 House of Commons |
Session 2007 - 08 Publications on the internet General Committee Debates National Insurance Contributions Bill |
National Insurance Contributions Bill |
The Committee consisted of the following Members:Chris
Shaw, Committee Clerk
†
attended the
Committee
WitnessesJane
Kennedy, Financial Secretary to the
Treasury
Steven
Effingham, Head of the Personal Tax Team, HM
Treasury
Jonathan
Athow, Head of the Work Incentives and Poverty Analysis Team, HM
Treasury
Sam Mitha, Assistant
Director Tax/NICs Policy Team, HM Revenue and
Customs
Public Bill CommitteeTuesday 15 January 2008(Morning)[Mr. Christopher Chope in the Chair]National Insurance Contributions Bill10.30
am
The
Chairman:
Before we begin, I have a few preliminary
announcements to make. If people wish, they can remove their jackets; I
see that one or two hon. Members have already done so. Will all members
of the Committee please ensure that their mobile phones and pagers are
turned off or are switched to silent mode during our
proceedings?
Adequate
notice should be given of amendments. As a general rule, I do not
intend to call starred amendments, so the reality is probably that the
time for amendments is
passed.
We are still
in the early days of taking oral evidence in Public Bill Committees, so
it might be helpful if I explain the procedure to make it clear to
everyone. The Committee will first be asked to consider the programme
motion on the amendment paper, for which debate is limited to half an
hour. We will then proceed to consider a motion to report written
evidence and a motion to permit the Committee to deliberate in private
in advance of the oral evidence sessions that I hope we can take
formally.
Assuming
that the third motion is agreed to, the Committee will then move into a
brief private session. When the Committee has deliberated, witnesses
and members of the public will be invited back into the room and our
oral evidence session will commence. If the Committee finishes its
questioning at a reasonable time before One o’clock—I
understand that that is the expectation—it will move on to the
more familiar proceedings of clause-by-clause scrutiny of the Bill,
after a short suspension to rearrange the room. I hope that that is
clear. I now call the Minister to move the programme
motion.
Ordered,
That—
(1)
the Committee shall (in addition to its first meeting at 10.30 am on
Tuesday 15th January)
meet—
(a) at
4.30 pm on Tuesday 15th
January;
(b) at 1.30
pm on Thursday 17th
January;
(c) at 10.30
am and 3.30 pm on Tuesday 22nd
January;
(2) the
Committee shall hear oral evidence from the Treasury on Tuesday 15th
January, and the hearing of that evidence shall (so far as not
previously concluded) be brought to a conclusion at 1
pm;
(3) the
proceedings on consideration of the Bill in Committee shall (so far as
not previously concluded) be brought to a conclusion at 5 pm on Tuesday
22nd January.—[Jane
Kennedy.]
Ordered,
That, subject to the discretion
of the Chairman, any written evidence received by the Committee shall
be reported to the House for publication.—[Jane
Kennedy.]
The
Chairman:
Copies of any submission that the Committee
receives will be made available in the Committee Room, but none has
been received so far. I call the Minister to move the motion on
deliberating in
private.
Ordered,
That,
at this and any subsequent meeting at which oral evidence is to be
heard, the Committee shall sit in private until the witnesses are
admitted.—[Jane
Kennedy.]
10.34
am
The
Committee deliberated in private.
10.40
am
On
resuming—
The
Chairman:
We will now hear oral evidence from the Minister
and officials from the Treasury and Her Majesty’s Revenue and
Customs. I welcome the witnesses here today. Minister, would you like
to introduce the witnesses, and would you be happy to go straight into
questions?
Jane
Kennedy:
I think that you have the names and titles
of the witnesses in front of you. The Committee has provided that to
you; but for courtesy’s sake, there is Steven Effingham, head of
the personal tax team; Jonathan Athow, head of the work incentives and
policy analysis team in Her Majesty’s Treasury; and Sam Mitha on
my left, who is the assistant director of PAYE and national insurance
contributions at
HMRC.
Q
1
Dr.
Ian Gibson (Norwich, North) (Lab): Without implying that
this is necessarily bad, is this just a money-raising exercise,
principally because you will do anything to get money into the bank for
the
Exchequer?
Jane
Kennedy:
As you know, that in itself, as a matter of
principle, is something that the Treasury would, naturally, want to
have an interest in. For the serious purposes of the Bill, it is part
of the overall reform that the Pensions Bill made to pensions
provision, and a lot of the measures were announced in the Budget. We
discussed this on Second Reading, and the broad purpose of the Bill is
simply to ensure that, by making the changes that we are proposing, the
anomaly that we have recognised for the higher
earners—those contributing to the national insurance
contributions fund—do not get a disproportionate benefit later,
as a result of their pension
payments.
Q
2
Dr.
Gibson:
How was this anomaly picked up, and how long has
it been in existence? 1066? Magna
Carta?
Jane
Kennedy:
We were aware that this was possible as a
likely consequence of the reforms in the discussions leading up to the
Budget. Both HMRC and the Treasury were aware of this possible
consequence. However, further work needed to be done in order to be
clear how best to correct the anomaly in a way that would be fair to
everybody, which was the Government’s intention. It did not
become clear until further work had been done between the Department
for Work and Pensions, HMRC and the Treasury on exactly how to do that.
It was apparent to us that it was better to do it separately in a Bill
of this nature, rather than to take the reform forward as an amendment
to the Pensions Bill.
Q
3
Mr.
Mark Field (Cities of London and Westminster) (Con): I
support simplification and can understand one of the ideas behind the
Bill. What thought was given by the Treasury to try to make the matter
revenue-neutral: in other words, by reducing the upper earnings limit
to such a degree that this whole aspect was revenue-neutral? Was any
consideration given to reducing the upper earnings limit, rather than
to increasing the limit at which national insurance is paid, to get to
that point? I can understand the idea that the Treasury would wish to
simplify the entire system—that makes a certain amount of
sense—but clearly, the way in which the current Treasury has
decided to go about this will hit middle-income earners who are about
to, or are already, paying income tax at the upper earnings limit. Why
was this not made revenue-neutral in such a way that the interests of
those people were
protected?
Jonathan
Athow:
The overall reforms that were
announced in Budget 2007 represented a reduction in the taxation on
employment and were funded by revenue raised elsewhere in the tax
system. In broad terms, there was a tax cut related to those elements
around the removal of the 10p rate of income tax—the cut to the
basic rate—and the alignment of the upper earnings limit with
the point at which you start paying income
tax.
10.45
am
The
aim for higher income individuals—those who will be basic rate
taxpayers after the reforms have been introduced—was to leave
them no better or worse off. The overall package, which increases the
upper earnings limit for those taxpayers but enables them to enjoy a
cut in the basic rate, should leave them no better or no worse off
overall than they would have been if the Budget 2007 reforms had not
been
implemented.
Jane
Kennedy:
Taken on its own, your point is valid. We
have repeatedly said that this is part of a package. It is part of a
major reform that we are taking forward. Overall, the families in the
income bracket that you are talking about will see no change to their
relative
position.
Q
4
Mr.
Field:
If I can just pick up on that, there is no
disputing the fact that revenue will be raised as a result of the
Bill—the question asked by the hon. Member for Norwich,
North—but someone must be losing out. If you are saying to me
that the middle-income families will find this revenue-neutral, who
exactly will be losing out as a result of these
measures?
Jonathan
Athow:
If I can explain, the position of some higher
rate taxpayers, depending on their national insurance position and
whether they have contracted out, is that they made a small gain from
the Budget 2007 reforms. In that sense, the changes here are not
disadvantaging relative to the position before Budget 2007, but they
take back some of that gain. That is why this Bill can raise revenue
without making anyone worse off than they were before Budget 2007. I
hope that that is
helpful.
Q
5
Rob
Marris (Wolverhampton, South-West) (Lab): Dealing with the
anomaly that the Minister referred to in her response to my hon. Friend
the Member for Norwich, North, I wonder why the alignment of the upper
earnings limit and the upper
accrual point is being done in two stages. Prima facie, it occurs to me
that, after the first step of that alignment, which is effective from
April 2008 until April 2009, when the second full step of alignment
will be made, the anomaly to which the Minister refers will continue.
If that is the case,
why?
Jonathan
Athow:
There are two issues. Obviously, the intention
of the Budget 2007 reforms was to introduce those changes as quickly as
possible. However, there are limits to what this Bill can look at,
especially with regard to any changes that can be made without
legislative change to the upper earnings
limit.
Q
6
Rob
Marris:
I am sorry to interrupt you, but we are dealing
with legislative change now. My initial response to your initial
response is that we have a Bill in front of us, why could we not do it
now?
Jonathan
Athow:
The national insurance Bill will allow those
changes. From April 2009, we can fully align the upper earnings limit
and the point at which people start paying the higher rate of tax.
However, as part of the step in that direction, the initial stages were
taken to start the alignment process from April 2008, but the words
“legislative constraints” meant that it could not be done
all in one go. Therefore, it is a two-stage process. The second stage
is dependent on the legislation in the national insurance
Bill.
Jane
Kennedy:
If I could just add to that, Mr.
Marris, if you look at the impact assessment, which is available to
Committee members, four options were considered when we were
considering what to do to respond to the circumstances as we believed
they would develop. One of those options was to do nothing; one was to
do the change effective from April 2009, but two other effective dates
were considered as well. On balance, we believed that it was better to
go for the earliest possible effective date on which we could change
it. Bear in mind that we are all the time seeking to simplify the tax
and benefit system in the UK, and that was also an important
consideration.
Q
7
Rob
Marris:
I quite understand that. It strikes me that for a
year, between April 2008 and April 2009, we will not have the
simplification that we will have from April 2009 onwards. I wonder what
the legislative constraints to which Mr. Athow referred are,
given that we have a Bill before the House now.
Jonathan
Athow:
The constraints are that—Mr.
Mitha will correct me if I am wrong—the upper earnings limit is
limited to a maximum of seven and a half times the lower earnings limit
and that to align that upper earnings limit with the point at which
people could start paying higher rate tax would actually mean an
increase above seven and a half times. That limitation means that
alignment cannot happen all in one go. Currently, the point at which
you pay higher rate tax is more than seven and a half times above the
lower earnings limit.
Jonathan
Athow:
The Bill makes changes to that ratio to allow
for alignment, so it will allow the upper earnings limit to be more
than seven and a half times the lower earnings limit.
Sam
Mitha:
Under the current legislation, prior to the
enactment of the National Insurance Contributions Bill, the upper
earnings limit is set at seven and a half times the primary threshold.
Once the Bill is enacted, assuming that it is passed in the form that
is being proposed, Ministers will be able to set it at a level that is
set by regulation, subject to affirmative resolution. At the moment,
the maximum of the upper earnings limit that could be set prior to the
passage of the Bill that is currently before Parliament is seven and a
half times the primary threshold, which is currently £100 a
week—the level at which national insurance class 1 contributions
become
payable.
Jane
Kennedy:
There is a more political point, which you
are making, Mr. Marris: if we have a pensions Bill before
the House, why are we not taking the measure in that? I understand that
that is perhaps what you are getting at. The truth is that we felt
that—rather than bring this forward as a Government amendment to
a pensions Bill, which we could not necessarily guarantee would be
debated in full—this was a better vehicle to use, given that we
wanted to take the time to get right the changes that we believed were
necessary. Rather than bring that forward in a set of Government
amendments, which we all know can be dealt with very quickly and very
often to the dissatisfaction of Members of both Houses, we felt that
this was a better way of doing it.
Q
9
Rob
Marris:
So am I right that we are getting partial
simplification from this April and full simplification for April next
year?
Jane
Kennedy:
Yes, that’s
right.
Q
10
Mr.
Jeremy Browne (Taunton) (LD): On a quick point of
clarification, in this immediate year, it will stay within the seven
and a half times threshold, but it will be no more simple than the
current arrangements. You could say that it will be halfway between
confusion and
simplicity.
Jonathan
Athow:
As I said, it is a step on the way to a
simpler system. Obviously, other changes are happening from April 2008,
such as the reduction in the basic rate, looking at the package as a
whole. Also, as I said, the aim was to make certain that people who are
higher rate taxpayers after the changes are introduced will be no
better or worse off. There was also a desire not to create a windfall
gain for those people by making no change now, only to then take it
away the following April, or to give them a windfall loss, only to
compensate them in the following April. It is very much from the desire
of leaving higher rate taxpayers no worse off this April, compared with
the April before, and April 2009, compared with April
2008.
Q
11
Mr.
Browne:
On a point about clarification, what would stop
the simplification happening with immediate effect, with the
legislation being passed to enable that jump to happen in one go beyond
the seven and half
ratio?
Jonathan
Athow:
My understanding is that we would not be
legislatively able to make those changes. To allow for the legislation
to be passed, it was decided that we would implement it from April
2009.
Q
12
Mr.
David Gauke (South-West Hertfordshire) (Con): I wish to
clarify the anomaly to which the Minister referred earlier. I got the
impression that you were talking about the upper accrual point and the
fact that we are going to run into some difficulties, as opposed to the
upper earnings limit? If there is an anomaly, it is the fact that you
stop paying national insurance contributions before you start paying
higher rate income tax—a gap that has existed for a
while.
Jonathan
Athow:
The long-standing anomaly is exactly as you
describe it; that is clearly what the reforms in the Budget set out to
look at. We then looked at consequential issues around the upper
accrual point. As the Financial Secretary made clear, those issues were
considered at the time, but we wanted to come back to them
subsequently, because there are a number of complex issues when talking
about the second state pension and how changes in the accrual point
would affect state pension entitlement.
Q
13
Mr.
Gauke:
Can we just turn to the question of Budget losers?
I take your point that, in isolation, the changes to the upper earnings
limit will raise revenue—£1.1 billion in 2008-09, and
£1.5 billion in 2009-10. One could look at it as part of an
overall package, but my memory is that the analysis done by the
Institute for Fiscal Studies showed that a group of people earning in
the range of £39,000 to £40,000 would lose out overall?
Considering it not in isolation but overall, they would lose out. Is
that analysis correct? Obviously, there will be some winners and some
losers, but I want to identify who are the losers in the overall
package. I think it is in that region. Am I
correct?
Jonathan
Athow:
There will be a small number of people for
whom the additional rise in the point at which people pay higher rate
tax does not fully compensate for the rise in the upper earnings limit.
The IFS has identified that group. However, it is a relatively small
number.
Jonathan
Athow:
I do not know
whether—
Jane
Kennedy:
I do not have a breakdown by income group,
but I have one for type of household. Bear in mind that these are
within the context of the overall package, including the other changes
brought forward by the 2007 Budget.
Around 5.3 million households
will pay marginally more. That is a lot of households, but that is in
the context of the 21 million households that will be either better off
or no worse off. It is in proportion to that figure. Of the 5.3 million
households that will lose, about 3.7 million will have a loss of less
than £3 a week.
A further breakdown
that I gave in answer to a parliamentary question I repeat for the sake
of clarity. About 900,000 households that contain a single adult would
see their income decrease by an average of about £1.45 a week.
There are 700,000 households with more than one adult but with a single
earner; they would see their income decrease by slightly
more—about £2 a week on average. There are 3.3 million
households that are worse off in which two or more adults are defined
as earners, who will see their income decrease by around £2.60 a
week on average. And then there are about 800,000 single adults with an
income below
£18,500 who will see their income decrease by £1.45 a week
on average. About 600,000 women aged between 60 and 64 will also see
their income decrease, but they will often be in households with other
earners or other people in the household. We anticipate that most of
them will be in households with more than one
adult.
Q
15
Mr.
Gauke:
I apologise—you might have said this, and I
might have missed it—but how many of the 5.3 million are in the
£39,000 to £40,000 bracket? Was that figure in
there?
11
am
Jonathan
Athow:
I do not think I have that figure to hand, but
we could provide it
later.
Q
16
Mr.
Gauke:
That would be interesting. Incidentally, when I was
on the Treasury Committee, I remember asking the then Chancellor
whether he agreed with the 5.3 million estimate produced by the
Institute for Fiscal Studies, which he did not. But there you
go.
Jane
Kennedy:
If it would help, I could provide an example
of someone earning at the upper-earnings limit, or above, who would
fall into that group. Using the 2008-09 tax year as an example, most
employees earning at the upper limit, or above it, will be better off:
the loss of the starting rate tax band means that they will gain about
£232 per year; the upper earnings limit being raised to
£770 means that they will gain a further £390 per year,
and the reduction of the basic rate to 20 per cent. means that
they will lose £673 per year. Overall, we calculate that they
will be about £51.60 better
off.
Q
17
Mr.
Gauke:
They are the people who will be better off, but
they are not the people that the IFS identified as the losers. I take
your point that they are marginal losers, but there will be different
groups and we must bear in mind fiscal drag. However, may I follow on
from a question raised by Mr. Field about how this will
work? I take the point that, in simplistic terms, the tax
increase—the increase in national assurance contributions and
the doubling of the 10p band—paid for the 2p off income tax. In
broad terms, that is what it did. How did that work? Did an instruction
come from up on high saying, “I want to knock 2p off income tax;
find me some ways to fund it!”? I am curious about how the
Treasury works in these
circumstances.
Jane
Kennedy:
It is part of a very lively discussion
process between Ministers and advisers in the Treasury and HMRC who
talk us through the various options, the impact on fiscal take and the
economy, and a whole range of other measures. That is particularly the
case when we are making changes with a set of policy objectives in
mind, which clearly we were in this
case.
Q
18
Mr.
Gauke:
I suppose I am asking what drove it. Was the
analysis that it would be good to have two rates for personal income or
was it a case of wanting to find extra money to fund the 2p off income
tax, so that the Chancellor could announce it at the end of his Budget
and put the Leader of the Opposition on the back foot? What drove the
decision?
Jane
Kennedy:
I was not informed at the time. We had a
number of objectives, the first of which was to seek to simplify the
personal tax system in the UK. We listen to, and are conscious of, the
criticisms of the complexity of the system for personal and business
taxation, which is why that was one of the policy objectives of the
changes. The second and very important objective was to test the
current personal tax structure in order to see whether it best served
our objective of reducing child poverty by bringing more children out
of relative and absolute poverty. I think that I am right in saying
that the changes that we are making, and have made, as a result of the
2007 Budget, and some of the changes today, mean that we will take a
further 200,000 children out of relative poverty. That was an important
consideration. There was a degree of redistribution in the way that we
did it to ensure that we gave as much help as we could to families with
children, which will help towards that
objective.
Q
19
Mr.
Gauke:
On redistribution, Minister, my memory of the IFS
analysis—ignore our relatively small group of 39,000 to
40,000—tells me that it was not a bad Budget for those on middle
incomes but that many people who earn less than £18,000 were
losers, if only by a small amount. In that sense, from a redistribution
point of view, it was a curious Budget, because some of the losers were
at the poorer end of the scale.
Jane
Kennedy:
The redistribution was not necessarily all
from higher to lower earners, as you rightly pointed out. There was a
redistribution for some, particularly single-adult households, but the
third important objective was to improve the incentive to work. I am
sure that the debate on whether we achieved that will continue, but we
are constantly reviewing policy to ensure that we do not work against
the objective.
Q
20
Mr.
Gauke:
This question might be one for the officials,
because they were at the Treasury at the time. Did the Treasury, when
officials were working through the process of reaching a Budget, ever
model a tax-neutral realignment of national insurance and income tax?
If you did, I should like to know what it looked like. I assume that it
would have a higher level at which people start to pay higher rate
income tax. Did you ever model
that?
Jonathan
Athow:
A number of options would have been looked at.
As I said, overall, the reforms from Budget 2007 on personal tax
represented a cut of around £2.5 billion. If you wanted to use
the upper earnings limit and the point at which people pay higher rate
tax as the balancing item, you would have to reduce the income at which
people start to pay higher rate tax. If you wanted to make it
revenue-neutral within the personal tax system, it would mean a
reduction, so people would start to pay higher rate tax lower
down.
Q
21
Mr.
Gauke:
I might be confused. There are two ways of
aligning. You can raise national contributions up around the limit, so
people pay 11 per cent. for
more, or you could reduce the point at which people start paying higher
rate income tax, so rather than paying 22p—it is now
20p—they start paying 40p. In a way, the fact that the
Government have raised the upper earnings limit raises less revenue
than the alternative approach. Is that
correct?
Jonathan
Athow:
Yes, that is
correct.
Q
22
Mr.
Gauke:
But if you wanted a revenue-neutral measure, you
would shift up the rate at which people pay higher rate income tax. The
higher rate threshold, in other words, would go up higher still. I have
not done the sums, but rather than 43p, it would be 45p or 46p. Is that
correct?
Jonathan
Athow:
The logic actually works the other way around.
Once the upper earnings limit and the point at which people pay higher
rate tax are aligned, the marginal effective tax rate below that
point—national insurance plus income tax—would be 31 per
cent. That comprises 20 per cent. income tax plus 11 per cent. national
insurance. Above that point, it is 41 per cent.—40 per cent.
income tax plus 1 per cent. additional national insurance charge. If
you wanted to raise money, you would want people to be paying more of
their money at the 41 per cent. rate, so you would reduce the
threshold.
Q
23
Mr.
Gauke:
I am asking whether, if you wanted the realignment
to be revenue-neutral, you would raise the point at which you started
paying 41 per
cent.?
Jonathan
Athow:
Again, it depends on what baseline you are
looking against.
Q
24
Mr.
Gauke:
Presumably, that must be right. If you wanted to
make the changes in isolation—I accept your point that they are
not being made in isolation—the point at which people started
paying 41 per cent. would be higher than is currently proposed by the
Government.
Jonathan
Athow:
As a hypothetical example of doing something
in isolation, that would be correct.
Q
25
Mr.
Gauke:
I suppose that what I am asking is whether you ever
looked at that as one of the options presented to Ministers, or was it
always a given that 2p was coming off income tax and therefore we
needed to raise more revenue from elsewhere.
Jonathan
Athow:
A set of reforms evolves over time; there are
ideas. As the Financial Secretary said, the Government had principles
about simplification, tackling child poverty, work incentives and
taking pensioners out of tax. If you look at the package as a whole,
the Government believe that it is a sensible set of reforms that is
best placed to meet those different objectives. I am not certain that
it necessarily makes sense to consider individual components in
isolation, because it is very much a package. The removal of the
starting rate and the reduction in the basic rate have effects for
higher rate taxpayers and need to be factored in when considering their
overall tax
position.
Q
26
Mr.
Browne:
I have a couple of questions further to
Mr. Gauke’s. If you wanted to make the proposal
revenue-neutral, you could, as you said, make the point at which it
kicks in at 41 per cent. higher than is proposed in this legislation,
or presumably you could have raised the threshold at the lower point as
well. You could have given money back to people at the lower end of the
scale, rather than the people at the upper end of the
scale.
Jane
Kennedy:
We would have asked for advice on that. In
the end, when you are introducing a major change to the tax and
national insurance system, which is what was proposed in Budget 2007,
and along with it a whole raft of other changes to
thresholds—the really complex changes that were
proposed—you will consider many different scenarios. My
experience has always been that you could spend a very long time
working through many different options to no good purpose. In fact,
Ministers would normally give a relatively clear steer on what they
were looking for as an objective for such a
reform.
Q
27
Mr.
Browne:
Was one option that was considered a halfway house
whereby you would have gone halfway towards making the measure
revenue-neutral—funding a 1p rather than a 2p cut in the basic
rate—or was that considered less politically dramatic than the
2p cut? Or was the attraction that of having 20p and 40p as the two
simple thresholds on the basis that both are divisible by 10, rather
than 21p and
40p?
Jane
Kennedy:
My answer to that is the same as the answer
that I have just given. I was not party to the discussions that took
place at the time, but my experience of such discussions is that you
will fairly rapidly move to a point at which, as Ministers, you are
fairly clear about what your objectives are. That being the case, you
will work with officials to test those objectives, not necessarily to
conduct an academic exercise to see what the whole range of different
options are in detail. You would give a relatively clear steer on what
you wanted to achieve and then ask for proposals that met those
objectives. I am not sure whether the specific option mentioned was
considered, but Ministers will have given a very clear steer at the
time as to what they wanted to achieve, and tax rises and other things
would have been part of that
discussion.
Q
28
Mr.
Browne:
We are talking about, I think, 5.3 million losers
under the overall arrangements. The question is whether you feel that
the then Minister could have said, “Wait a second. I can
identify two big groups of losers.” That is those who benefit
almost or completely from the lower, 10p rate but do not earn enough to
benefit from the reduction from 22p to 20p in the basic rate, who are
relatively low earners, and the people who benefit from the admittedly
somewhat anomalous position of their marginal rate going
down—the £39,000 to £40,000 income earners. Those
are the two big groups that took a big hit from the
Budget.
Mr.
Browne:
Do you want me to have another stab at that? As
the Minister said, these measures are all considered as part of a
package. The changes to national insurance funded the proposals, as did
the abolition of the 10p rate. Interestingly, as the Minister has
admitted, that meant that there was a redistribution from some people
on relatively low earnings, who benefited from the 10p rate but did not
earn enough to benefit from the cut in the basic rate to higher
earners—something that struck many people as a curious political
feature of the budget.
11.15
am
Jane
Kennedy:
We are in some difficultly here. I could
answer purely on national insurance, but that would not give the
Committee a full picture of the overall intention. In order to be
helpful I have set the parameters fairly wide—it makes it more
difficult for me and perhaps also for you.
I would like to give an example
of how the process would have worked, as that seems to be of most
interest. When the discussions were taking place, issues would have
been flagged up with regard to who the potential losers from different
packages would be. As a result of that, a package would have been
brought forward that was engineered to address those people. For
example, as a result of this package and because of the changes to the
threshold that we have made, around 580,000 fewer pensioners will be
paying income tax than would otherwise have been the case.
Where there were going to be
losers as a result of the change, we were careful to ensure that those
losers were not in the categories that other Government priorities
clearly wanted to help. When these issues are discussed and the options
looked at, any decisions that are made have to be balanced, and
sometimes there will be some losers. However, as we have said, we
sought to make those who lost out do so in a very small part. They are
losers but not with a capital “L”, and overall, looking
back at the changes that we have made to tax and benefits since 1997,
there are no losers. Even those that we have mentioned are still well
over £900 a year better off as a result of the full reforms that
we have made since we were elected in 1997.
Jonathan
Athow:
If I may make an observation, the Institute
for Fiscal Studies was mentioned earlier, and there are two quotes that
were made by the director when he introduced its commentary on the
budget. In the first he said, “The income tax and NI package has
been cleverly designed to limit the number of losers”. He went
on, “To reform the system in a useful way within tight financial
constraints and with only modest...losses should be a cause for
congratulation rather than criticism.” The intentions behind
that, in terms of making a useful series of reforms while minimising
the number of people who would lose from them, was exactly the
Government’s intention.
Q
29
Justine
Greening (Putney) (Con): Just a couple of follow-up
questions. Can I clarify whether the work done by the Institute for
Fiscal Studies that looked at winners and losers was done on the Budget
outcome? Presumably it did not include the quantified impact of
bringing forward the flattening of the state second pension, which is
the other half of this Bill. Is that fair? The figures were included in
the pre-Budget report?
Jonathan
Athow:
As that was not announced Government policy at
the time, it would not have included that.
Q
30
Justine
Greening:
It was not included in the figures. Okay. My
second question is brief, and it is about the Minister’s
comments on incentivisation to work. The key people who were losers
from the Budget were, generally, single people with no children. In
terms of their typical profile, I guess that they would tend to be
younger people. How does that stack up with our levels of youth
unemployment? Although we all understand the desire to ensure that
families with children are supported and that child poverty is tackled,
that longer-term aim of ensuring that young people are in work in the
first place seems to have been undermined by this aspect of the Budget.
Was that matter discussed prior to the
Budget?
The
Chairman:
Does anyone want to answer that? The reason that
I am allowing that question is that the Minister, herself, has said
that one of the objectives of all
this—
Jonathan
Athow:
There are a number of observations to be made
here. First, employment has risen strongly in recent years for almost
all age ranges. When we look at work incentives, there is a concern
that parents, in particular, face some of the toughest work incentive
problems because of the way that the benefit system has grown and
changed over time. Often, they faced the biggest unemployment trap, and
found it difficult to make work pay, particularly with child care
costs.
Therefore, many
of the reforms have been aimed at further strengthening work incentives
for families with children. That was why the working tax credit
threshold was increased. It will also benefit those without children
who receive the working tax credit. In that sense, work incentives for
many low-paid people, particularly parents, were actually improved as
part of that series of
reforms.
Q
31
Justine
Greening:
But, it strikes me that perhaps the easiest time
to get those who are unemployed into work is before they have
additional barriers to work. Taking care of children as single-parent
families is clearly identified as a barrier to work. Obviously,
employed people who then have children will often get support from
their employers. So, it seems that perhaps the danger of the Budget was
that it undermined the best time to encourage people to go into
employment, which is before they have
children.
Jane
Kennedy:
The reforms are taking place in an economy
in which employment itself has grown very strongly. Notwithstanding the
debate that is taking
place about those not in education or employment, employment among young
people has grown strongly. I know that in my constituency, as many of
us will who have constituencies where youth unemployment was a serious
scourge, it is now virtually non-existent. Therefore, it is within that
context that we quite rightly started to look at how we could use the
tax and national insurance contribution system to give more assistance
to those households to which we were seeking to offer the most help and
make the biggest difference, particularly in helping them into
work.
The areas of
greatest focus now are those people who continue to have difficulty
getting in to work—those who have children. A whole range of
policy measures were put in place to help families in those
circumstances. All those have to be funded, and clearly those are
issues that Government need to consider, when taking forward a reform
of this nature. Equally, we are doing it in the context of an economy
that is continuing to perform well in providing employment
opportunities. In that context, you can start to consider making the
kinds of decisions that were made in Budget 2007. Had we been in the
context of a labour market of 15 or 20 years ago, such decisions would
have been much more difficult for the individuals
affected.
Q
32
Mr.
Gauke:
Mr. Mitha mentioned earlier the ratio
that exists between the upper earnings limits and the primary
threshold, which is essentially being abolished within this
legislation. Can I ask what the purpose of that ratio was? Why does
existing legislation contain a ratio between the upper earnings limit
and the primary
threshold?
Sam
Mitha:
Historically, national insurance limits have
moved basically in line with prices. Although the ratio has been in
existence a long time, I think that it was designed to ensure that
there was no abrupt increase in national insurance levels. The level
was set at an historically high level because the annual increases were
in line with the growth in
prices.
Q
33
Mr.
Gauke:
We know that it needs to be reformed because of the
changes that we have been discussing about increasing the upper
earnings limit. Do we know what the upper earnings limit primary
threshold ratio will be for 2008-09 and 2009-10?
Sam
Mitha:
That will be contingent on ministerial
announcements about the growth. Ministers make annual announcements
about uprating the primary threshold in line with
prices.
Jonathan
Athow:
Yes, we do, but unfortunately I do not have
the ratio in front of
me.
Sam
Mitha:
It will be £770 a week. I will give the
figures again. The upper earnings limit will be increased to
£770 for 2008-09 and the lower earnings limit will be
£105.
Sam
Mitha:
Yes. It will be £800. We do not yet
know the level of the lower earnings limit.
Jonathan
Athow:
It was the intention that in the second
year—because we do not know the inflation figures that will be
used in 2009-10 for the price uprating—the £800 figure
was the point at which we would start to pay higher rate tax above
prices. Again, we reach the point at which those people paying higher
rate tax will be no better or no worse off. The actual weekly limits
have not yet been
set.
Q
38
Mr.
Gauke:
If, as the then Chancellor said in his Budget
speech in March, that higher rate income tax will be payable at
£43,000 and that there will be an alignment at which point the
upper earnings limit will be at the same point, presumably all we need
to do is to work out what £43,000 is on a weekly basis and that
will give us our number. Or am I missing
something?
Jonathan
Athow:
I should make it clear that the numbers quoted
in the Budget speech for what the levels will actually be in April 2009
were obviously based on projections for inflation that were included in
the Budget, so the actual levels—the actual primary threshold
and the actual upper earnings limit—and the actual point at
which people start paying higher rate tax will not be known with
certainty until the inflation numbers are made clear and a statement
has been made by the Treasury setting out those values. I just want to
make it clear. They were given for illustrative purposes to help
explain the shape of the reform. We just want to be clear about what
has been
given.
Q
39
Mr.
Gauke:
I understand why you want to clarify that point,
but the then Chancellor was able to make the statement that he did in
March. Let us say that it was a reasonable thing for him to have said.
The Treasury and the Bank of England have not changed their inflation
projections. They still talk about 2 per cent., as they did then. Let
us for argument’s sake use that £43,000. Is the
£800 based on the assumption that it will be
£43,000?
Jonathan
Athow:
That includes the £800 additional
increase.
Q
40
Mr.
Gauke:
We know that the primary threshold for 2008-09 is
£105. Presumably we would be safe to assume that it will not be
lower than £105. I do not know historically whether the pattern
is that we might expect it to be up another £5 or £2. I
do not know the range of the usual increase in the primary threshold on
an annual basis. Can you help me on
that?
Jane
Kennedy:
It is determined from year to year, based on
economic circumstances.
Q
41
Mr.
Gauke:
Of course, I would not hazard a guess on what the
economic circumstances will be next year, but one might expect a small
increase of around £2 to
£5.
Jonathan
Athow:
Yes, that would be consistent with previous
increases.
11.30
am
Q
42
Mr.
Browne:
If it went up by that sort of figure—let us
say, from £105 to £110—we would stay within the
seven and a half ratio, because 110 times seven and a half is more than
800. For want of a quid or two on the bottom rate, we will have to
legislate to get rid of a 6.5 to 7.5 per cent. threshold that has
existed for 16 years, so that it could be 7.55 per cent. or
whatever.
Jonathan
Athow:
On our projections at the time of the Budget,
we can revisit and look at exactly those questions about what the ratio
would have been under the assumptions that we made at that time, but
when we looked through the arithmetic, it was in excess of seven and a
half times the primary
threshold.
Q
43
Mr.
Browne:
But my point is that it is so fractional—I
am struggling to divide 800 by seven and a half, which comes to
something like £109. You are so close to getting within that
without having to take us through this legislative process of
abandoning the 7.5 per cent. safeguard as some would see
it.
Jonathan
Athow:
I am afraid that the law is the
law.
Q
44
Mr.
Browne:
But instead of increasing the bottom threshold to
£108.50, you could increase it to £109.50, and spare us
this legislative change. Some people may be suspicious that, when you
have got rid of the seven and a half, there is only one way to go,
which is up and
up.
Jonathan
Athow:
As we have said, the aim of the Bill was
alignment of national insurance and income tax. We have alignment at
the bottom, so the point at which national insurance starts to be paid
on a weekly basis is now the same as the annual limit for the point at
which income tax starts to be paid. We wanted alignment at the top.
Given those aims of simplification and alignment, there was a
constraint within the
legislation.
Q
45
Mr.
Browne:
But you could have achieved that objective by
increasing the starting point, which now goes up to £105.
Obviously, the more you increase that, the easier it is to get within
the seven and a half. You have to be careful not to increase it so much
that you drop below six and a
half.
Jane
Kennedy:
I am not sure how helpful this is. The
purpose of the reforms was to achieve three major policy objectives,
one of which was to simplify the upper point at which there was
alignment between tax and national insurance contributions. A
legislative brake applied to the point at which national insurance
contributions could be aligned, so to achieve the other policy
objectives, primary legislation was necessary to make that change. The
point is that, if the objective was simply to achieve the seven and a
half times and stay within that, we would have taken a completely
different route, and we would not be making the changes that we are
making today.
Q
46
Mr.
Browne:
My final point is that the changes were made
around 1992 and included the legislative safeguard that the figure
would not be more than seven and a half times higher than the bottom
one. A concern that some people may have is that that safeguard is
being removed and is not being replaced with a higher level of eight,
rather than seven and a half or eight and a half. As I understand it,
there is no specified higher level, and it will not require primary
legislation in future to change that. Some people will say that they
understand that you want to align the two and to simplify the matter,
but if you are doing that and all it requires instead is to break the
7.5 multiplier and to make it 7.52 or whatever it will be—it
will be a fraction over 7.53—you are opening the doors to go up
and up as high as the Government may wish at the time. It seems strange
that, for 0.03, this legislative change is required. Some people may
fear that Ministers in the future may exploit or even abuse it, when it
would require only a tiny tweak to stay within the current
limit.
Jane
Kennedy:
But there is no legislative requirement to
meet at the lower end—at the point at which you start to pay
contributions. There is none whatever, so it seems illogical to
continue with the upper limit purely because it exists. There are sound
policy reasons, as I have advanced, for that particular alignment
spread, including not only the three main policy objectives of the 2007
Budget, but the correction of the pension anomaly that resulted from
pension reform, so that we achieve the overall objective of pension
reform with all-party support when we implement it.
Members may have that concern,
but recognising that, we will take forward changes to the national
insurance contributions upper earnings limit through the affirmative
procedure in both Houses. Both Houses will have an opportunity to
debate the proposals, so it is not as though the Government will be
able to act with impunity; there will be very clear and robust scrutiny
of any such proposal.
Q
47
Mr.
Gauke:
I do not know whether Mr. Marris wants
to come in; I was going to broaden the question to ask about the way in
which national insurance contributions are
changed.
Q
48
Rob
Marris:
I have a specific point. Let us consider what
Mr. Browne said about the limit going above seven and a half
to eight and so on. Contrary to the implication of what you said,
Minister, if that were to happen and the upper earnings limit ratio
went to eight and a half, for example, would not people in the top
slice, between seven and a half and eight and a half, pay less tax? The
point at which they start paying 40 per cent. would be
higher.
Jonathan
Athow:
In a situation where the point at which you
start paying higher rate tax is aligned with the upper earnings limit,
an increase in the upper earnings limit in the higher rate threshold
would mean that people in that bracket saw a fall in their overall tax
and national insurance paid.
Q
49
Mr.
Gauke:
Before we return to the issue of national insurance
contributions and the constitutional way in which they are changed, you
said, Minister, that there was not really a restriction on the lower
end. But if there is a ratio, it restricts both ways, and you cannot
cut the rate at which people start paying if you have a ratio that
holds you steady at the top. I have not expressed that very clearly,
but it applies both ways, and the point of the ratio is that it stops a
big distance between the primary threshold—it used to be the
lower earnings limit—and the upper earnings limit. Is my
understanding correct?
Jonathan
Athow:
That is very much the way in which the ratio
works, as you say, by limiting the gap between the two. However, there
is the existing commitment, dating back to the 1999 Budget, of the
alignment, instead of the primary threshold at the point—with
the personal allowance—at which you start paying any income tax
at all. So that is the constraint on the bottom. Given that that is
Government policy, the ratio bites only on the top of that
band.
Q
50
Mr.
Gauke:
I should advise everybody to double check any
numbers that I calculate, but to follow Mr. Browne’s
questions, if the primary threshold in 2009-10 went up to
£107—that is at the lower end of our expectations for an
increase—and the ratio of seven and a half continued, that would
get us above a weekly figure of £800, I think. Correct me if I
am
wrong.
Jonathan
Athow:
That would be true. I was just looking back on
the numbers, and I think that it is a little over the £43,000
quoted by the Chancellor in the Budget. That would equate to an upper
earnings limit—again, I am doing some maths in my head—of
about £850 a
week.
Jonathan
Athow:
The £800 was actually the increase in
the point at which people start paying higher rate tax above what would
have happened with just price indexation. Once you have done that and
aligned the upper earnings limit, the measure was designed to make
certain people who are higher rate taxpayers no better and no worse off
under the new system. Apologies if there was
confusion.
Q
52
Mr.
Gauke:
Fine. So the figure that we should be looking at is
therefore £850, is it, for the purposes of this analysis of what
the primary threshold would be and so
on?
Jonathan
Athow:
Unfortunately, I have not brought my
calculator with me, but we can use a figure of about
£850.
Q
53
Mr.
Gauke:
I suspect that your calculations might be better
than mine. So we are looking at about the £850 figure, to
achieve the objective. Therefore, if we were on £105 or
£107, the ratio of seven and a half is clearly not going to
work, but a ratio of about eight would
work.
Jonathan
Athow:
I think that it would be somewhere between
seven and a half and eight.
Q
54
Mr.
Gauke:
I think it would be helpful to the Committee to
have an understanding of how national insurance contributions are
changed generally. Perhaps it would be even more helpful to do that in
comparison with income tax. Obviously, they are both taxes on income,
and the relationship between the two is getting closer by the year.
Could someone guide us on how rates and thresholds of
national insurance contributions are set, compared with income
tax?
Sam
Mitha:
National insurance contribution levels are
actually set annually as part of a re-rating exercise, following a
report by the Government Actuary’s Department. The Government
Actuary examines the balances of the national insurance fund and makes
recommendations about what future increases in national insurance
contributions may be necessary. The system operates as a pay-as-you-go
system, and on the basis of the Government
Actuary’s report, the Treasury and HMRC make recommendations to
Ministers about future increases in national insurance contribution
levels. Until fairly recently, most of those increases have been
predicated on the basis of increases in prices, or when balances in the
national insurance fund have at any time appeared to be inadequate to
meet the commitments of the fund, Ministers have recommended slightly
larger
increases.
Q
55
Mr.
Gauke:
I am sorry to interrupt. You mention what happens
when there is a shortfall in the fund. What happens if there is a large
surplus in the fund? Do Ministers ever recommend a decrease in national
insurance? There is a large surplus at the moment, is there
not?
Sam
Mitha:
The surplus in the national insurance fund is
basically something that goes towards funding public
services, because it reduces the level of Government borrowing. If
there were not a large surplus in the national insurance fund, the
Government would need either to raise taxation or borrow the money on
the open market. It is not always possible to predict accurately what
the calls on the fund will be. It is usually possible to predict what
the major call will be, from state pensions, but the fund is used also
to pay other contributory benefits such as contributory
jobseeker’s allowance and incapacity benefit. It is not always
possible to quantify that. The Government and the Government
Actuary’s Department usually recommend that the fund be managed
on a very prudent
basis.
11.45
am
Q
56
Mr.
Gauke:
At the moment, the Government Actuary recommends
that the fund should maintain a balance equivalent to 17 per cent.
benefit spending, which is around £10 billion. In March
2006—I do not know whether there are more up-to-date
figures—the balance of the fund was £34 billion, which is
£24 billion higher. Are those figures correct?
Sam
Mitha:
They appear to be correct. I have not got my
numbers in front of
me.
Q
57
Mr.
Gauke:
It is essentially another tax, is not it? The
relationship with spending on benefits is pretty
indirect.
Sam
Mitha:
National insurance contributions are most
empathically not a tax because they can be used for only one
purpose—funding contributory benefits and, where specified, for
funding the NHS. Money from the national insurance fund may be used
only for those purposes, and transfers from the Consolidated Fund, into
which taxation goes, can be only one way. If there is a shortfall on
the national insurance fund, general taxation can be used to shore it
up, but when there is money in the national insurance fund, the only
purpose for which it may be used is to pay contributory
benefits.
Q
58
Mr.
Field:
You mention the money put aside for the NHS. To our
mind, that area has totally muddied the waters between income tax and
national insurance contributions. It is not, perhaps, too fanciful to
suggest that a future Government—perhaps even this
Government—might look to do a similar thing by putting a penny
on national insurance for the education system, or some other form of
moneys. You mentioned earlier that it is a pay-as-you-go system. It now
seems apparent, from what my colleague, Mr. Gauke, said,
that the reserves are at an historically high level. Is there a
realisation that there are likely to be significant takers from that
fund in the foreseeable future? Is it the perspective of the Treasury,
at least, that it is a prudent
device?
Jonathan
Athow:
Yes. Obviously, the Government must be mindful
of future calls on national insurance. As we all know, certain
demographic changes will be upon us and the Government have to be
mindful not only of the position today but of public finances more
generally, as those changes come to pass.
Q
59
Mr.
Field:
Thank you for that answer. Mr. Mitha, do
you regard the notion of moneys coming out of that historic fund for
the health service, which has come about very recently, as undermining
the very notion of having that ring-fenced
fund?
Sam
Mitha:
That is a matter for Ministers. They
made a case for that when the legislation was
introduced and Parliament passed it.
Jane
Kennedy:
The good news is that that has not gone
unnoticed.
Q
60
Mr.
Browne:
I understand the official hesitation about
answering what is quite a political question, but the answer to the
question is yes, is not it? However worthy the cause, that it is a
contributory insurance scheme no longer applies—the same with
the 1p running right through the system. It means that national
insurance is no longer what it says on the tin. The rationale for
merging it with income tax is all the greater after the changes that
were used to fund the NHS and to honour the promise of not raising
basic income tax made at a general
election.
Jane
Kennedy:
If we were to merge the two into one tax on
income, we would have to find a different way of funding benefits and
pensions out of that general tax take. That would be an imprudent step.
We would have to expend a lot of time and energy on finding a
guaranteed way of funding such things, particularly
in
relation to pensioners, where we have to meet a public commitment. I do
not accept the argument. We had the argument about the status of the
national insurance fund and NICs when the change was made, some time
ago, and there has been broad public support for it. The exception was
quite clearly defined in law. The House has decided on that
point.
Q
61
Mr.
Gauke:
What would be the implications of the changes that
we are examining today—in other words, the increase in the upper
earnings limit? Presumably, more will go into the national insurance
fund, because more will be paid through national insurance
contributions. Do we therefore expect this balance to rise further in
the medium
term?
Jane
Kennedy:
The surplus in the national insurance fund
has more to do with the success of the economy and the fact that more
people are working and paying national insurance than with the levels.
Clearly, if we raise national insurance contributions at that point,
more money would go into the
fund.
Q
62
Mr.
Gauke:
I shall avoid a discussion of the number of people
who are on out-of-work benefits, which has remained stubbornly above 5
million; but presumably, we can expect the national insurance fund
balance of £34 billion to increase yet further. That is not
necessarily a criticism, but it is the
implication.
Jonathan
Athow:
That would also depend on the
calls on the fund as they are made and whether there
are changes in that, either through changes in the economy or, to go
back to a previous answer, in demographics. An ageing population, as it
often described, will also affect the future path of the national
insurance fund and whether there is a
surplus.
Q
63
Rob
Marris:
On that point, it obviously depends on the call on
the fund. But the call on the fund will be less because the higher rate
earners affected by the changes in the Bill will get a lower state
second pension than they would have done, and the flat-rating, as it is
called, will be achieved by 2031, instead of 2035. What will be the
saving on the national insurance fund by bringing that date forward by
four
years?
Jonathan
Athow:
I do not know whether I have that information
to hand or whether any of my colleagues has. We could get back to you
separately on
that.
Q
64
Rob
Marris:
Would I be right in thinking that the calls on the
national insurance fund will grow with the state second pension, or is
that not coming from that fund? The state second pension is fairly new
and an increasing number of people will start to draw on it as the
years go by.
Jonathan
Athow:
Yes, the state second pension is
funded from the national insurance fund, so changes in entitlement will
affect calls on that fund in the future. As I said, I do not think that
we have the information to
hand.
Q
65
Rob
Marris:
Broadly speaking, subject to the exception to
which I referred for higher rate earners between 2031 and 2035, would I
be right in thinking that the state second pension’s call on the
national insurance fund is likely to increase in the next 30
years?
Jonathan
Athow:
Indeed. State second pension is a relatively
recent creation. Obviously, given that and demographics, it is likely
to
increase.
Q
66
Rob
Marris:
I would just comment as a politician that it is
quite a good thing that we have that surplus if calls on the fund are
going to increase anyway, even when the economy remains strong and
unemployment is relatively
low.
Jane
Kennedy:
I could not agree
more.
Q
67
Justine
Greening:
On a point of clarification, Minister, you said
at the beginning that the national insurance fund worked in tandem with
the need to increase or decrease Government borrowing. So if there is a
surplus of £24 billion over what is required, does that, by
definition, mean that the Government have had to borrow £24
billion
less?
Jane
Kennedy:
Am I right in thinking that the surplus is
there, and it is being used for other purposes at the moment?
Sam
Mitha:
It is lent to the Government, which therefore
reduces the Government’s borrowing
requirement.
Jane
Kennedy:
So the answer is
yes.
Can I just return to the
question about the procedure for national insurance contributions,
which we started on before I sidetracked the Committee with the issue
of the national insurance fund surplus? Essentially, Mr.
Mitha, you are saying that national insurance
contributions—thresholds, rates, etc.—are set by
regulation. How does that compare to income tax, just so that we can
have this on the
record?
Sam
Mitha:
In both instances, there is an evaluation of
what the requirement is. In the case of national insurance
contributions, there is the report by the Government Actuary’s
Department about what level of funding is necessary. Then Ministers
have to make a decision, by reference to the fiscal priorities at the
time, about what the appropriate level
is.
Q
69
Mr.
Gauke:
What are the respective mechanisms through which
changes are made? I understand that Ministers take a view about what
the economy and the public finances require and make decisions
accordingly, but national insurance contributions are dealt with by
regulations and income tax is dealt with—
Sam
Mitha:
Through the Finance
Bill.
Is any
consideration given to reforming the way that national insurance
contributions work? It seems a bit of an anomaly. I take your point
about the restrictions on how national insurance is spent. Income tax
and national insurance are both essentially taxes on personal income:
one is done through primary legislation, and the other is done through
secondary legislation. There appears to be an anomaly. Has any
consideration been given to reforming that? Perhaps that is a question
for the Minister.
Jane
Kennedy:
Not at this
moment.
I have one
further point on how we use national insurance contributions. My
colleagues have quite rightly pointed out to me that, actually, the
national insurance fund has been used for many years to support the
health service. If you ask most members of the public what they
consider national insurance is used for, most of them would associate
it with the national health service, rather than with the benefits that
we know the majority of it goes towards. That is a more general
point.
There are no
further plans at the moment. Other than the changes that we are making
today, which would allow the process to be taken forward through
affirmative resolution, there is nothing further proposed—unless
you want to deal with income tax by affirmative
resolution.
Mr.
Gauke:
We certainly do not. [Interruption.] I think
that I am safe in making that point. Are you suggesting that you might,
Minister?
Jane
Kennedy:
Not at
all.
Given that, as
you say, the spending of the national insurance fund goes on the health
service, as well as contributory benefits, and given the professed
desire for greater simplification and the fact that we are making these
changes to the upper earnings limit to align with higher rate income
tax, is there any view to take this further? For example, there are
currently differing definitions of
earnings.
John
Whiting, former president of the Chartered Institute of Taxation,
partner at PricewaterhouseCoopers and a fairly resident expert on Radio
4’s “Money Box”, says: “It is worth noting
that the alignment of income tax and mixed thresholds does not complete
the alignment of the two levies that many, especially employers, would
like to see. We still have differing definitions of the earnings
subject to the levies with various anomalies.” He goes on to
say: “Hopefully the review of income tax and NIC alignment
started by the recent PBR will produce changes that will pay a real
simplification dividend, even if this will mean another NIC
Bill.” Where are we in relation to the review of simplification
in this
area?
Jane
Kennedy:
I will deal first with the different
definitions of earnings. I would be happy to look at those that you are
drawing to our attention. I was not aware that there were different
definitions, but I am more than happy to look at them. My colleagues
might want to respond on the other point that you
made.
Sam
Mitha:
The Government’s review of the further
alignment of income tax and national insurance was published in the PBR
and the document is available. It concluded that, on balance, the costs
and benefits for employers of collecting national insurance
contributions on an annual and cumulative basis did not justify making
any radical changes to the existing mechanisms. Ministers decided to
take forward a number of other measures consequent upon the
review.
Q
72
Mr.
Gauke:
Thank you. That answer was helpful in informing the
Committee, but I come back to this point, Minister: is there any
concern that the parliamentary scrutiny of reforms to
national insurance
contributions, compared to income tax, is inadequate? We go through this
process of separate Bills, but why do we not debate these changes as
part of the Finance Bill, as we do with every other
tax?
12
noon
Jane
Kennedy:
The Finance Bill will be coming much later
in the parliamentary year. It will come after a Budget, at some time in
the late spring or early summer. The timing would mean that it would be
difficult to achieve our objectives even for next year if we were to do
it that way. I am not conscious of any criticism of the process, other
than the criticism that you, as Opposition Members, may have of general
scrutiny. I do not intend to consider further reform of the process of
scrutiny.
Q
73
Mr.
Gauke:
I take your point on timing, but the issue with the
ratio that we have been debating is not an issue for 2008-09. We know
that the ratio will be below seven and a half. The issue is for
2009-10. If this were debated later in the year, whether with the
Finance Bill or not, there would still be time to make the changes for
2009-10, so that the ratio is reformed. What is the cut-off point at
which it is too late to amend the ratio for
2009-10?
Jonathan
Athow:
Traditionally, it has been the practice to
give employers good notice of changes, particularly with national
insurance, because of the nature of the system. Because it is
non-cumulative, it is not possible to make changes during the year in
the same way that you can with income tax. There are different
constraints on the system. As I said, the decision to make full
alignment only in April 2009 was to give us good time for a Bill,
knowing that parliamentary timetables can be very busy and compressed.
Therefore, it is possible that this could be done later, but the
earlier we can do it, the more certainty we can give employers about
what the changes will
be.
Q
74
Mr.
Gauke:
So there is not a specific cut-off point, as such.
It is a case of giving notice to employers, because there is an
administrative burden involved in any
change.
Jonathan
Athow:
Indeed. National insurance contributions are
collected by employers. We need to give them good notice. The Bill on
this current timetable gives us plenty of time, but it is difficult to
give a singe cut-off
date.
Q
75
Mr.
Gauke:
But, for example, we are debating this Bill, but we
cannot tell employers what the primary threshold will be for 2009-10.
When will that announcement be
made?
Jonathan
Athow:
Traditionally, it is made in the pre-Budget
report. Because of the link to the September retail prices index, the
announcement has to be made after those data are
available.
Jonathan
Athow:
October, November, December would be the
normal time for that decision to be made.
Q
77
Mr.
Gauke:
Is there a huge administrative gain for employers
in knowing today what the upper earnings limit will be for 2009-10,
when they do not know what the primary threshold will be? Presumably,
they make their adjustment together. I ask that in curiosity; I do not
know the answer.
Sam
Mitha:
In normal circumstances, if the upper earnings
limit was going up with prices, it would be announced with the primary
threshold. At the moment, we are talking about a very large increase in
the upper earnings limit in order to align it with the higher rate
threshold for income tax. That will necessitate some procedural
changes, because the legislation will bring forward the upper accrual
point. That is why employers need a greater degree of certainty about
it. They will need to update their procedures and software, so that
employees are ready to deal with the
changes.
Sam
Mitha:
That is it,
yes.
Q
79
Mr.
Gauke:
So I come back to my point, as long as the
announcement for the upper earnings limit and the primary threshold is
made in October, November or December, there should be plenty of time
to do what they need to do. I do not necessarily mean in this year but
in future years. Is that a reasonable thing to
say?
Jonathan
Athow:
That is usually the timetable, so that is what
we would assume is
reasonable.
Q
80
Mr.
Gauke:
We are, therefore, coming back to our comparison
with income tax and national insurance contributions. The Finance Bill
does the changes for income tax for that year—the year that we
are in. Therefore, this summer’s Finance Bill will deal with
everything from 2008-09. At the same time, we need to do the national
insurance contributions. For argument’s sake, we could not do it
at the same time because we are actually a year ahead. Therefore, the
two could not be aligned in that
sense.
Jonathan
Athow:
Yes, that is correct. One of the reasons why
that is the case is because national insurance is collected over a pay
period, which means either weekly or monthly. Income tax, on the other
hand, is balanced over the year. It is possible to make changes to the
income tax parameters during the course of the year and the system will
balance out over the year as a whole. Whereas with national insurance,
everything needs to be tied down before the start of the tax
year.
Jane
Kennedy:
There are two totally separate structures
for considering the rates of income tax and national insurance. For
ease of reference, Erskine May describes national insurance
contributions on page 782. He stated, “To the extent that they
are payable into the National Insurance Fund, contributions paid by
earners, employers and others under the provisions of social security
legislation are not regarded as charges upon the people or as subject
to the rules of financial procedure”. We would have to implement
primary legislation to be able to consider national insurance in the
Finance Bill. It would certainly not be possible to achieve that by
2009-10, and I am not even persuaded that it would be
desirable.
Q
81
Mr.
Gauke:
That is very helpful. I come back then to one of
the points that we started with. We have a very different system for
national insurance contributions. If we go back to the mid 1970s, the
Executive’s ability to make changes by regulation to the system
was restricted by things such as the ratio between what was the lower
earnings limit, now the primary threshold, and the upper earnings
limit. That structure is now being dismantled in this
Bill.
Jane
Kennedy:
Yes.
Q
82
Rob
Marris:
I want to probe some more. If national insurance
contributions and the figures and thresholds have to be nailed down by
the September before the April, and income tax is not nailed down until
the June after the April when the Finance Bill goes through, how will
we get continuing alignment for the years 2010-11 onwards? That cannot
be done unless you pull out your calculator after the September nailing
down of the national insurance figures to tell you what income tax will
be from the following June without a political decision on what that
income level will
be.
Jonathan
Athow:
As I said, the process of alignment started
with aligning the personal allowance with the primary threshold, and
since they have been aligned they have both been announced together in
the autumn before the start of the tax year. This autumn, we announced
both the primary threshold and the personal allowance at the same time
because they are aligned.
Jonathan
Athow:
As we keep that alignment, I envisage that we
will be making announcements at the same time for the upper earnings
limit, the point at which people start paying the higher rate of
tax.
Q
84
Rob
Marris:
Do correct me if I misunderstand you, but in terms
of what I might call the political landscape, the income tax thresholds
and so on are going henceforth to be moved from the March Budget to the
September pre-Budget report, otherwise we will not be able to have the
alignment that the Bill seeks?
Jonathan
Athow:
As I said, we already announce the personal
allowance in the autumn; in October, we announced the personal
allowance for 2008-09. That is what has happened since the alignment
was achieved. It therefore seems that the same process will apply to
the upper earnings limit and the point at which people start paying the
higher rate of tax. However, there are many other parameters within the
income tax system
rates—
Jonathan
Athow:
There are special higher allowances for people
aged over 65. There are ways in which they are tapered out, which are
other parameters in the system. As I said, we already have an approach
in which the pre-Budget report traditionally announces the personal
allowance for the year ahead.
Q
86
Rob
Marris:
So, understandably, we are going to continue with
the system of not having alignment for those over the age of 65 who
have earned income.
Jonathan
Athow:
People aged over 65 do not pay national
insurance.
Q
87
Dr.
Gibson:
Is there a masterplan, a head sheet of what will
happen year by year and month by month? Have you done
that?
Jonathan
Athow:
You can take the assumptions for inflation
that the Government
produce—
Q
88
Dr.
Gibson:
We do not like assumptions, because you sometimes
get blown off course. We want facts and good statistics to back them
up—a bit of analysis.
Jonathan
Athow:
We publish for the year ahead. Given certain
accepted practices, with the default being indexing by prices, if
inflation turns out to be different, we have to have different
numbers.
Q
89
Mr.
Gauke:
Does the Minister agree with Mr.
Marris’s question that, as far as the political landscape is
concerned, this is going to make the PBR a more significant event than
it currently is? Does it throw up any practical concerns? We know that
the state of the public finances can change fairly dramatically from
the autumn through to March, when the Budget is announced. Indeed, that
has happened a fair bit in recent years. Therefore the decision as to
what you do with income tax is going to be made at a time when you are
less sure of the state of the economy and public finances than
previously was the case. Is that a
concern?
Jane
Kennedy:
I do not think that it is necessarily as
fundamental and deep a change to practice as has been suggested. I hope
to reassure the Committee that there is a very well established role
for the pre-Budget report. The fact that this will bring about certain
changes to further pre-Budget reports is just a step along the road
that we are taking. It is not a fundamental change of
direction.
Q
90
Mr.
Gauke:
I presume that we are talking just about
thresholds, rather than rates. There is no reason why the rates of
income tax could not be changed in the March
Budget.
Jane
Kennedy:
Exactly.
Jonathan
Athow:
As I said, there will be other parameters as
part of the income tax system which could still be varied in the
Budget.
12.15
pm
Q
91
Justine
Greening:
One of the issues that arose on Second Reading
was the chronology of when the fact that the flattening of the state
second pension needed to start earlier was identified. When was that
consequential issue identified by the
Treasury?
Jonathan
Athow:
As I think I indicated earlier, this was a
result of the changes that were considered in the preparation for the
Budget. It was realised that it was a very complex issue and it was
decided that we needed to look at whether there was a need, and
therefore what sorts of changes would be needed and how they would be
delivered after the Budget. That was exactly the process that was
followed and the conclusions were therefore reached in the pre-Budget
report.
Q
92
Justine
Greening:
Was there a reason why this particular impact
was not flagged up in the Red Book at the time of the
Budget?
Jane
Kennedy:
The fact is it was, but the necessary
changes to correct the impact on the state second pension needed to be
fully worked through with cross-Government Departments, before we
brought forward a set of proposals to correct
it.
Jonathan
Athow:
There are a number of issues that you have to
consider when you are making these changes. These were quite large and
fundamental reforms to the system. There were a number of consequential
issues. We knew that we had to deal with the entire knock-on effects to
lots of different systems. We were looking, for example, at the way it
affected charities. These were all things that we knew about at the
time and we had to have a process, once the Budget had got out of the
way, of reflecting on those further, having had informal conversations
with key stakeholders. We knew that there were a number of issues that
we were looking at. We set out quite a clear narrative in the Red Book
around all the issues, but then we knew there were some other issues
that we needed to look at.
Q
94
Justine
Greening:
Where in the Red Book? I just want to find which
paragraph outlines the impact on the state second pension and the
flattening period and the possibility of bringing that
forward.
Jonathan
Athow:
Sorry, I do not think that we specifically
mentioned
that.
Jane
Kennedy:
It was not explicitly raised in the Red
Book; my
apologies.
Jonathan
Athow:
Some of the reasons are for space. As I said,
there were a number of consequential issues that we needed to look at
following this large reform. Those were some of the ones we knew we had
to deal with. I think if we noted everything that needed to be looked
at after such a large reform, we could probably have filled a whole
book with such consequential issues. There were merely constraints on
space.
Q
97
Justine
Greening:
Was there a sense of the size of this impact in
terms of revenue? In the pre-Budget report it totals up to £730
million over the comprehensive spending review time frame. Was there a
sense that it was of that order, in terms of
impact?
Jonathan
Athow:
It was noticed as a significant issue, on
which we needed to return and to talk to others and understand the
nature of the issue. I do not know if exactly those numbers were being
considered at the time of the Budget. I would doubt that we would have
such accurate projections, or that they would not have changed since,
but it was noted as an issue and noted as a significant one that needed
further work and discussions with interested
parties.
Q
98
Justine
Greening:
If you had got through that process of assessing
the financial impact of this and if those figures had been understood
at the time of the Budget, have you made any assessment of the changes
that would have been made to the winners and losers conversation that
we had earlier this morning about the numbers of households who would
have been better off? Do you have any understanding of how that would
have
differed.?
Jonathan
Athow:
I think it is very difficult to know what
decisions you would have made if more information or other things had
come to light at the time. The intention here was that for those who
were paying the contracted-out rate of national insurance there would
actually be a small windfall gain. What we were trying to do for the
majority of those people was to claw back some of that small gain, so
that we could fulfil our objective of not making higher rate taxpayers
better or worse off. That is the primary way in which that money is
raised. I do not have the figures to hand, but I cannot envisage that
it would materially affect the number of people who would
lose.
Q
99
Justine
Greening:
I suppose that the context for my question is
that the total policy decisions for 2008-09 and 2009-10 were, I think,
pitched by the Government as essentially revenue-neutral. Obviously had
those impacts been included, that picture would probably have
changed.
Jonathan
Athow:
If other decisions were made to do other
things in the Budget, that would have changed the costings. That is
true, but this decision was taken subsequently and was part of the
decision about the overall stance of the pre-Budget report. It needs to
be considered in that context, as that was the fiscal event in which it
was considered.
Jane
Kennedy:
The consequences for revenue and cost would
have been dependent on which options were decided upon to address the
concerns raised about this. It is sensible to deal with the issue in
slower time, after we have had an opportunity to look at the range of
options that are available.
Q
100
Justine
Greening:
How long did it take you to get through that
process? When did you first have an understanding of what the likely
revenue and costs would be? Was it two or three months after the
Budget?
Jonathan
Athow:
I do not really remember the exact evolution
of that. Obviously there were other commentators—the Pensions
Policy Institute for example. It is not a matter of simply doing the
analysis and getting to an answer; it is an ongoing process. It was
considered in the run-up to the pre-Budget report when many different
options were being considered. There were different ways of dealing
with this matter and the income impact assessment sets out those
different options.
Q
101
Justine
Greening:
Why did you not start that process earlier, so
that it was finished by the time of the Budget?
Jane
Kennedy:
Because presumably Ministers at the time
were not requesting that sort of detail. We were working on a major
package of reform for pensions, and had been doing so for a period of
years. In the
income impact assessment we openly concede that when the personal tax
package was announced in the Budget 2007, it was never intended to give
the state second pension benefit and the extra benefits to higher
earners that were perceived as being likely as a result of some of the
other changes. Because of that, we wanted to do further work to see how
we could correct that within the framework of our reforms, and within a
framework of simplification of the overall tax system. That is one of
the reasons why the process took the shape that it
did.
Q
102
Justine
Greening:
I absolutely understand that those are complex
calculations, but I am just trying to understand why that process did
not start well before, presumably at the time of discussion about the
overall Budget package. Why was that not included as part of the
discussion and calculation process?
Jonathan
Athow:
As we have said, this was an extremely large
package of reform. We were making some big changes to the income tax
system. Obviously, that analysis and undertaking is in itself an
extremely long-winded process.
Q
103
Justine
Greening:
You managed to do some calculations on things in
the Budget such as gift aid and an increase in benefits that had a net
impact of £5 million. What I am trying to find out is
why calculations on that—which over two years toss it up to
£730 million, a substantial sum of money—were not
prioritised to be done in time for reflection in the Budget.
Jonathan
Athow:
Traditionally, Budgets are put together under
tight security. This was a very large set of reforms, and there was
necessarily the usual Budget purdah
process.
We can work
at some of these issues more easily on our own. We have the resources
of Her Majesty’s Revenue and Customs to help us do that. In
other areas, we need other sets of input. For example, we wanted input
from the Department for Work and Pensions and other parties interested
in pensions to find out the right answer there. For some of these, as I
said, there are limits to what you can do in-house. Therefore, it is
sensible to make the changes that you can make, and, when you know that
there are other issues that you need to follow up, to do that as
quickly and sensibly as you can after the event. Realising that the
changes were affecting a series of pension reforms that had been
through extensive debate and commentary, we wanted to think very
carefully before making those changes, and not simply to spring them on
people.
Justine
Greening:
Actually, I still have some questions. I was
just pausing for thought over whether to pursue that particular line.
Perhaps I will move
on.
Q
104
Mr.
Gauke:
I would just like you to clarify something about
the figures in the Red Book, Mr. Athow. I apologise if you
do not have a copy in
front of you, but items 20 and 21 deal with income tax and national
insurance contributions. The first regards the phased alignment of five
thresholds; the second relates to raising the higher rate threshold and
upper earnings limit. As far as the projections of the financial
implications to the Exchequer for, say, 2009-10 are concerned, is that
figure net of the additional rebates that will need to be paid to
opted-out second state pension funds as a consequence of the higher
national insurance
contributions?
Jonathan
Athow:
We try and capture in that everything that we
can quantify. So, if there was a quantifiable effect and we could work
out what the impact was on the rebates to pension schemes, that would
have been included in
here.
Jonathan
Athow:
I do not know. I can go away and find out. As
I said, that is exactly the sort of analysis we would have tried to
have looked
at.
Q
106
Mr.
Gauke:
Just to explain why I asked the question: in the
PBR, in the list of revenue-raising items, a saving is identified,
which essentially the Government are explaining is the additional cost
incurred because more rebates are being paid out, which was not the
intention. I understand that, but was that additional cost picked up
here? I am slightly worried that we might have double counted that
saving, because we did not identify the additional costs in the first
place, but now we are identifying the saving in the PBR. I am sure that
that has not happened, but I would be grateful to know why
not.
Jonathan
Athow:
I am very grateful to colleagues for passing
me notes saying that the rebates were fully scored in the Budget. They
were then scored again in the PBR when we took that
back.
Q
107
Mr.
Gauke:
I am grateful for that clarification. Also, can I
clarify whether Ministers were informed of the matter prior to the
Budget being announced on 21
March?
Jonathan
Athow:
I think that Ministers were informed of a
number of
matters.
Q
108
Mr.
Gauke:
I am sure that they were, but were they informed of
that matter? Were Ministers aware of
that?
Sam
Mitha:
Yes.
Q
109
Mr.
Gauke:
Was the Chancellor informed that there would be a
knock-on impact for the second state pension as a consequence of the
changes in national insurance contribution that he was due to
announce?
Jane
Kennedy:
And he would have commissioned the work that
was ongoing at the time.
Jane
Kennedy:
Yes. There is no scope in
this.
12.30
pm
Q
111
Mr.
Philip Dunne (Ludlow) (Con): It is on a similar topic,
relating to the decision taken to address an anomaly that appears to
have been identified primarily by the Pensions Policy Institute rather
than by Ministers, which is that this should be dealt with by a
revenue-raising measure at the front of the process rather than by
deferring the alignment to a flat rate second pension at the back-end
of the process. Will you explain why the decision was taken that way
around?
Jane
Kennedy:
The potential delay to the state pension
reforms was recognised, as we have been discussing for the past half an
hour, during discussions within the Treasury and with HMRC, and during
the formulation of the personal tax package for the 2007
Budget—in advance of the Pension Policy Institute’s
statement. However, because it is such a complex policy area, it was
quite proper that a solution was worked out across government to
address the potential delay.
I must pay tribute to the very
considerable efforts made by officials in the Treasury and HMRC to
achieve the objectives and priorities set by Ministers. Officials are
set targets for presenting solutions that will work for a Budget, and
they perform superbly. It was quite proper that we took the time
necessary on this set of proposals in order to get them right. That is
why we can discuss them today with so little concern from outside
experts that we are the only people being grilled here this
morning.
Q
112
Mr.
Dunne:
I am not concerned so much to understand the
process, which we discussed earlier, but about the decision taken that
the right approach to the problem was to raise revenue via alignment at
the earlier periods, rather than to give up alignment in 2030-31.
[Interruption.] I am sorry—not to give up the
alignment, but it could have been allowed to align in 2035. Why was it
decided that that was a more important criterion than allowing it to
slide
slightly?
Jane
Kennedy:
Because to have done nothing, which we did
consider doing, would have led to higher earners receiving a
greater-than-intended benefit from the state second
pension.
Q
113
Mr.
Dunne:
I am sorry, but you misunderstood the question. I
am not arguing for the do-nothing option, but for considering impact
assessment option 4, which was to introduce the upper accrual limit in
2012, when the other measures will be introduced. For a reason that we
have not got to the bottom of, you decided that that was not
appropriate, although it would have pushed out alignment to 2035. That
seems to have been the primary objective; the Government decided to
stick to 2030, which, albeit, will raise more tax from people over the
next few years.
Jane
Kennedy:
But as I understand it, if we had adopted
options 3 or 4, either of which would have delayed the flat-lining,
there would have been an unintended benefit to the high earners, as a
result of the state second pension. Our intention was to correct that
and to bring in flat-lining as early as
possible.
Sam
Mitha:
Delaying bringing in the upper accruals point
until 2009, which this Bill seeks to do, might have disrupted the
contracted-out rebates for pension providers. We explained to Ministers
the consequences of each of the four options, and it seemed that the
one that employers and pension providers would find easiest to cope
with was the one that Ministers brought before
Parliament. Waiting until 2012 before introducing an upper accruals
point would have caused even greater complexities and far more
difficulty for pension providers than they have faced, and they would
have had to deal with the consequences. We have been able to minimise
the disruption to them.
Q
114
Mr.
Dunne:
Did you consider the potential impact on the
industry in the event that the pension regime does not come in in 2012?
This Bill will pass before the end of the tax year. At this point, it
is the only piece of legislation that relates to the package of
measures introduced in other legislation such as the Pensions Act 2007.
However, this Bill is the only one that will bite before 2012, and it
remains uncertain whether the earnings link will be restored. You are
therefore encouraging the industry to go down a particular course that
may or may not link with other measures in subsequent years.
Sam
Mitha:
These decisions were taken when the Pensions
Bill was before Parliament. That Bill included a
strong commitment from Ministers and the Government that the earnings
link would be restored in 2012, or at any rate by the end of the next
Parliament. We also gave a firm indication, in the form of the
legislation that Department for Work and Pensions Ministers introduced
and Parliament passed, that an upper accruals point would be introduced
from 2012.
The changes
introduced by the Chancellor in the Budget resulted in the decision
that you have been debating and questioning the Minister about today.
If Ministers had not taken the decision to bring forward the upper
accruals point to 2009 and if they had delayed it to 2012, there would
have been a very severe degree of disruption for pension
providers—they would not have certainty about contracted-out
rebates, because they would not have known what would happen.
It would have resulted in
additional difficulties. Pensions are a difficult subject, and it is
already difficult enough to explain what is happening. More
fundamentally, following the Pensions Commission report, Ministers
outlined a vision for pension reform that included as an integral part
the changes to the state second pension, which will be brought back
into line when the Bill receives Royal
Assent.
Q
115
Mr.
Dunne:
I have just one question to follow that up. I hear
what you say, but I fail to understand why the industry would be thrown
in confusion and would not know what would happen in 2012 if we
legislated for, or if you had chosen, option 4, which would have made
the upper accruals limit in 2012 clear.
Sam
Mitha:
We have obviously engaged in a lot of analysis
of the options in consultation with the DWP. As a result of the work
done in collaboration with our colleagues in the DWP and the Treasury,
we concluded that the change would mean that the schemes are not
required to increase their funding or benefits to meet
the tests that pension schemes must pass to be contracted out of the
state second pension. The proposal that Ministers brought forward will
reduce the disruption for pension schemes more than the other
option.
We went through each option in
great detail with people who are experts on the way in which pension
arrangements work, and I am in close touch with the industry about the
possible impact of the changes. Ministers have not received formal
representations from pension providers or employers following the
publication of the impact assessment, which outlines the analysis and
which caused Ministers to take their
decision.
Q
116
Justine
Greening:
I wanted to clarify the figures and what was
included in what figure. Minister, you talked about the windfall
impact—the unintended windfall—resulting from the
alignment of the upper earnings limit and the upper accruals rate. Was
that windfall included in the Budget
figures?
Jonathan
Athow:
To the extent that it would appear within the
time frame, yes it was. However, obviously, much of this is about the
entitlement to state second pension that would accrue many years in the
future, so it would not necessarily be captured in the three-year
horizon set out in the Red Book.
Q
117
Justine
Greening:
Okay, I understand. So the reversal of that
windfall featured in the pre-Budget report as an
impact.
Jonathan
Athow:
There are two separate issues. There is the
additional entitlement to state second pension. There is then the
additional contracted-out rebate that individuals would have been
entitled to under the Budget reforms that we decided to take back. Two
items are included in those lines: the rebates are the bigger item in
the short term; the accruals—the additional accrued
entitlement—are a much more long-term effect. Pretty much of the
cost that we are talking about is the effect of the
rebates.
Jane
Kennedy:
The short-term, contracted-out rebates
were.
Jonathan
Athow:
We included the short-term, contracted-out
rebates. That was an additional cost in the Budget that became a yield
in the pre-Budget
report.
Q
119
Justine
Greening:
I want to pick up on that because, on Second
Reading, both my hon. Friend the Member for South-West Hertfordshire
and I probed about which figures were in which book—the Budget
and the pre-Budget report. The colleague of the Minister who is here
was clear about the fact that the flat-rating of the second state
pension being brought forward was in the Budget book and, at the time,
my sense was that it could not have been given what you have said today
and my understanding of what was
done.
Can we have some
clarification? When the Minister said the hon. Member for
Putney
“asked whether we knew at the time
of the Budget that there was an issue about aligning the state second
pension—flatrating the upper earnings limit—and about the
changes that the Bill brings into effect to prevent unintended
windfalls for those who earn above the higher earnings limit. We knew
that that was the case, so this is not, as has been alleged,
incompetence—in fact the figures featured in the Red Book as
part of the national insurance contributions
calculations”,—[Official Report, 17
December 2007; Vol. 469, c. 664.]
that was incorrect. Preventing unintended
windfalls was not in the Red Book; it was in the pre-Budget report and,
quite rightly, it could be said that it was a clawback and used as part
of the figures that paid for the changes on inheritance tax, but it was
not in the Red Book. That was
incorrect.
Jane
Kennedy:
The costs of the contracted-out rebates were
included. The costs of the contracted-out rebates from increasing the
upper earnings limit were included in the Red Book, but we then made a
policy announcement at the PBR, which scored those costs back. The
figures actually featured in both the Red Book and the pre-Budget
Report.
Jane
Kennedy:
What you are trying to get to is to
demonstrate that the Minister misled the House. That is not the
case.
Justine
Greening:
Not at all. As an accountant, it was something
that particularly interested me. I wanted to
understand what was in which series of figures. The
clear message that we got on Second Reading was that the prevented
“unintended windfalls” were included in the Budget book.
All I am trying to clarify is that although it is a complex area, that
was incorrect. Actually, the figures are correct and
it was in the pre-Budget report that the unintended windfalls
adjustment was
made.
Jane
Kennedy:
As we have been discussing at length this
morning, those predictions of future benefits would have been, as
Mr. Athow was describing, so far in the future that it would
not have been proper to have included that detail in the Red Book. The
costings that we did have available were
included.
Jonathan
Athow:
I think that we would need to look exactly at
what was said. I do not have the quote in front of me, so I cannot
comment. I think we said that we knew about the consequential effects
on state second pension at the time of the Budget and what we included
in the Budget were the effects, including the costs of the rebates as
we could quantify them at the time. I am not certain that that is
necessarily at odds with the quote from Second Reading, but I do not
have it in front of me so I cannot comment on it in detail. I do not
necessarily see them in
conflict.
Q
122
Justine
Greening:
I think that if you read back through the quote,
you will find that it is at odds. But I understand the position and
that is the result that I was trying to achieve. Thank
you.
Q
123
The
Chairman:
Does anyone else have any questions? In that
case, it remains for me to thank the Minister and her officials for
coming along. At various
stages, officials have said that they do not know the answer and that
they can go away and find out. I hope that the Minister will ensure
that, whenever those references were made, the necessary inquiries will
be made and the information provided to members of the Committee. I
hope that she can arrange for
that.
Jane
Kennedy:
I hope that we did not say it too often, but
I certainly undertake to do
that.
Q
124
Mr.
Dunne:
I endorse your statement, Mr. Chope. The
Minister read out a list of bands of income that would be affected and
the number of people who would be affected. Some of us may have managed
to scribble them down, but it would be most helpful if the Committee
could be provided with a full copy of the impact assessment on
individuals.
Jane
Kennedy:
It is an answer to a question from my good
right hon. Friend the Member for Birkenhead (Mr. Field) of
18 October 2007, who asked it in his good usual helpful
style.
Jonathan
Athow:
It is at column
1266.
Further
consideration adjourned.—[Claire
Ward.]
Adjourned
accordingly at thirteen minutes to One o’clock until this day at
half-past Four
o’clock.
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