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8.25 pm

Adam Price (East Carmarthen and Dinefwr): It is usual at this point in proceedings for an unearthly calm to settle upon the debate. Thus far, it has been quite lively. The hon. Member for Crosby (Mrs. Curtis-Thomas) declared, with characteristic chutzpah, that this was a landmark Bill. In a slightly different tone, the hon. Member for Dagenham (Jon Cruddas) has just told us that new Labour is now in the third phase of an evolutionary strategy.

Mr. Chris Mole (Ipswich): I think that the person whom the hon. Gentleman has in mind is my hon. Friend the Member for Corby (Phil Hope), not my hon. Friend the Member for Crosby (Mrs. Curtis-Thomas).

Adam Price: I am grateful. My English geography has always failed me, but I am sure that hon. Members will forgive me.

It should be acknowledged that the Budget represents a welcome change in direction by the Government. Given the comments of the hon. Member for Gedling (Vernon Coaker), it should be said that it is a change for which many people, both inside and outside the Labour party, have fought.

The Chief Secretary to the Treasury said that the debate was not about whether we need the extra investment in public services. We wholly agree with that assertion—we are glad that the Government have now adopted the view that Plaid Cymru and the Scottish National party have held for some time. The debate is about how that money should be raised, and it is on that that I shall focus my speech, as it is where some of the problems arise. Clearly, we will support the Government on Second Reading, because the investment in our public services is sorely needed.

The Bill marks a small step forward, but hon. Members will forgive me for believing that half a step backwards has been taken in terms of the mechanism by which the Government have chosen to raise the funds. Despite claims to the contrary, national insurance contributions are relatively regressive. Increases in employer contributions have a deflationary impact on jobs and investment, and that will to some extent eat into the extra investment in the public sector.

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In March, the Deputy Prime Minister tried to justify the use of national insurance contributions for the health service, saying:

"What people forget is that the health service started off as a payment out of national insurance".

He forget to mention that he was referring to the National Insurance Act 1911, which created a form of mandatory health insurance scheme whereby all wage earners and employers paid into a scheme, in return for which they received some degree of medical support. Anyone familiar with the novels of A. J. Cronin will know that that was not an entirely satisfactory arrangement, which is why the Attlee Labour Government placed direct taxation at the heart of the funding arrangements for the national health service. The National Insurance Act 1946 contained a partial link to health service funding, but was primarily about funding the provision of welfare benefits such as retirement pensions and sickness and unemployment benefits. A small proportion—it is now about 10 per cent. of national insurance contributions—goes to the NHS.

As we heard in a thoughtful speech from the hon. Member for Bury St. Edmunds (Mr. Ruffley), the value of contributory benefits demonstrates a breaking of the link between national insurance contributions and welfare benefits. Unfortunately, the hon. Gentleman is no longer in his place. I do not remember who said that the two things that can be said reliably about the national insurance fund are that it is not a fund and it is nothing to do with insurance. That is more the case now than ever before.

Semantics aside, the increase in national insurance contributions is an increase in taxation. When the Government transferred responsibility for national insurance contributions, the Inland Revenue probably gave the game away, although I need not detain the House too long on that.

Dawn Primarolo: The previous Government believed that national insurance should be transferred to the Inland Revenue, on the basis that it made sense to make some alignments to reduce the burdens on employers that result from some of the mechanisms. It was not a statement of what was to come, but I think that the hon. Gentleman is making some interesting points.

Adam Price: I am grateful to the Minister. One of the things that gives me the greatest pleasure in this place is that I never have to speak on behalf of the Conservative party. I certainly do not claim responsibility for the previous Government.

I believe that there has been some discussion within Government, or at least some feasibility studies, of the pros and cons of amalgamating the tax and national insurance systems. That might suggest that national insurance contributions, to a greater or lesser degree, are a form of taxation.

Dawn Primarolo: I am listening to the hon. Gentleman carefully and he is making some pertinent points. One of the problems, as business tries to persuade the Government that we should amalgamate national insurance with tax, is the loss of the contributory principle of the national insurance fund, which flags up benefit entitlement. That is precisely the point that the hon.

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Gentleman is saying is missing. The very thing that keeps the national insurance fund in its present form is the fact that it is contributory and flags benefits.

Adam Price: I am grateful for that clarification. I note that the payroll sub-group of the Government's better regulation task force said that

"we understand that the really big regulatory gains would come from either combining national insurance contributions and tax into a single charge for those who currently pay both or NICs being shown as a social security surcharge."

I will happily person the barricades jointly with the Minister to oppose any further erosion of the contributory principle, but I would like to move on to the regressive nature, as I see it, of the national insurance contribution mechanism as it provides for general Government expenditure.

Generally, national insurance contributions are regressive because workers on average incomes pay a greater proportion of their income on contributions than those on higher incomes. The Chancellor could have abolished the upper earnings limit, but the anomaly of the ceiling would remain. Those earning £31,000 a year face a marginal tax rate of 23 per cent., whereas those earning less have a marginal tax rate of 33 per cent. That is clearly unacceptable for those who support a progressive income tax system.

To be fair, the Chancellor has been progressive to some degree in the way in which he has dealt with national insurance contributions. Previously, he has raised the lower earnings threshold faster than the upper earnings limit. In the most recent Budget, he introduced the additional primary percentage to operate above the ceiling. That is a partial breach of the upper earnings limit, and we hope that there is more to come. As a recent OECD study concluded, the shift from income taxation to payroll taxes leads to an overall decline in the progressivity of the tax system.

Labour Members would do well to be aware of those dangers. There has been extremely rapid growth in payroll taxes over recent years. If we include the employer contribution, we find that many people pay more in payroll taxes as a proportion of their total wage bills than they do in income tax. We have seen a continuous upward trend. Employer contributions have risen from 10 per cent. in 1997 to 12.8 per cent., according to the Government's proposals. Employee contributions have increased from 6.5 per cent. in 1979, under the Conservatives, to 10 per cent. in 1997, and now to 11 per cent. Both the employee and employer contributions represent the highest ever figures in terms of payroll taxes.

The problem is that the burden falls disproportionately on those on average and lower incomes. There are fewer bands within national insurance contributions because of the upper earnings limit. As we have heard from the hon. Member for Oxford, West and Abingdon (Dr. Harris), unearned income is not taxed in this context. We live in interesting times when we hear the hon. Member for Bolsover (Mr. Skinner) defending the rights of what used to be called the rentier class in days gone by in the Labour movement. I am referring to wealthy people who do not rely on employment for their income.

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There is the rejoinder that those of us who are in favour of fairly taxing unearned income are in favour also of taxing pensioners. It should be remembered that the Labour Government introduced the tax on dividends from occupational pension funds. That has had a considerable impact on the welfare of those who rely on income from such sources.

If the NIC proposal is not classically redistributive, it certainly will be deflationary in its impact on the economy. We heard about the Beveridge principles from the Chief Secretary. It is true that the Government embraced the idea of shifting the burden of taxation from employment to phenomena that are more negative in terms of social welfare, such as environmental pollution. We saw that with the climate change levy. We now see a shift of the burden back on to employment. We have not had a satisfactory explanation of the rationale that lies behind that.

It is irrefutable that if non-wage labour costs are increased, ceteris paribus, there will be a negative impact on job creation.

Mr. Kevan Jones: The hon. Gentleman has been speaking for 12 minutes, and I am fascinated by his economics lecture. He obviously welcomed the extra investment in the health service, but where would his party get that extra investment, if not from national insurance?

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