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Mr. Redwood:
I am grateful to the Minister for giving way again. Can she remind the House how much worse off somebody will be when they get to their state second pension if they are earning a sum above the
current upper earnings limit? They will lose their earnings-related element and go over to the flat rate, as I understand the scheme.
Jane Kennedy: There are a range of factors that will affect people at that point. If the right hon. Gentleman will allow me, I shall seek to get the detail that he asked for during the debate.
Rob Marris (Wolverhampton, South-West) (Lab): My right hon. Friend is being extremely patient. Is not the political import of the total package that the Government propose a certain rebalancing, so that the prosperous in our society may pay a little more and the less prosperous may obtain a little more? If that be the case, does she share my surprise at some of the comments from both main Opposition parties about trousering an extra £2 billion, when both parties, on paper, are in favour of lessening the inequalities in our society—as the Government rightly are as well?
Jane Kennedy: I agree with my hon. Friend’s point and thank him for making it. It is true that the package of changes results in some people paying slightly more income tax, but overall the changes that we have put in place since 1997 mean that households are very much better off than they were previously, as a result of all the reforms that we have introduced.
May I say to the right hon. Member for Wokingham (Mr. Redwood) that no one loses out because of the withdrawal of the earnings-related element of state second pension or because of the new cap on state second pension or national insurance contributions rebate? The introduction of the upper accruals point would affect the state second pension entitlement or contracted-out rebates only for high earners and their employers—those earning above the upper earnings limit of about £35,000 a year. The right hon. Gentleman’s point is taken. However, as I have said, in the context of the whole range of changes that we have made, higher earners will still—even in the short term—receive a slightly higher state second pension entitlement or contracted-out rebate compared with the intended pensions White Paper outcome, as they will still receive a small gain in state second pension or contracted-out rebate between 2008 and 2012. There are a number of swings and balances that in the end lead to benefits rather than negatives.
Mr. David Gauke (South-West Hertfordshire) (Con): The Financial Secretary is arguing that nobody loses out.
Jane Kennedy: I did not say that.
Mr. Gauke: Right. Well, I want to make it clear that the HMRC impact assessment refers to the 2.1 million people with earnings above the upper earnings limit who have contracted out. The assessment states:
“These individuals will either see a reduction in their take home pay (as they will get a lower rebate on their NICs than would otherwise have been the case) or a reduction in the money that goes into their pension scheme compared to not introducing the UAP until 2012/13.”
Does the Financial Secretary agree?
Jane Kennedy: We will be able to discuss the detail in Committee. Members from Opposition parties, and perhaps some on the Government Benches, will want to probe a number of points in detail. Although we are simplifying things in carrying out this change, there are complexities around it and interplaying factors in respect of how individuals are affected— [Interruption.] I am trying to say that I accept that there are criticisms of the package that we have put forward. However, when it is taken in the round and in the context of the reforms that we have introduced over a long period, few will be absolute losers as a result of the overall package.
The changes will mean that from 6 April 2009, all employers will have to calculate, record and report additional information for employees with earnings above the upper accruals point. Although that will require changes to their payroll records, the information is essential for state second pension purposes and the calculation of contracted-out rebates. As we have just discussed, there has been some speculation about potential losses in state second pension entitlement and rebates. Although the proposals to introduce the upper accruals point in 2009 will affect some high earners, state second pension accruals and rebates for that group are still expected to be higher than those envisaged in the pensions White Paper.
In conclusion, the Bill is important and necessary. It allows us to implement a personal tax package that reduces child poverty, in which I am particularly interested. I am proud of that. It also takes pensioners out of income tax and creates one of the simplest personal tax structures of any developed country. Furthermore, it allows us to return to the timetable for the introduction of a simple flat rate state second pension scheme. I commend it to the House.
6.3 pm
Mr. David Gauke (South-West Hertfordshire) (Con): It is a pleasure to speak on this Bill, although it will not catch the headlines as some do. Today there have been three oral statements and 24 written statements—we are getting close to the recess, and it seems to be Government “put out the trash” time. The Bill may not even lead the debates on specifically Treasury issues; we have had the Poynter review, the security breach in Coventry and the row between the Treasury and the Bank of England on Northern Rock.
However, we are debating the last legislative business before the end of the year—and I am delighted that we are. Although the Bill has been described as essentially technical, we can see from its contents and the story of how we got here a number of the attributes of the Government, and they go a long way in explaining some of the difficulties that the Government face.
The first difficulty is that the Bill is, for all its technicalities, about a tax increase—two of them, in fact. As we have heard, the first increase relates to the national insurance contribution changes announced in the 2007 Budget. Hon. Members will recall it well: the then Chancellor announced with a flourish the 2p cut in income tax, and perhaps he achieved a tactical success. However, it soon emerged that he had made a strategic error, as the Budget became known as being about a tax con, not a tax cut. The national insurance change was part of that package of measures. As we
listened to the then Chancellor on 21 March 2007, it was not clear what was being announced. He announced an increase in the level at which the top rate of income tax would be payable, increasing it from £38,000 to £43,000. However, he then said:
“I will align the income tax system with the national insurance system, with its ceiling set at the same threshold of £43,000”.—[ Official Report, 21 March 2007; Vol. 458, c. 826.]
I do not know whether it was clear to other Members—it was not entirely clear to me—but he had just announced a tax increase of £1.5 billion a year.
The argument for the alignment is that it promotes simplicity, and it is good to argue for simplicity; the Conservatives have been doing so for some time. We approve of simplicity. However, by aligning national insurance with income tax in that way, the Government have essentially imposed yet another stealth tax. The Chancellor has argued for simplicity in the reform of capital gains tax, although he does not do so as much these days. When the Government talk about simplifying the tax system, taxpayers need to start checking the spoons.
The second tax rise is the reform of S2P, or the state second pension. I shall return to the details a little later, but as my hon. Friend the Member for North-East Hertfordshire (Mr. Heald) pointed out, contributions that were once made towards earnings-related benefits now contribute towards nothing—they are just contributions to the Exchequer. The Exchequer will raise an additional £500,000 a year on rebates to opted-out schemes. Earlier, I quoted from the HMRC impact assessment. It said that 2.1 million people with income above the upper earnings limit are contracted out of S2P and that:
“These individuals will either see a reduction in their take home pay (as they will get a lower rebate on their NICs than would otherwise have been the case) or a reduction of the money that goes into their pension scheme”.
The Exchequer Secretary to the Treasury (Angela Eagle): Do I take it from what the hon. Gentleman has said that the consensus on pension reform is now broken and that the Tory Front Bench position no longer supports having a flat payment for the state second pension by 2030?
Mr. Gauke: Later in my speech I shall address in greater detail the particular issue with pensions, but I should say that we support flat-rating as part of a package. The point is that this change is breaking that package up. That is one of our many difficulties with the Bill.
Rob Marris: I am grateful to the hon. Gentleman for showing his usual generosity and politeness in giving way. Is the Conservative party in favour of the redistribution of wealth to address some of the inequalities in our society, or is it not?
Mr. Gauke: We believe in addressing poverty.
Let me address the issue that we face. The distinction between the two elements and the breaking up of the package are a consequence, it would appear, of an enormous oversight that goes back to the Government’s changes to national insurance contributions announced in the March Budget. The Government’s position is
that as a consequence it is necessary to change S2P as proposed in the Bill in order to address the matters mentioned by the Financial Secretary.
That prompts the question why the proposals were not identified in March 2007. The Pensions Policy Institute identified the issue in its briefing published shortly afterwards, as well as the concern that the approach appeared to be inconsistent with what the Government were attempting to do. My hon. Friend the shadow Chief Secretary to the Treasury raised the matter some months ago, long before October, in a number of parliamentary questions.
The apparent oversight and the fact that the Treasury did not spot the problem is striking because of the fact that when the revenue impact of the Budget announcements was calculated, which the Treasury would have had to do as part of the process of producing the Red Book, it presumably should have taken into account the additional liability for additional earnings-related benefits and, in particular, the additional rebates for those who have opted out. I assume that that was done.
If I am wrong, I hope that Ministers will correct me in the course of the debate. If it was not done, the figures in the Red Book are clearly inaccurate. We have had no indication from the Government that that is the case, so I assume that the figures in the Red Book are accurate, and that they took into account the fact that additional rebates would have to be paid over the years ahead. However, once it was spotted somewhere in the Treasury that that was an issue, it would appear that nothing was done about it.
Why was no announcement made in March? As is so often the case with the Government, we are left to ask whether there was some kind of concealment or whether the problem was incompetence. I do not take the cynical view—certainly not in this case. However, some hold the view that the then Chancellor was on the brink of becoming Prime Minister and did not want any further tax increases, particularly in connection with pensions, where his reputation was perhaps not all that it might have been; he therefore glossed over the issue and left it for his successor. I do not hold that view. I think that the problem was just not spotted. Perhaps Ministers could confirm that it was not spotted.
I believe that the problem was not spotted, particularly because of the suspicion that there was a breakdown of communication between the Treasury and the Department for Work and Pensions at the time. Even at the best of times, the then Chancellor—now Prime Minister—has not been renowned for his openness with other Departments. He is not necessarily the easiest person to work with. After all, the then Secretary of State for Work and Pensions, who is now the Secretary of State for Business, Enterprise and Regulatory Reform, was the Cabinet member who was widely believed to have said that the then Chancellor would make an “awful Prime Minister”—I spare the House the other adjective used.
Steve Webb: I hesitate to bring the hon. Gentleman back to the Bill, but may I clarify? His position is that there are two elements in the Bill, the first of which is a national insurance increase, which he opposes, and the second of which is a cut in rebates and state second pension entitlements, which he opposes. Will he therefore vote against the Bill today?
Mr. Gauke: We will vote against the Bill.
Mr. Charles Walker (Broxbourne) (Con): So you can’t go home early.
Mr. Gauke: As my hon. Friend says, we cannot go home early. I am sorry to disappoint hon. Members.
This is not just to do with incompetence. It would appear that the problem was incompetence because of the secretive and distrustful way of working of the former Chancellor, who failed to consult and isolated his internal opponents.
Mr. Redwood: To reinforce my hon. Friend’s point that this is a tax increase and not a pension contribution, will he confirm that the money will not only be collected before the pensions are paid out but will be spent on general Government expenditure and not saved for future pensioners?
Mr. Gauke: I am grateful to my right hon. Friend, as he brings me to the issue of pensions. He is absolutely right. The Government should have been sensitive on the subject of pensions. Another of the Government’s attributes is that they have inflicted great unfairness on those saving for pensions. Of course, I refer to the £5 billion tax raid on pension funds. I know that an announcement on occupational pensions was made today, and I am grateful for it, but the Government have been dragged kicking and screaming to make those concessions. I congratulate the campaigners who have achieved that.
The rebates provided for those who opt out of the state second pension are less than the value of those recommended by the Government Actuary’s Department. Fairness on the subject of pensions is not something of which the Government can be proud. There is unfairness here, too. The essential point is that the S2P is a contributory system but that people will make additional contributions without receiving additional benefits.
Mr. Gauke: May I finish my point? The Government argue—I suspect that this might be the point that the Exchequer Secretary was about to make—that flat-rating was part of the package under the pensions legislation. Absolutely. However, it was part of a package. It is being brought in now when we may not see the rest of the package until 2012 at the earliest, and possibly 2015. We have to remember that that will all be dependent on the economic conditions at the time and on whether the fiscal circumstances will allow it. It is a long way off, and I am certainly not going to make any predictions about the economic conditions, but it is perfectly possible that in 2009 these proposals will come in and that the upper earnings limit and upper accruals limit link will be broken, while the rest of the package is delayed for six years, or even more.
Angela Eagle: Will the hon. Gentleman answer the question that I asked before? The changes restore the original nature of the pensions package because of the changes to the upper earnings limit. Is he telling the House that the cross-party consensus on flat-rating the state second pension by 2030 is now broken because his party has decided that it no longer supports it?
Mr. Gauke: We support the principle of flat-rating as part of a package. The Government broke up that package because of the incompetence of introducing a measure in March 2007 when they had not worked out the pensions contributions. The Government got themselves into this mess. The only way in which they can resolve it is by unfairly levying national insurance contributions on earners who will not receive any benefits as a consequence. Earnings-related contributions will not receive earnings-related dividends. The Government are imposing that unfairness on 2.1 million people because they failed to understand what they were doing in March 2007. They may say that it was always the original intention to make this move, but it was as part of a package; and now we have to take it on trust that the Government will actually deliver on these measures, because, rather than doing everything all at once, the Government have got themselves in a muddle.
If economic conditions do not permit the implementation of the Pensions Act, will these provisions be reversed? There would be a logic to that. Ministers say that this is all part of a package being implemented over a period of time, but I doubt that that will happen. That is a good reason for being sceptical about the proposals, and for not giving them our support.
Rob Marris: If the Bill receives its Second Reading—which is quite likely, given the mathematics of the House—it will go into Committee. If that were to happen, and as it is an enabling Bill, would the Conservatives support it if it were amended to give it a commencement date of 2012 at the earliest, rather than of 2009, which has been announced verbally but which I do not think is in the Bill?
Mr. Gauke: We would look carefully at such a proposal, but we have other concerns with the Bill. We shall certainly want to examine a number of amendments in Committee. The hon. Gentleman has raised an interesting point, and perhaps we shall have an opportunity to examine the full implications of it if he serves on the Committee. From my previous experience of serving with him, I very much hope that he will.
A further attribute of the Bill is that it demonstrates that the role of Parliament is not being taken quite as seriously as it might be. For all the talk about strengthening Parliament’s position that we heard from the new Prime Minister when he first arrived in his new post, we have seen little action to support it. The Bill will weaken Parliament’s position. At present, the upper earnings limit must be no more than seven and a half times the level of the primary threshold. Clause 1 abolishes that ratio and provides for the upper earnings limit for 2009-10 and beyond to be set by means of secondary legislation. The Financial Secretary said that that would be done by the affirmative resolution procedure, but we could nevertheless be faced with a situation in which potentially substantial tax increases could be achieved by Committee. For example, what would stop a Government substantially increasing the upper earnings limit by secondary legislation? It might interest the hon. Member for Wolverhampton, South-West (Rob Marris) to learn that, as far as I can see, they could increase the higher rate band of income tax—if we take income tax and national insurance together—by 11 per cent. through secondary legislation. That is not something that the Conservatives would welcome.
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