Examination of witnesses (Questions 140
- 151)
TUESDAY 23 JUNE 1998
MR RICHARD
BARON and MR
BILL KNOX
140. The national minimum wage at the level
suggested would add half of one per cent to national wage bills.
Those are the Treasury figures. In your evidence you talk about
national insurance changes and you say that the savings from the
proposed changes should not be exaggerated. You say, "Large
retailers are typically expecting to save only around 0.5 per
cent of their salary bill ..." If it is "only 0.5 per
cent" of the salary bill in terms of national insurance contributions
and that is an "exaggerated" saving, why is 0.5 per
cent on the salary bill through a national minimum wage a problem
for you?
(Mr Baron) The 0.5 is for the salary bill of the
nation as a whole, yes?
141. Yes.
(Mr Baron) That will be the impact on the average
employer who has got people at all points in the wage scale following
the national wage profile. The impact is likely to be much more
serious on employers who tend to have employees concentrated towards
the lower end, like, for instance, these large retailers. The
reason why they are not going to be making very much out of the
national insurance change is that a lot of their people are part-time
and on relatively low wages and therefore they are not yet paying
national insurance anyway or they are paying very little, and
increasing the starting point for employers from £64 to £81
a week does not make that much of a difference to a large number
of their employees. I think one has to look behind these averages
a bit and one has to look behind these half per cents.
142. To a large retailer the costs of the
minimum wage would be much less than 0.5 per cent of their wage
bill. Then the 10p tax rate. Could we have a reaction to that?
Perhaps Bill would like to say something about the minimum wage
as well.
(Mr Baron) The 10p tax rate will have a beneficial
impact. For someone on the 20p tax rate you are probably looking
at a marginal tax rate of 68.5 as opposed to 69.85 for someone
who is on a 23p tax rate. For someone on the 10p tax rate you
are probably looking at an effective marginal rate of something
in the low sixties per cent. That will help. There are other arguments
against the 10p tax rate policy, in particular it will generate
extra complexity. It will make it even harder, specifically in
relation to Working Families Tax Credit, ever to fit that into
the PAYE system because one of the problems of fitting the Working
Families Tax Credit into the PAYE is that people's marginal tax
rates can go up and down from one week or one month to the next
and if you introduce an extra boundary between two rates, between
ten and 20 as well as the one between 20 and 23, you are going
to have a whole lot more people floating up and down between tax
rates. We would rather that the Chancellor, instead of introducing
a 10p tax rate, increased the personal allowance by whatever he
could for the same exchequer cost so as to take more and more
people outside the tax system altogether.
143. Could I ask about the National Insurance
Contributions, the trade off that we have got in terms of the
Government's plans to raise the threshold at which employers start
to pay NICs but to offset that by a change in the rate of payment
to 12.2 per cent. Is that something that you would welcome?
(Mr Knox) I think Taylor also mentions the fact
that there are going to be winners and losers. The Government
reckon that at the end of the day they will have the same income
from national insurance. So, yes, some people are going to lose
and some are going to gain. I just hope that my members are not
the ones who are the losing ones. Some of them have carried out
their own calculations and do show a loss and they are not too
happy with it. Until it is up and running we will not know exactly
who the winners and losers are. The theory is that under a certain
level there should be winners and over a certain level there should
be losers. I am not altogether against that point, it balances
out quite fairly. Anything that helps to bring people into employment
is good. Removing these initial levels of national insurance brings
people into employment.
144. Do you think it will do that?
(Mr Knox) That is the hope. To my mind it is too
little. I think we have got to go a lot further than that. I did
say already that I felt both tax and national assurance should
start at a far higher level than we are talking of at the moment.
I do not see any logic if you say that the figure for the minimum
wage shall be X and you then tax people who earn that figure.
If the state believes that people should earn that amount of money,
that is the living wage they need. Are they saying that is the
living wage they need to pay their taxes? My argument would be
that is the living wage they need to pay all their overheads and
they should start at a fairly high level. I think you could regenerate
the economy of this country by taking these people into that higher
band. It might sound very simplistic. I think we tend to get a
tax structure that is far too complex and then we have to try
and change it to deal with more complexities and the only people
that benefit seem to be the tax lawyers.
Mr Leigh: Exactly.
Mr Pond
145. Maybe you would like to comment on
this trade off between the 12.2 per cent rate on national insurance
as against the raising of the threshold which employers pay. Is
that something larger firms are welcoming?
(Mr Baron) I think a lot of firms are. They see
it as reasonable. There are obviously some firms who will be badly
affected. I am afraid that includes the lawyers and accountants
because their salary structure tends to be skewed towards the
high end, but it also includes the computer software houses. There
are certainly some employers who are going to lose quite significantly
and one must not lose sight of that. On the whole it seems to
us to be a reasonable change so long as it does work out relatively
neutral, so long as the Exchequer, including the NI fund, is not
going to be making out of this. That is why we have made the point
that it is important that the employers' national insurance rebates
for contracting out of SERPS do at least remain the same.
Mr Wicks
146. In terms of when these things should
be paid, Mr Knox, you talk about national insurance contributions
and income tax in the same breath. Is that how you see it now?
What about the idea of a contributory principle, ie, you pay in
and then you get out of the community chest? If people do not
pay national insurance contributions until a far higher level
of income would you want them to get benefits?
(Mr Knox) The sad situation is national insurance
is not being used as a fund, it is simply being incorporated into
the general expenditure of the country. We deal on an annual basis
with pensions and everything else. We do not have a sinking fund
anywhere that people are going to receive their national insurance
benefit or their pensions from. So to the extent that I talk of
the two in the same breath, they are both state collected funds.
147. I understand that actuarially speaking
there is no fund, yes?
(Mr Knox) Yes.
148. But there is a kind of fund of goodwill
in the idea that you pay your contributions and you get out your
benefits. Do you think that has all gone now?
(Mr Knox) Yes. I would not like to insult you
in any way.
149. Go ahead!
(Mr Knox) It is rather naive to say that because
for people in employment and people that are unemployed their
main worry is not nowadays being part of a community and being
seen to be part of a developing community, their main worry is
the costs they have to pay out and the food they have to buy,
the rents they have to pay.
150. You are putting it to us that there
is no such thing as a community.
(Mr Knox) It is a very thin fabric, if it exists.
There are not many people who willingly give money to others either.
They do not go up to the tax office and say, "I have under-paid,
there is another £1,000." The days of that situation
on an individual basis does not exist, if it ever did exist. Even
the situation where people helped each other is disappearing to
a large extent, forgetting the financial aspect. It is the society
we have. I do not wish to make any political comment. I do not
know of anybody out there that is desperate.
151. That is a grim view for the corner
shop, is it not?
(Mr Knox) Realism.
Chairman: Gentlemen,
can I thank you both very much. It is encouraging for members
of the Committee to know that there is some constructive work
on the practical aspects actually in train. We will have access
to the Treasury witnesses and experts at the end of October. I
hope that you will feel able to continue informing us about how
your negotiations and consultations are proceeding. I take very
much the point that was made by Mr Knox earlier which was that
perhaps this could have been made earlier if the consultation
had happened before the announcement. Still, we have all got to
use our best endeavours to try and get the thing as easily implementable
and as practically efficient as possible. We are very grateful
to you for your time and memorandum. I hope, Mr Baron, you will
not take it the wrong way if I wish Mr Knox a particularly good
day! Thank you very much for coming.
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