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Lord Goodhart: My Lords, this group of amendments concerns Clause 51, which introduces what is probably the most important restructuring of national insurance contributions for a decade. It will affect virtually every employer and employee in the country. It is, of course, a move towards the integration of national insurance contributions and tax. We have already gone a long way in that direction. We have collection of national insurance contributions through the PAYE system. The link between the amount of contributions and the amount of benefits has largely been broken. For employees who are contracted in, the amount of their contributions affects only their right to the state earnings related pension supplement (SERPS). For those who are contracted out of SERPS, the amount of their contributions affects the size of their benefits not at all. It is true that the making of contributions is still the trigger for the right to receive benefits. But even there the link has been diluted by the credits given to the unemployed and disabled people, and by home responsibility protection. Those all confer benefits without the payment of contributions.

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There are statements made in the Budget that the Contributions Agency is to be transferred to the Inland Revenue, that the starting-point for employers' contributions is to be the same as the single personal allowance, and the start for employees' contributions is to be brought to the same level as soon as the Government work out a mechanism for preserving the rights of those earning between £64 and £81 a week. That will mean that for the first time someone in employment who is paying no contributions will qualify for benefits. Employers' contributions have no upper earnings limit. Earnings above the upper limit do not even qualify an employee for SERPS. The integration of national insurance contributions and tax has therefore gone at least half-way and indeed rather more.

That development is not in itself unwelcome. The time has come to realise that national insurance contributions are effectively a charade. Many people think that contributions pay for the national health service or go into a fund to pay for their pensions, which, of course, they do not. As I said on a previous occasion, the national insurance fund is not a reservoir but a pipe. If we recognise national insurance contributions as a tax, as indeed they are, we could abolish the complex record-keeping which the contribution system still requires; we could base retirement pensions on residence in the United Kingdom; and we could base jobseekers' allowance on having an employment record. That would be both simpler and more honest. However, that is a matter for the future.

I return to Clause 51. It is an extremely important restructuring of national insurance contributions. I share the regret of the noble Lord, Lord Higgins, that it was introduced at Report stage in this House after the Bill had completed its passage through the other place. There was therefore no opportunity to test the clause in Committee in either House. It had a perforce limited discussion at Report stage in this House. It is for that reason that I believe it right to bring amendments to the clause on Third Reading to allow further discussion. The House of Commons will have an opportunity to discuss the issue on the debate on the Lords' amendments, but I believe that that is not a satisfactory substitute for a proper debate in Standing Committee in that House.

While I share the view of the noble Lord, Lord Higgins, that this is a thoroughly unsatisfactory way of introducing these extremely important changes to national insurance, I am unable to support the text of his amendment. I believe that it was a useful peg on which to hang a speech criticising the procedural way in which the Government have dealt with the matter. The noble Lord's textual analysis of the Chancellor of the Exchequer's Budget speech was perhaps pressing the point too far. While the Government will no doubt be in a better position than I am to refer to chapter and verse, it was my understanding at the time--certainly within a day or two afterwards--that it was no part of the Budget undertakings by the Chancellor to raise the lower earnings limit at the same time as he raised the threshold for employers' national insurance contributions in line with the threshold for tax.

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Secondly, I believe that it is improper for this House to knock a hole in the Government's taxation plans by effectively cutting tax by raising the starting point for employees' national insurance contributions from £64 to £81 a week.

Thirdly, and most importantly, the amendment will cut out those earning between £64 and £81 a week from the duty to make contributions and will therefore deprive them of the contribution record to which they would otherwise have been entitled. It is clear that the amendment cannot be supported unless there is at the same time an amendment to preserve the rights of those earning between £64 and £81 a week.

Therefore, while I support the objections to the procedural way in which this has been handled, I am unable to support the amendment as it stands.

4.15 p.m.

Lord Newton of Braintree: My Lords, I rise briefly to refer to my Amendment No. 6, if only to dispel any impression that it is a rival to my noble friend's amendment or that there is any dispute between us. I have every sympathy with the arguments he advanced.

My amendment arises from doubt as to precisely what the Government mean by the £81 figure. If it is intended to be a substitute for the current lower earnings limit, admittedly at some uncertain time in the future, presumably it will, like the lower earnings limit, normally be reviewed and usually increased year by year.

I should like to know, first, whether the £81 figure is what the new lower earnings limit would be if it were introduced now or whether it is what the figure will be at some unknown time in the future when it is introduced. If, as I understand it, it is loosely related to the single person's allowance, in the same way as the current lower earnings limit is, that, of course, is index-linked and will rise each year. Therefore, when the Government finally get round to doing this, £81 will not be the right figure, in which case my amendment is more closely directed to achieving what the Government intend.

From the body language of the Minister--if I may call it that--I believe I am right in my interpretation that that is not the figure at which it will be introduced, but perhaps she could confirm that. I mean that I should like to have it on the face of Hansard.

My noble friend on the Front Bench and the noble Lord, Lord Goodhart, raised a point as to what the alleged protection means. At present, on current-year figures people earning over £64 a week and paying contributions would acquire pension rights and rights to unemployment benefit, and so on, in certain circumstances. It is clear that at some future stage those earning over £81, or whatever the figure is, will do the same. We are told that people earning between those two figures will be protected. What does that mean? Does it mean that the rights that they have already built up to pensions, for example, will be protected; does it mean that for a period, until they run out of them, their rights to unemployment benefit will be protected, those rights only ranking for two tax years in relation to

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national insurance contributions; does it mean simply that the rights that those people already have will be protected but that they will not go on acquiring new rights to pensions, and the like, on contributions which they are not paying; or are we to have a new form of contribution credit? That question must be answered if we are to be sure that we are not blowing a complete hole in the national insurance system or seriously damaging rights in a way which purports to be improving people's position. We need a clearer idea of the answer to that question before we can acquiesce to the way the Government are proceeding.

The Parliamentary Under-Secretary of State, Department of Social Security (Baroness Hollis of Heigham): My Lords, I urge the House to reject these amendments. I am sure the House will be relieved to hear that I shall not make a Second Reading speech on Part II of the Bill; nor do I intend to joust with the noble Lord, Lord Higgins, about the difference between "further" and "future", when my understanding is that both lie in the future. Instead, I shall try to address the amendments.

In putting forward the amendments, the noble Lords, Lord Higgins and Lord Newton, appear to be trying to introduce into the Bill a change heralded by my right honourable friend the Chancellor in his Budget. The Chancellor announced future reforms that would raise the lower earnings limit to the level of a single person's tax allowance. As I was invited to do by the noble Lord, Lord Newton, I confirm that that is indeed the case. The alignment will in future be with the single person's tax allowance. In that sense, he is right to correct the possible technical flaws in his noble friend's amendment.

I am pleased to see that the Opposition support the Chancellor's proposals to such an extent that they want to expedite their introduction. Unfortunately, neither the amendment of the noble Lord, Lord Higgins, nor that of the noble Lord, Lord Newton, addressed the major implications, touched on by the noble Lord, Lord Goodhart, that they would have for the pension and benefit position of millions of employees. The amendments would take up to 1 million low-paid people--four-fifths of them women--out of reach of certain contributory benefits. They would reduce the future state earnings-related pensions and contracted-out pensions of millions of others. And they would reduce national insurance contribution revenue by approaching £1.5 billion a year.

The Government have introduced into this Bill a number of changes to the structure of national insurance contributions as announced by the Chancellor in the Budget. Those measures brought forward at Report stage are intended to come into force in April 1999. They will abolish the 2 per cent. entry fee paid by employees on their earnings below the lower earnings limit. That will increase by £1.28 a week the take-home pay of every employee who pays contributions. The measures will enable us to increase the point at which employers start to pay contributions from the current level of £64 a week to the level of the single person's tax allowance--£81 a week this year. They will abolish

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the contribution that employers pay on earnings below this new higher threshold. And they will greatly simplify the structure of employer contributions by cutting the number of rates from four to one.

This radical package of reforms will help to make work pay. It will build on the many other measures the Government are introducing to help people move from welfare into work, including the working families tax credit, the childcare credit and the new deals. And it will align the national insurance system more closely with income tax, cutting red tape for business and reducing the cost of administration.

The Chancellor also announced his intention to build on these changes. He said that, crucially, once measures were in place to protect people against benefit losses he would be increasing the lower earnings limit for employees to align with the new higher threshold for employers; that is, to the level of the single person's tax allowance.

The proposed increase in the lower earnings limit will have many advantages. It will build upon other measures the Government are introducing to make work pay. And it will continue the progress made by this Government to cut the cost of administration for employers. We wish to do this as soon as possible. That is why the Chancellor announced his intention to introduce the measure in the future, and one imagines that is why noble Lords opposite tabled the amendments.

But without corresponding changes to the benefit rules, an increase in the lower earnings limit would remove access to certain contributory benefits from up to 1 million men and women earning between £64 and £81 a week. Those people--four-fifths of them women--would cease to build up rights to jobseekers' allowance, to incapacity benefit and to maternity allowance. They would no longer be eligible for statutory sick pay and statutory maternity pay. And many would cease to build up rights to the basic state pension.

In addition to these effects on the low-paid, the amendments would reduce the pensions being built up by millions of people right across the earnings spectrum. They would cut the portion of earnings that count for the state earnings-related pensions scheme--SERPS--thus reducing future SERPS pensions and many occupational and personal pensions. Is that what noble Lords want from the amendment?

The noble Lord's amendments do not provide people with any protection against those benefit and pension effects. They make no effort to prevent losses. That cannot be either right or decent. If the noble Lords, Lord Higgins and Lord Newton, were truly concerned about the level of benefit, they would do as the Chancellor proposes and await the brigading of both sides of the equation--the benefit side with the tax side--and not seek to bring forward today a one-handed, one-sided amendment which would strip people of the earnings and the entitlement to those earnings that they built up through the insurance system. The noble Lord's amendment does precisely what he says he does not want it to do. I hope that as a result he will change his mind.

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The Government believe that those effects are unacceptable, indecent and wrong. We will not increase the lower earnings limit at the expense of people's access to contributory benefits and pensions. Instead, we will wait until we have completed both sides of the equation. As the Chancellor announced, we will take the steps necessary in the future and at the same time to ensure that these low-paid men and women do not lose benefit as a result of the change.

Of course, all aspects of the present system are not cast in stone forever. We need to modernise the national insurance system; we need to simplify its administration and to examine the link between contributions and benefits. That is precisely why we will be coming forward with proposals in due course. But they will be proposals that do not strip away benefits from lower paid men and women as the amendment, in isolation, does.

That is my first criticism of the amendment; that is, that it strips away the rights that people are entitled to claim by virtue of their insurance. It is no use the noble Lord shaking his head; that is precisely what the amendment does. He may not wish it, but it does. I have a second criticism which is that the amendment is financially reckless. It is reckless with people's benefit entitlements and reckless with public funds. It would leave a gaping hole in the Government's finances. It would reduce national insurance contribution revenue, as the noble Lord, Lord Higgins, admitted, by £1.5 billion a year. I note that neither the noble Lord, Lord Higgins, nor the noble Lord, Lord Newton, were anxious to tell us where they will find that £1.5 billion or by what cuts in expenditure they will seek to do it. Will they take it from pensions, from education or health?

Changing the lower earnings limit has major financial implications and noble Lords are ducking the issue today by not addressing how they will compensate for that shortfall. It is for the Chancellor to decide when it is appropriate to make such a change. The financial effects will appear in the Red Book at that time as part of his Budget proposals and matters will be properly discussed by the Commons in that Budget debate. The change will not be made in April 1999. It will be made when the Chancellor feels that the time is right and the financial effects will then appear properly in the Red Book at that time. I urge your Lordships therefore not to support the amendment.

The third point raised by the noble Lord is that if the amendment is not about financial prudence--it is not; it is reckless--and if it is not about considering the policy in the relationship between contributory benefits--it cannot be because it failed to do so--then why press it? The noble Lord, Lord Higgins, said that it was to allow the other place adequate scrutiny of the Chancellor's Budget intent. The other House has already had a debate on the Budget.

Raising the LEL is not part of the Bill; I must emphasise that. Because it is not part of the Bill, we are not denying the House the proper scrutiny it should have. If we were trying to introduce LEL into the Bill,

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the point would be well taken. We are not. The noble Lord, Lord Higgins, is not aiding the House of Commons by initiating a debate today and asking Members to debate in due course something that is not even in the Bill.

In due course this measure will be formally brought forward by the Chancellor of the Exchequer, probably in a Budget but possibly not. In either case it will need to come forward as primary legislation. At that point the raising of the lower earnings limit will be discussed, scrutinised and debated by the Commons in four stages of its procedure and five stages of this procedure. Is the noble Lord going to tell us that, as a result of that, any such change will not have been properly scrutinised? The noble Lord, Lord Higgins, cannot hide behind the need of the Commons to debate when there will be ample opportunity in due course, when we have the full information, to debate this when primary legislation is introduced.

I urge your Lordships therefore not to support the amendment which, I promise, is extremely ill-judged. It is financially reckless. I repeat: it leaves a gaping hole of £1.5 billion in public finances without any suggestion of how that hole should be plugged. Is it now Tory policy not to tax and spend, but to spend and not to tax?

The amendment is also indecent. It leaves those struggling in low-wage jobs without the protection of insurance benefit which they thought they had earned. This amendment will strip away their rights. That is quite wrong and it is not decent to do so. Is it now Tory policy not to favour the brigading of work with insurance rights, but to insist on work without those rights? Is that fair to those struggling on low wages, because that is what this amendment does? Is it also the case that if we do not introduce a lower earnings limit clause into a Bill which has nothing to do with it, that we are going to deny the Commons the opportunity to debate it when it is introduced as primary legislation? Of course not. Any proposals will be properly scrutinised in both Houses in due course when both the tax and the benefit sides are brought together. In that regard, the Government have made clear in their Red Book how the loss of national insurance contributions is to be properly funded. To do anything other than that is reckless, imprudent and wrong.

This amendment would be perfectly proper as a probing amendment, but it is not a probing amendment. To push it to a vote would be reckless and imprudent. I hope that your Lordships will value the judgment of this House and not do so.

In the course of the Committee and Report stages, as I am sure the Tory Opposition will accept, many amendments were moved and most of them were accepted by the Government. We all believed--and the voice of the House indicated--that to do so was good public policy. I can list the amendments if noble Lords wish. About 10 amendments have been tabled by us which arose from Opposition amendments to improve the Bill. That was in the nature of good public policy. This amendment is not; it will not make it a better Bill and it is not relevant to it. Noble Lords have the numbers. They can push these amendments through if

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they choose, but on the grounds of financial prudence and of respecting the right of the lower paid to the insurance benefits that they have built up; and also respecting the role of the Commons to debate this issue when proper legislation is introduced in due course, I urge noble Lords not to support these amendments, but to press the noble Lord to withdraw them instead.

4.30 p.m.

Lord Higgins: My Lords, I think that the noble Baroness doth protest too much and, in a large measure, has been hoist with her own petard. Part II of the Bill has been introduced by the Government, totally bypassing the House of Commons up to this point. The purpose of this amendment is to give the other place an opportunity to discuss a specific point which was explicitly referred to in the Chancellor of the Exchequer's Budget speech, which undeniably gave the impression that he was going to do this. That is what this amendment seeks to do.

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