HL Deb 21 March 2002 vol 632 cc1544-51

7.52 p.m.

Lord McIntosh of Haringey

rose to move, That the draft order laid before the House on 6th February be approved [19th Report from the Joint Committee].

The noble Lord said: My Lords, with the leave of the House, it has been suggested from the Opposition Front Bench that both this and the next order on the Order Paper should be debated at the same time. I am happy to agree to that proposal, if noble Lords are similarly content. I shall speak to both orders now. When debate on the first order is concluded, I propose to move the second order formally.

I should, first, affirm that the provisions in the first order are compatible with the European Convention on Human Rights.

First, the order will reduce, from 11.9 to 11.8 per cent, the rate of secondary Class 1 contributions payable by all employers from April 2002 to recycle revenues arising from the introduction of the aggregates levy. It will thereby help to protect UK competitiveness.

Secondly, for the self-employed, it raises the small earnings exception below which, depending on the level of profits, they may claim exemption from Class 2 contributions. The exception will rise next April broadly in line with prices, from £3,955 to £4,025 a year. Given that the rate of Class 2 contributions for 2002–03 will remain at £2 a week, which is a reduction in real terms, it may be that many people will choose to pay the contributions in order to protect their benefit entitlement.

Staying with the self-employed, the draft order also sets the profits limits between which Class 4 contributions are paid. The lower limit at which contributions become due, and the upper limit, will increase broadly in line with inflation. The lower limit will rise in line with the income tax personal allowance, from £4,535 to £4,615 a year. At the other end of the scale, the upper profits limit will continue to match the upper earnings limit for employees, at £30,420 for 2002–03. This ensures that the self-employed pay Class 4 contributions on much the same range of earnings as employees liable to Class 1 contributions, and is an essential element in making the national insurance system fair for everyone.

Thirdly, the draft order deals with the weekly rate of voluntary Class 3 contributions, which help those with insufficient contribution records in any given tax year to make up a "qualifying year" for benefit purposes. The rate of Class 3 will rise next April by 10 pence to £6.85 a week, a standard re-rating in line with prices.

The review of contribution rates is accompanied by a report from the Government Actuary detailing the effects of the draft order, and the draft order up-rating benefits, laid by my right honourable friend the Secretary of State for Work and Pensions, on the National Insurance Fund. I am pleased to say that, for the fifth year in a row, there is no expectation that the fund will need a Treasury grant. Nevertheless, a prudent minimal provision is made in line with advice from the Government Actuary.

As happened last year, there is a single draft order for both Great Britain and Northern Ireland. Northern Ireland has a separate national insurance scheme from Great Britain, but the two schemes are closely co-ordinated and maintain parity of contribution rates. Following the transfer of policy, Northern Ireland's social security legislation was amended to enable the draft re-rating order to include corresponding measures for the Province.

I move now to the Tax Credits Up-rating Order 2002. Again, I confirm that the provisions in this order are compatible with the European Convention on Human Rights. The order increases the main rates and thresholds of working families' tax credit and disabled person's tax credit from 9th April this year by 1.71 per cent, in line with the increase in the Rossi index. In addition, as part of a package of more help for families with children with disabilities, it increases the disabled child tax credit and the enhanced disability tax credit for children within working families' tax credit and disabled person's tax credit by an extra £5 a week above indexation. These increases will boost the incomes of 1.3 million low income working families and disabled people who work.

Perhaps I may explain the provisions in a little more detail. The order increases the amount of credits for an adult, child, or young person, including the extra "30 hour" tax credit that a family receives when one earner works at least 30 hours a week, and the disabled and enhanced disability credits. These credits determine the maximum working families' tax credit or maximum disabled person's tax credit that the family or disabled person may receive.

The order also increases the income threshold for working families' tax credit and the thresholds for disabled person's tax credit. The thresholds—or "applicable amounts"—are the levels over and above which income begins to taper away the maximum award of the tax credits. The increases will provide a minimum income guarantee of £227 a week for a family with one child in receipt of working families' tax credit, £172 a week for a single person on disabled person's tax credit and £260 a week for a couple with one child on disabled person's tax credit. These figures are based on one earner in full-time work, working 35 hours a week and earning the national minimum wage.

The order ensures that the differentials between in-work tax credits and out-of-work benefits are maintained. It provides extra help, over and above indexation, for families with children with disabilities. It reflects this Government's commitment to encourage people into work, to make work pay, and to target extra support to those who need it. I beg to move.

Moved, That the draft order laid before the House on 6th February be approved [19th Report from the Joint Committee].—(Lord McIntosh of Haringey.)

Lord Higgins

My Lords, the House will be grateful to the Minister for his explanation of these two orders. It is helpful to take both orders together. As I said in the previous debate, a problem arises because of the extent to which the Treasury has taken over many of the former activities of what used to be called the Department of Social Security. As a result, there is now a considerable amount of overlap and confusion between the two departments.

We have before us an order that is a Treasury order—the draft Tax Credits Up-rating Order 2002— which uprates those benefits. Noble Lords on this side of the House certainly welcome the improvement made to the disabled person's tax credit and to the position of certain children and disabled adults, and so on. Indeed, that is certainly welcome. Of course, the noble Baroness and I debated a corresponding order on 17th March—I refer to the Social Security Benefits Up-rating Order 2002—which uprated a number of other benefits.

If we take those two lots of uprating together on, so to speak, the expenditure side, we must then consider what is happening on the income side. It seems to me that is the more interesting aspect of the matter. It is embodied in the Social Security (Contributions) (Re-rating and National Insurance Funds Payments) Order 2002, which we are debating this evening. That covers the income side, rather than the expenditure side. I leave unanswered why it is that the order should be headed "Social Security", rather than "Work and Pensions" or why it is not the Work and Pensions (Contributions) and so on Order. That is a debating point that it would be rather sordid to raise.

There are important issues to be raised on the contributions side. Our debate on the matter on 7th March was wide-ranging, as is traditional. I do not propose to go anywhere near as wide this evening; I hope to keep within the confines of the matters raised by the order. I shall, however, make one point. There have been suggestions in the press in the past few days that the Chancellor of the Exchequer is likely to increase national insurance contributions in order to fund increased expenditure on the National Health Service. I was rather surprised by that speculation—no doubt, it is speculation—because, as I understand it, national insurance contributions are nothing to do with the NHS, although they both originate in the Beveridge concepts. Perhaps, the Minister can confirm that.

On the contributions side, there is a report by the Government Actuary's Department. I find myself being increasingly suspicious of actuaries, particularly with regard to that report. We are told that it is based on the same assumptions as were made by the Chancellor in his pre-Budget statement, and it is apparent from the report that, as a result of the increases in benefits, to which I have already referred and which are partially covered by the other order, benefits will increase in the current year by £1,730 million. On the other hand, the re-rating order reduces the amount of revenue by £317 million in some areas and by £242 million in social security contributions. That is a total of £559 million. Expenditure has gone up by £1,730 million, and the contributions are going down by £559 million.

In a well worn phrase, the Minister described the fund as being at a reasonably prudent level. In fact, it is not. The actuary says that a reasonable working balance would be one sixth of annual expenditure. One sixth is a singularly inconvenient fraction if one wants to convert something into percentages. If we do convert them, we see that the balance for this year is, in fact, 52 per cent of benefit payments. The Minister says, "Oh well, it's a reasonably prudent balance at the moment", when the actuary regards it as one sixth and, in fact, it is over 50 per cent. That suggests that the balance is too high. Perhaps, the Minister might reasonably have recommended, had he been an actuary for a company pension scheme, that there should be a contributions holiday, preferably not for the Treasury but for those who contribute. I should declare my interest as chairman of a company pension scheme.

We seem to be accumulating more and more in the fund; so much that the Government Actuary's estimates are considerably out, when compared with what he said last year. The increase in the fund this year was, as he says in the report, substantial. He estimated that it would go up by £2.5 billion; it has gone up by nearly £5 billion. Not only is the balance, which is said to be prudent, way over what the actuary regards as prudent, but it has increased over the past year by nearly £5 billion. We are entitled to some explanation of why the contributions are being changed as they are, if that is the situation.

I have one or two other questions for the Minister about the Government Actuary's figures, on which the orders are based. On page 7 of the report, the actuary refers to an item that relates to what I have just said. The balance at the beginning of 2001–02 was £19,399 million, but, for 2002–03, it is £24,192 million. That confirms what I said.

Of particular interest are the questions raised in the Government Actuary's report and reflected in the orders about the state second pension. In paragraph 9 of page 5, the actuary says that the state second pension is, of course, about to come in in place of SERPS. The report says: The new accrual regime for the State Second Pension, which was introduced by the Child Support, Pensions and Social Security Act 2000, will come into force in April 2002. Earnings-related pension will accrue at 40% of earnings". I shall not burden the House with the detail of what is said. However, the fact is that those accruals will go into the fund as such, without any distinction. The Government's declared intention is to switch from a situation in which 40 per cent of pensions are covered by the private sector and 60 per cent by the Government to the reverse situation. Perhaps, the time has come for the Government seriously to consider whether there is not a strong case for segregating the contributions that will be put into the state second pension, so that they are an identifiable fund.

There has been a mass of publicity in the past few days relating to the auditor's report and the rebates that are mentioned in it, suggesting that people ought to go back from a company system into the state second pension—or SERPS, at the moment. It is highly undesirable to have people switching back and forth between the state second pension and company pensions. It is because of the way in which the Government act in reaction to the Government Actuary's report that we find ourselves from year to year being unclear about whether the rebates are sufficient to push people in or out of the state second pension. A degree of stability would be desirable, as would a move to greater funding.

Those are my main points. I shall briefly ride my usual hobby horse. The whole of the Government Actuary's report is concerned with receipts and payments, not with the overall balance sheet of the fund. That still does not exist. I repeat my plea, which the Minister will have heard on several occasions, that it is high time that the Government Actuary was asked to estimate the liabilities of the fund. At the moment we have no clear idea of that. Given his previous commercial experience, I am sure that the Minister will agree that an operation which concerns itself only with receipts, payments and cash-flow and not with the balance sheet does not a give a clear indication to shareholders or, in this case, to taxpayers, of what is the actual underlying situation.

Having said that, although I have expressed some doubts with regard to the re-rating order, I certainly welcome the improvements in benefits on the other one.

Lord Addington

My Lords, the emphasis of my remarks will turn more to the second of the two orders, on which I have more distinct views. When it comes to national insurance orders, I always regard them as those addressing the tax that, in effect "dare not speak its name". When we change the figures, it is always important to bear very much in mind the general taxation position.

I am glad to say that we welcome the uprating of benefits. However, I have one query to put to the Minister about the general thinking behind the uprating. As a Treasury-based calculation, does it pay enough attention to general poverty rates and issues related to that?

Having made those few comments, we find nothing basically objectionable in the orders.

Lord McIntosh of Haringey

My Lords, I am grateful to both noble Lords for their reception of these two orders. I shall try to respond to the points that have been made.

The noble Lord, Lord Higgins, began by referring to speculation over recent days with regard to the rates and upper limits of national insurance contributions. Within a week of the Budget, the noble Lord will not expect me to make any comment on matters which are properly for the Budget, but he will be aware that ever since the election we have been consistent in our approach to these matters.

The noble Lord asked me a very interesting question about national insurance contributions and the National Health Service. It is a historical fact that part of the receipts from national insurance contributions goes to the National Health Service allocation. That figure this year is £7.3 billion. A comparable figure goes to the National Insurance Fund. I do not know how far back through the sands of time that division goes, but I rather like it as a concept. Indeed, I feel a little sentimental about it, just as I feel sentimental about the term "social security", which of course was originally Beveridge's phrase, but was changed to "national insurance" by post-war governments.

8.15 p.m.

Lord Higgins

My Lords, can the noble Lord say whether any of the money raised under the re-rating order before the House goes to the National Health Service? Does it appear at all in the Government Actuary's accounts?

Lord McIntosh of Haringey

My Lords, it is more complicated than that. A different proportion of each of the amounts goes to the National Health Service according to contribution rates. Again, I believe that there are historical rather than rational reasons for that, and thus there is no single figure. However, I have said that, broadly speaking, some £7 billion will go to the National Health Service allocation while, I think, a comparable figure will go into the National Insurance Fund. But it cannot be tied down to any particular contribution.

The noble Lord asked me about the balance on the National Insurance Fund and quoted from the report of the Government Actuary. Of course the figure of one-sixth of expenditure to which the Government Actuary refers is a minimum figure. The fact that the figure, at £24 billion—which the noble Lord, Lord Higgins, is quite correct to point out is substantially larger than that fraction—is the result of the fact that the balance on the fund is the difference between two very large figures indeed. Even what seems like the large figure of £24 billion is not such a large figure as all that. This is the fifth year that we have seen an increase in the balance of the fund. The point I wish to make here is that what we do about income and expenditure from the fund has to be consistent over a period of years.

If we were to over-react to a particular surplus in one year by allowing, as suggested by the noble Lord, Lord Higgins, a benefits or a tax holiday, that would be extremely dangerous. I do not believe that any government of the noble Lord's persuasion would want to do that either. We should remember that in 1993–94 there had to be a very substantial Treasury grant, which at that point in the economic cycle was not particularly appropriate.

The noble Lord also asked me about the state second pension and the case for an identifiable fund for it. He made the point that switching between the two schemes is undesirable. To an extent, I think that we have to admit that switching in and out of the state second pension, or in and out of its predecessor, SERPS, is to some extent inevitable if we have a situation such as that which pertains at the moment; that is, where the number of final salary schemes is reducing. If we see a much longer trend of people changing jobs a number of times during their working life and thus making final salary schemes less attractive, then clearly there will be more switching in and out. What we are much more concerned about is to ensure that, wherever it comes from, people should be making adequate provision for their pensions. The fact that those pensions might be made up from more than one source is not necessarily a bad thing.

The noble Lord's final question concerned the estimate of the liabilities of the fund. We are now just about within a week of moving over to resource accounting and the almost complete abandonment of cash accounting in the public accounts as the main measure. The point made by the noble Lord about having a balance sheet as well as an income and expenditure account is, to my mind, well made. It is one which I think should be brought up and deserves parliamentary time as we move towards the new method of public accounting.

Turning to the second order, I was asked by the noble Lord, Lord Addington, whether we were using the correct index from the point of view of poverty. The point about using the Rossi index, which is RPI with certain housing costs excluded from it is, first, that it has been used for this purpose since 1983. There are advantages in consistency. Secondly, it maintains the differential between in-work and out-of-work provisions, as I hope I made clear when introducing the order. Different measures are used for different benefits and purposes in government.

Again, some of those measurements exist for historical reasons rather than for reasons which we could now rationally justify. For example, the fact that sometimes we take prospective RPI and sometimes past RPI is difficult to justify rationally, except on the basis of using a swing from one measure to another for base party political purposes. We are not doing that here.

On Question, Motion agreed to.