House of Commons Hansard Debates for 8 Feb 1999 (pt 20)

6.34 pm

Ms Gisela Stuart (Birmingham, Edgbaston): I am delighted to follow the hon. Member for Gainsborough (Mr. Leigh). I wonder whether he fed his birds with cake crumbs as a result of his savings measures. I am also somewhat intrigued to be taking part in a debate in which the Bill has been made out to be the end of welfare as we know it. Either I am missing something, or some extremely creative reading is going on.

The Bill is both necessary and welcome. When the Government came into office less than two years ago, the welfare system was in dire need of modernisation. That need was quite independent of any change of policy. The status quo was unacceptable: the technology was outdated and the system impossible to administer. There was a lack of cohesion, and benefit chimneys built up as a result.

I am intrigued that so many members of the Select Committee on Social Security are in the Chamber today. I am sure that they will recall a meeting with the Chancellor of the Exchequer at which the direction of the Government's welfare policy was discussed. My right hon. Friend the Chancellor said that we had grown up with a system under which Governments collected taxes into one pocket and handed out benefits from another. That system completely ignored the fact that the Government want people to work if they can, but he said that there was no way to get them back to work without some co-ordination of tax collection and the administration of benefits. My right hon. Friend told us that the philosophy of the Treasury and the Department of Social Security was to make work pay, which involved some co-ordination between taxation and benefits.

The Inland Revenue and Customs and Excise are the two main tax-collecting agencies, and the national insurance collection system also plays a part. However, the national insurance system, since its introduction after the second world war, has never been truly

8 Feb 1999 : Column 70

insurance based. To some extent, the argument about hypothecation is phoney, as the fund is actuarially ring-fenced. That is significant.

Mr. Cousins: May I draw my hon. Friend's attention to a matter that hon. Members too often forget? At present annuity rates, to build up a personal pension plan that would bring in income at the basic pension rate would probably require establishing a contribution fund of about £80,000. As a matter of practical fact, millions of our constituents receive basic pension entitlements far more valuable at the basic rate than anything that they could aspire to if payment were made simply on the basis of what they could afford to contribute. In that fundamental and obvious sense, the national insurance system is still very much part of our social fabric.

Ms Stuart: My hon. Friend's intervention does not contradict the point that I am making. Also, low annuity rates reflect low inflation and a steady economy, so the whole economic climate must be taken into account when considering those rates.

I do not suggest that national insurance and the contributory principle have come to an end, but I draw the House's attention to some research by the Department of Social Security that was published in August 1998. The report stated:

"respondents had little direct experience of benefits, and only a hazy perception of the structure of the National Insurance scheme; few had thought systematically about how they would cope with unemployment, sickness absence from work or retirement; in the absence of direct experience, media reports of policy debates or of issues such as fraud could be influential in shaping their views".

In view of the time, I shall not go into further detail, but the report makes it clear that a myth has been built up that members of the public have a clear idea of how taxation and national insurance contributions work.

I also recall some research that found that one third of school leavers did not realise that money would be deducted from their wages. Never mind what the various deductions might be--they did not think that anything would be deducted.

Let us focus on what the Bill will do, which is significant. As my right hon. Friend the Secretary of State made clear in his opening speech, the Bill does not, at this stage, change the way in which national insurance contributions are calculated or how they interact with taxation. However, it is a first step in bringing together that which must be brought together in the interests of good public policy and administration.

I beg the House's indulgence while I remind hon. Members of what the task force headed by Martin Taylor said when it considered the problems of alignment between income tax and national insurance. That is not a theological debate, but an examination of the concrete question of why the two systems do not work properly. The first main area of concern was the base of charge: income tax is levied on earned income and benefits in kind, whereas national insurance contributions do not currently reflect benefits in kind. Reliefs and rebates are inconsistent in relation to taxation; the periods of assessment are different; and the structures of charge are different. If the Government are serious about making work pay, the basis of national insurance and taxation must be aligned to some extent.

8 Feb 1999 : Column 71

Martin Taylor said:

"At present, benefits in kind are not subject to NICs, other than the employer-only Class 1A charge on company cars and car fuel. This gives employers an advantage in offering benefits in kind, so reducing the NICs yield and distorting competition. However, it does not look straightforward to value benefits in kind, at least on anything like the income tax rules".

He also argued that there was clear evidence that business and employers welcomed the combining of national insurance contributions and taxation, because that would be easier to administer. The previous Government failed to address the difference between the costs to Government and the costs to business. There may be considerable costs to the Government, but we must look seriously at the reaction of business.

I wish the Bill went further in one respect, which relates to schedule 6 and exchange of information. We are all concerned about confidentiality and privacy, but if we are--

Miss McIntosh: We are.

Ms Stuart: So are Labour Members. We have all seen constituents who complain about having to fill in endless forms to claim benefits and say, "But I told thembefore . . . " It seems to them that the same form has to be filled in again and again. That causes considerable hindrance, especially to pensioners who become sick and tired of filling in forms. There is scope for the greater transfer and integration of information gathered for benefits or taxation purposes, and that will help people in need. Similarly, we need to ensure that fraud is designed out of the system, for if fraud is prevented in the first place, we can stop wasting resources on chasing fraudsters.

I urge the House to take the Bill at face value. It is important administratively and will allow us to move forward to the second stage. Move forward we must, because the current benefits and taxation systems are unacceptable. I hope that the Opposition will see the error of their ways and welcome the Bill as I do.

6.44 pm

Mr. Archy Kirkwood (Roxburgh and Berwickshire): It is a pleasure to follow the hon. Member for Birmingham, Edgbaston (Ms Stuart), who was a distinguished member of the Select Committee on Social Security and has now moved on to higher, if not necessarily better, things.

I agree that we have to move forward; no one would try to defend the status quo. However, two things struck me as I listened to the debate. The first was the Secretary of State's announcement that the date of implementation would be 1 April 1999. I am nervous, because I fear that that is too soon. Anyone who thinks that the transfer will be a straightforward and easy piece of work, to be carried out at administrative office level, is mistaken.

I understand that there is a political imperative: Governments always want to get things done and move forward, because if they fail to do so they are criticised for not moving fast enough. However, in my experience such changes, if they are not timed properly, can cause far more trouble than they are worth. Regardless of whether

8 Feb 1999 : Column 72

changes are right or wrong, they have to be planned carefully. My concern is that we are trying to make the change too quickly and that the benefits of the change might be lost to us as a result. We might be unable to capture the positive results of the change if we do too much, too quickly.

The second point that struck me is that there is a huge cultural difference between the two Departments which has not been recognised in the debate. The way in which the Inland Revenue works, the time scales to which it does its calculations, its systems and its methods are entirely different from those employed by people working in DSS agencies such as the Contributions Agency.

I went on a brief visit to Newcastle with the Social Security Committee a few months ago. I was deeply impressed by the commitment of George Bertram and his staff and I am sure that they will make every effort to ensure that the change works. The hon. Member for Newcastle upon Tyne, Central (Mr. Cousins) will agree that that is so. We often fail to recognise the work done on our behalf by civil servants in the agencies, so it is worth putting it on the record that they do a splendid job keeping a creaking system going, sometimes at great personal cost and for little reward. However, the combination of the culture shift that is needed and the time scale within which the change is planned cause me concern.

I support the Bill and will be happy to vote for its Second Reading. It comes as no shock to me to learn that there are to be changes to the tax structure and that the Government have in mind a design that aligns income tax and national insurance. That is obvious to anyone who is aware of the fact that, from this April, the Government are introducing changes to the employers class 1 contributions, which are to be raised to a new earnings threshold set at the level of personal tax allowances. There is clearly a big change in view. However, I should like to quote a couple of sentences from the Green Paper on welfare reform and ask a few questions about them.

The Green Paper said:

"future reforms will align the lower earnings limit with the single person's tax allowance ensuring that no one pays National Insurance for the first £81 of their weekly earnings and that all employees earning between £64 and £81 would have their rights to benefit protected".

It is the last clause--

"would have their rights to benefit protected"--

that causes me concern. If the lower earnings limit is to be raised in that way, how will those earning less than that be protected? What physical administrative steps are to be taken to keep track of their earnings? How does that fit in with the continuation of the contributory principle? That is an important question, because it is illustrative of how confused the Government might become in future if they are not clear about the direction in which they are going.