§ 3.19 p.m.
§ Lord Davies of Oldham rose to move, That the draft order laid before the House on 4 February be approved [8th Report from the Joint Committee].
§ The noble Lord said: My Lords, this order deals with various national insurance contribution rates and thresholds. The provisions in the order are compatible 447 with the European Convention on Human Rights. All the changes were announced at the time of the Pre-Budget Report.
§ For the self-employed, the order raises the small earnings exception, below which, depending on the level of their profits, they may claim exemption from paying class 2 contributions. The exception will rise in April, from £4,095 to £4,215 a year, an increase broadly in line with prices. Many people choose to pay these contributions in order to protect their benefits entitlement. The rate of class 2 contributions for 2004–05 will rise to £2.05 a week, also in line with prices.
§ Staying with the self-employed, the draft order also sets the profits limits between which main rate 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 £4,615 to £4,745 a year. At the other end of the scale, the upper profits limit will continue to match the upper earnings limit for employees, which will go up to £31,720 for 2004–05. This ensures that the self-employed pay main rate 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.
§ The draft order also 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 in April by 20 pence to £7.15 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 uprating 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 sixth year in a row, there is no expectation that the fund will need a Treasury grant. Nevertheless, a prudent provision of 2 per cent of all benefit expenditure is made.
§ 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. This draft order covers both Great Britain and Northern Ireland. I commend the order to the House.
§ Moved, That the order laid before the House on 4 February be approved [8th report from the Joint Committee.]—(Lord Davies of Oldham).
§ Baroness Wilcox
My Lords, the debate on this annual order is a valuable opportunity to examine the key issues surrounding national insurance contributions, which have come into the spotlight since the Chancellor's decision to raise them last April. We are particularly privileged this year in that, in 448 contrast to last year, we have the opportunity to discuss the order in this House before it goes to another place.
It is important to examine the order in the context of the increases in national insurance that the Government have already introduced. I am sure that outside the Westminster village people are well aware of these rises, as they have seen the large dents that have been made in their pay packets. It is worthwhile reminding the House, lest anyone here forgets, that national insurance contributions rose by 1 per cent last April. This increase applied to all earnings over £4,615, not just to those below the ceiling, and employers also have to pay an additional 1 per cent.
These increases came despite the Prime Minister's assertion before the last election that people should not suppose that he proposed to increase national insurance. My party has consistently argued that the increases are a tax on jobs and we see no reason to change that view. It is noteworthy that the Explanatory Notes claim that the,order does not impose any new costs on business".Perhaps this is technically correct; the damage to business has already been done by the increases brought in last April. For their part, the Government have argued that the increases are necessary to increase spending on the health service but a 37.5 per cent increase in spending has brought only a 5 per cent increase in hospital activity. It is increasingly clear that the NHS needs not just more money, but also meaningful reform.
In the light of last year's national insurance increases, in the Pre-Budget Report published last December the Chancellor announced that:NICs threshold and limits will also increase in line with inflation. There will be no change in NICs rates for employers and employees, or the profit-related NICs paid by the self-employed, in 2004–2005".I am intrigued to see that this order applies to only the rates of class 2 contributions by the self-employed, class 3 voluntary contributions and the thresholds for the class 4 profit-related contributions paid by the self-employed.
I would be grateful if the Minister would explain why the thresholds, the lower earnings limit, the primary threshold and the ceiling are not being raised for class I contributions. I would also be grateful for an explanation of the level of increase in each case: class 2 contributions are to rise by 2.5 per cent; class 3 contributions and the threshold for class 2 contributions are to rise by 2.9 per cent. The lower limit for class 4 contributions is to rise by 2.8 per cent and the upper limit by 2.5 per cent. Why is there no consistency? I listened carefully to the Minister but I would still like clarification on this question.
I note that my colleague, the then shadow Paymaster General, raised this issue in another place last year. He was told that:We rounded the figures to make them easier and more understandable, both for employers and for our constituents".—[Official Report, Commons Standing Committee on Delegated Legislation, 6/3/03; col. 15.]449 If the aim was to increase everything by as near as possible to the retail prices index inflation measure of 2.8 per cent, as according to an announcement by the Secretary of State for Work and Pensions in another place is occurring with national insurance benefits, the threshold for class 2 contributions would be set at £4,210, rather than £4,215, and the upper limit for class 4 would be £31,810. I have no doubt that an explanation of the Government's thinking in these cases will be very enlightening. I am sure that the Minister will explain at any minute.
As I have said, it is fortunate that this time we have an opportunity to debate this order, especially as we are discussing it before it goes to another place. I would therefore be very grateful if the Minister would address my queries.
§ Baroness Barker
My Lords, as the noble Baroness, Lady Wilcox, rightly pointed out, the national insurance fund has taken on a significance that it might not have in other years. Those of us in this House who eagerly await the emergence of the Pensions Bill from another place find ourselves unduly fascinated by the subject.
I have just one substantial question for the Minister, which is about the state of the out-turn on the national insurance fund. My honourable friend in another place Steve Webb pressed the Minister on this point and he got no joy. It is a significant matter and therefore I am following up his question.
In Appendix 7, the actual out-turn on the national insurance fund of £1.75 billion is compared to the estimate that the cost of administration of the fund would be about £1 billion. The estimated cost of administration has gone up by £750 million. The footnotes give two reasons. One is that it was one-off payment to the Welfare Modernisation Fund. My colleagues in another place have tabled Questions about exactly what the payment was and how it was broken down. So far, answers have not been forthcoming.
It seems that this fund is being used by the Department for Work and Pensions on interesting and curious schemes, notably its administration, simply because there is, as the Minister said, a healthy balance in the fund. Indeed, for the sixth year running there is no need for a Treasury grant. However, £750 million is a sizeable amount to be moved into departmental administration. Will the Minister tell us why the costs of administration have risen so much and why the money has not been spent on national insurance benefits?
§ Lord Davies of Oldham
My Lords, I am grateful for the contributions from the two noble Baronesses who have spoken in this debate.
The noble Baroness, Lady Wilcox, asked why level I is not included in the order. Class 1 will be increased in the same proportions and under the same principles in a different set of regulations which come into force in April. They are not included in this order; they are in different regulations.
450 The noble Baroness mentioned the increase of 1 per cent surcharge last year with regard to the NHS. I hear yet again that doleful and yet, I assume, well meaning cry from opposition Benches that such imposts have the most devastating effect on the employment prospects of our fellow citizens. I merely report that this is what they said last year in anticipation of this measure and they are reiterating it now. Last year they had at least the benefit of their supposed foresight without any evidence. Their view is being reiterated today when they have the evidence; namely, that Britain's employment level is at the highest it has ever been and that the unemployment level is historically not just very low in this country but is low compared with any other economy in the western world. Yet I am charged at the Dispatch Box with the view that, if one dares to increase expenditure on the National Health Service in this way, it will have the most devastating effect upon employment levels in the country. That is just not so.
As for the impact on the National Health Service, we all recognise that one does not just flick a switch and expect an immediate response when dealing with a body that is so significant. It requires—and this is what we are planning—substantial increased investment over a number of years, of which the last year has been a very significant one. The noble Baroness knows that we have already been able to increase significantly the number of doctors and nurses in the health service. We have seen improvements in our hospitals— that is the daily experience of our fellow citizens.
I do not pretend that we will create the desirable position of the National Health Service overnight. We all know that there are very significant demands upon its resources. Nevertheless, I defy anyone in this House to suggest that the increased expenditure on the National Health Service, particularly on increased numbers of doctors and nurses, is not money well spent on the health of our fellow citizens.
The noble Baroness also raised the issue of the upper limits of the figures. I heard what she said. There is no arithmetical accuracy on the translation of the inflation rate to the two figures she quoted. On a figure of £31,801 we are £70 out. My mathematics is not up to translating that into a percentage but it appears pretty microscopic to me. On the other figure that she quoted, we are £5 out on a figure of over £4,210. Again, it seems that we may be straining at a gnat if we are not able to digest these figures when we say that— in broad terms— they have been increased in line with the level of inflation.
The noble Baroness, Lady Barker, addressed me on the issue of the estimate of the administrative costs. The estimate includes several items that will not be incurred in future years. There was an extra payment made to the department to compensate for an under-payment in 2001–02, and a one-off payment to the Welfare Modernisation Fund. Those two figures explain the bulk of the £750 million to which she referred. They are not recurring costs, but one-offs. I hope I have reassured her of the justification for that increase. I commend the order to the House.
§ On Question. Motion agreed to.