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To add to that point about an annual programme Bill to deal with national insurance contributions, if, once there is alignment, the Government wanted to increase the personal allowance or the basic rate limit by more than the rate of inflation, that would also generate a programme Bill. Restricting it in this way as a practical matter is deeply unwise. Considering where we are, I am sure that the noble Baroness will withdraw the amendment, but I hope that she will reflect on the difficulties of having a weekly system on the one hand and an annual system on the other.

Baroness Noakes: I thank the noble Lord, Lord Newby, for his support. Like him, I rejoice that this is not a tax for the purposes of today's debate. Although deciding whether national insurance is a tax is an interesting topic that we can debate from time to time, for the purposes of the proceedings of your Lordships' House, we are happy that it is not a tax, because it allows us to debate the issue and use our skills on the topic.

I heard what the noble Lord, Lord Newby, said about not ruling out the upper earnings limit by increasing it by a particular amount at any point. I conceded that. However, if it is to be realigned, that is a subject for Parliament, just as in the Finance Bill so is the realignment of personal allowances at a rate other than that produced by Rooker-Wise.

4 pm

The Minister took us back to the Crewe by-election bung. I will return to that in the next group of amendments and I shall not respond to any of those points at the moment.

The burden of the Minister’s argument is that the amendment does not do the trick because it does not produce an acceptable result without further tinkering and intervention and would result in a Bill every year. I am not convinced that that is correct and that this cannot be dealt with by tinkering with either the rounding in this Bill or, potentially, the rounding in the Income Tax Act to keep alignment. I have not done the detailed modelling but I cannot believe that it is beyond the wit of a rounding clause to get it to that point. I do not accept that for the sake of a few tens of millions of pounds, there is an insuperable objection to putting a restriction on the Government’s unlimited power to raise national insurance by increasing the upper limit. The Minister has not addressed the point that the current limitation imposes a clear limit and that the Bill takes that limit away and puts nothing in its place.



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Lord McKenzie of Luton: The noble Baroness is right: I did not specifically deal with that point and I should have done. The Bill does put something in its place—the affirmative resolution procedure. It is clear that we cannot do it in an arbitrary fashion. I should also have said that the same issues would apply with alignment and rounding up adjustments to the primary threshold as to the upper earnings limit.

Baroness Noakes: I accept that they would arise wherever we did the roundings. But the affirmative resolution procedure is not an answer to that. It is already done in that way and changes to the limit are usually nodded through on a Thursday afternoon. There is nothing in the Bill that gives anything back in return for the Government grabbing huge amounts of tax-raising powers.

I am not impressed by the arguments that the structure of the two systems is out of line. I concede that there could be circumstances when the amount would need to be raised by a higher or completely different amount that was not catered for by the indexation if the Government of the day chose to restructure the tax and national insurance systems. That is when I envisage a need for primary legislation and, for all the Minister’s talk about programming, I cannot see that a one-clause Bill would be difficult in that context.

The Minister said that I had overegged the pudding by making it affirmative as well as in line with RPI. I completely accept that and give up Amendment No. 3. The Minister will not see Amendment No. 3 again.

While I will read carefully what the Minister said about rounding, I have heard nothing this afternoon that suggests to me that, in broad terms, what I have proposed in the amendments is not workable and he has said nothing to make me believe that they are not necessary. While I will withdraw the amendments today—we are, of course, in Grand Committee and the Minister has not accepted them—I have to put him on notice that this is not the end of the matter. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 2 and 3 not moved.]

[Amendment No. 4 had been withdrawn from the Marshalled List.]

Clause 1 agreed to.

Baroness Noakes moved Amendment No. 5:



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The noble Baroness said: Broadly on the same theme, in moving Amendment No. 5 I am introducing the possibility of a new clause to go after Clause 1. In the previous group of amendments I sought to get the annual uprating of the UEL to align with the uprating of the higher rate tax threshold. That was the scheme that the former Chancellor promised in 2007; the current Chancellor confirmed it in his Pre-Budget Report last October and, again, in his Budget in March.

At that stage, it occurred to me that the Government might one day want to take the UEL on a different path of their own to raise billions of extra tax under the guise of national insurance. It also occurred to me that we ought to keep the tax and national insurance limits in step on a statutory basis, which is the substance of the last group of amendments. But it did not occur to me when we prepared for Second Reading, or even when we started to prepare for this Committee, that two weeks after our Second Reading the Chancellor would be panicked into abandoning all previous pledges about rates and allowances when faced with an electoral defeat in the by-election in Crewe. I simply did not have enough imagination to see that the Government would go in that direction.

The spectacle of the Government’s second attempt, as it turned out, at a U-turn to get themselves out of the 10p-rate hole made me realise that harmonisation and simplification of tax and national insurance was much more fragile than I had imagined it could possibly be. We know that in the week before the Crewe by-election the Chancellor announced, as the Minister explained, that the personal allowance would go up by £600 and the basic rate limit would come down by £600. That has the effect of the primary threshold being £600 less than the personal allowance. I remind the Minister of what he said at Second Reading—that,

At a stroke the Chancellor has put that into the realms of fantasy. It is clearly perfectly possible for the Government to break the alignment whenever it suits them.

The second effect is that the higher rate threshold and the UEL are now £600 closer together. If nothing else happened, that would mean that the Government could proceed with their further simplification and raising of the limits without the need to repeal the 6.5 to 7.5 times limit that is in existence in the current legislation, so there would be no necessity for this bit of the Bill.

What happens next seems to be a bit of a mystery. The Chancellor said—and the Minister has repeated it today—that these changes are for one year only. He said this again when he appeared before the Treasury Select Committee in another place last week. What he did not say is what he intends to do instead. As the Institute for Fiscal Studies pointed out, if he tries to reverse the changes—if they genuinely were made for one year only and he tried to put the situation back where it was—he would have to deal with 13 million households, not 5.3 million.



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The Government have got themselves in a mess. The panicky changes that the Chancellor announced for this year create even bigger problems for next year. The low end of the primary threshold and the personal allowance are out of kilter for the first time since the primary threshold was introduced. The top limits are a bit closer together, but for how long? One question for the Minister today is what the Government intend to do about the harmonisation and simplification of the tax and national insurance limits next year and beyond. Is it now abandoned? Some people are telling us that they have heard that within the Treasury harmonisation is de facto abandoned because it is too difficult to put back in place having separated it, given the current fiscal position. However, it cannot be right that a Bill that has been justified on the basis of simplification and harmonisation can go through your Lordships’ House at the precise time that that noble aim has been thrown out of the window.

Amendment No. 5 reflects the political reality that the Finance Bill gives the Government of the day carte blanche, if they have a majority in another place, to put tax and national insurance out of alignment, temporarily or permanently, whenever it suits them. Because the two are separated by different legislative and structural frameworks and until that is changed, it will be necessary to set national insurance rates ahead of the year. It is always difficult to change them during the year—I completely accept that. That is not true of income tax, because the Government can change their mind at virtually any time during the year. Because of the availability of the PAYE mechanism, the vast majority of tax will be paid in the right place by the right people.

It is intended to state in Amendment No. 5 that when the UEL and the higher rate threshold go out of alignment, the Treasury should lay a report setting out what it intends to do about it; that is, it should come clean about how long any divergence is expected to last. We currently have no idea what the Government will do in respect of their 10p U-turn. As the Minister is aware, the amendment is deficient. It refers to the basic rate limit; it should refer to the higher rate threshold, which is not defined in legislation. My amendment should have said that if the basic rate limit plus the personal allowance is set below the UEL, a report should be laid. As I mentioned to the Minister before the Grand Committee started, I discovered that omission at the weekend when preparing my detailed notes for today. I informed the Minister and the noble Lord, Lord Newby, today about that. I apologise to the Grand Committee for any confusion, but I hope that we can debate the idea behind the amendment, even though it is not perfect, because what I was trying to do was pretty plain.

I should also say, for completeness, that the amendment ought to refer to the bottom end—to the primary threshold and the personal allowance alignment. I failed to draft that into the amendment, but if I had done so, I am sure that the authorities that struck out my previous set of amendments would have done the same for that part of this amendment. I will leave that issue open for the time being.



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Parliament is entitled to some explanation when tax and national insurance, which are claimed to be harmonised, are split further apart. As I have noted, the Chancellor has given no indication of what he intends to do. That is regrettable and I hope that the Minister can clear up some of that today, which would be helpful. Going forward, my amendment, or a better version of it, would be essential if there were no other amendment to the Bill to cover the situation that has arisen this year and to provide proper parliamentary scrutiny of that decision. I hope that the Minister can agree with the principles behind the amendment. I beg to move.

Lord Newby: I have some sympathy with what the noble Baroness is seeking to achieve. Although in many ways the amendment is a counsel of perfection, she underestimates the ability of the Treasury and Treasury Ministers to produce a piece of paper which might technically satisfy the requirements of the amendment, but would not necessarily shed any great light on it. The first of the two areas for which explanation is required relates to why the paths have diverged. I have noticed that Ministers, particularly in another place, have started using the word “right” to justify any change that they wish to implement. The phrase, “We are doing this because it is right”, is now the day-to-day lexicon of justification in another place. “Right” is a completely subjective description and gets you absolutely nowhere, but has the advantage that it can be used with great conviction. It is used by Ministers, but it is just a covering for what Ministers wish to do.

As far as setting out the expected future paths of the two limits is concerned, one could imagine that there would be a broad statement of principle around which so many caveats about why it might not in reality come to pass would be hung that, again, it might not necessarily be worth the paper it was written on. While there is a lot to be recommended in the general principle that the Treasury should come forward to Parliament to explain in simple and credible language what it was doing, as this is far from the practice in so many other areas, any attempt to achieve the aims of that principle in this narrow area would almost certainly be doomed to failure.

Lord McKenzie of Luton: I say to the noble Lord, Lord Newby, that I am astounded at his cynicism about how the Treasury might approach these matters. To conceive that the Treasury would obfuscate in any way a full report, if that were what it were required to produce at the end of the day, is so outrageous that I cannot say more.

I shall deal next with the specific challenge that came from the noble Baroness, Lady Noakes, about the Government’s commitment on alignment. I want to make it clear that the Government remain committed in principle to aligning the income tax personal allowance with the national insurance primary threshold, bringing our income tax and national insurance systems closer together to improve fairness and coherence, reduce administrative burdens and make them easier to understand. I reiterate that the Chancellor said on 13 May that he would set out plans for future years in

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the 2008 Pre-Budget Report in the autumn. Similarly, the Government remain committed to aligning the UEL with the level at which higher rate tax becomes payable in future years. That commitment is not in any way diminished.

4.15 pm

I turn to the amendment, a proposed new clause requiring a report to be published and laid before Parliament for the tax years 2010-11 onwards, in circumstances where the basic rate limit is set below the UEL. There are considerable practical difficulties with the proposal. The noble Baroness indicated that she realised that there was a flaw in the amendment’s intent—that it should have said that if the basic rate limit plus the personal allowance were set below the UEL, a report should be laid. However, I shall deal with the amendment as drafted for the record.

The amendment has two technical flaws. First, it is proposed that the UEL be aligned with the basic rate limit—an annual limit, whereas the UEL is a weekly limit. That means that, assuming a normal RPI increase in the basic rate limit year on year, it could never drop below the UEL. Secondly, using weekly equivalents—which appears to be the intention behind the amendment—the UEL, when aligned with the corresponding upper tax threshold, will represent a weekly equivalent of the aggregate of the basic rate limit and the personal allowance. That point has been recognised, I think. Even allowing for a weekly equivalent of the basic rate limit, it will always by itself be lower than the UEL, meaning that the report suggested would be needed every year. I do not think that that was the amendment’s intent.

I come to what the noble Baroness suggested was the real purpose behind the amendment. She explained that it should have said that if the basic rate limit plus the personal allowance were set below the UEL, a report should be laid. I intend to explain why that is unnecessary. There is no de minimis limit on the misalignment under her proposals. Consequently, there may always be misalignment as a direct result of the rounding rules, which we discussed earlier, for the UEL, the personal allowance and the basic rate limit. That would lead to a report every year. If the Chancellor decides to change either or both of the personal allowance and the basic rate limit by other than RPI, that has to be included in the Finance Bill, and the reasons will be given in either the Budget speech or documents or in the finance debate on the appropriate measure, or all three. Also, as national insurance contributions and income tax thresholds will be announced at the Pre-Budget Report and under the Bill the regulations setting the UEL will be subject to affirmative procedure, there is ample opportunity for scrutiny in both Houses. Those opportunities preclude the need for a separate report, as envisaged by the noble Baroness.

Also, the amendment would apply to Great Britain only, as no corresponding amendment is proposed to be made to Clause 2.

I do not see that the change proposed in the Bill should give anyone cause for concern in terms of parliamentary scrutiny. The House always extremely carefully considers affirmative resolutions that come

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before it, and the Delegated Powers Committee chose to make no reference to the powers in the Bill. When it has concerns, it routinely draws them to the House’s attention.

The amendments taken together or separately to link the UEL to the RPI or the higher rate of tax are unworkable, as I have explained. With the proposals for new affirmative procedures, that amounts to a huge and unnecessary increase in parliamentary oversight. I hope that the noble Baroness will accordingly withdraw the amendment.

Baroness Noakes: Before I respond, can the Minister explain his comments about the Delegated Powers Committee? The amendment does not have any orders related to it but he said that the Delegated Powers Committee would have referred to it.

Lord McKenzie of Luton: I was referring to the affirmative procedure proposed in the Bill. The committee has not commented in any adverse way on the use of that process.

Baroness Noakes: I thank the Minister for that reply and the noble Lord, Lord Newby, for his comments. I agree that this is a relatively weak amendment because it allows the Treasury to table the kind of meaningless content that we see from time to time—for example, in relation to Written Answers—and which has become an art form in certain departments. Indeed, it would give the Treasury another opportunity to assert that it was right, although I suspect it could not assert that it is a long-term decision because such decisions rarely are. The noble Lord, Lord Newby, made me realise that this is not the right amendment; the earlier amendments are the right ones because they put the proper parliamentary process in place regarding changes.

The amendment does not deal with the issue of the Government separately pushing the personal allowance out of alignment. The Minister said that it would be in the Pre-Budget Report and in the Budget and there would be lots of opportunity to discuss it. However, what happened in the week before Crewe was in neither the Pre-Budget Report nor the Budget; it was conjured up at the last minute to buy the Government out of the huge trouble they were in and foresaw for the following week.

Lord McKenzie of Luton: Is the noble Baroness saying that there was no opportunity to debate that in the other place?

Baroness Noakes: There still is not because the Government have not yet tabled amendments in the other place to effect the change. It is unclear whether the Government intend to bring those amendments forward at the Committee stage of the Finance Bill or to magic them in at the very last minute of the Report stage.

Lord McKenzie of Luton: But, whatever process is adopted, it will be before the other House before the legislation is determined.



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Baroness Noakes: That is correct. But the Minister will recognise that it is a quite extraordinary departure from the ordinary course of events for the Government, having stated one policy to bring everything together—which was affirmed in the Budget, followed by Pre-Budget Report, followed by Budget—to state a few weeks later, “Oh dear, the politics look at little difficult so we will make an entirely political decision, which we will then assert is right and probably in the long-term interests of the country, and then produce it without necessarily any changes”.

I fully accept that my amendment merely gives the Treasury the aggravation of a process to deal with and, therefore, does not give any substantive control; the only control exists in the Finance Bill in another place. Even if we get in place proper control on the amount of the upper earnings limit, the Bill will allow the Government to smash harmonisation and alignment at will, which is what they have done. The point of the amendment is that the Government should be put to the extra trouble of bringing forward a paper.


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