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7.10 pm

Baroness Hollis of Heigham: My Lords, I am sure that I speak for the whole House in thanking my noble friend the Minister for such a clear explanation of the Bill. It is narrowly drawn, but it has wide-ranging implications, or so I shall seek to suggest. I shall not go into the flattening of S2P—I understand the logic of that and think it is sensible. Instead I shall raise two issues. The first is some issues concerning the alignment of NICs and tax bands. The second, which will not surprise my noble friend, is the issue of buy-back.

NICs and tax thresholds have always been curiously connected. It was not until 1975 that we constructed LELs and UELs, as we currently understand them, as a self-enclosed system with a crude ratio in which LELs were about a quarter of average earnings and UELs at about one and a half of average earnings. In 1985, the then Government removed UEL for employers but not—although it is often suggested by those to the left of me, and perhaps even by those to the right of me—for employees as well. A few years back, the Government also separated the LEL from the tax threshold. I cannot find out when, but it may have been when we introduced tax credits to replace family credit. I am not sure about that. We now have a

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primary tax threshold that is £10 or so higher than LEL, which itself is now quite arbitrarily attached to the level of the basic state pension, which is a benefit. Finally, in a move which separates the national insurance upper limits from benefits, we are reconnecting UEL to the upper tax threshold. So we now have alignment of the tax and benefit system at the top but some rather curious connections at the bottom, where LEL runs. It is those connections that I want to explore now, particularly as they very much interact with those who are also experiencing the loss of the 10p tax band.

It is even more complicated than that. At the bottom, we have a tax credit threshold at 16 hours’ work, which gives you tax credits. It is different from the LEL because you can run several small jobs together to qualify, but if you do get tax credits, that passports you through to national insurance, notwithstanding your being below the LEL on all other grounds. LEL is still for some arbitrary reason attached to the basic state pension and gives entitlement to contributory benefits. The question I want to ask my noble friend—as I gave the department notice of it yesterday, I am confident he will have an answer to it—is whether this LEL will rise with earnings from 2012 as will pensions, rather than with RPI as at present. At the bottom is the primary threshold, PT, at which point you pay tax.

If the LEL rises with earnings, because it is attached to the basic state pension which will rise with earnings, the gap between it and the primary tax threshold, which I presume will be largely RPI’d, will narrow over time: LEL will rise faster than the primary threshold. Equally, if average earnings rise faster than the minimum wage, an increasing number of people will fall below the LEL, though working 16 hours a week at minimum wage, and lose entitlement to contributory benefits.

In discussion on the Bill in the Commons, everybody fretted about what was happening at the top; nobody looked at what was happening at the bottom. I am sure that my noble friend can allay my fears. However, if LEL rises with basic state pensions and its earnings links, what are the implications for those, especially women whose earnings are rising less fast, who are on the minimum wage or who work part time? Will they become progressively disfranchised from contributory benefits? If the primary threshold remains RPI’d, does it mean that LEL and primary threshold will, as with the UEL, again become realigned over time, reconnecting the lower earnings limit with the tax threshold, both at bottom and at top?

It is clear that the higher that the LEL rises, the more people, such as partnered women in part-time jobs and disabled people in part-time work, are potentially excluded from contributory benefits. The simple answer would be to break the link with the basic state pension level and allow LEL to remain below that at which the BSP rises, because people would otherwise drop out of the contributory system. My noble friend may be able to give me other reassurances about the distributional effects. Real issues surrounding who will be eligible for a contributory system will arise if we do not think ahead about what is going to happen to LEL if it continues to be connected to a BSP that will be earnings-linked rather than RPI-linked.



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My second point is that those who are currently disconnected from contributory benefits, especially for BSP, have an incomplete national insurance record. I rather doubt that my noble friend can give me the reassuring reply that I would like also on this.

Those who are savvy or well-heeled, or who have parents or husbands with the same fortunate attributes, can buy back their missing national insurance contributions as they go along, back to a further six years. But poorer women may well have missing years long before their previous six years. They may have had children before 1978; they may have dovetailed together several part-time jobs—if they are not eligible for tax credit, they do not get into the NI system; they may be service wives accompanying husbands abroad; or they may have extended caring responsibilities for older people. As a result, they would have a shortfall on their record which they could not cover under existing rules, meaning that only a quarter of women, compared with 90 per cent of men, currently retire with a full BSP. The Government’s figures are higher only because widows inherit a full BSP from a contributory husband. Therefore, the relevant statistics are about not when they retire but what they currently enjoy on average during their retirement.

The situation of those pensioners will improve from 2010, and dramatically so from 2020, thanks to the Government’s Pensions Bills, but in the mean time there will be a sandwich generation which as it retires is dependent on the support of partners or the state to fund their retirement even though they would like to help themselves by co-purchasing missing years back beyond the six-year rule. We are talking about women who, as we have argued previously in this House, keep several generations afloat: their own older children, their grandchildren, their partner or husband and often elderly parents as well. By supporting others they will often have lost the chance to support themselves, at least with a pension of their own.

We debated this matter very fully last summer. I am considering tabling similar amendments to this Bill to allow buy-back beyond six years by amending the 1992 social security Act. I hope that if I do so the House will be minded to support me as fully and extensively as it did last summer when the Government faced their biggest defeat since 1997. I am sure the House would forgive me if the amendment introduced delays to the passing of the Bill.

If I propose such a measure, I hope that my noble friend will not tell me on behalf of Her Majesty’s Treasury that it cannot be afforded. The cost of such an amendment, with sensible hurdles in place, would run on average at about £25 million a year, declining sharply after 2030. The current Exchequer contribution to class 3 buy-back contributions is of the order of £450 million for the last year for which I have figures. Each and every year it fluctuates by more than the cost of this would-be amendment. That fluctuation in contribution, and its scale, seems to bother nobody one bit. We cannot suddenly start to worry about the cost only when it comes to helping poorer women help themselves.

As those missing years are bought by all and sundry, including by Ministers and ex-Ministers, I hope we will not be told that it is poorly targeted. We do not

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know. I have asked and been told that the Government do not collect information about who currently receives this benefit by way of class 3 contributions. I suspect that it is poorly targeted. If we do not ask the questions, we cannot be seriously worried about the issue. Therefore, suddenly to put it on the back of some poorer women is inappropriate.

The third argument that has been run is that of risk: if poorer women knew that at the end of their working lives they could buy back missing years they would not do it during the course of their working lives. This is to presume a rationality which is sadly missing from the lives of women who possibly in many cases do not even understand the reduced married women’s stamp. In any case, we are dealing with a transitional generation, those who from about 2105 to 2020 will certainly enjoy the benefits of the Pensions Act and the reduced number of contributions they will need to make—only 30 years. Therefore, those women who are now 50 to 60 cannot revisit their past behaviour and change it in perverse ways that my noble friend or HM Treasury might think unacceptable. That behaviour is already there; we need to be able to help them to help themselves.

Finally, relevant to affordability—I have a couple of remarks on this—is the state of the National Insurance Fund, which can only be used for contributory benefits, apart from the NHS supplementation. Obviously that fund does not sit there as a piggy bank; it allows for reduction of the borrowing requirement which in turn is a form of not-so-hidden subsidy to other services. The guidelines from GAD are for a 16.7 per cent balance, which I calculate as about £12 billion on current levels of contributory benefit expenditure. The balances are growing fast; the figure now—for the current year, I think—is forecast at £42 billion, as opposed to £12 billion. That is equivalent to 65 per cent of benefit expenditure, rather than 16.7 per cent. The balances are also growing each and every year—by £5 billion, then £6 billion and £7 billion—because more people are earning and paying higher contributions, while fewer people are drawing out.

I repeat; there is a £5 billion addition, rising to £6 billion and £7 billion, yet we cannot have £20 million from a fund devoted to contributory benefits. Of course, given the demographics and the earnings link to BSP, these surpluses will begin to flatten from 2012 on, but while employment remains high—and with the raising of the state pension age, which also puts into the Exchequer a contribution equivalent to about £5 billion a year, but is excluded from nearly all discussion—that flattening will take some time to occur. I suspect we will be well into the 2020s, depending on unemployment figures, before we even begin to come back near GAD’s recommended figures. By that time, the cost of these buy-back proposals will have dwindled to the stuff of margins of error.

I am confident that if the National Insurance Fund were in deficit and required a taxpayers’ contribution, we would be told quite sharply that there was no money available for increases in certain benefits. If my noble friend will forgive me, I will tease him that such arguments, interestingly, only ever seem to run in one direction.



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I am entirely content with the clauses in this Bill as it stands, but it is about reading the silences—the things not said. I am hoping that the House will continue to investigate and explore my particular concern about the connections between the tax threshold at the lower earnings level and buy-back on the other in further stages of this Bill.

7.23 pm

Lord Newby: My Lords, the fact that we are debating this Bill in detail at all reflects a curiosity of parliamentary procedure. In the minds of voters, this Bill relates to tax; that is how national insurance is perceived. From a parliamentary perspective, it relates to contributions to that extraordinary and almost mythical creature, the National Insurance Fund—about which almost everyone is completely ignorant. However, it does, and therefore we have the joys of debating it at length in your Lordships’ House.

As the Minister explained, the Bill contains but two principal proposals. When the Bill was debated in another place, Ministers explained that the first, the increase in the upper earnings limit for national insurance, was part of a carefully balanced package. He repeated that principle this evening; however, unfortunately for the balance, another component of the package was the abolition of the 10p tax rate. That, of course, is now being reversed. It would be cruel to ask the Minister to explain current government thinking on how it is to be reversed, and therefore I will not, but any discussion of these measures in the context of a balance is now completely redundant.

The other argument used, and used again this evening, was that this is a simplification measure. It is, and we welcome it as such. We are in favour of tax simplifications, but both we and the Government like a tax simplification that also, as it happens, brings in an additional £1.5 billion in revenue. We should have more of those. Our complaint here is simply that the Government should be clearer that one consequence of this measure is to raise that amount of money. I do not think I heard the Minister explain in any detail in his introductory speech that main consequence of this measure—and it is, arguably, one main reason behind it. Given the way in which the Government are perceived, if they are raising £1.5 billion—a quite significant sum—they ought to come clean about that and not pretend by hiding behind the fact that this is a simplification measure.

There have also been rather exaggerated claims in another place by the Government about the benefit that this additional revenue will bring, not least on child poverty. In their wilder moments, Ministers in another place almost seemed to suggest that child poverty and many other social ills were to be solved, virtually at a stroke, by this relatively modest amount. Getting to the bottom of how the money will actually be spent would, I suspect, be a fruitless exercise. However, the Institute of Chartered Accountants in England and Wales has come up with a relatively modest and sensible suggestion; namely, to ask the Government to publish their projections of how much of the extra revenue raised will be allocated to the National Insurance

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Fund and the NHS. Could the Minister express a view on whether the Government would be minded to accede to such a request?

The second proposal in the Bill is to introduce the upper accrual point in relation to state second pensions. Unlike the Minister and the noble Baroness, Lady Hollis, I am a mere toiler in the vineyard of Treasury matters and have never graduated to a detailed understanding of pension legislation. I suspect that even though we have a Committee yet to come on this Bill, I will not qualify even at the end of our deliberations.

In general terms, however, as the Minister knows, these Benches have been extremely critical of the Government’s priorities on pensioners—in particular, on pensioner poverty. We have been critical of pension credits, not least because 40 per cent of eligible pensioners do not claim them, and have argued the case both for a speedier reintroduction of the link between state pensions and earnings, and for a move toward a citizen’s pension, particularly as a means of moving to deal with the scandal of women who receive little or nothing by way of a state pension.

I do not intend to repeat to your Lordships this evening all of the arguments in favour of those policies. However, what happens to the extra revenue that is raised under this proposal? I believe that it is likely to be up to £450 million a year. In debates in another place, Ministers said that that sum was accounted for in the 2007 Red Book. I have looked at that, and while the figure may be included in one of the broader totals, I was not able to see it identified anywhere separately. I accept that that may be a result of my slipshod reading of the Red Book, but I would welcome some clarification from the Minister on how that additional revenue is accounted for in that statement; to a casual or even semi-qualified observer, it is very unclear at present.

Much of the debate on this Bill in another place related not to these principal changes, however, but to one consequence of them and one issue of parliamentary principle. The consequential change is the abolition of the ratio, of 7.5 times, between the upper and lower earning limits. That ratio is long-standing, and the noble Baroness explained how it was established in the first place. It has been seen as a check on any Government’s ability to raise that limit without primary legislation and proper parliamentary scrutiny. The parliamentary principle, linked to that point, is that national insurance thresholds and limits can, of course, be changed by order despite the fact that the change in limit can have substantial consequences on revenue. The Minister explained that in future any changes to the upper limit will have to be by affirmative resolution in a statutory instrument. As we have debated many times in your Lordships’ House, this is very different from the level of parliamentary scrutiny that applies on measures that come in via primary legislation. I have considerable sympathy with the concerns expressed in another place on this issue.

There is probably a consensus among the parties that once the change to align the two limits—the upper NI limit and the threshold for higher rate national tax—has been brought about, they should remain aligned, and that the Government should not succumb

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to the temptation to raise the upper national insurance threshold above the starting point for upper rate income tax. There was considerable debate in another place about how that might be achieved, the problem being—as Members in another place sought to address when they tabled amendments—the completely different process and procedures for dealing with income tax and national insurance changes and the different timetable for introducing a national insurance change that starts at the beginning of the tax year and a tax change that starts at the beginning of the tax year.

No doubt we will explore some of these issues in Committee, but it seems to me that one could go some way towards dealing with this problem if the Government effected two things. First, they could confirm that for the remainder of this Parliament, at least, the upper national insurance limit would not exceed the threshold for the 40 per cent of income tax and that from now on changes to both those limits could be set out in the Pre-Budget Report. If they moved in step—which seems to be what the Government want and what there is a consensus on—people would be reassured; but if there was any attempt to hide the limit for national insurance purposes beyond the threshold for higher rate income tax, we would at least be forewarned before statutory instruments were introduced and there would be that much more scope for parliamentary debate.

We could, of course, begin to treat national insurance in legislative terms as if it were a tax, but that is probably too revolutionary a step and certainly way beyond the scope of this Bill.

7.32 pm

Baroness Noakes: My Lords, when we debated the Queen’s Speech last November, I said that we would greet this Bill with little enthusiasm. The intervening five months or so have done nothing to change that.

The noble Baroness, Lady Hollis, has used this opportunity to return to the fray on buy-back. The whole House was shocked when the Minister reneged on the commitment that he had given her during proceedings on the Pensions Bill. The noble Baroness, in her doughty way, has refined her attack and sought to deal with the objections that the Government have come up with. In particular, through the use of hurdles, she wishes to constrain the annual cost of implementing any buy-back proposals. I just say to the Minister today that the noble Baroness makes a strong case and, if she decides to pursue it in this Bill, without making any commitments, we will look very carefully at whether we can support her on the refined basis that she has put forward.

For all the Minister’s fine words, this is a money-grabbing Bill designed to pour a couple of billion pounds each year into the Treasury. It has a fig leaf of pensions and national insurance reform but money is what it is about. It is ironic that your Lordships’ House is able to consider this Bill in detail because, technically, it is not a money Bill. The noble Lord, Lord Newby, referred to this. I welcome the opportunity to consider this Bill fully and would welcome the ability of your Lordships’ House to consider the technical aspects of Finance Bills in future. But that is for another day.



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As the noble Lord, Lord Newby, pointed out, it is little more than a fiction that national insurance is not a tax. The money goes into a mythical National Insurance Fund. But, as the noble Baroness, Lady Hollis, pointed out, there is a surplus building up in that fund. On the basis of the last accounts that I could trace, the Government Actuary recommended a balance of around £10 billion at March 2006, but at that date the fund had £34 billion in it—and so £24 billion had already been used to prop up the Government’s spending. Will the Minister say when the 2006-07 accounts will be available, as they seem to be overdue? What does he expect the figure to be on an up-to-date basis—say, at March 2008—and what impact will this Bill have on the surplus? The noble Baroness, Lady Hollis, referred to the increasing surplus that we expect to see from higher rates of higher national insurance payments being made. It is clear that the money which will be raised by this Bill is in substance an increased tax, because it is not needed for National Insurance Fund purposes. Rather, it will fund the UK’s budget deficit, which I remind the House is now outdone in relative size only by those of Pakistan, Hungary and Egypt.

The first thing that this Bill does is to increase the upper earnings limit so that employees pay national insurance at the full rate on more of their earnings. This was introduced by the Prime Minister when he was Chancellor as part of the package of income tax changes which have been so mishandled by the Government. Only those on middle incomes are affected by the raising of the upper earnings limit under this Bill, paying £ 1.5 billion a year as their contribution to the package. But we know, as the noble Lord, Lord Newby, pointed out, that another part of the package was the 10p rate abolition, which hit 5.3 million mainly single people on low earnings. We still have no details on how, when and to what extent that wrong will be righted. I am sure that voters, when they go to the polls tomorrow, will remember that the Prime Minister knows how to raise money but has no idea about how to do it with fairness and equity.

We agree that, in principle, the national insurance and income tax systems should be harmonised, but this Bill does not do that. There are still significant differences between the two, including the weekly basis of contributions and different bases on which national insurance and income tax are levied. Noble Lords should be aware that this Bill is not about reform; it is about grabbing £1.5 billion a year dressed up as reform.


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