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The Government pretend that this Bill harmonises the upper earnings limit and the start point for the higher rate tax, but that is completely untrue. What the Bill does is to give the Government power to raise the upper earnings limit by order to whatever level the Government choose. There is no restriction on the amount at which the upper earnings limit can be set. The noble Lord, Lord Newby, referred to the loss of the constraint of the 6.5 to 7.5 times the primary threshold, contained in current legislation. The only constraint is the rather ludicrous one of there being an affirmative order. I agree with the noble Lord, Lord Newby, that that allows for insufficient scrutiny and we shall return to this area in Committee because we believe that some restrictions on the Government’s

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use of this power should be enshrined in legislation. I can tell the noble Lord, Lord Newby, that I have given some thought to a series of amendments that might achieve the alignment over the next two years but also put a constraint on the Government thereafter.

The second thing that the Bill does is to raise money for the Treasury by stopping the accrual of S2P above an upper accruals point from 2009-10. As I have already made plain to the House before, I have never understood how S2P actually works, but I am hoping next year when I reach pensionable age that I might find out whether I have accrued any. This change raises approximately £450 million a year, mainly through contracted-out rebates. We heard the Minister’s spin on this; it is all about implementing the Pensions Commission recommendations that the S2P should be flat-rated by 2030. The Government’s May 2006 White Paper, Security in Retirement: Towards a New Pension System, was very clear on the Government’s policy. It said at paragraph 3.13 that,

The policy was to link flat-rating to earnings linking and the 2030 date for the completion of the flat-rating was a mere estimate.

All we know about earnings linking is that it will not start before 2012 but could start any time thereafter within the next Parliament, subject to the Treasury’s view of “affordability”. We also know that the Government’s finances are not in great shape and so there are considerable doubts about whether the commencement of earnings linking can be afforded in 2012 or even in 2015. We shall be exploring this further with the Minister. For today the key issue is that flat-rating the S2P is being started three years ahead of its earliest planned date and possibly six years ahead of the actual introduction of earnings linking. The Minister has rehearsed the Government’s line that they had to act because the increase in the upper earnings limit in Budget 2007 meant that, if nothing else were done, flat-rating would be delayed from the date of 2030. But the 2030 date was merely an estimate rather than a target and hence there is a degree of hypocrisy in now elevating it to target status.

In another place my honourable friend Mr David Gauke probed Treasury Ministers on this decision to bring forward the start of flat-rating. The answers that he received are somewhat incredible. Apparently the Treasury knew when Budget 2007 was put together that the UEL changes would increase the S2P accruals and would hence affect contracted-out rebates in the near term, and that this additional cost was included in the 2007 Red Book. I think the noble Lord, Lord Newby, was looking for revenue in the 2007 Red Book. Actually it was an additional cost that we are told is in the Red Book but I have not found it either. The Treasury also knew, apparently, that it would affect the flat-rating projections but it seems that the Chancellor, the other Treasury Ministers and Treasury

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officials thought it quite unnecessary to tell anybody about it at the time. Instead they waited until this Bill was considered in another place before coming clean on the issue. At best, this is Government at their least transparent.

Having increased the UEL, there were several options for achieving flat-rating. Given the Government’s existing policy statements, a disinterested observer might conclude that the most rational way was to realign from 2012 or from whenever earnings linking was introduced if that were later. Whether to flat-rate by 2030 would have been a separate decision affecting the speed of achieving flat-rating. Any observer who knows this Government would know that the Treasury would just see another stealth tax on offer and select the option which produced the greatest inflow to the Treasury. We have stopped counting the number of stealth taxes the Prime Minister introduced when he was Chancellor because the number grew so large, but this one has to qualify for a special prize for stealthiness.

We should also remember that the Government have form on using national insurance rebates. The last quinquennial determination blatantly loaded costs onto employers in order to save the Treasury money. The Government ignored the advice of their own Government Actuary as well as submissions made by employers and the pensions industry. The Government lamely tried to hide behind the words “cost neutrality” and “fiscal circumstances”—that is, the Treasury’s view of what it wanted to afford rather than what occupational pension schemes needed in order to compensate them for assuming contracted-out obligations.

In this Bill the Government are at it again, giving plausibility to their raid by describing the rebates in the impact assessment as “anomalous gains” for employers. When are the Government going to treat private sector occupational pension schemes, especially defined benefit ones which are most affected by the rebates, with respect? Do they really think that employers, already cheated out of their contracted-out rebate levels, think that these so-called gains are anomalous? The Government are doing everything possible to kill occupational pension provision and we will be discussing that again with the Minister when we reach the Pensions Bill. This is a miserable little Bill. I feel sorry for the Minister, who is an honest man, for having to come to the House to defend it.

7.45 pm

Lord McKenzie of Luton: My Lords, it has been an interesting debate. I am flattered by the noble Baroness’s concern but I am happy to bring this measure before the House and I am very grateful to the small band of noble Lords who have gathered tonight to comment on it.

Before I respond to each of the points raised, let me remind the House of the two purposes of the Bill. First, it allows the Government to deliver the package of personal tax reforms announced at Budget 2007, in particular by allowing the upper earnings limit to be aligned with the point at which higher rate tax starts to be paid. This Bill makes possible a major simplification of the UK’s tax and NIC system. I believe that has a

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measure of support from the noble Baroness, Lady Noakes, although I acknowledge that there is not an identity between the tax and NIC systems. We are not suggesting that there is. Secondly, the Bill is looking at providing a solid and simpler state pension. I will come back to the issues as to why we have advanced the introduction of the upper accrual point in a moment.

I will move on to the individual points raised and start with my noble friend Baroness Hollis. She asked specifically about the lower earnings limit and its link to the basic state pension and expressed a concern that when pensions are increased by earnings, this could drag up the lower earnings limit and therefore exclude people from benefit. It is typical that my noble friend focuses on the lower paid when others have looked at the other end of the scale. This problem was identified and the Pensions Act 2007 makes amendments to break the link between the LEL and the basic state pension from when the basic state pension becomes earnings linked. Breaking that link will avoid the issue that my noble friend has focused on.

The noble Baroness, Lady Noakes, and my noble friend referred to the issue of class 3 buy-back contributions. I reject the assertion that the Government have reneged on their commitment. What was set out at the time in the other place by my honourable friend Mike O’Brien and repeated by me here was that we would look to try and make the proposition work but having regard to fairness, affordability and simplicity. A lot of work has been done since our debates with HMT and HMRC and stakeholders have had some informal meetings to try and make the proposition work. Our priority and the priority of my noble friend, as expressed tonight, was to find an option which would particularly target women on low incomes living in this country. The challenge has been to come up with a proposition that fits that description. Poorer pensioners are likely to be better off if they are close to retirement under pension credit and it would therefore not benefit them to pay voluntary contributions. They may find themselves paying voluntary contributions and getting no benefit because there would be a withdrawal of pension credit pound for pound. The cost of six years of class 3 contributions is currently around £2,500 and around three quarters of households in the bottom three income deciles containing women aged 55 to 59 have less than £5,000 in savings.

Baroness Hollis of Heigham: My Lords, the whole point of being able to buy at the point of your retirement is that the increase in your pension more than pays for the cost, even if you had to borrow that money by loan.

Lord McKenzie of Luton: My Lords, that depends on how long one is going to live. It is generally the case that people at or close to retirement do not wish to take on extra borrowing. Even if there is an arithmetic case for what my noble friend says—I accept that point—I doubt whether, as a practical matter, poorer households would want to take on that additional borrowing.

One concern is that those who could take advantage of the proposal are wealthy expatriates—men and women. We estimate on the original proposition that

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something like 65,000 people living overseas could benefit. I acknowledge, as indeed has the noble Baroness, Lady Noakes, that my noble friend’s subsequent amendment to the proposition, particularly to have a 20-year contribution threshold, certainly helps to reduce the cost and raise the barrier to exclude some of the non-residents, but there are potentially significant costs attached.

My message is that we need to continue talking about this issue. I want to emphasise my noble friend’s point about the changes made in the Pensions Act 2007. They will narrow the gender pensions gap and deliver fair outcomes to women and carers, and significantly improve women's state pension coverage. I will not go through the detail because we have discussed it before and the clock is moving on. The concern is about targeting. If we had a way of reaching those poorer women whom my honourable friend is most concerned about, as are we, there may be scope for moving forward on that matter.

My noble friend also asked about the National Insurance Fund and what would happen to the surplus. My noble friend is well aware that that surplus is invested back into the public sector. If it were not available, the Government, through borrowing or raising taxes, would have to find the wherewithal by other means to fund their current Budget.

Baroness Noakes: My Lords, does the Minister therefore accept that it is fulfilling the function of a tax?

Lord McKenzie of Luton: My Lords, we can debate the differences between income tax and NICs. For example, income tax is focused on all incomes and national insurance just on earnings. On income tax there is no age limit but for NICs there is a 16 to 60 or 65 age limit. Income tax works on a cumulative basis but NICs is based on an earnings period. The two are not the same.

Baroness Noakes: My Lords, perhaps I can explain. I understand that they are on different bases. I was seeking to make the point that there is an accumulating surplus in the National Insurance Fund not needed for current purposes and not needed according to the Government Actuary’s Department calculations. It is going into the National Insurance Fund and is being siphoned off immediately into funding expenditure for which it was not designed in the same way that tax is used to fund expenditure. That was the point that I was making, not the technical underlying bases of how they are raised.

Lord McKenzie of Luton: My Lords, nobody is trying to hide what happens to the resources that go into the National Insurance Fund. There is a surplus, but that is used to support other government expenditure.

I would particularly like to deal with the suggestion that this is all about raising revenue. I made it very clear in my opening remarks that this was part of a package. If you look at the components of that package, from removing the 10p rate there was a benefit of

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£8.6 billion. Reducing the basic rate to 20p cost £9.6 billion. The alignment of NICs created a surplus of £1.5 billion. Raising the aligned UEL and HRT by £800 a year—the inflationary increase—cost £0.25 billion. An increase in age-related tax allowances by £1,180 above inflation cost just short of £1 billion. There was a price tag of £1 billion for an increase in the child element of child tax credit by £150 above earnings and there were other components. Overall, that package cost £2.5 billion—before whatever might arise from the current look at two groups of people who have been debated extensively recently. It is simply not right to peel away one component and say that this is about raising revenue. It is not.

Baroness Noakes: My Lords, may I clarify something? Is the Minister saying that this national insurance hike is just being used to fund tax effects elsewhere in the system? If so, in what sense is it national insurance and not a tax?

Lord McKenzie of Luton: No, my Lords, I am not saying that. I am saying that the starting point in all this is to simplify the tax and national insurance system. The noble Baroness's party called for that and I thought in principle supported it. She referred to that earlier. Other commentators have supported it. The IFS has supported that alignment as a simplification of the system. If you are going to simplify the system, that is done by having various components at its point of introduction. It is absolutely right to do that. But it is entirely spurious to take out one component and say, “This is a tax increase. That is what this is all about”. That is absolutely not so. The noble Baroness, Lady Noakes, knows that full well because she can read the numbers as well as I can.

Lord Newby: My Lords, I do not necessarily want to support the noble Baroness, because she is perfectly capable of making her own argument. However, if the Government raise taxes, by and large, they spend it on something. That does not mean that they have not raised taxes in the first place. That is what is happening here. It may be that the money is being spent on the most wonderful purposes that humankind has ever considered, but that does not negate the fact that in order to spend it you have to raise it. That equates to a tax.

Lord McKenzie of Luton: My Lords, of course this particular item raises revenue, but it is part of a package, where there are costs from changing other aspects of the system. Surely, it is right to look at this in aggregate. You cannot seriously argue that you can pick one component and say that this is all about raising taxes. It is simply not the case.

The noble Lord, Lord Newby, asked specifically about projections and what changes would happen as a result of allocations of revenue collected between the UAP and the UEL—a point raised by the ICAEW. The introduction of UAP does not affect the overall application of NICs between the NIF and the NHS, which are calculated in accordance with Section 162 of the Social Security Administration Act 1992. It does not affect that at all.

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The noble Baroness, Lady Noakes, asked about the latest accounts. I shall have to write specifically on the 2006-07 accounts, but I am advised that there is a Government Actuary’s Department report published in January 2008. I am not quite clear what period that covers, but I will write to the noble Baroness with more details.

Baroness Hollis of Heigham: My Lords, the latest stats that I could get were dated January 2007. I tried, exactly as the noble Baroness did, to find out whether there was a set of January 2008 stats. We are actually dealing with 2005-06 real figures and forecasts for the years thereafter. I am afraid that she is absolutely right: we seem to be running behind. Perhaps there is a good reason for that, but she is absolutely right.

Lord McKenzie of Luton: My Lords, I will certainly make sure that all noble Lords who have contributed tonight will get a response on that. I do not have the details immediately before me.

The noble Lord, Lord Newby, and the noble Baroness, Lady Noakes, asked why we should allow changes to national insurance to take place by affirmative order and whether that gave the Government carte blanche to do things that they should not. We have been clear about aligning the UEL at the higher rate tax starting point just as we have been clear about aligning the primary threshold with the personal allowance—effectively the start of income tax. That latter point is dealt with by regulation. I can see no reason why the level at which employees stop paying NICs at the main national insurance employee rate of 11 per cent should be subject to primary legislative restrictions, when the point at which they start paying NICs has none. There is simply a symmetry about that.

Baroness Noakes: My Lords, does the Minister think that there ought to be statutory requirements in relation to both ends?

Lord McKenzie of Luton: My Lords, the arrangements in respect of the primary threshold have worked perfectly well since it was introduced and we have stuck by the commitment to maintain that alignment. That is what has happened in practice so I do not see why it should not operate at the other end as well.

The noble Baroness said that we should not have gone about the flat rating as we did. To reiterate the point: the need to bring forward the timing of the upper accrual point was driven by the change in the upper earnings limit. If that were not increased, there would have been no necessity. I believe that the noble Baroness is trying to make a point.

Baroness Noakes: My Lords, the point I wanted to make—which I should not have done from a sedentary position, for which I apologise to the House—is that that is the Government’s spin on the position.

Lord McKenzie of Luton: My Lords, I reject that. The various components of the settlement were very clear in the provisions that we debated last year, including when there could be an earnings-related uprating of the basic state pension. It was a carefully

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constructed package that had financial implications which had to be affordable. If one component changes, it seems entirely reasonable that we should try to end up where we would otherwise have been, where that settlement was going to take us, and that is what this is doing. Notwithstanding that, there is still some extra gain for higher earners beyond that which would have accrued to them under the original proposals, because by bringing forward the upper accruals point a few years early, there is still a longer time period by which that level of earnings would be within the S2P accruals. So it is entirely justified to do what we are doing in the Bill.

I hope that I have covered most of the points that noble Lords have raised; if not, I would be very happy to receive more interventions. I reiterate that this is a narrow technical Bill which is based on wider issues that are current at the moment. We will cover more of the detail in Committee. Trying to simplify the income tax and national insurance system, which is what this facilitates, and trying to make sure that our pension settlement consensus stays on track, where it should be, is the right thing to do. For that reason, I commend the Bill to the House.

On Question, Bill read a second time, and committed to a Grand Committee.

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