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Orders of the Day
National Insurance Contributions Bill
Not amended in the Public Bill Committee, considered.
Mr. David Gauke (South-West Hertfordshire) (Con): I beg to move amendment No. 8, page 1, line 5, at end insert ‘and
(c) in subsection (6), at end insert “and may not include any increase in the upper earnings limit in excess of the increase in the retail price index, in percentage terms, for the year to September of the preceding tax year.”’.
Mr. Deputy Speaker (Sir Alan Haselhurst): With this it will be convenient to discuss the following amendments: No. 10, page 1, line 5, at end insert ‘and
(c) after subsection (6) insert—
“(7) Any regulations made under this section which increase the upper earnings limit shall be reviewed by the Treasury not later than 6 months after the date on which those regulations come into force to determine whether the upper limit, when calculated on an annualised basis, exceeds the level of earnings at which the higher rate of income tax becomes payable.
(8) If this review so determines, the Treasury shall make regulations which set the upper earnings limit, when calculated on an annualised basis, at a level which does not exceed the level of earnings at which the higher rate of income tax becomes payable.
(9) Any regulations made under subsection (8)—
(a) shall be made by statutory instrument which is subject to annulment in pursuance of a resolution of either House of Parliament, and
(b) must be made not later than 1st January of the tax year in which they are made and have effect in respect of the following tax year.”’.
No. 9, in clause 2, page 1, line 18, at end insert ‘and
(c) in subsection (6), at end insert “and may not include any increase in the upper earnings limit in excess of the increase in the retail price index, in percentage terms, for the year to September of the preceding tax year.”’.
No. 11, page 1, line 18, at end insert ‘and
(c) after subsection (6) insert—
“(7) Any regulations made under this section which increase the upper earnings limit shall be reviewed by the Treasury not later than 6 months after the date on which those regulations come into force to determine whether the upper limit, when calculated on an annualised basis, exceeds the level of earnings at which the higher rate of income tax becomes payable.
(8) If this review so determines, the Treasury shall make regulations which set the upper earnings limit, when calculated on an annualised basis, at a level which does not exceed the level of earnings at which the higher rate of income tax becomes payable.
(9) Any regulations made under subsection (8)—
(a) shall be made by statutory instrument which is subject to annulment in pursuance of a resolution of either House of Parliament, and
(b) must be made not later than 1st January of the tax year in which they are made and have effect in respect of the following tax year.”’.
Mr. Gauke: These amendments offer alternative ways to deal with what we perceive to be a significant problem with the Bill. I shall set out in detail how they would work, but before I do so I shall put the problem in context.
All hon. Members are aware of how important taxation is as a constitutional matter, and the House guards very jealously its right to raise revenue. In the broad historical sweep, for instance, the English civil war and the American revolution could be considered relevant to this discussion, although I shall not refer to them in detail. All parties in this House consider the proper scrutiny of revenue-raising measures to be very important.
This country has two forms of taxation on income—income tax and national insurance—and it is worth taking a moment to look at the different ways in which they are dealt with in this House. Income tax was introduced as a temporary measure in 1798; it was abolished five years later and then reintroduced on a permanent basis in 1842. Partly as an historical overhang, since 1860 we have renewed income tax every year, although previously it had been renewed over groups of three or seven years on a number of occasions. However, the review of income tax is also part of Parliament’s power over the Executive, as the Crown cannot raise revenue if Parliament is dissolved. Corporation tax is subject to the same restriction.
In essence, this debate is about thresholds. Since the introduction of the Finance Act 1977, when the Rooker-Wise amendment was implemented, thresholds and personal allowances have increased in line with inflation; they do so unless Parliament expressly states otherwise. The clear intention was to prevent stealth taxation, as thresholds and allowances are both diminished by inflation. Of course, inflation in 1977 was somewhat higher than it has been for some few years now. We still have fiscal drag within a year, but not from year to year.
Parliament retains the ability not to uprate allowances and thresholds in line with inflation. Indeed, it exercised that power as recently as 2003-04, but it must do so explicitly. It does so through a Finance Bill. This is where I would like to make a comparison with national insurance contributions. With income tax, from the point of view of the taxpayer, the concern is that thresholds will not increase in line with inflation. Our practical concern with national insurance contributions is with the upper earnings limit increasing faster than the rate of inflation. There is also a concern—it is probably more theoretical than practical—that the lower earnings level or primary threshold could fall, but at a practical level the political debate over many years has been about whether the upper earnings limit might increase more rapidly.
2.30 pm
The contrast between national insurance contributions and income tax is considerable in that respect, because thresholds regarding national insurance contributions are determined by regulation, as opposed to primary
legislation or a formula that can be amended through such legislation. Section 1 of the Social Security Pensions Act 1975 provides a safeguard, however. The upper earnings limit cannot be increased by more than seven and a half times the lower earnings limit, or by less than six and a half times the lower earnings limit. Why? Such an arrangement prevents abrupt changes in the scope of national insurance contributions without proper parliamentary scrutiny.
On looking at the debate on Second Reading and in Committee on that legislation, I noted that the concern expressed in Committee was that the provisions were unduly flexible and that six and a half to seven and a half was too wide a band to permit the Government to vary the national insurance contributions upper earnings limit. I also noted that representing the Opposition on that occasion in 1975 was my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke), who raised some important points about flexibility. It shows that things do not necessarily change as much as they might do. The concern in 1975 was that the provisions were too flexible. Clearly, Parliament was provided with an opportunity to restrict the power of the Executive to vary the upper earnings limit unduly and rapidly to increase the upper earnings limit to make a substantial increase in the tax on income that people in the United Kingdom would face.
That brings me to one of the major problems that we have with this Bill. Clause 1(1) abolishes the ratio and the protection that mean that only so much can be done by regulation.
Mr. Mark Field (Cities of London and Westminster) (Con): It gives us insight to have that perspective on the matter. Indeed it shows that there is a comparator, albeit in different contexts, for national insurance and income tax. Would my hon. Friend like to go into detail as to why he believes the Government have sought in that way to break down the safeguard to which he has referred?
Mr. Gauke: My hon. Friend asks a good question. We raised that issue in Committee. Under the new procedure for Public Bills, we were able to ask both the Financial Secretary and her officials that question at the evidence session. The answer was somewhat limited. All we heard was, “It gives us greater flexibility.” Let me quote the Financial Secretary:
“We see no reason to reintroduce an arbitrary ratio, given our proposal that future changes to the upper earnings limit will be subject to approval by both Houses of Parliament.” ——[Official Report, National Insurance Contributions Public Bill Committee, 15 January 2008; c. 44.]
However, that is not a satisfactory justification, because if an arbitrary ratio was good enough for Barbara Castle, and indeed for my right hon. and learned Friend the Member for Rushcliffe, in 1975, I do not see why a ratio is not appropriate for us now. The arguments remain the same.
Mr. Field:
We had an excellent engagement in the evidence session in Committee. Is my hon. Friend saying that the reality is that we should respect the notion of a ratio, but there is an argument that suggests that the bands within that ratio be changed? Surely it
cannot be the view of the Government, and I would imagine that it is not the view of Opposition Members, that the notion of a ratio itself is defunct.
Mr. Gauke: I do not think that the argument for abolishing the ratio has been made; at least, not terribly persuasively. I shall come in a moment to the detail of our amendments, in which we have attempted to outline alternative ways to address that concern. I am not saying that I am necessarily wedded to the idea of a ratio, but that is how Parliament’s position has been protected for the past 33 years, and it may be the best way to protect it in future. We can examine other ways. My hon. Friend will recall that we considered the ratio argument in Committee.
I understand that the Government are trying to align national insurance contribution rates and bands with those for income tax. Although I am concerned that their way of doing it is motivated principally by the aim of raising revenue, the objective of aligning the two is a perfectly respectable and honourable one to which we have no particular objection. It is fair to say that publications such as the Forsyth report were instrumental in encouraging the Government to go down that route or at least to place greater emphasis on simplification. We do not have any problem with that, so we are keen to be helpful to the Government, notwithstanding our concerns about the revenue-raising element. We are willing to help the Government achieve their objective while providing some protection for Parliament; that is the basis of the amendments that we have tabled in Committee and today.
Various calculations were done on widening the bands. For the first time in some while, I got out my calculator and tried to work out what ratio would be needed, given that the upper point is seven and a half times what is now the primary threshold. It is a difficult sum to calculate in some respects, because one must look at future years and so on, but it is clear that if the existing ratio is breached, it will be breached by only a relatively small amount. One idea, which I think the hon. Member for Taunton (Mr. Browne) proposed, was that the primary threshold could always be increased a little if the ratio would be breached only by a small margin.
One of our proposals in Committee was to widen the bands, as my hon. Friend the Member for Cities of London and Westminster (Mr. Field) mentioned, so that eight would be the top point rather than seven and a half. Quite possibly Treasury officials have done the calculations—if so, I should be interested to hear what the Minister says about it—but I do not think that there is any doubt that a ratio of eight times the primary threshold as the maximum point would cause the Government any difficulties in achieving their stated objective. One approach would be to consider that ratio. We debated and voted on that proposal in Committee, so it could not be brought back on Report, but it is an idea to which we are sympathetic.
Mr. Field:
To clarify the issue, is my hon. Friend saying that abolishing the ratio will entirely do away with the protection put into place a third of a century ago that allows Parliament to have its say on the matter, and that as a result this House will have
no say on whether to hold back from an arbitrary correction—from the Government’s perspective—of national insurance thresholds, particularly at the higher end?
Mr. Gauke: My hon. Friend sums up the position well. For the sake of completeness, let me add that there is the matter of regulation, which would be introduced through the affirmative procedure. No doubt the Minister will make that point.
It might be helpful to compare two very similar tax changes—a failure to uprate the threshold for income tax in line with inflation and an increase in the upper earnings limit. A failure to uprate a threshold for income tax would be announced in the Budget. Under the previous Chancellor it was unlikely that it would be announced in the Budget speech, but it would appear in the Red Book. There would then be four days of debate on the Budget, followed by a vote on a Budget resolution that, as I understand it, would include the income tax element. The resolution would be implemented through a Finance Bill. There would be a Second Reading debate on the Bill, and the income tax element would be a major part of the Bill. One can imagine an Opposition opposing a Finance Bill on the grounds of a failure to uprate income tax.
That would almost certainly be one of the issues debated by a Committee of the whole House considering such a Finance Bill. The issue would presumably not be debated in Committee, but would certainly come back on Report and Third Reading. So by my reckoning, in the circumstances that I set out, a failure to increase the threshold for income tax would be the subject of up to seven days’ debate on the Floor of the House and at least four votes of the House—not of the Committee, but of the House.
By contrast, a tax increase on income, which is in many respects similar to the case that I described, such as raising the upper earnings limit, would be the subject of one debate in Committee, lasting perhaps two and a half hours, followed by one vote in Committee. In one case there would be a much superior method of parliamentary scrutiny. There is hardly any comparison between the two cases, and that is difficult to justify.
Mr. Field: Is not one of the biggest concerns the fact that the change is pretty high profile in people’s minds and affects everyone in the workplace? Whatever their level of earnings, they pay national insurance. As a result, if the Government had their way on the matter and did not allow full scrutiny, the measure would go through on the nod and would not be scrutinised as it should be, not just on the business pages, but beyond. It would not be treated like other matters following a Budget. I do not believe that the Government are being dishonourable or disrespectful, but the change goes to the heart of what many of our constituents feel about paying tax in the broader sense—income tax or national insurance. These issues should therefore be at the forefront of a readily understandable Finance Bill debate, rather than discussed in a Committee Room.
Mr. Gauke: My hon. Friend is right. The matter would be at the heart of any debate about our finances and our taxation system.
In Committee we touched on the 1992 general election, which some hon. Members remember better than others and some remember more fondly than others. The Labour party, which was in opposition at the time, was proposing the abolition of the upper earnings limit. Clearly, the Government’s position has changed. I regret that amendments tabled by the hon. Member for Hayes and Harlington (John McDonnell), which would have had the effect of reverting to the 1992 position by abolishing the upper earnings limit, were not selected. The proposal may well return. I would argue against the abolition of the upper earnings limit for reasons of concern about tax burden, but it is a perfectly respectable position to take.
It is not this Government’s position, but it is not inconceivable—it is unlikely, however, and certainly would not be in Britain’s interests—that a Government with a manifesto pledge to abolish the upper earnings limit will be elected. Clearly, that Government would be entitled to abolish the limit, but they should be able to do so only if there were proper parliamentary scrutiny and if all the expected procedures were gone through. The Bill does not provide that protection.
2.45 pm
Peter Viggers (Gosport) (Con): In a throwaway line in his Budget, the previous Chancellor of the Exchequer put a tax of some £1.5 billion on middle-income families; he simply referred to a change in the upper earnings limit. Does my hon. Friend agree that if the safeguard is removed, that can only lead to the conclusion that the Government are preparing, and intending one day, to use the changes in respect of the removal of the safeguard? Perhaps they will come back with a proposal under the negative procedure, which does not require any debate on the Floor of the House. Having been bitten once, we should fear being bitten again.
Mr. Gauke: I am grateful to my hon. Friend, who raises a concern that many have. To be fair to the Government, their position is explicitly that the issue is part of the realignment process and that the upper earnings limit will not exceed the point at which people start paying higher rate income tax. The Financial Secretary gave that commitment in Committee, and I do not doubt her integrity.
However, we all move on at various times. In the words of Robin Day, we are all “here today, gone tomorrow” politicians to some extent, although I am sure that the Financial Secretary would move on only to even greater things. We find ourselves in the position of not having the legislative protection in the system. We are relying on a commitment—and that is unsatisfactory, given that previously we have had real protection in the system.
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