Select Committee on Social Security Minutes of Evidence


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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