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Mr. Bryant: Will the hon. Gentleman give way?

Mr. Ruffley: I hope that the hon. Gentleman will forgive me, but I am coming to the end of my remarks.

Honesty, transparency and clearly delineated reform are not characteristics of the Bill or any other part of the Chancellor's legislation. Unfortunately Complexity Brown has complicated an already confused national insurance regime by a further damaging blurring of the distinction between general taxation and national insurance contributions.

8.13 pm

Jon Cruddas (Dagenham): I briefly want to consider the Bill in terms of two general criticisms levelled against the national insurance increases announced in the Budget. The first is that it marks a break with Government strategy since 1997, and the second is that it compromises the national insurance fund through its extra financing of the NHS.

The Bill enacts the national insurance elements signalled in the Budget. From April next year, the primary threshold for the level of earnings at which national

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insurance contributions begin will be frozen at £89. Employees' contributions will be increased from 10 to 11 per cent. Employers' contributions will be increased by 1 per cent. to 12.8 per cent. From next year, the 1 per cent. increase will also apply to earnings above the limit. A person on median earnings, or £21,400, will pay £3.70 extra each week.

When considering those proposals, it is worth remembering that, between 1979 and 1997, NICs were raised for most workers from 6.5 per cent. to 10 per cent. As my hon. Friend the Member for Gedling (Vernon Coaker) said, at the same time, there were no discernable increases in what might be described as the social wage. Indeed, when the increase from 9 to 10 per cent. was announced in 1995, it worked alongside cuts in national insurance support—down to six months—for unemployed workers.

In contrast, these national insurance proposals work alongside the developing tax credit regime to ensure that a two-child family with one adult in full-time employment on average pay will be nearly £4 a week better off even after the freezing of personal allowances. Under the Government's proposals, tax will rise as a proportion of national income from 37 per cent. in 2001–02 to 38.3 per cent. in 2005–06. Even then, average European Union tax takes are 3 per cent. higher. Moreover, our main rate of corporation tax is lower than in any other major European country. For small businesses, the situation is even more favourable.

The response to the revenue-raising proposals announced in the Budget was very interesting. Many commentators assume that the Budget marks a rupture with the patterns of economic management and investment sustained by the Government since 1997. That argument is worth addressing, because any specific proposals, such as these for national insurance, must be analysed in terms of the general strategy that underpins them.

I prefer to consider the national insurance proposals in terms of the evolution of Government strategy since 1997 rather than as a form of rupture that began on the day of the Budget. In that sense, four core elements in Government economic strategy are identifiable since 1997. First, the priority of efficient macro-economic management means that we have witnessed the lowest interest rates for 40 years, the lowest mortgage rates since the 1950s and the lowest inflation rate since the early 1960s. At the same time, debt estimates stand at a healthy 31 per cent. through to 2004. Secondly, we have attacked unemployment through our active labour market policy and work subsidies. Using those two strategies, the Government have dramatically altered the trade-off between levels of unemployment and accelerating rates of inflation. In one sense, that is one of the greatest hallmarks of their activity since 1997.

Thirdly, we have attacked poverty through re-incentivising work and by helping pensioners, especially poorer ones, and young families. Fourthly, I refer to our historic refinancing of public services. The effects of fiscal drag, debt repayment and reductions in unemployment have allowed us to refinance the public services with some £36.1 billion extra of annual cash expenditure by 2003–04 compared to 2000–01. As such, since 1997, we have witnessed an incremental strategy at work that systematically redistributes while simultaneously locking in stability and comparatively

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high growth rates. Rather than breaking with that incremental strategy, the Budget develops it further. The hallmark is its continuity in terms of stability, re-activating the supply of labour and confronting poverty and refinancing public services.

Within that overall strategy, three areas stand out in the Budget. The first is the way in which our comparative productivity shortfalls have moved centre stage in terms of our economic strategy, which I very much welcome. The second is the announcement of £33.5 billion of investment in the health service between 2003–04 and 2007–08, which, again, I very much welcome. The third is the acceptance of the revenue implications of such a strategy and, therefore, the national insurance proposals that we are discussing today.

The national insurance elements will raise £7.9 billion in 2003–04 and, alongside that, the freezing of allowances will raise £700 million. Despite those revenue-raising mechanisms, the Red Book projects that general Government net borrowing will be 1.1 per cent.—or some £12 billion—for next year, which is the end of the current comprehensive spending review period, and will rise further through the next CSR period.

I mention that briefly to highlight a prospective problem in the development of the overall strategy of refinancing public services—namely, the growth and stability pact that might interfere with this incremental domestic strategy and break the link with public service refinancing.

Adam Price (East Carmarthen and Dinefwr): Before the hon. Gentleman moves on to discuss the growth and stability pact, will he assist me? I do not have his mastery of the figures, but will he explain how the 1p cut in the basic rate of income tax in 1999 and the 1p increase in employee and employer national insurance contributions reflects a continuity in Labour Government policy?

Jon Cruddas: I tend to perceive three distinct phases, which gradually paint a picture. Furthermore, it is possible to see evolution in the devolutionary strategy. First, after 18 years of Tory government, the focus between 1997 and 1999 was on reinforcing our bona fides in respect of general economic management. That moved us into a second phase—the three-year comprehensive spending cycle, which ensures real-terms reinvestment across all public services and, through the effects of the tax revenues of fiscal drag, retains healthy balances on the accounts to allow for that investment. The third phase, which was signalled in the Budget, is to accept the revenue consequences of another three-year real-terms refinancing of the health services, and at the same time to retain the core macro-economic conditions that allow real-terms growth across all public services. That strikes me as an incrementally radical agenda that systematically confronts poverty and inequality while retaining healthy economic conditions within which that radical agenda operates. I see no contradictions.

The growth and stability pact might interfere with the incremental domestic strategy and break the link between public services reinvestment and our revenue-raising initiatives. In so doing, we might compromise the reason why the public elected us last year, which I believe is also

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the reason why they will accept the national insurance contributions changes, in that they are being levelled so as to refinance our public services systematically. That link could be broken if we were seen to use the receipts to finance net balance at the expense of those investment plans. I therefore welcome the national insurance estimates and the way in which they will allow us incrementally to deliver the agenda on which we were elected.

The second argument—that the national insurance proposals signal a rupture with the past—relates to the historic role of the national insurance fund itself. The argument runs that, in contrast with the original assumptions behind the contributory principle, the new proposals, with their explicit link to the national insurance fund, weaken the link between contributions and benefits by cross-subsidising public service investment, which should come out of direct taxation. At the same time, because national insurance contributions are a payroll tax, the proposals act as a disincentive to employment.

However, the national insurance system has never been the wholly earmarked social insurance system that such arguments imply it was: for example, apart from a brief period between 1988–89 and 1993–94, there has been a Treasury supplement to the fund from the Consolidated Fund. At the same time, a portion of contributions income is paid into the NHS; the House of Commons Library estimates that, at various times, it has amounted to between 6 per cent. and 17 per cent. of NHS costs, and the figure for 2001–02 is some 12 per cent. of NHS revenue. If we assume that all of the increase in contributions is directed to the Consolidated Fund for use specifically in the NHS, in 2007–08, £13.2 billion from the insurance fund will amount to some 12.5 per cent. of NHS income.

It can therefore be argued that in a period of massive reinvestment in the NHS in the current CSR period, with £36 billion coming in the next CSR period, the national insurance proposals simply ensure that the proportion of contributory income directed to the NHS remains relatively stable at 12 to 12.5 per cent. Therefore, the proposals continue the principle established in the 1940s of raising resources towards the cost of the NHS through national insurance contributions.

It seems to me that these initiatives are in turn consistent with the arguments deployed by Beveridge in "Social Insurance and the Allied Services", specifically in terms of the anticipated comprehensive national health service. That is because of Beveridge's continuous emphasis on the link between the provision of social insurance, a national health service and continued paid employment. All his proposals have to be seen in the light of his desire to retain income maintenance. He states on page 8:

and later he argues that

The corollary of treatment was the anticipated form of socialised medicine. It is therefore entirely legitimate to direct an element of contributions to health care, not least because, as the CBI states, workplace absence cost British business about £10 billion in 1999. As for the

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employment effect, any effect of the national insurance proposals must be seen alongside the totality of initiatives that have helped to reduce unemployment to about 1 million, reactivated much of the labour supply and created about 1.5 million jobs since 1997.

Overall, I strongly support the national insurance proposals. On the ground in my constituency, Dagenham, we are beginning to see real changes in health provision. A new hospital will be up and running within a few years, and the health authority is working on increased budgets. None the less, the needs of the community are immense: the incidence of heart and lung disease, infant mortality and life expectancy, especially for males, are among the worst in the capital. Yet the new PCT faces GP shortages and a swathe of GP retirements, while health inflation squeezes out its real-terms budget increases.

In coming years, the proposals will help to deliver the sort of health care that my constituents should receive as of right. The Bill is part of the Government's overall strategy to refinance that care effectively, and I strongly welcome it.

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