We have reached the final stage of this Houses deliberations on the National Insurance Contributions Bill, which will ensure that the personal tax package can be fully operative. I think that it will be helpful if I outline the details of the package again, as some hon. Members have focused on only a few aspects of it.
Since 1997, the Government have delivered a comprehensive programme of reforms to the tax and benefit system. Their aim has been to simplify the system, to tackle child and pensioner poverty and to make work pay. Budget 2007 announced the next stage of the reforms as part of a rebalancing of the tax system to offer more support for work, families and pensioners.
The package simplified income tax and national insurance contributions. It increased the personal allowances for those aged 65 and over, and it changed the rates and threshold for child tax credit and working tax credit. It was carefully balanced, so that the tax credit changes focus on those whose need is greatest,
including low-income families with children. The personal tax changes provide a simpler system with a modest impact on most sectors, and increased support to pensioners over 65. Each change should not be looked at in isolation.
Alongside producing the lowest basic rate of tax for over 75 years and one of the simplest personal structures in the developed world, that package results in four out of five households being better or no worse off, with the average household gaining £100 per year. A lone parent with one child will see their annual gain from returning to work rise by up to £350, and 200,000 children have been removed from poverty. Households with children in the poorest fifth of the population will be on average £340 per year better off, and around 600,000 fewer pensioners will pay income tax than would otherwise be the case, so that in total only 43 per cent. of pensioners will be taxpayers.
In helping to deliver that package, the Bill first allows the upper earnings limit to be aligned with the point at which higher-rate tax starts to be paid, significantly simplifying the United Kingdoms tax and national insurance contribution systems. From April 2009 there will be just two main rates of income tax, and they will apply to the same bands of income as the two rates of national insurance contributions, creating one of the simplest personal tax structures of any developed country.
Secondly, the proposals in the Bill are central to the Governments commitment to provide a solid and simpler state pension. By bringing forward the introduction of the upper accrual point, the Bill returns the timetable for the removal of earnings-related state second pension to that recommended by the Pensions Commission. That will mean that by around 2030 the complex earnings-related structure of the state second pension will be withdrawn, leaving a flat-rate scheme that will be simple to administer and to understand for both contributors and pensioners.
I got a little carried away during my earlier contribution; I blame it on the flu. In trying to reassure the hon. Member for Gosport (Peter Viggers), which I patently failed to do, on winners and losers in respect of the upper earnings limit, I got the figures the wrong way round. The loss of the starting rate band and the upper earnings limit being raised mean that those people are worse off by the amounts that I gave. However, they are better off as a result of the basic rate being introduced at 20 per cent. I know that he knew that; he just did not want to cause me embarrassment in the debate. However, I was right to say that, overall, they will be £51.60 better off.
I am grateful to hon. Members for the way in which this Bill has been debated. It is a short Bill. It makes the two changes that I have described, for the reasons we have debated. I am pleased to be able to conclude that the Bill has had thorough scrutiny. As I have said, I have been impressed by the constructive contributions. I thank hon. Members on both sides of the House for their contributions to the debate.
As the Financial Secretary said, we have had some good scrutiny of the Bill, but Opposition Members remain concerned about what the Bill seeks
to achieve and the manner in which that is being done. As the right hon. Lady also said, there are two elements to the Bill. The first relates to taxation, in the sense of the change to the provisions on the upper earnings limit. The second relates to changes to pensions.
On the first point, we have already debated at some lengthI do not intend to repeat the points that were madeour concerns about the lack of proper scrutiny that may occur should there be other increases in the upper earnings limit, and the fact that the restrictions in existing legislation provide some protection to ensure that there is an opportunity in this House, and particularly within this Chamber, to examine any changes to the upper earnings limit. There is no doubt that the Bill will weaken that ability, and we are considerably concerned about it.
It has not been an entirely happy week for the House of Commons, to put it mildly. I do not want to be hyperbolic, as there have been other issues of even greater concern, but we are unhappy about the effect of these provisions on future scrutiny. There is a broader point about the increase in the upper earnings limit: it is a stealth tax increase, part of what turned out to be the Prime Ministers final Budget as Chancellor, in which he produced a rabbit out of a hat for political effect, and £1.5 billion a year will be raised from middle earners as a result.
Mr. Adam Holloway (Gravesham) (Con): Does my hon. Friend agree that we are in effect legislating for a £1.5 billion tax rise? We were told that the Bill would simplify the tax system, end child poverty, address inequalities in our society and so on, but it is a tax increase, not for the super-rich but, yet again, for middle-income families.
Mr. Gauke: My hon. Friend makes a good point. We have been rather consensual this afternoon, as we were in Committee, when discussing areas of disagreement between us and the Government, but some of the debate on Second Reading was slightly more feisty, and the accusation was made that the Conservatives, in raising concerns, were on the side of the wealthy. Actually, as my hon. Friend points out, the people who will lose out as a consequence of both the package as a whole and the measures dealing with national insurance contributions are those who earn about £39,000 to £40,000 a year. That is certainly what the Institute for Fiscal Studies concluded. So we are talking about police officersthey are not receiving a full pay increase as it issenior nurses and teachers, not the very wealthy. It is middle England, to some extent, that will suffer as a consequence of the increase.
I want to make it clear that we do not object to aligning national insurance contributions with higher rate income tax. The idea seems sensible, and I made the point earlier that debate on the matter has been led by my hon. Friend the Member for Tatton (Mr. Osborne), the shadow Chancellor. The Forsyth report, which advocated something similar, has been influential, but those proposals were based on the use of fiscally neutral measures. As my hon. Friend the Member for Gravesham (Mr. Holloway) made clear, the measures in the Bill are not fiscally neutral. They are intended to raise more tax revenue, which we know the Government need to do. I shall not stray too far
into yesterdays Institute for Fiscal Studies report, which showed that there is an £8 billion black hole in the Governments finances, and that taxes will need to increase to ensure that the Prime Ministers fiscal rules are met; the point is that the measures are primarily a tax increase, and not one that will be paid by the wealthy. Looking more broadly at the Budget 2007 packageI shall not dwell on this pointwe see that it is the low earners who make up the majority of those who will lose out.
We know that 5 million households will lose as a consequence of the measures. I do not think that we ever got an answer to the question asked at a Committee evidence session about how many of those 5 million households would be in the £39,000 to £40,000 income range. I do not know whether the Financial Secretary has an answer, but it would be interesting to know how many households within that band will lose out. Of course, it is the way in which national insurance contributions are being aligned with higher rate income tax that will cause that loss.
The second element of the Bill is the separation of the upper accruals point from the upper earnings limit. We all speak of the consensus on all sides about the Turner package of pensions reform, and there is a fundamental consensus on the thrust of what we need to do. The reason why we have expressed concern about what the Government propose in the Bill is not because of any abandonment of the consensus, as was alleged on Second Reading. We believe that there should be a restoration of the earnings link to pensions, and have advocated that idea for some time. We have also accepted the principle of separating the upper earnings limit from the upper accruals point as part of a packageas part of a set of proposals that would enable us to finance the restoration of the earnings link.
However, what we see in the Bill is the breaking up of that package, and we are legislating now on separating the upper accruals point from the upper earnings limit at least four years before the implementation of the restoration of that link. That will not happen until 2012, the date that the Government are working on. The Financial Secretary reiterated in Committee that it remains the intention and expectation of the Government that the link will be restored in 2012. The caveat on which the former Chancellor, now the Prime Minister, insisted was that the Government could not restore the link unless economic conditions allowed.
Given the green budget produced by the Institute for Fiscal Studies, one must seriously question whether those economic conditions will permit that in 2012. If not, it could be another seven years before the link is restored, yet we will already be paying the costpeople will be paying contributions to a contributory system, and their contributions will count for nothing. Those will no longer be contributions, but tax payments.
The Pensions Policy Institute raised the issue following the 2007 Budget when national insurance contributions were increased by the increase in the upper earnings limit, and made it clear that as a consequence, unless something was done, the flat-rating would be delayed until 2035. On Second Reading and in Committee we explored in some detail whether the Treasury was fully aware that that would happen. We were told explicitly that the Treasury was aware. In
the Red Book showing the financial implications of every policy announced in the Budget, the additional costs of the increase in the upper earnings limitin other words, the additional rebates that would be paid to funds for those who had opted out of the second state pensionwere scored.
That being the case, it is surprising that the Treasury, which with the left hand had identified that there was an issue, had not done more with the right hand to address it. It was conceded by the Treasury officialswhom I take this opportunity to thank for their clear evidence and their help to the Committeethat the Red Book made no explicit reference to the problem. We know that the Treasury was aware of it, yet no proposals were made at the time of the 2007 Budget. One cannot help concluding that the 2007 Budget package was somewhat rushed, and that not all the implications were appreciated or, if they were, not all the necessary mitigating steps were taken to address those consequences. That Budget looks increasingly flawed
I move swiftly on to our essential concern about that second element of the Bill. A number of peoplenot the very wealthywill be paying more in contributions but not receiving the benefit, because they will reach the upper accruals point. We have asked one question throughout. The Governments explanation is that we need to ensure that we revert to 2030-31 as the point at which flat-rating comes in. What has never been satisfactorily explained is why that 2030-31 date is so important. I appreciate that it was part of the original Turner package, but that was based on the assumption that the national insurance contributions upper earnings limit was not going to be increased as it subsequently was. Why was 2030-31 so sacrosanct that it had to be maintained?
My hon. Friend the Member for Ludlow (Mr. Dunne), who is detained on important constituency business today, raised that very question in Committee. The Minister answered that it would have led to higher earners receiving a greater than intended benefit for the state second pension. That is absolutely right, but those higher earners, as she describes them, were contributing more in national insurance contributions than had been anticipated. Why should they not also receive additional benefits? I hope that that point will be explored further in another place.
The Bill will raise additional revenue from national insurance contributions. It will weaken Parliaments ability to scrutinise further tax increases in this area, and it means thatin a manner not anticipated by the Turner report and the consensus that arose from itpeople will pay more in national insurance contributions but not receive additional benefits as a consequence. For those reasons we remain concerned that the Bill is flawed, and we will oppose Third Reading.
Mr. Jeremy Browne: Today is 31 January, and tax simplification is probably on the minds of many millions of our fellow citizens. In my party there is an appetite for greater simplification of the tax system, and since 1997 we have consistently criticised the Government on the issue.
A criticism that can be made of the Government in respect of the past 11 years or so is that a lot of additional complication has been added to the system; if some of that is now being reversed, that is welcome. I suppose I can boil our criticisms down to four succinct points. First, the simplification has come with a large sleight of hand; as has been pointed out, the Bill is part of a process that enables the Government to raise something in the order of £1.5 billion of additional revenue.
The situation was fairly anomalous before, when the marginal rate of tax being paid by people earning in the region of £38,000 or £39,000 was considerably higher than that paid by those earning in the region of £28,000 or £29,000. That dip in the graph in that income area could have been seen by many on lower incomes as being unfair on them if they took the view, as I do, that national insurance contributions are, to all intents and purposes, income tax under a different guise. I understand the argument that they are not the same because they are calculated and levied on a different basis. However, many people looking at their payslips at the end of the month will find it anomalous that some people on higher incomes pay lower marginal rates than some of those on lower incomes. I understand the logic of that aspect of the changes, but had the simplification been revenue-neutral, it would have been more widely welcomed than this measure, which combines it with a large additional tax take.
Our second objection is that abandoning the multiplier of 7.5 per cent., which Members who have been consistently interested in the Bill have discussed at length, represents a loss of discipline. It is always easier to loosen ones belt than to regulate ones diet. The Government would have been better advised, having raised the level of tax take beyond what would have been considered conceivable by Chancellors prior to this Governments coming to office, to look more often at how they can maintain and impose greater discipline on themselves instead of looking at ways to raise the tax take further.
My third point has been discussed at length by the hon. Member for South-West Hertfordshire (Mr. Gauke)the ability of this House to scrutinise changes that may take place in future. We share the concerns that Conservative Members have expressed in that regard. Even if one takes the view that the current Government are benign and benevolent in all their intentionscertainly, most people take that view of the Financial Secretary, if not of the Governmentone can see that it is nevertheless desirable that safeguards
should be put in place to prevent future abuses. I think that most people would agree that those safeguards are now less onerous than would otherwise have been the case.
My fourth point is about part 2, which we have not discussed at such length. As the Conservative spokesman said, as regards the state pension we are getting the pain at least four years before we get the gain. He did not say, of course, because Conservatives never do, that the need to reconnect the link with earnings and price increases has come about because the Conservative party broke it in the first place. Passing over that for the time being, it remains the case that these provisions are being coupled together in the minds of the public, yet we cannot expect the state pension to have that link restored until 2012 at the earliest. My party does not think that the provisions in the Bill are sufficient for pensioners, particularly poorer pensioners and women pensioners.
The Bill is not the most controversial measure, principally because it is a means to an end rather than an end in itself. Those who object to the Chancellors Budget and to the Governments overall tax policy, and have rushed into the Chamber to make those objections, have good reasons to do so in many cases, and those are legitimate debates. However, the Bill is about enabling these changes to take place, and that is a separate argument from whether the changes have merit in themselves. I have plenty of views about the merits of the Governments policies and their last Budget. I also have reservations about aspects of the Bill that I feel less strongly about. The Bill is not particularly controversial, but it does have limitations that give us cause for concern; that is why we will not support it.
Mr. Mark Field: It is a great pleasure to follow the hon. Member for Taunton (Mr. Browne). I suspect I may be getting into the spirit of things, and perhaps reflecting the concerns that my hon. Friends the Members for West Chelmsford (Mr. Burns) and for Bournemouth, East (Mr. Ellwood) wished to raise earlier, when I say that the fact that the hon. Member for Taunton is here on his own shows either that his 62 fellow Liberal Democrats are convinced of the case for simplification or that they are all hurriedly filling in their tax returns in advance of the deadline this evening.
One way or another, it has been a pleasure to have served briefly on the Committee considering this Bill. The evidence session that we had was an excellent innovation. It was the first time I had dealt with a Bill where there was quite that level of interplay between Ministers, officials and Members of Parliament. Such sessions are considerably more revealing than the stylised debate form, even within the relatively informal surroundings of a Public Bill Committee. The session that we had allowed some deeper questioning, and far more clarity. That ensured that the process was rather more revealing and, I suspect, more straightforward than it would have been if we had to constrain comments within the confines of stylised amendments. It was a useful process, and I thank the Minister and her officials for ensuring that we had that sort of debate.