Examination of witnesses (Questions 60 - 75)
WEDNESDAY 30 JUNE 1999
MS PAT HAWKES, MR RICHARD EXELL and MS JOANNE SEGARS
60. That is very well put. I think you still have to deal with the problem of the dead weight of the National Insurance benefits, pensions, whatever, that then accrue to the top 20 percent of the population who arguably are making alternate provision and do not need them. That is a problem that still has to be resolved. Let me ask you another couple of questions. You are critical—and rightly—of the problem of means testing and how that interacts with work incentives, but is it not also true that contributory benefits themselves, because they do not have tapers, because the cut-off point is so absolute that they too can act as a work incentive? And just picking up the point in the Working Families Tax Credit, you are also critical of the Working Families Tax Credit here and I wonder if you could explain a little bit why because you seem to be implying—I think you state -that although the taper of the Working Families Tax Credit is gentler than the Families Credit taper, the fact is that more people will be affected by the taper because the whole benefit is more generous. I really do wonder, is that not just trying to find a criticism of the equivalent of means testing just for the sake of it?
(Mr Exell) I am sorry if our written submission has given the impression that we are opposed to a Working Families Tax Credit—
61. No, not opposed, but criticisms?
(Mr Exell)—because we do strongly support it and when we have identified possible future problems with WFTC it is because we want to help overcome those problems rather than because we are simply being negatively critical. However, when you are designing any means tested benefit, there is a balance between the depth of the poverty trap and the breadth of the poverty trap and with WFTC, the Government has decided to make it shallower, but at the expense of making it broader. Now that is a decision that we supported because, on the whole, we agree with the Government's judgment that facing a lower marginal effective tax rate is going to have more of a positive impact than the problems that will be caused by having more people facing high marginal effective tax rates. But we could be wrong. We are saying here and that is a possible problem for the future, especially as there is some research which indicates that the way in which the poverty trap works is not to affect people's decisions about discrete changes in employment status. The poverty traps are probably not, almost certainly not the most important Welfare to Work barrier when it comes to decisions about: "Am I going to be unemployed or am I going to work?" but it does affect decisions about whether to increase your earned income and the fact that more people are going to face that disincentive once they are in work could leave us with a problem with large numbers of people, as with Family Credit, getting into work and then staying put on the same earnings or hours. So that is our worry on WFTC.
62. Let me just pull you back to the first part of the question which is that the Institute for Fiscal Studies have pointed out that contributory benefits, like incapacity benefit, also carry within them the potential for being a work disincentive because of the sharp cut out. Do you accept that broadly or not?
(Mr Exell) Yes, and one of the reasons why we have suggested a return to part benefits for unemployment is because there is a real problem with JSA with the 16 hour cut off. Either you are unemployed or you are employed and now that we have fewer sharp differences in the labour market, we should have fewer sharp differences about employment rules for eligibility in the benefit system.
63. Last quick question, again picking up where we have been talking before, but you were taking us earlier on further and further I thought towards the idea of the personal pot and the construction of earnings related elements of that exacerbates that trend, but is there not also a real risk that we are simply adding more and more to a bureaucracy in National Insurance and has that not already turned into a complete horror story with difficulties with the computer system? Is that part not simply adding to an administrative cost and burden that people also react against?
(Mr Exell) Yes, that is a possible problem and I certainly would not want to see any fundamental changes made to National Insurance before the information technology is sorted out. Yes, that would not be a sensible approach.
64. You believe there will be an IT nirvana in the future which will allow us all to—
(Mr Exell) I hope lessons are going to be learned.
Mr Leigh
65. Just a couple of questions. We have agreed, or you agree, that means testing is expensive, creates a poverty trap, breaks the link between contributions entitlement, all the rest. How would you describe the present Government's attitude towards means testing?
(Mr Exell) I think that the present Government has broken with the previous government's policy which, as far as I could identify it was "to save money in the short term we are going to increase the amount of means testing and just live with the consequences". Now the new Government is still using means testing—WFTC can be seen as a development of means testing—but it is at least putting in measures to try and cope with some of the worst effects of means testing. Here you come to the reasons why we have strongly supported Working Families Tax Credit. We think that the lower taper, will address the poverty trap in part, that it will reduce stigma, that there will be a greater willingness on the part of the public to support Working Families Tax Credit than other forms of means tested benefits. The US experience suggests that very strongly. So the Government strategy combining that with a drastically increased investment in active labour market policy is addressing an awful lot of the problems with means testing which does seem to us to be an improvement on, "okay there are problems with means testing, but we will live with them".
66. So it is okay for the Government to increase means testing as long as somehow it reduces the stigma of it or brings in lower tapers, that is what you are saying, is it not?
(Mr Exell) Reduces stigma, puts in reforms to bolster public support, addresses the poverty trap. They are addressing most of the arguments against means testing where they are retaining means testing. What we are suggesting is that National Insurance can take that further by reducing means testing even further.
67. Yes, I agree. But if it is on the Working Families Tax Credit and it was the old Family Credit, there is no evidence to suggest is there that that particularly stigmatised people, did it?
(Mr Exell) There is a reluctance on the part of some people to claim benefits as opposed to getting payment through the wage packet and if you look at Family Credit, even when take up has been improved, it is the obvious problem of people with comparatively small FC entitlements and stigma may well be a factor there holding back take up.
68. So this is why you describe in your paragraphs 63 to 65 that the Working Families Tax Credit is a genuine third way?
(Mr Exell) Yes.
69. So if I said to you that the Government are going to gradually do away with the old-fashioned contributory principle concept and they are going to move to some kind of complete tax credit system as envisaged by a previous Conservative Government which I think you refer to somewhere in your paper, you would be reasonably happy with that, would you? Because it comes in and out of your tax coding there is no stigma, but it is still effectively means testing, is it not?
(Mr Exell) As I have explained, this was the point where we feel that we have a job of persuading the Government of the importance of National Insurance and I do not think they are going to get rid of National Insurance. The problems I was outlining earlier about how do you pay for continuing benefits rights once the National Insurance contributions have been got rid of, would apply there as well. So I do not think they are going to do that.
Chairman: Quick supplementary from Mr Pond?
Mr Pond
70. We have talked about the Government's attitude to means testing. In paragraph 63 in your submission you talk about the Government's lack of enthusiasm for National Insurance. The Chair earlier described it as rather an agnostic approach, given the quote from the Secretary of State. Why do you think the Government lacks enthusiasm for National insurance?
(Mr Exell) Because as I said earlier on it is not as it stands an active benefits system. It is a lot easier to activate the means tested elements of the benefits system than it is to activate National Insurance, but we believe that National Insurance can play an active role in promoting positive labour market transitions, not just into employment but into unpaid caring, education and training, combining work and family as well. But as I say, if I were sitting in the Minister's seat at the moment I would be more inclined to see National Insurance as a problem than an asset.
Chairman: Andrew Dismore?
Mr Dismore
71. I would like to come back to one of the things that we were talking about earlier on about the gross earnings limits and I think one of your important topics are the low paid workers and the Lower Earnings Limit. Could you give us some more information about how you think that the contributory benefits scheme for people with low earnings could be expanded and, in particular, how you see it being paid for?
(Mr Exell) The work which we commissioned from Emma MacLennan suggested that benefits other than pensions could be extended to people with earnings below the limit at a cost of about £150 million and then there were various reforms to eligibility rules that could cut that cost still further. However, as Ms Hawkes was saying in her opening remarks, that has to a large extent been overtaken by events, and we are not really arguing particularly strongly for the measures that we put forward there any more, because we think that the zero rate band gives a very useful tool. Obviously we would like to see it being lowered, but simply relying on fiscal drag would bring in hundreds of thousands of workers a year.
72. Okay, and then going back to some of the points which Ms Segars was making earlier on about the Upper Earnings Limit, how much do you think you would actually raise by putting up the Upper Earnings Limit and do you think the Government would realistically be prepared to tax higher earnings this way? I suppose what you might say is that well you are not really talking about higher earnings any more. I might actually be very wrong.
(Ms Segars) I cannot remember off the top of my head what the figures are. I think £8 billion, but I am—
(Mr Exell) Obviously it would help fund National Insurance, but the main reason why we are getting worried about the Upper Earnings Limit is the way it is coming down and down and down with the earnings scale. We did quote as a projection in our written submission that in a generation's time it could be less than two-thirds of average earnings and it is concerns about equity and the overall structure of the National Insurance system which is our prime reason for being concerned about the UEL, but obviously the money would be good.
73. Professor Alcock said that we should be trying to make the social insurance scheme more comprehensive and inclusive by actually recognising that there is this fiction between contributions and entitlement and looking at contingencies like ill health, unemployment, disability through hypothecated social insurance contribution. Would you welcome a more inclusive National Insurance system where contributions between when in work and entitlement are weakened, for example, give more help to disabled people and carers to have access to the scheme?
(Mr Exell) Yes. Certainly what we would say about the Lower Earnings Limit we would regard as being an absolutely vital step towards making National Insurance more inclusive. But also broader definitions of eligibility for carers and for credited and home responsibility protection would be useful. At times there are rules—for instance about a break during the year in your home responsibility protection and you lose a whole year's credited contributions. There are quite a few technical points like that which would make the system more inclusive.
(Ms Segars) And the systems differ between benefits. With the basic State pension and the new State second pension the home responsibilities element, for want of a better term, will differ. The categories of carers that can get the benefits will differ and in terms or accrual of pension rights that does not seem to make an awful lot of sense.
74. If we were going to move in the balance further away from means testing and more towards a National Insurance contributory base system, then presumably the rates of benefit would have to go up dramatically to meet that difference, to give people enough to live on. Do you think there is a popular will to increase the rates of contribution that would be needed to fund that?
(Mr Exell) Well, as we were saying before, the way in which you get the popular will for that is by having a strategy for achieving it, and the strategy is to make National Insurance more worthwhile for the Government so that it can then be made more worthwhile for the individuals claiming it. That produces the political will that makes it easier for governments to raise the level of contributions and to have contributions towards the fund from general taxation. So if you said right now—you do not even have to take the whole population—if you said right now a poll of trades union members who are going to be the strongest supporters of the system: "Would you pay an extra 10p in contributions for this wonderful new National Insurance system?", almost certainly they would say no. People learn by doing and by experiencing and that is why we say it is a process rather than a single change.
75. In paragraph 122 of your submission, you talk about focusing on transitions rather than contingencies. Can you try and expand a bit about what you mean by that? Are you talking about differential benefit rates tapering in or out or what?
(Mr Exell) Yes, well there are going to be two changes that are already taking place which are going to be more noticeable in the future in the labour market and if National Insurance does not keep up with them, then fewer and fewer people will want to defend it. One is that people are going to experience more labour market transitions, so time spent caring, in education, changes of jobs, moving from full time to part time employment, all these sorts of changes will become much more common. National Insurance was designed for a world in which changes like that were rare. The second thing is that more and more people will be combining more than one type of labour market status. So people doing a temporary, part time job and a permanent part-time job, for instance, or combining care with a part time job, or combining education with a part time job. Now at the moment the system throws blocks in your way when you make those transitions or those combinations, so, for instance, we would like to see the development of disability leave, so that people who become disabled or whose condition gets worse can have a period of leave during which they go in for rehabilitation, try out adaptions to the work place and so on and a National Insurance benefit to provide an income during disability leave would stop such provision being a burden on business, but enable people who are becoming disabled to keep their jobs, and it is much easier for disabled people to keep jobs than to get them from unemployment. Similarly we could see National Insurance offering, as an alternative to Job Seeker's Allowance, a grant for while you are studying or a grant towards combining study with part time work. At the moment some of the most ludicrous rules in the benefit system apply to people who need qualifications when they are unemployed. On the one hand the Employment Service can tell them to go for utterly inappropriate training and they lose their benefits if they do not do it, but if they show some gumption and go for stuff themselves then they lose their benefits again. And once you get into the training course the problems do not stop because you find yourself losing benefits. The daftest one of all is you lose your benefits if you are so committed to the course that you have paid the fees yourself, because that shows that you are more committed to the course than to job seeking and so therefore you are not really available for work and blah, blah, blah. Now National Insurance should not be behaving like that and the reforms to address that are not going to be expensive. Other reforms to provide support for people to go into training and education would be more expensive, but it is the sort of expense the Government is already showing itself willing to bear. Similarly, National Insurance could be used in the Government's child care strategy. One of the problems that we have is not just the need for child care in work, but also child care when you are taking up a training course. Now the National Insurance fund in the long run is going to be better off helping someone to get the qualifications to get off benefit than it is subsidising them on benefit for a long time. So giving someone help with child care while they are doing training is another way in which National Insurance could be developed. At the same time there are other reforms which the Government is introducing about the administration of benefit which are really going to be progressive and if they are applied to National Insurance as well as to means tested benefits do offer a way forward. We strongly support the Government's increased discretion for decision makers in welfare agencies and the move to personalisation, localisation of administration and personal advisers working with you. Now, if in a reformed National Insurance system you had been getting this statement of your prospective National Insurance benefit rights, with a contact person you could ring up if you had any queries about it, all the time that you were in work and then you rang the same number when you were out of work, and that might not be the actual personal adviser you would deal with, but they would put you on to your personal adviser so that you would be being handed on from one stage or another by a person all the time rather than a series of forms. National Insurance can be part of this exciting change to the administration of welfare that is taking place at the moment.
Chairman: Ladies and gentlemen, I do not think after that response by Mr Exell that anyone can be in any doubt about the TUC's views on the contributory principle and we are really deeply grateful for that evidence which we will study with great interest—I am sure it will repay careful study—and we promise, honest Injun, to give you at least the rest of the summer off before we ask you back. It has been very, very valuable and thank you very much for your attendance this morning.
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