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Social Security (Contributions) (Re-rating and National Insurance Fund Payments) Order 2001

7.58 p.m.

Lord McIntosh of Haringey rose to move, That the draft order laid before the House on 30th November, Session 1999-2000, be approved [First Report from the Joint Committee].

The noble Lord said: My Lords, the order does three things. First, it deals with the reduction of the employer's Class 1 contribution to match the climate change levy; secondly, it increases the small earnings exemption for the self-employed; and, thirdly, it raises the voluntary Class 3 contribution in line with prices.

First, I deal with the reduction in the secondary Class 1 contributions from 12.2 per cent to 11.9 per cent. That will be the rate payable by all employers from April 2001 to recycle revenues arising from the introduction of the climate change levy. It will therefore help to protect UK competitiveness.

Secondly, the order raises the small earnings exception for the self-employed, below which, depending on the level of their profits, they may claim exemption from Class 2 contributions. The exception will rise next April broadly in line with prices, from 3,825 to 3,955 a year. Given that the rate of Class 2 contributions for 2001-02 will remain at 2 a week--a reduction in real terms--it may be that many people will choose to pay the contributions in order to protect their benefit entitlement. Nevertheless, the increased exception will be of real assistance to the lower earning self-employed.

Staying with the self-employed, the draft order also sets the profits limits between which Class 4 contributions are paid. The lower limit at which such contributions become due will rise in line with the income tax personal allowance, from 4,385 to 4,535 a year. At the other end of the scale, the upper profits limit will continue to match the upper earnings limit for employees, at 29,900 for 2001-02. This ensures that the self-employed pay Class 4 contributions on much the same range of earnings as employees liable to Class 1 contributions and is an essential element in making the national insurance system fair for everyone.

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Thirdly, the draft order deals with the weekly rate of voluntary Class 3 contributions, which help those with insufficient contribution records in any given tax year to make up a "qualifying year" for benefit purposes. The rate of Class 3 contributions will rise next April by 20p to 6.75, a standard rerating in line with prices.

The review of contribution rates is accompanied by a report from the Government Actuary detailing the effects of the draft order, and the draft order uprating benefits laid by the Secretary of State for Social Security, on the National Insurance Fund. I am pleased to say that, for the third year in a row, there is no expectation that the fund will need a Treasury grant. Nevertheless, a prudent minimal provision is made in line with advice from the Government Actuary.

As happened last year, there is a single draft order for both Great Britain and Northern Ireland. Northern Ireland has a separate national insurance scheme from Great Britain but the two schemes are closely co-ordinated and maintain parity of contribution rates. Following the transfer of policy from the DSS to the Treasury, Northern Ireland's social security legislation was amended to enable the draft rerating order to include corresponding measures for the Province. I commend the draft order to the House.

Moved, That the draft order laid before the House on 30th November, Session 1999-2000, be approved [First Report from the Joint Committee].--(Lord McIntosh of Haringey.)

8 p.m.

Lord Higgins: My Lords, the House will be grateful to the noble Lord for that explanation. It is of course the case that Mr Gordon Brown, as Chancellor of the Exchequer, seems to be taking over more and more the role of other government departments. It was previously the case that the uprating of benefits under social security has been discussed at the same time as the uprating of the contributions that are designed to cover those increases in benefits. However, since the matter of contributions was transferred to the Treasury, the two debates have become separated. I think it is true to say that the noble Lord has now taken over that aspect of what was previously dealt with by social security Ministers.

I am second to none in my admiration for the noble Lord's versatility and ability to widen the scope of his activities. At the rate Mr Brown is taking over matters, the noble Lord will find the burden increasing more and more until we will need to have him investigated by the Monopolies and Mergers Commission. At all events, I am not very happy about the way in which the benefits increases and the contributions increases have been divided. Looking back, I notice that when the Government first came to office these matters developed into a really major discussion of the whole of social security policy, whereas today we are concerned with what is obviously a much more limited order.

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Perhaps the Minister can clarify one point for me. Earlier in the evening I was puzzled about the relationship between this order and the Social Security (Contributions) (Amendment) (No. 2) Order Regulations 2001. I could not find out where those had disappeared to. I think I am right in saying that the reason they appear to have disappeared, if that is not a contradiction in terms, is that they have been dealt with under the negative resolution procedure rather than the affirmative resolution procedure. The regulations are concerned with the uprating of primary Class 1 contributions and have been dealt with separately. I should have thought that there was a case for discussing the two together, even though the other instrument, which in many ways is more important, has been dealt with under different provisions in the primary legislation.

The wording of the two instruments is rather different. The order before the House refers to the Treasury having carried out a review of earnings, and so on. The wording of the other instrument is far more formal. In my concluding remarks, I shall come back to the question of a review.

We recognise that some aspects of the order are favourable. I refer, for example, to the ability to make up qualifying years and to the change in the lower limits for some classes of contribution. Two major points come to mind. The first concerns Class 1 secondary contributions relating to the climate change levy. We are told that this money is being recycled. We are told that companies will have to bear the climate change levy but that they will be compensated in some way by the reduction in the Class 1 secondary contribution. That is a rather strange way of going about it. To what extent will the burden of the climate change levy overall be covered by the reduction in Class 1 secondary contributions? Are the amounts, broadly speaking, of the same order of magnitude?

Although the sum may be in balance overall, it is clear that that will not apply with regard to individual companies. Being very much fuel intensive, the climate change levy is likely to affect manufacturing industry in particular; for example, the motor industry and the steel industry. I think in particular of CORUS and all the problems associated with that company. It seems unlikely that the "compensating" change in national insurance contributions and the climate change levy will be anywhere near in balance. On the other hand, it seems likely that the reduction in the Class 1 secondary contribution, introduced apparently to balance up the climate change levy, will benefit other non-manufacturing industries for no apparent reason. The Government are using a blunt instrument in their efforts to protect--understandably and with our support--the export ability of British industries, particularly against the present high level of the exchange rate. It would be helpful if the Minister could give us an explanation--he did nothing of the kind in his opening remarks--of exactly how the levy and the change in the Class 1 secondary contributions will balance out, either overall or in individual cases.

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I am reinforced in what I say by my continuing view that national insurance contributions should be regarded as a tax. To the extent that the Chancellor has taken over the matter, that is recognising the move in that direction. National insurance contributions are in many ways similar to a tax and so give cause for concern.

I turn to my other main point before I put matters in a broad macro-economic context. I refer to the question of Class 4 contributions paid by the self-employed. We see from the debate in another place that the upper limit for Class 4 contributions is to be increased. That increases the revenue. It is a classic stealth tax. Those in this category earning over around 30,000 will find that they will pay more than 2,000 extra as a result of the changes in this order. The limit will be raised from 27,820 to 29,000, an increase of some 7.5 per cent. In some cases, it will be 8.24 per cent or more.

The Chancellor did not mention this in his Budget speech. The closing remarks of the Explanatory Note to the order before us state that:

    "Class 4 upper profits limit increases [are] in accordance with the announcement in the March 1999 Budget".

It may be in accordance with the documentation and with remarks made by other Ministers, but certainly the Chancellor of the Exchequer, although he announced in his Budget speech the increases in the benefits which were going to be made, did not mention the increases in contributions, which are clearly far in excess of inflation. Perhaps the Minister could explain why it is that this increase--in my view it is clearly a tax increase--is justified. I find it difficult to think of a reason, but no doubt he will be able to enlighten the House.

That brings me to my final major point. Both the Minister in another place and the noble Lord this evening have stated that this is in line with the recommendations of the Government Actuary in the context of the increase in government grant. I find it difficult to understand why the Minister thinks that the increase in the proposed Treasury grant of, admittedly, only 2 per cent or so, is in line with the recommendation of the Government Actuary. It is clear from the Government Actuary's report that the fund is massively in surplus. For that reason, it is not clear why, on grounds of prudence--however prudent Mr Brown may be--the Treasury thinks it necessary to take powers to increase the government contribution.

In fact, this increase is far from modest. It is far in excess of the proposal made three or four years ago for increasing the grant on a so-called "prudent" basis. The report of the Government Actuary indicates that he is quite content with the present state of the fund--one-sixth of the fund payable, which is the minimum limit which he has imposed. The fund is satisfactory and does not require any more money. However, while the Government Actuary has recommended one-sixth of the fund--or a little more than that in percentage terms in order to avoid a recurring fraction--the actual amount in the fund is over 40 per cent. As a

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consequence, it is difficult to understand why--although the Minister has stated that this is in line with the actuary's recommendation--it is necessary at all.

To put this important order involving a great deal of money into context, it may be helpful to consider the report of the Government Actuary in the related context of the Child Support, Pensions and Social Security Act 2000. He looks at the costs of uprating the basic retirement pension in line with the general level of earnings or in line with prices, a subject which lies close to the heart of the noble Baroness, Lady Castle of Blackburn. On page 11 of that report, which is in many ways more relevant than the report produced in relation to this order, we can see that the extent of increase in the fund rises very strongly indeed. To take the period 2000-01 to 2005-06, the balance at the end of the year, on the assumption of only price upratings (the Government have said that that is their intention) it rises from a surplus of 18.4 billion to 21.9 billion, 24.2 billion, 25.8 billion, 27.7 billion and 29.9 billion. Yet this order has been put before us to increase the money to be collected by the Government, despite the fact that this balance is enormous.

If we take the corresponding percentage in relation to benefit expenditure--which is what this order is supposed to finance--we see that it rises from 39 per cent to 44 per cent, 47 per cent, 48 per cent, 50 per cent and 52 per cent. One must ask the question: why is this order being introduced, given that that is the projection which the Government Actuary has made of the surplus in the fund? This is developing into a levy which is increasing government borrowing. Of course, in broad macro-economic terms, an increase in government borrowing has much the same effect as changes in taxation. This will be of great help to the Government in terms of macro-economic management. However, given the actuary's projections, I find it difficult to understand why it is the Government think they should go on introducing orders of this kind.

Perhaps I may draw an analogy with a private company pension scheme. If the surplus was of this order and was forecast by the actuary to increase at this rate, one of two things would happen. Either a contributions holiday would be declared or the benefits would be increased. However, in most cases the benefits here are not to be increased any more than in line with prices. Furthermore, there appears to be no prospect of a contributions holiday.

These are important issues. We need to consider the order in the light of the overall macro-economic context. At the moment, I find it difficult to understand exactly what is the underlying policy in relation to the question of contributions.

8.15 p.m.

Lord Goodhart: My Lords, we on these Benches welcome the small reduction in the secondary Class 1 contributions. Secondary Class 1 contributions are of course a tax on jobs. We believe that it is right to transfer that tax from jobs and to replace it with taxes on non-renewable inputs, CO 2 emissions and other forms of pollution. For that reason, we welcome the

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climate change levy. Furthermore, we feel that the reduction of 0.3 per cent in secondary contributions, though small, demonstrates a move in the right direction.

Moving on to the situation as regards Class 2 and Class 4 contributions, we welcome the shift of the burden of contributions made by the self-employed from Class 2 to Class 4. Flat rate payments such as those for Class 2 are regressive. However, I wonder why the small earnings exemption has not been increased by much more than the rate of inflation, along with the lower earnings limit for Class 1 contributions?

For the current year, the starting point for Class 2 contributions is only 120 below the lower earnings limit. However, next year that gap will rise to nearly 600. We believe that it is wrong to make the self-employed pay Class 2 contributions at levels well below the lower earnings limit.

I shall turn to the more general contributions. To some extent, I share certain concerns with the noble Lord, Lord Higgins. We see that in the year 2001-02, receipts will exceed payments by some 2.5 billion. Reserves will increase to more than 40 per cent of the amount of the yearly payments.

It is my understanding--I may be wrong--that the 2 per cent figure for contributions out of public funds is a notional figure which will not be called upon unless something goes quite extraordinarily wrong. Nevertheless, national insurance contributions are obviously a hypothecated tax. We believe that national insurance contributions should not be used to bring in revenue in excess of payments at a time when the reserves stand at something like two-and-a half times the recommended minimum level.

The noble Lord, Lord Higgins, referred to the question of the raising of the upper limit for the Class 4 contributions, which is of course well above the rate of inflation. I wonder whether the Government, if they are re-elected to office, would be prepared to undertake a wider review of the contributions system, in particular the balance between the liability of the employed--including both primary and secondary contributions--and the self-employed. Undoubtedly the present system imposes very heavy burdens on employees as against the self-employed. This has undesirable side effects--for instance, it encourages firms to contract out work rather than give it to their own employees--and it encourages contribution avoidance schemes such as the personal company scheme, which was targeted by the well-known--perhaps I should say notorious--IR35.

It is clear that we need a thorough review of the system, in particular the relationship between the employed and the self-employed. I recommend to the Minister a discussion paper which has just been published by the Tax Law Review Committee on the subject of classifications of people as employed or self-employed. That is an issue we should look at seriously.

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Those are the points I wish to make. On the whole, we are broadly supportive of this order, but we think that there are issues which should be looked at and, perhaps, one or two missed opportunities.

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