§ 3.2 p.m.
The Parliamentary Under-Secretary of State, Department of Social Security (Viscount Astor)
My Lords, I beg to move that the Bill be now read a second time.
The Bill is a short one and has just one main purpose: to give effect to the 1 per cent. increase in national insurance contributions from 6th April which, your Lordships will recall, was announced in the Budget last March. However, the Government have taken the opportunity presented by the Bill to include two subsidiary items which are essentially clarification of existing legislation. They concern the allocation of money out of national insurance contributions to the health service and the liability of self-employed people with a personal pension for Class 4 national insurance contributions. I shall of course say more about the precise provisions in the Bill in a moment but, on the matter of the proposed contribution increase, it may be helpful to the House if I say something about the background to the measure and the operation of the National Insurance Fund.
As your Lordships will be aware, the National Insurance Fund operates on pay-as-you-go basis, with current contributions meeting the costs of current benefits. It was not set up as a true funded system. The fund operates under the control and management of my right honourable friend the Secretary of State for Social Security and its main source of income is the national 10 insurance contributions payable by employees, employers and the self-employed. If the fund is not to run out of money, these must broadly speaking match expenditure on the contributory benefits payable out of the fund—such as retirement pensions, but also widows', sickness, invalidity, maternity and unemployment benefits.
I use the words "broadly speaking" because, as your Lordships will recall, the Social Security Act 1993 introduced the facility for my right honourable friend to seek a grant from the Treasury to the National Insurance Fund. There is a statutory ceiling to the amount of grant which may be made available. This is a maximum of 17 per cent. of estimated expenditure on contributory benefits. The rest of the fund's expenditure must be met by contributions.
I should like to emphasise the uniqueness of the National Insurance Fund. Aside from the Treasury grant, it must be self-sufficient in income, but by the same token its resources cannot be used to pay for any matters other than benefits and their administration. Unlike general taxation, which goes into the Consolidated Fund, national insurance contributions are a hypothecated charge, which means that they cannot be used to fund items paid for out of general taxation. Apart from a small allocation to the health service and appropriate rebates for those contracted out of SERPS (the state earnings related pension scheme) all the money from contributions goes into the National Insurance Fund. It cannot find its way to the Exchequer.
I think it is important that the House should recognise the constraints under which the National Insurance Fund operates because of concerns about the Government's plans to increase employees' contributions in 1994–95 yet at the same time announcing their intention to make changes to benefits in later years—as if there were plans for the Government to raise contributions, reduce benefits and pocket the difference ! That is not the case.
As my right honourable friend the Secretary of State has already announced, there will be uprating of all benefits in line with inflation and in many cases increases above inflation next year. We will be spending well over £2 billion more next year on benefits, around a billion of that from the National Insurance Fund. Changes to some benefits have been proposed for future years, but any government of whatever persuasion must expect to make adjustments to the scope of the social security scheme in order to meet the evolving needs of society. Whatever changes may occur in subsequent years, expenditure is still likely to go on rising.
The plain fact is that existing levels of contributions are not sufficient at present to sustain the levels of expenditure to which the fund is committed. There is nothing unusual or untoward about that. It is a feature of a pay-as-you-go scheme that adjustments to contributions will be needed from time to time, either up or down, depending on the calls upon the fund and on the state of the economic cycle. in 1985 and again in 1989 we put contributions down. We have not increased them for 11 years, but an increase is now necessary to keep the fund stable in the year 1994–95. What the position may be beyond that I cannot predict. Rates before us 11 will not be set in stone. It may well be possible to reduce them again at some time in the future as we have done before.
Clause 1 provides for the main primary percentage rate of national insurance contributions for employees to be raised from 9 per cent. to 10 per cent. from April next. Your Lordships will be aware that the Government restructured national insurance contributions in 1989 and introduced a two-tiered system for employees. There is now an initial percentage of just 2 per cent. which applies to the first £57 of weekly earnings, and the main percentage applies to earnings over £57.
The 1 per cent. increase before the House applies only to the main percentage. So the structure will become 2 per cent. plus 10 per cent. That means of course that the increase applies to a lesser extent to lower paid workers, who pay a greater proportion of their contributions at just the 2 per cent. rate. The increase will also apply to those people whose contributions are a modified version of the main primary percentage, most notably people who are contracted out of SERPS and whose contributions are rebated by 1.8 per cent. Their main rate will rise from 7.2 per cent. to 8.2 per cent.
I will turn now to the other provisions in the Bill. Both measures have retrospective effect as the Bill is drafted. I mentioned earlier that a proportion of national insurance contributions is allocated to the health service. This dates back to the inception of the contributory scheme as we know it. Under the old flat rate stamp scheme it was a proportion of each contribution; since 1975 we have had earnings related contributions, and the health service allocation comprises part of the percentage rate which is applied to people's pay. Thus, of the current 9 per cent. rate, 1.05 per cent. goes to the health service and 7.95 per cent. goes to the National Insurance Fund.
In 1989 the Government restructured national insurance contributions and introduced for the first time the concept of an initial primary percentage—the 2 per cent. rate. It was always intended that all the 2 per cent. should go to the National Insurance Fund so that the NHS allocation would only be payable on that part of contributions due at the main rate on earnings above the lower earnings limit. It is quite clear that the amendments brought about by the 1989 Social Security Act correctly exclude the payment of a health service allocation on the initial 2 per cent. rate. However, they do so by providing for an allocation only on contributions paid at the main primary percentage rate. We now note that it is possible to construe the provision as drafted in such a way that no allocation is payable on variants of the main primary percentage of 9 per cent. —for example, where employees are contracted out of SERPS and a rebated main contribution rate of 7.2 per cent. is then paid. This was never the intention and the allocation has in fact been paid all along to the NHS from all contributions from employees above the initial 2 per cent. rate. It therefore needs the minor amendment provided for in Clause 2 of the Bill to ensure that the law is clear.
12 Finally, I turn to the remaining item in the Bill. Clause 3 is again a simple clarifying amendment and does not involve any change of policy. It simply ensures that the taw reflects the intended policy that payments made to approved personal pension schemes by self-employed people are not allowable as a deduction in the computation of profits on which Class 4 national insurance contributions are charged. This policy is in line with the basic principle that only genuine business expenses, not personal expenses, are allowed as a deduction. It therefore provides for equity of treatment with employees who do not get a contribution relief for contributions they make to personal pension schemes. The provision applies from the date approved personal pensions were introduced in 1988, since which time there has been no formal legal challenge to the way we have applied the law. This clause merely clarifies the position and prevents what might otherwise be a period of potential uncertainty.
There is a temptation for some to see this as a taxing Bill. Its aim is to raise money, there can be no doubt of that. But it is money for the National Insurance Fund, not the Exchequer. It is money so that our commitments to the old, frail and sick can continue to be met under the contributory principle. I commend this Bill to the House.
§ Moved, That the Bill be now read a second time.—(Viscount Astor.)
§ 3.13 p.m.
§ Baroness Turner of Camden
My Lords, this Bill comes to us having had a rushed passage through the other place where I believe the Opposition objected so strongly that I understand normal co-operation has been withdrawn. I believe that we in this House have an even greater responsibility than usual to ensure that the Government's intentions as regards this Bill come under close scrutiny. This is not a small, insignificant, technical Bill at all, although, of course, it is a short Bill. However, it is part and parcel of the Government's overall strategy in regard to social provision—I believe the Minister made that fairly clear when he introduced the Bill—and it therefore must be examined closely.
Of course it is understood that any government must be careful about public expenditure. Every government must seek to raise taxes, often from a reluctant electorate, in order to provide the social and public services without which a civilised society cannot function. The argument is about whether the policies adopted are fair and equitable and, even more important, whether the philosophy underlying the policies is an acceptable one. I believe that it is not. We have had over 14 years of Conservative administration and during that time the gap between the very well-off and the poorest has widened considerably. I do not think that this is disputed. For the poorest 10 per cent. of the population real incomes are said to have declined by some 14 per cent. since 1979. Recent research would appear to indicate that one-third of our children now subsist at a level below that regarded as the poverty level. We have, as everyone knows, a high rate of unemployment. The continuing argument about the Government's statistics surfaced again during the holiday break. A study 13 recently produced by a Cambridge economist argues that the number of people unemployed but unable to claim benefit is of the order of 1.08 million. That number includes school leavers, long-term unemployed who have been out of work for over a year, and other groups of people.
Since 1979 there have been 29 changes in the way in which British unemployment figures are calculated. Even so the Government's own figure of 2.8 million is unacceptably high and it accounts partly for the high level of social security expenditure. Now the Government are proposing in this Bill that employees' contributions should be increased by 1 per cent. However, that increase cannot be looked at in isolation. People are entitled to ask what they will get for it. The answer, simply, is that they will get less.
There is to be the so-called "reform" of unemployment benefit. There will be a job seeker's allowance which will be payable for only the first six months of unemployment. Thereafter individuals still unemployed, even though able to satisfy the "actively seeking work" criterion introduced by the Government in a previous social security Bill, will have to rely on means-tested benefits, and if their partner is earning, they could well end up with nothing.
Of course it is argued by the Government that the social security budget has increased. It has done so because we are having to fund unemployment. It has done so because we have more poor people and so more has to be paid out by way of social benefits. Of course the Government will say that they have to try to make the books balance—the Minister said so this afternoon—but in our view they are doing so by making the least able and most vulnerable pay for it. The Government won the previous election by claiming to he the party that was against high taxation: yet we now face tax increases on a massive scale—I disagree with the comment that this new increase is not a tax; of course it is—increases which will total £24 billion over the next three years, and with the tax bills of the average family escalating by £15 to £16 a week within the next two years. Now there is to be the increase in national insurance contributions. We must look at this Bill having some regard to the economic policies which brought us to this point.
The Government really cannot blame anyone else for high unemployment and the present state of the economy. We are being told that there are signs of improvement and we honestly hope that that is the case, but improvement will only be obvious to most people when we begin to see a real growth in employment. There are areas of the country where the prospect of alternative employment for men in particular appears to be virtually nil. Yet the Government come along with this Bill which cuts the benefits for people in that situation while increasing the contribution that those in employment must pay.
One cannot but recall that over the years successive pieces of legislation have been introduced with the objective of tightening the conditions for entitlement to benefit. It is sometimes forgotten that when the Conservatives took office in 1979 we actually had provision for earnings-related unemployment pay 14 through the earnings-related supplement, like many other countries in Western Europe—however, it is true that we had much less unemployment with a Labour government—but that was one of the first benefits to go.
Then we had the new definition—instead of being simply available for work, a claimant had to be actively seeking work and could not be too choosy about it. Then entitlement was reduced for men aged 55 with small, early occupational pension schemes. Sixteen to 18 year-olds have no entitlement either; and now we have this latest infringement of rights. It will mean that around 240,000 people will come off the register of those claiming benefit and presumably this will result in further doctoring of the statistics so that the Government can claim that the unemployment figures are not as bad as everyone thinks they are. However, it will fool no one. It will simply increase the cynicism with which large numbers of the population regard politicians. That is something which bodes ill for democracy and which cannot cause any joy to any of us in this House.
In the meantime the Government will no doubt continue with their policies, which seem to be, deliberately designed to introduce more injustice and inequality. A great deal of that injustice and inequality is due to unemployment and its attendant evils. Such growth in employment as there has been is in low paid, often part-time employment, mainly among women. Perhaps the Government really believe that the so-called entrepreneurial culture which they were so proud of having espoused in the 1980s would result in everyone becoming richer, but that has not happened. The trickle-down effect has not been forthcoming.
In the meantime even those in employment—say at a level of £22,000 a year£are beginning to feel unhappy. They are the people who will have to pay more all round, not only as regards the increase in national insurance contributions, which will cost them approximately an extra £4.56 per week but as regards other measures stemming from the recent Budget which seem designed to impact on that section of society most concerned to make prudent provision. However, that section of the population—mainly white collar employees—has no more protection against unemployment and no greater expectation of employment security than manual workers have had. Furthermore, in some instances they have been unwise enough to be taken in by the Government's national insurance bribe and have gone in for private personal pensions. The Government have done everything they possibly can to persuade people to make their own, individual pension investment. As we are now seeing, that is proving disastrous for some of the people concerned.
Only a few years ago the Government ceased payments into the National Insurance Fund. I agree that it is a notional fund, but the Government ceased payments which until that time had been set aside for that purpose. They have given rebates to encourage people to make personal provision. I do not blame the insurance industry for what has happened because I am sure that, although unacceptable practices have been used in order to sell insurance in inappropriate circumstances, the principal blame for the whole affair rests with the Government whose idea it was. The 15 Government are so ideologically motivated against collective provision, whether by the state or good occupational schemes, that they had to provide national insurance rebates—and thus forgo income—in order to persuade people to enter the individual pensions market.
As I said earlier, it is not possible to look at a Bill of this kind without considering the philosophy which I believe motivates the Government's approach to social security generally. The Government's approach is an intensely individualistic one. They believe that we must all provide for ourselves and our families and must break away from the dependency culture. However, most people do not want to be dependent on anyone. One of the problems with means-tested benefits is that some people who are entitled to them do not claim because they find it too humiliating. However, if ill luck strikes and poverty looms through unemployment, illness or other misfortune, people who have spent money paying their national insurance contributions are entitled to expect that their basic needs will be met since that was the objective of the social insurance programme.
No one is saying that the welfare state as envisaged by Beveridge should not be re-examined. Times have changed substantially since 1944 and adjustments have to be made to cope with those changes. However, the Government's attitude has been to try to cut back. The result is that the poor and the vulnerable pay the highest price.
Of course a great deal depends on the economy, which we all hope will improve, but there is no sign yet from the Government that they espouse the cause of full employment, even as a desirable objective. Nor is there any indication that they are intent upon developing an industrial strategy which has any hope of bringing that about.
This Bill is another helping of the same old policies. As such we cannot welcome or applaud it. To put it simply, people are being asked to pay more for much less. Were it not for the tradition that stipulates that we do not oppose Government Bills at Second Reading in this House I would be disposed to oppose the Bill. However, we shall simply do our best with it when we have the opportunity in Committee.
§ 3.26 p.m.
§ Earl Russell
My Lords, I should like to congratulate the noble Viscount on the skill with which he introduced the Bill. It was an outstanding example of the sedative style of ministerial speaking. In fact, it demonstrated why the Opposition is exhorted to show eternal vigilance. The Minister, did not make it easy for us but I hope that he did not make it impossible.
National insurance has the same sort of relationship to tax as Berwick upon Tweed has to England: we include it when we feel like remembering it and leave it out when we feel like making a distinction. As I am sure the noble Lord, Lord Boyd-Carpenter, will say again in a few minutes, in this House national insurance Bills are not money Bills. As I understand it, we are entitled to amend national insurance Bills and they enjoy only the usual qualified financial privilege of another place. On 16 the other hand, the Bill is obviously part of a Budget package and, as the noble Baroness, Lady Turner of Camden, said, must be considered in the light of that Budget package.
It is fairly clear that the purpose of the Bill is to raise revenue. I admit that, as the noble Viscount said, the measure is hypothecated. The House may take note that this is one context in which the principle of hypothecation has been accepted by the Treasury, is accepted by the Treasury and continues to be accepted by the Treasury. But to say that it is a hypothecated tax is not to say that it is not a tax. At the last election we put forward a proposal for a hypothecated tax of one penny on income tax to be devoted to education. We never dreamt of telling the electorate that because it was hypothecated to education it was not a tax. Had we done so I can imagine what the noble Viscount and his colleagues would have said about it. Therefore, the purpose of the measure is to raise revenue.
The noble Viscount said—I think that I took down his words correctly and I hope that he will correct me if I did not—that the money in the National Insurance Fund was insufficient to meet the pressures to which the fund was committed and therefore it had to be raised because of the state of the economic cycle. Translated into plain English that means that this increase is brought in to pay for the recession. At the same time, as the noble Baroness brought out, it means there will be greater contributions for benefit. Therefore it appears, whether rightly or wrongly, to undermine and weaken the contributory principle.
The noble Viscount may remember that in the Social Security Bill of 1989 the Government removed the Treasury supplement for the National Insurance Fund. The first decision that I had to take while holding this brief in this House was whether to divide the House against that proposal. I was probably right not to do so but I still feel a hankering regret that I did not, because the Government reintroduced the Treasury supplement in 1993, but too late to avoid the present increase, which would have been unnecessary if they had kept the Treasury supplement.
We are reaching the situation illustrated by the noble Lord, Lord Gilmour of Craigmillar, in his book, where we have a government who feel entitled to raise taxes only during a recession. I do not find that a particularly helpful approach to tax increases. For this Budget has certainly been one of tax increases. Taking together the Budgets of March and November, we have tax increases of£15.2 billion over two years. I think that I am correct in saying that that is the biggest tax increase which has been introduced in peace time.
Overall, this has not been a tax cutting government, it has been a tax increasing government. In the first Budget of this Government, the noble Lord, Lord Howe of Aberavon, said that he was offering people income tax cuts with which to pay their VAT. That seems to have been the signature tune of the early years of this Government.
In that context, I must say I am prepared to take no lectures from the Government Benches about any proposals which my party may put forward to increase taxes. Of course, the Minister may reply, perfectly 17 reasonably, that he will similarly take no lectures from me about any proposals of his to increase taxes. If he does so, I would accept the justice of the reply and I would regard it as a helpful contribution to political debate. We cannot live in a world in which all tax increases are taboo. That is like saying that every car should go on the road without brakes. It is not a situation that I should wish to carry on for long.
However, if we can once agree that tax increases are not anathema but something that may have to occur from time to time, we still have two questions which need to be discussed. One is, "Why should we have tax increases?" We recommend tax increases to pay for better public services. The Government recommend tax increases to pay for a ravaged tax base. That ravaged tax base seems to be characteristic of late Reaganomics in any country. In fact it marks the Government's recruitment to the firm of Keating and Campbell. In all countries where Reaganomics are applied the result of making control of inflation the sole objective of macroeconomic policy seems to be that unemployment rises. That means fewer taxpayers. It is also a regular objective of Reaganomics to lower wages by competition. That means that many people drop out of the bottom of the tax base and many others who pay tax pay a great deal less than they otherwise would have done. In fact some become dependent on means-tested benefits. Therefore the cost of the social security budget rises also. That seems to be why Reaganomic governments around the world in general have not succeeded in lowering public spending to any significant degree. I admit that they have tried. They have tried very hard indeed, but they have not succeeded. In fact they had better start thinking of other ways to go about that objective.
When considering tax increases one needs to ask the question, "What taxes?" In any century, not only in this century, a low taxation philosophy has tended to go with high indirect taxes because, however low the Government's taxation philosophy may be, they cannot succeed in forgoing revenue. Therefore they tend to use indirect taxes in the hope that people will not notice. At first the Government operated on the policy of income tax cuts to help people to pay VAT. When now considering remarks about the 20 per cent. tax rate, we wonder whether we are seeing income tax cuts to enable people to pay national insurance.
I am not sure that that is a good approach to taxation. National insurance is in effect a tax on employment. If we want more taxpayers, I do not believe that that is the right tax to raise. We are offered a yield of £1.9 billion from the Bill. That is the same amount that could have been achieved from raising the standard and 20 per cent. rates of income tax. I do not understand why it was not proposed in that way. It would have produced the same amount of revenue. We are now back with the Treasury supplement. I do not understand why that revenue could not have been paid legally into the national insurance funds, just as this yield will be. I see that the noble Lord, Lord Boyd-Carpenter, shakes his head. I shall listen with interest to his reply.
However, even if we use national insurance, there are other ways in which we could set about this. We could 18 have cut out the 2 per cent. on income below £57 a week. That would have meant a much less steep step in the costs to the employer when the £57 threshold is passed. It would have diminished the incentive to the employer to pay people wages which take them out of the national insurance base altogether. It might have benefited the National Insurance Fund as well as the employer. The Government could have considered a taper in the rate at which national insurance comes in. That again would have made a less steep poverty trap and would have diminished the incentive to keep wages down.
Such a concession would have had to be paid for. I can envisage no reason why it should not have been paid for by a slight movement—it would have only needed to be slight—in the upper earnings limit. In the Chancellor's Budget speech we were also promised a 1 per cent. reduction in the lower rates of employer contributions and a 0.2 per cent. reduction in the standard rate. I shall be glad if the noble Viscount will tell us when and in what form—I presume in regulations—that proposal is likely to be laid before us and whether the regulations will be under the affirmative or negative procedure.
The Chancellor said in his Budget speech that the proposal was to provide an incentive to employers to create low-cost jobs which might get people out of unemployment. At first glance that looked as though it might be a good idea. However, the Chancellor also said that that same reduction was meant to pay for the costs of statutory sick pay. We shall discuss that issue tomorrow. I had always thought that one cannot spend the same money twice. I have been looking at the figures. Employers are being offered an £830 million reduction under this procedure. Of that, £695 million will go to meet the cost of statutory sick pay. That leaves only £135 million to encourage the creation of jobs. Spread around all the employers in the country, £135 million really is not much money. Once again we have good and bad ideas in the Budget fighting each other to a standstill. It looks more than ever like an eightsome reel danced by Englishmen.
So here we are, my Lords. The Thatcher revolution is slowly winding to its close. Instead of a great liberation, we have a steady drop in the tax base, a difficulty in bringing about recovery because of lack of productive capacity, and the recruitment to the firm of Bush and Major, and Keating and Campbell—two down; two to go.
§ 3.38 p.m.
§ Lord Boyd-Carpenter
My Lords, I wholly agree at any rate with the opening sentence of the noble Earl's speech that my noble friend the Minister has given a good and clear exposition of the Bill. I believe that your Lordships' House is greatly indebted to my noble friend for the clear statement he gave of what is undoubtedly an extremely important measure. There is no question that we are dealing with a matter of major importance, and of major importance to the whole of our working population and to the working of our economy. As I 19 have had good reason to know over a long period, the subject is highly complex. We are particularly indebted to my noble friend for his clear exposition.
However, I am afraid that I must part company with the noble Earl, Lord Russell. I always enjoy listening to his speeches—they have the entertainment value of high grade fiction. I thoroughly enjoyed his exposition. However, it was interesting to hear the way in which he drifted away from national insurance into general questions of taxation. We are not dealing with general questions of taxation. The Bill deals with national insurance. As was pointed out, I believe by the noble Baroness, we are dealing with national insurance which is a matter upon which, if your Lordships' House sees fit, it can divide and seek to amend, whereas we cannot do so on taxation. That is the clearest illustration of the fact that we are not concerned in this Bill with general questions of taxation at all. Your Lordships' House is not, either as regards this Bill or generally, in a position to vote and decide upon taxation matters.
Here we are concerned with national insurance. It is obvious that in the present state of the economy, with the present level of unemployment, the revenue from the National Insurance Fund needs to be fortified. As I understand it, that, in a sentence, is the purpose of the Bill. I hope it will be the case—and it may well be—that in years to come the call on the National Insurance Fund will be less. It may then be possible to make a reduction in the contribution which is exacted from the citizen to the fund. However, I beg noble Lords to bear in mind in discussions on the Bill that we are here concerned simply with the financing of the National Insurance Fund. That is a large element in the working of our national economy. It is a matter of great importance to almost every citizen, because very few of us, at one time or another, do not need to be supported or aided by one aspect or another of national insurance. That is the essence of National Insurance: it completely covers the whole of the population.
Given that and the fact that obviously the demands on the fund must be increased by the level of unemployment, it seems to me, with respect, that your Lordships' House has no option but to say that we must agree to the increases in the national insurance contribution which are necessary to keep the fund in balance.
I wish to ask a question which my noble friend may be able to answer when he replies. On page ii of the Explanatory and Financial Memorandum which accompanies the Bill it is stated that:Clause 2 provides authority for the future payment of some £1 billion per year to the National Health Service out of National Insurance contributions. It also provides authority for payments amounting to some £4.6 billion from October 1989 to April 1994".I ask my noble friend why, if authority is required for those payments, it has not been sought over the five-year period during which they have been made. It seems that either there is no need for further legislation to deal with the matter or that we have been dealing with those large sums of money for five years without proper legislative authority. On either view, it is desirable that when my noble friend replies he should explain why this 20 extraordinary retrospective provision is included in the Bill. Is the provision necessary? If it is, why has it not been necessary for the past five years?
§ 3.44 p.m.
§ Lord Ennals
My Lords, it is always a pleasure to follow the noble Lord, Lord Boyd-Carpenter, and I hardly ever do so. It is interesting that although he spent so many years dealing with social security in another life, as did I, in this place we hardly talk to each other about the subject.
This debate is unique in that we not only have the noble Lord, Lord Boyd-Carpenter, speaking, with all his experience in another place dealing with social security, but the noble Lord, Lord Renton, who has vast experience, and the noble Lord, Lord Dean of Harptree. Leaving out myself, we have a rather distinguished list of people who spent their time in another place dealing very much with those issues.
The noble Earl, Lord Russell, prophesied that when the noble Lord, Lord Boyd-Carpenter, spoke, he would say that, of course, this is not a tax. I shall not enter very much into that argument because for the people who pay it does not make much difference. For them, it is as much a tax as if they paid it in some other way. However, I shall take it as a tax, as did my noble friend on the Front Bench.
It is accepted that it is a short Bill, the main provisions of which are contained in Clause 1. We shall not be able to make many changes in it during the course of the debate in this place, but it is an important Bill. I suppose that is the reason why the Government decided to guillotine a reasonable debate in another place. That was a shocking thing to do. It has hardly been known in the history of the House of Commons for a decision to guillotine a debate to be taken before the Second Reading of the Bill. To give to another place only one day in which to deal with all the stages of the Bill is, I believe, an insult to our parliamentary system.
Part of the proof of the need for a second Chamber is, I suppose, to do what another place is denied the right to do. We shall do that tomorrow on another Bill that was forced through without any reasonable time for debate. That is perhaps because the Government think that the matters are important, so get them dealt with quickly—"Let us see that the public do not allow themselves to be aroused". I wondered whether that was why the Secretary of State decided not to accept responsibility for taking the Bill through another place and left it to the much more emollient Minister of State, Mr. Nicholas Scott, who has gained for himself from all sides of the House, both in another place and here, respect for the way in which he has applied himself to his main job of dealing with the needs of the disabled. The Secretary of State, Mr. Peter Lilley—one of the central figures in the "back to basics" campaign so brilliantly led by the Prime Minister—may wish to keep out of the controversial debate at this time. If that is the reason, then I suppose we understand it.
We must put the Bill into context. It has much to do not with "back to basics" but, so far as I am concerned, with "away from basics". I remember that the issues we are debating today of national insurance contributions 21 arose in 1942 when I first became interested in them and when the Beveridge Report was published. I was a young education officer with the responsibility of ensuring that the public —that is, at that time members of the Armed Forces—understood what it was all about. The welfare state and providing and ensuring that people's needs were met from their own contributions—whether by taxation or national insurance is not especially important at this time—was to establish that we were a community. Perhaps we were rather ahead of ourselves at that time: we are certainly not ahead of ourselves now—we are way behind—but it was to ensure that we were a community which, by taxation and national insurance, would provide a guarantee that in times of unemployment, sickness or disability people would know that they would not have their backs to the wall. Therefore, I wish to put the Bill, which is raising a large sum of money, into context.
This Bill is one of the Government's devices which tear up the pledges that they made at the time of the general election. The "party of low taxes" was the presentation made by the Prime Minister and all his colleagues; and no doubt noble Lords on the other side of the House who took part in the debate and stumped the country, telling the public what the debate was all about, were saying, "We are the party of low taxes. Vote for us and you will not have to pay out as much as you will if Labour gets into power". Of course, that was just so much hooey. It was just a device to confuse the public. I am afraid that one of the charming features of the British electorate is how easily it is fooled. People believe what those in high office say to them. That is very charming, but I am afraid that it now proves itself to be very disarming and very concerning that the public take at face value things that are said to them which we now know are blatantly untrue.
Yesterday, as no doubt many other noble Lords did, I followed the interview which the Prime Minister gave to Sir David Frost. I have to admit, and perhaps it is because of my old age rather than the boring nature of the two contributors to that debate, that I fell asleep. But when we reached the vital moment my wife woke me up. When confronted with the suggestion that promises made at the election had been broken—that pledges were made which had led the public to vote in one particular way but which we are entitled to say had been broken—the Prime Minister charmingly said that they had not been pledges but objectives. He was very sorry that it had not proved feasible to carry out those very recent promises, or hopes. They were not pledges, just hopes.
Certainly the changes made in this Bill play a very small part, though the sum of money is large when we see it in proportion. I see this provision, raising money as it does, as a contribution to what the British public will have to pay for the state of the economy. From October 1994, a typical family will pay an additional £10 a week in tax, rising to £16 a week in April 1995. As has been said, the tax increases already announced for the next three years amount to the biggest tax hike in British history, imposing an extra £24 billion in taxes on the public. Nineteen out of every 20 households will lose as a result of these imposts, of which this Bill is just 22 one. The Government promised year-on-year tax cuts but they are now delivering a tax rise every six months. They forecast that the nation's tax burden would rise every year over the next five years. Over the next five years it will become 38.5 per cent. of the nation's earnings. In 1979 the tax burden was 34.75 per cent.—4 per cent. less—so it is not true, if it ever was true, that the party opposite is the party of low taxes.
Let us look at the matter in perspective. From April 1994, the typical family with one earner will pay an extra £9.30p per week in tax. National insurance tax, up 1p, accounts for £3.19p. That is what this Bill is about. That is why it is so important. It is the largest single sum in the £10 to which I referred. We have the reduction in mortgage tax relief, which will bring in £2.24 per week. The married couple's allowance is frozen and cut to £20. That will bring in £1.85 per week. There is 8 per cent. VAT on fuel; the single person's allowance frozen; the extension of the 20p band; and excise duties, over-indexation, etc. The total is £9.32p.
After October 1994 that will increase to £10 a week. From April 1995 it will go up to £16 a week. That why I have said that the Government are starting on a course, of which this Bill is the first step, which will dramatically increase the amount that the public will have to pay. Whether it is referred to as taxes or national insurance, so far as they are concerned the effect is the same. It is taken out of a dwindling amount of money that is at their disposal. Ninety-nine per cent. of non-pensioner households will be worse off as a result of this measure. Over half of the total increases come from direct taxes, and half a million individuals who did not previously pay income tax will have been trawled into tax by the double freeze in allowances.
The second charge that I make against the Government is that the Bill further undermines the insurance principle. As my noble friend Baroness Turner of Camden said, people will be paying more for less in terms of services which they receive through the National Insurance Fund. They are paying more, and we shall see in other respects what will happen to their pensions, disability benefits, invalidity benefits, unemployment benefit, etc. Those are all issues that will be debated on the Floor of this House.
The whole of my political life, from the time that the Beveridge Report was first presented—whether or not in office; usually not in office but especially when in office—was given to finding ways of improving benefits and what the state could do for the public front the amount received in taxation and national insurance. We have now moved into a phase in which we are doing the opposite. The amount that is paid is going up and the degree to which people can expect to benefit is going down. I am happy to say that over quite a long period of some 30 years there was almost a consensus between the political parties on this matter. We all genuinely sought not to throw these issues at each other and argue about them. When the noble Lords, Lord Boyd-Carpenter, and Lord Renton, and my noble friends Lord Dean and Lord Houghton (I wish that he were here) were Ministers, that same relationship existed. There was a consensus which we sought to maintain. Of course charges went up arid down, as has been said. The national insurance 23 payments would sometimes go up and sometimes they would go down. But the state of the fund as revealed in the parliamentary research paper shows that by 1993 the working balance had for the first time for many years (possibly ever) gone below the recommended minimum of one-sixth of a year's benefit expenditure which is required in the months ahead to meet the expected allowances. Recent estimates on the state of the fund have shown a move from surplus to deficit. This refers to an excess of expenditure over income. It does not mean that there is not enough in the fund to pay benefits. The fund has a working balance to prevent that. However, it means that that balance has been eroded. We are told in the research paper:In the 1990 Quinquennial Review the Government Actuary stated that 'it would seem advisable to maintain a minimum balance of about one-sixth of a year's benefit expenditure'. Estimates in the 1991 report from the Government Actuary on the benefits uprating and contributions re—rating orders showed an excess of expenditure over income for the years 1991–92 and 1992–93. Consequently, the Government Actuary predicted that the balance of the fund would fall from 40 per cent. of benefit expenditure in 1990–91 to [only] 17 per cent. in 1992–93".As the noble Lord, Lord Boyd-Carpenter, said, something had to be done. But I must say that at the time when I was Secretary of State and had responsibility for ensuring that the National Insurance Fund was properly funded in order to do its duty I would have come under very great criticism had I ever allowed the fund to get into its present dangerous position. So I do not argue that, pursuing the kind of policies that the Government pursue, they do not in fact need to make some changes. But they have done it in what I believe is a very unfair way.
Those are the charges that I make against the Government. I want now to look at the way in which this House will handle the matter. The changes can be seen in the context of recently announced cuts to national insurance benefits. As my noble friend said, they include the replacement of unemployment benefit, which was apparently paid for one year, by the new jobseeker's allowance, which will mean testing after six months. That will take place in 1996 but before then it will be debated, no doubt very furiously, in your Lordships' House as well as in another place. Another change is the replacement of sickness benefit and invalidity benefit by incapacity benefit for new claimants from April 1995. Unlike the invalidity benefit, the new benefit will be taxable and will have a tighter medical test. There is also the raising of the female state pension age to 65, which will be phased in between 2010 and 2020. The Government estimate that the first of those two changes, alongside certain other measures such as the abolition and recovery of statutory sick pay costs for larger employers, will save some £2.5 billion a year by 1996–97.
The Bill itself absolutely contradicts assurances that have been given by both the Prime Minister and other Ministers. The Prime Minister said—one occasion was on 28th January 1992—that the Government had no plans to raise the level of national insurance contributions. Why did he make that statement? Why should he say to the public that the Government had no such plans and then do so unless they were simply 24 weasel words, using the phrase "no plans to do so" to mean "not yet put into legislation to submit to the House"? I think that is a form of dishonesty. At the same time, during the election the Chairman of the Conservative Party ruled out an increase in national insurance contributions, but we are now deciding just what such a level of contributions will be.
I hope that in his reply the Minister will say a little more about the National Health Service aspect, as he was asked to do by the noble Lord, Lord Boyd-Carpenter. A statement was made in another place on 16th December by the Minister, Mr. Scott, who said:We currently allocate about 10 per cent. of all contribution income to the health service under a principle dating back to the inception of the contributory scheme as we know it".—[Official Report, Commons, 16/12/93; col. 1303.]As an aside, I believe that it is about time we looked again at this matter. It does not make any sense to the public and not much sense to us that about 9 per cent. of the National Health Service funding is contributed through a grant made to it by the National Insurance Fund. It is not quite 50 years (in fact it is 45 years) since the ideal was introduced. It makes no sense at the present time. The Minister continued:However, we have uncovered a minor ambiguity in the legislation that split employees' contributions in 1989 into an initial rate of 2 per cent. and a main rate of 9 per cent. which, as the House will be aware, is to be increased to 10 per cent. I am entirely clear that it was always intended that the NHS allocation should, from 1989 onwards, be paid out of the main rate and not out of the lower 2 per cent. rate, because that would have left only about half the 2 per cent. contribution rate to go into the National Insurance Fund".To me that is as clear as mud. It is a load of gobbledegook. Either the Minister did not understand or he was revealing a very serious situation. I hope that when the noble Viscount answers this debate he will make a clearer statement about just what the leak is with the National Health Service and how it came about that the correction is having to be made in this Bill.
§ 4.5 p.m.
§ Lord Renton
My Lords, the noble Lord, Lord Ennals, with his usual modesty, describes himself as being of old age. I hope it will comfort him if I remind him that he is nearly 20 years younger than was Lady Elliot of Harwood when, alas, she left us some 10 days ago after an accident caused by tripping over her gown as she left this Chamber after the opening of Parliament. To the very end her mind was active although her body was so frail.
Characteristically, the noble Lord, Lord Ennals, did not make quite the attack on this Bill that was made by the noble Baroness, Lady Turner, when she opened the debate. In the course of my short remarks, I hope to be able to show the noble Lord, although I cannot answer all his points and shall have to read his speech—
§ Lord Ennals
My Lords, I was a great admirer of Lady Elliot and knew her for many years in so many of her capacities: her interests were not just in the welfare state but also in international affairs, including her presidency of the United Nations Association for many years. I am grateful to the noble Lord for allowing me to intervene to pay my own personal tribute to a very wonderful lady.
§ Lord Renton
I am sure that all your Lordships are pleased by that intervention of the noble Lord, Lord Ennals. Perhaps I may carry the matter a little further. The noble Lord was not only Secretary of State for Social Security but deeply involved in matters of health. In another place, when Colonel Walter Elliot, who had been Minister of Health, ceased to work on the Front Bench and went to the Back Benches, I often used to sit with him. It was from then onwards that Lady Elliot became a family friend.
The noble Lord, Lord Ennals, said that the Bill undermined the national insurance scheme. I am sure that if he reflects upon it, he will see that financially it strengthens that scheme. I welcome the Bill. We need to regard it in the light of the background of national finances which still show a budget deficit of £40 billion in the financial year. Also, there is a need to make the National Insurance Fund and the National Health Service more solvent and less dependent upon the general body of taxpayers. I should have hoped that both sides of your Lordships' House could agree on that.
The increased employee contribution from 9 per cent. to 10 per cent. means that employees earning less than £130 a week will pay less in national insurance contributions than they did under the Labour Government in 1979. I hope that that will comfort noble Lords opposite.
Bearing in mind that expenditure on national insurance benefits rose by no less than £10 billion in the four years to 1992–93—and they will rise further—surely the £1.9 billion in a full year, which the 1 per cent. increase in employee contributions will raise, is reasonable in the circumstances.
That is all that I want to say about the purpose of the Bill. Perhaps I may now trouble your Lordships with a few comments on the method used. Clause 1 is short and clear and has been well explained by my noble friend Lord Astor. Clauses 2 and 3 are technical and contain a lot of cross-references which some people may find obscure. As was pointed out by my noble friend Lord Boyd-Carpenter, each of them is retrospective. I shall say more about that matter in a moment. But neither of them involves any change in policy and neither Clause 2 nor Clause 3 will make anyone worse off.
As to the retrospection, I do not like this legal fiction being introduced. I know that I am only a stuffy old lawyer, but to have the word "deemed" introduced in a statute in order to give an interpretation to a previous Act of Parliament which was never intended at the time it was passed always seems to me to be a weakness from the point of view of drafting. But retrospection is sometimes acceptable and sometimes unacceptable; that is well established. I remember a Financial Secretary to the Treasury saying in another place many years ago that retrospection is not justifiable if it adversely affects individual taxpayers or indeed makes the general body of taxpayers pay more. But it is acceptable if it is in favour of taxpayers individually, as a group or in general. It is also acceptable if it is purely internal to the Government—if it merely enables the Government to justify moving public money from one account controlled by the Exchequer to another account controlled by another department of government. That 26 is what will happen here. Without going into details, it is perfectly clear that Clauses 2 and 3 are retrospective in a way which enables the Government to transfer funds already in their possession between one fund and another.
A brief word about drafting. I have only one suggestion to make. I think that Clause 2(1) would be improved if it repealed subsection (5) of Section 162 of the Social Security Administration Act 1992 and re-enacted it in the way in which it is intended in subsection (1) it should be done. It would be a very simple amendment, it would be easy to draft and it would be much easier for the users of the statute if such an amendment were made.
Those are the only comments that I wish to make but I hope that noble Lords opposite will realise, in view of what has been said by my noble friends Lord Astor and Lord Boyd-Carpenter and in view of the few further points that I have put forward, that their minds can be set at rest and that the Bill really is in the public interest and is not unjust to anyone.
§ 4.13 p.m.
§ Lord Jay
My Lords, I rise to support the arguments advanced by my noble friend Lady Turner in her most persuasive and lucid speech this afternoon. There is an important sense in which the National Insurance contribution is a tax. There is another important sense in which it is not a tax. It is a tax in the simple sense that the contributor must pay the moneys compulsorily to the insurance fund. It is for that reason that I oppose this further 1 per cent. increase as being unfair.
Many people tend to judge the fairness of the percentage of income paid to the state by different taxpayers simply on the basis of income tax alone and ignore all other inputs. But most taxpayers nowadays, including the average salary or wage earner and indeed many low wage earners, pay not merely income tax but VAT, the other indirect taxes, council tax, the national insurance contribution and the EC food import levies, which alone amount to £5 or £6 a week per head of the population. Those taxes are often omitted from the calculation. It seems probable that, if one includes all those inputs, as one should, the average wage earning family today is paying as much as 50 per cent. of its total income to the state, a much higher proportion than is paid by many people with very much higher incomes. For that reason I am opposed to further increases in the contribution, which falls on everyone except those on the lowest incomes.
Secondly, there is another sense, equally real, in which the contribution is not just a tax. Unlike income tax or VAT the contributor buys in return for his payment a specific benefit and protection against poverty in retirement, unemployment, sickness and other problems. The contributor, after all, acquires the crucial security of knowing that he has a benefit which is unassailable and of which at any rate no responsible or reputable government would deprive him. For that very reason, however, this Government are also to be condemned for suddenly and arbitrarily cutting the payment period for unemployment benefit from 12 27 months to six months. That is a breach of contract which, if perpetrated by an insurance company, would be generally regarded as fraud.
I know that some rather glib financial journalists—the people whom the noble Lord, Lord Lawson, in his unregenerate days described as teenage scribblers—have recently been attacking the whole contributory principle on the argument that the contribution is really only a tax because its relation to the benefits eventually acquired is not a wholly actuarial one. That is an unsound argument. First, the Government Actuary regularly monitors the state of the fund. Secondly, even so, the practice of professional actuaries is not an exact science. A professional actuary has been defined as a man who is "dead on time"—but many of us amateurs do not die on time. In an age when money values, interest rates and unemployment percentages are all unpredictably varying, the actuary science cannot be exact. But that does not in the least alter the essential fact that if the contributory system is responsibly managed the contributor pays a substantial sum on which is based eventually a substantial benefit in turn. One does not by this system get something for nothing, and that is what I believe gives the contributory system great moral and social value.
My experience as a constituency member in another place would lead me also to believe that that is real for a large section of the population. Indeed in one way the contributory system is twice blessed. It is blessed from the point of view of the Exchequer—and in this case the fund—because the average person feels less resentment at handing over £1 knowing that he will get benefits in return than in handing over £1 in income tax or VAT. Secondly, throughout his working life he knows that he has some protection as of right—not charity—against unemployment or sickness in old age.
Ernest Bevin called the retirement pension "deferred pay". I believe that that is a just description. Winston Churchill once described the whole contributory system as "bringing the magic of averages to the relief of poverty". I confess that, having paid contributions myself for 30 years, I feel encouraged by the thought, when I receive a pension, that I have contributed something towards it. At the same time I fully agree (some people forget this) that the pension is itself subject to income tax. If people have other income they pay the corresponding amount of tax. The pension is not simply given away to those who do not need it.
For that reason it is highly misleading, as we sometimes read, that there are tens of millions of people who are getting benefit which they do not deserve and to which they do not contribute. I hope that most of your Lordships agree that the contributive principle, including, incidentally, the Exchequer contribution to the fund itself, is something which Parliament must remain determined to preserve. Therefore, I welcome the assertions of support which we have had recently from both the Prime Minister and the Chancellor of the Exchequer that the Government are determined to protect the retirement pension and to honour the contracts made in it by the Government.
28 Unfortunately, however, those pledges are somewhat weakened by two factors: first, the many grotesque U-turns from this Government on all kinds of issues and, secondly, the really deplorable story—which we shall have to discuss in more detail in this House on another day—of the Government driving contributors to contract out of the earnings related state pension scheme and then taking no effective steps to show that by leaving the state pension scheme, people will be very much worse off than before as in fact is the case.
In conclusion, I wholly support one change in the system which the Government have made; namely, the rise in the pension age. The whole idea, which has been so much publicised, that we are all faced with a great future burden of idle, elderly people, is largely a myth. If better health enables us to live 10 per cent. longer, it has also enabled us to work 10 per cent. longer. The retirement ages of 60 and 65 are becoming very largely obsolete. The fact that people live longer is a problem of employment and not of pensioner policy. An increase in the number of the working population is, after all, an opportunity and not a burden provided, at least, that we are following sane economic policies.
§ 4.23 p.m.
§ Lord Dean of Harptree
My Lords, no one likes an increase in contributions, but in introducing the Bill I believe that my noble friend made out a convincing case for the necessity for it. I am puzzled by the argument that the Bill somehow undermines the contributory principle. Its aim seems to me to be far from that: it in fact strengthens and reinforces the contributory principle. One of the principles which has been in existence, ever since we have had national insurance, is that contributions should meet the bulk of the cost of benefits. It is on that basis that the concept of benefits as of right in return for contributions rests.
§ Lord Ennals
My Lords, before the noble Lord moves on, will he accept that if it is true that we are asking contributors to pay more for what we know will be less in benefits, that is undermining the contributory system?
§ Lord Dean of Harptree
My Lords, if the noble Lord, Lord Ennals, will wait just a moment, my next paragraph will deal with that point. There has never been an absolute right to an absolute level of benefit. The eligibility for and the level of benefit is changed at regular intervals. I believe that that really is the answer to the point which the noble Lord, Lord Ennals, has made.
As my noble friend said in introducing the Bill, it is not concerned with an insurance or a fund in the normal, commercially accepted sense of those terms. It is based on a pay-as-you-go principle which means that there must be sufficient revenue coming in each year, broadly speaking, to meet the costs of the benefits going out. If a shortfall should occur it has either to be met by increases in contributions or, alternatively, by the taxpayer. It is very dangerous to allow an Exchequer grant, or the old Exchequer supplement as it used to be called, to meet too big a cost of the benefits. If that were to happen the concept of benefits as a right in return for 29 contributions could easily be undermined. It could then be easily argued that all benefit should be paid on a means-test basis.
As the noble Lord, Lord Ennals, said, it is very clear from the Government Actuary's reports that additional revenue is required for the fund. In the Government Actuary's quinquennial review 1990, he stated,it would seem advisable to maintain a minimum balance of about one-sixth of a year's benefit expenditure".That is certainly not the case at the present moment. The position would deteriorate still more were there to be no increase in contributions as envisaged in this Bill. So I believe that the Government are right in principle in introducing the Bill and that they have the authoritative support of the independent Government Actuary for what they are doing.
In conclusion, perhaps I may raise two individual points. The first concerns the self-employed. I note that the increase in their contributions is also to be 1 per cent. as for the employee. On the face of it it seems to be somewhat harsh that they should have a similar percentage increase in contributions. I recognise of course that the self-employed contributions come out of profits, but none the less they are not entitled to statutory sick pay and if they wish to have provision of that kind they have to make it for themselves. In answering the debate perhaps my noble friend will be able to assure the House that the increase of 1 per cent. is not unduly onerous on the self-employed.
My second point concerns personal pensions. I recognise that they do not appear directly in this Bill, but none the less there is reference to them. Your Lordships will recollect that the Securities and Investment Board found some disturbing evidence of high pressure salesmanship persuading people to exchange their present occupational pension scheme for what looks, on the face of it, a superior personal pension. I believe that the Royal College of Nursing has drawn attention to the fact that there may be a large number of nurses who have been misled in this way and who will suffer unless some retribution or compensation is made.
I am not suggesting to your Lordships that this is a matter in which the Government should intervene directly or that they should make any financial contribution. But I hope that when my noble friend comes to reply he will be able to assure the House that if the Securities and Investment Board needs any assistance from the Government in righting what appears to be an injustice, the Government will use their good offices to assist it in whatever remedial action it may feel is appropriate. I welcome the Bill. In introducing it I believe that my noble friend gave ample justification for the measure.
§ 4.30 p.m.
§ Lord Rea
My Lords, this has been an interesting debate and, for one speaking on social security matters for the first time from this position, an instructive debate. Notwithstanding the strong defence of the Bill made by the noble Lords, Lord Renton, Lord Boyd-Carpenter and Lord Dean, the speeches of my noble friend and others have shown that the Bill 30 provides for a regressive form of fundraising. They have shown how it is part of a whole package of measures introduced by the Government, aimed at squeezing the least well off and cutting welfare provision.
It is clear that contributions to the National Insurance Fund are falling behind benefits, because many people are receiving unemployment benefit and there are many others who could be working but who are not included among those claiming unemployment benefit. As other noble Lords have done, I draw attention to the irony that simultaneous with the proposed increases in contributions, unemployment benefit is being withdrawn for the second six months of the current year of payment of unemployment benefit. As my noble friend Lord Jay pointed out, that is surely a breach of contract for those who are paying their NI contributions and expect a full year's unemployment benefit. It is a prime example of a pay-more-get-less principle. It is one which, I am afraid, underlies too much of the Government's social security legislation. At the same time as the withdrawal of the second six months of unemployment benefit, it appears, as explained by my noble friend, that some 240,000 people will disappear from the unemployment total.
Noble Lords opposite may ask how we on these Benches would rectify the deficit in the National Insurance Fund. The proper answer here is to take the position of the proverbial Irish farmer who, I think, was a great deal more intelligent than he is supposed to be in the story, and who, when asked by a lost traveller how to get to Tipperary, said:If I were you, I would not start from here".We do not accept the Government's position that the National Insurance Fund has to stand entirely on its own feet as a self-funding entity. Neither do the Government appear to hold that view strongly, or why would they have given a supplement of £7.8 billion to the fund last year?
When David Lloyd George introduced the national insurance scheme he said that it would involve paying in fourpence to get out ninepence; in other words, that the benefits would be assisted by general taxation in addition to direct contributions, including those from employers. That ensures that the least well off are supported by the better off as does any progressive rather than regressive tax.
The proposals contained in the Bill w ill take money from those between the lower and higher earnings limits as well as those above the higher earnings limit. Many of those are low paid or paid only moderately. It would have been more equitable to have raised the higher earnings limit. My noble friend explained how that would probably have raised more money and cost the contributor less. Doubtless the Government feel that that would be electorally unpopular.
More could be done—I believe everyone on this side of the House will agree with me—by the Government to get people back into employment and thus raise the base from which national insurance contributions are taken. It would simultaneously lower demands for benefits. That is obvious. I was interested to see how vigorously the Government attacked M. Delors' plan to boost employment through programmes of public works and 31 to increase the numbers in caring roles. Such plans, whether they be called Keynesian, neo-Keynesian or New Deal, will trigger the revitalisation of the economy of the western world. As it is, we are afflicted by the spectre of high unemployment with its devastating social effects.
A recent report from Cambridge, which many noble Lords will have seen, confirms what most of us know: unemployment, especially that of young people, is associated closely with crime. As a family doctor, my experience is that it is strongly associated with drug abuse.
§ Lord Renton
My Lords, perhaps the noble Lord will allow me to intervene. Does he remember that in the 1930s a higher proportion of the population was unemployed than now and that there was far less crime, in relation to the size of the population, than there is now?
§ Lord Rea
My Lords, I dispute the fact that unemployment affected a higher proportion of the population than it does now. The published unemployment figures conceal a large number of people who are unemployed but who are not included in the statistics, as my noble friend pointed out. A recent report has suggested the figure of 1.08 million in addition to the published 2.8 million. The other point about crime not being so prevalent in the 1930s during a period of high unemployment is that the pressure to acquire was not so great. There were not so many people with consumer goods. There was not constant encouragement to own and possess more and more material goods.
A recent report in the British Medical Journal shows clearly that hospital admissions of people suffering from severe psychiatric illnesses are significantly higher among the unemployed.
The Bill is unnecessary, unjust and petty. It bears most heavily on the less well off and upon those whom the Government would normally regard as their friends—those earning about £20,000 a year. As my noble friend said, the Bill should be rejected by the House, but, of course, by convention we cannot do that. In Committee, as my noble friend said, we shall move amendments to try to improve it and to spread its burden more fairly.
§ 4.40 p.m.
My Lords, my noble friend Lord Boyd-Carpenter was right in saying that we are not dealing with general taxation but with national insurance contributions and the National Insurance Fund. My noble friend Lord Dean of Harptree was also right in saying that the Bill reinforces the contributory principle, not as otherwise suggested. National insurance contributions are part of the contributory system whereby contributions paid make people eligible to receive benefits. Therefore, it is right that the rising costs of benefits should be addressed by higher contributions and not, for example, by raising levels of income tax.
The noble Earl, Lord Russell, accepted that taxes or contributions should, where necessary, rise to meet 32 expenditure. But, of course, in doing so he exposed the fallacy of the Labour Party's policy, which always offers greater benefits but never explains how it will pay for them. Indeed, it did not do so today.
The noble Baroness, Lady Turner, and the noble Lords, Lord Jay and Lord Ennals, charged the Government with cutting benefits while raising contributions. That is simply not true. Aside from administration costs, receipts from national insurance contributions are spent on the National Health Service and on contributory benefits. None of the money is used as general taxation. Expenditure on benefits will continue to rise next year. The Secretary of State has announced the full uprating of benefits, some by more than inflation. That will cost the National Insurance Fund about £1 billion extra at a time when contribution income is already several billion pounds short of expenditure. Thus the national insurance contribution increases are needed simply to fund existing benefit commitments. Our proposals for the future will ensure that we have a benefit system that is fair, that ensures that help is given where appropriate and that is affordable. Any government must be able to make modifications to the social security scheme in order to meet the changing needs of society.
The noble Lord, Lord Ennals, said that the proposed increases broke the promises given by the Government at the last election. It is clear that the deficit in the fund is liable to persist. Earlier this year we introduced a Treasury grant to ensure that the fund could finance the level of benefits we have maintained. The grant is paid for by all taxpayers. However, in a contributory system it is right that contribution rates should be adjusted to reflect the rise and fall of benefit expenditure. This is the first increase for 11 years in the main contribution rates.
The noble Lord also charged that the Bill was pushed through on a guillotine Motion in another place. Does the noble Lord, Lord Ennals, remember that when Michael Foot was Prime Minister he had five guillotine Motions in one day? I believe that the noble Lord was actually a Member of his Government—
§ Lord Ennals
My Lords, can the Minister give any example of a guillotine Motion being introduced even before Second Reading had been taken? I know of no such example. The cases to which he referred when Michael Foot was Leader of the Labour Party were quite different. There had been many hours, days and in some cases weeks of debate.
My Lords, that all goes to show that a guillotine is right for one side but not for another. However, I remind the noble Lord, Lord Ennals—
§ Earl Russell
My Lords, can the noble Viscount tell us the dates when Michael Foot was Prime Minister?
My Lords, I should have said the noble Lord, Lord Callaghan. As regards the history of the Labour Party, my knowledge of some of its policies is weak. I have always tried to concentrate on the policies of my own party. I apologise if occasionally I make a mistake about the policies of the Opposition. However, from the recess of my memory I recollect that the noble Lord, Lord Ennals, moved the Social Security 33 (Contributions, Re-rating) (No. 2) Order, 1977, which raised employees' national insurance contributions from 5.75 per cent. to 6.5 per cent. and employers' rates from 8.75 per cent. to 10 per cent. Those increases were larger than the ones with which we are dealing today—
§ Baroness Turner of Camden
My Lords, does the Minister agree that in those days employees received a little more? Does he recollect that in 1979, when the Labour Party was last in government, there was an earnings-related supplement with unemployment pay which disappeared when his party was elected?
My Lords, I was merely pointing out that the charge that this Government should not raise the rate when necessary is not right because the party opposite did so when it considered such a step to be necessary.
The national insurance system cannot stand still. We shall not hesitate to make changes that are necessary and suited to the needs of the country now and in the future. Those in need will always be looked after. At the same time, we must ensure that resources are in place to fulfil those needs. None of the money is used as general taxation. Expenditure on benefits continues to rise. It will cost the National Insurance Fund about £1 billion extra. Our proposals will ensure that we have a system that is fair.
The noble Baroness, Lady Turner, suggested that there will be a reduction in benefits. There will he no reduction in benefits for the year with which we are concerned. Benefits have gone up. We must match contributions to the needs of expenditure. The 1 per cent. increase applies only to the main contribution rate. Due to the dual structure for employees, which we introduced in 1989, the low-paid pay proportionately more of their national insurance contributions at the initial rate of 2 per cent. That remains unchanged. Even after the 1 per cent. increase in the main rate, someone earning up to about £130 per week will still pay less than they would have done at the fixed-rate charged by the Opposition when it left office.
The noble Baroness, Lady Turner, said that people will pay £4.56 per week more in national insurance contributions. Only those people earning more than £22,000 per year will pay that much more. Low earners will pay proportionately less. The noble Earl, Lord Russell, asked about regulations. Reductions in national insurance contributions can be given effect by an affirmative resolution order. That will be brought before your Lordships' House in the near future.
My noble friend Lord Boyd-Carpenter asked why the legislation is required if money has already been paid over to the National Health Service; that is the £4.6 billion since 1989. A drafting flaw in the Social Security Act 1989 means that there has not been full and clear legislative cover for part of the allocation paid over since then. The deficiency in legislation has only recently been discovered and we are quite properly taking the first opportunity to clarify beyond any doubt the legal provisions governing the calculation of the amount of contribution which is payable to the National Health Service. I hope that that answers my noble friend's question.
34 The noble Lord, Lord Ennals, asked about the rate and the changes. Our intention was always to restrict the National Health Service allocation only to the main rate of contribution and not to the 2 per cent. rate; that is, to the 9 per cent. full rate or to the variations of that. We are making that absolutely clear in the Bill.
My noble friend Lord Renton made as always some interesting drafting points. I am sure that the parliamentary draftsmen will read carefully what he said about Clause 2(1). My noble friend Lord Dean of Harptree asked about the self-employed and wished to know whether they are paying more than is fair. Under this Government the self-employed will continue to receive a good deal. The Government have announced that there will be no increase in the flat rate Class 2 self-employed contribution beyond inflation. That is particularly helpful to lower-paid, self-employed people. However, it would not be right completely to absolve the self-employed from helping to meet the rising cost of benefits. That is why it is proposed to raise the contributions for self-employed people with higher profits. Nevertheless, from April the average rate of contributions paid by the self-employed will still be below the equivalent of that for employees, even after allowing for reduced benefits entitlements. Half of Class 4 contributions can also be offset against income tax. Of course, the self-employed also receive sickness benefit, which is different.
My noble friend asked me also about the Securities and Investment Board and whether it will find a solution for those who opted out of occupational pensions into personal pensions. The Government support fully the Securities and Investment Board initiative to assess the size of the problem and to find remedies. The regulation of selling personal pensions is primarily a matter for that board and the Financial Services Act regulators. Where failure to comply with regulations on selling has damaged investor protection, it will fall to those responsible for non-compliance, and not to the Government, to take remedial action.
The noble Baroness, Lady Turner, and the noble Lord, Lord Ennals, asked about our proposals for the jobseeker's allowance. That allowance will not be introduced for over two years. We need to ensure that funds are available in 1994–95 to pay for the benefits to which we are committed in that year. That includes the cost of the uprating as well as the additional help that we are giving to all pensioners to help with the cost of VAT on fuel bills.
Your Lordships should be aware also that we are again providing for a grant from general taxation to help with the financing of the fund. Without that grant, contribution rates next year might have to be increased further or benefits reduced. The Government believe that neither of those measures would be appropriate.
The noble Baroness, Lady Turner, spoke about people coming off the register. The number of people who may lose from the introduction of the jobseeker' s allowance will depend on the level of unemployment and the benefit rates in 1996 when the benefit is introduced. The majority of those affected by the restriction on the contributory conditions will, we expect, be entitled to a jobseeker's allowance on a 35 means-tested basis. It may be that some 90,000 or so will lose entitlement to benefit but they will be able to claim national insurance credits which will not be removed from the unemployment count.
The noble Lord, Lord Ennals, mentioned the invalidity benefit review. It is right that we should have that review. Over the past 15 years the case load has trebled from 550,000, to nearly 1.5 million at a time when the health of the nation has improved.
We have had an interesting debate on this short Bill. I am sure that subsequent stages will provide an opportunity for your Lordships to return to the matters that we have discussed today. The Bill is concerned primarily with the raising of additional money for the National Insurance Fund by increasing contributions. I expect that few of us would volunteer to pay extra contributions but, set against the need to meet the increasing level of benefits payable from the fund in 1994–95, most people will recognise that a contribution increase is necessary.
By restricting the increase to the main rate of contribution, we are minimising the effect upon the lower paid because the initial contribution of 2 per cent. will continue to apply to the first £57 of weekly earnings. It is intrinsic to the contributory principle of our national insurance scheme that contribution rates may need to be varied up or down as expenditure and income fluctuate. The Bill is in keeping with that principle and I commend it to the House.
§ On Question, Bill read a second time, and committed to a Committee of the Whole House.