomes have increased in real terms twice as fast as those of the population as a whole in the period between 1979 and 1985 when their average net incomes rose by 18 per cent. That is 2.7 per cent. a year compared with only 3 per cent. in the whole of the previous five years.

In those circumstances, we do not think that contributors should pay for higher state retirement pensions especially as the incomes of people in work who pay for benefits have increased less quickly than those of pensioners themselves. If the surplus were spent on higher contributory benefit rates then the level of tax-financed benefit expenditure would also be dragged up. This arises because poorer pensioners could benefit fully only if rates of income support and housing benefit were also raised. Non-contributory benefits are paid for by taxpayers, and £20.4 billion will be spent on these benefits in the next financial year. Raising pensions would benefit only the better-off pensioners and we do not think it right at present to increase further the rates of those benefits which are paid for wholly by the taxpayer.

I must apologise about a matter which the noble Lord, Lord Banks, has brought to my attention. If the noble Lord, speaking on behalf of the whole House, felt that the Guardian advertisement gave the appearance of prejudging a decision of Parliament, I can assure him and the House generally that this was not intended, though I clearly understand the noble Lord's view that it did. I have not seen the advertisement myself. I shall study it and make it my business to see that this does not happen again.

He also asked whether there was the right balance between Treasury payments and contributions. I hope that in my opening speech I explained the rationale for our decision and up to now continuing to cut the Treasury supplement by 2 per cent. a year. If he really believes in contributory benefits being paid for by contributions, it would be appropriate to make sure that this is done. Not for the first time the noble Lord, backed up by the noble Lord, Lord Kilmarnock, talked about the merging of national insurance and tax. That has been a long-term objective of the Liberal Party. I was interested to see that this policy has been attractive to the SLD and indeed to the noble Lord, Lord Kilmarnock, himself.

The noble Lord, Lord Kilmarnock, asked me to explain why there was an increase of administration costs within the National Insurance Fund. I did not quite hear his percentage but I am advised that it is 11.7 per cent. on the previous year. The increase is due to inflation but the increase also takes account of the National Insurance Fund's share of the cost of the department's operational strategy. As noble Lords will be aware, the social security part of the DHSS is undergoing a massive investment programme in computers. It is only fair that this fund should bear its part of the cost of that programme.

I think that I have answered all the questions. It is a very complicated subject, and if I have missed any points perhaps I may be allowed to write to noble Lords. In the meantime, I commend the order to the House.

On Question, Motion agreed to.