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I have modelled the impact of varying rates of inflation and varying levels of income tax thresholds. If the Treasury wants to set the upper earnings limit at one-52nd of the higher rate threshold, rounded to the nearest pound, the amount that is produced by steps 1 and 2 of my amendment would need to be altered at most by an extra £2 up or down. Two pounds will in fact be the exception as there would generally be an adjustment of nothing or plus or minus £1. I also tested out the position if the Treasury wanted to round the one-52nd calculation up by one to the nearest £1, which is perhaps a more natural stance for the Treasury. That produces no requirement to reduce the amount arrived at in step 2 at all and at most a £2 upward increase would be required. Hence step 3 of Amendment No. 2 gives the Secretary of State power to alter the amount arrived at in step 1—which is RPI indexation rounded up to the nearest pound—by up to £2 for the purposes of harmonisation. I believe that this gives the Government all the powers they need to avoid unnecessary legislation while allowing them to fulfil their aims of simplification.
Most importantly, my amendment would protect national insurance payers from a Government running short of budgetary options and being tempted by the opportunity that this Bill would otherwise present. I beg to move.
Lord Newby: My Lords, these amendments do not in any way undermine the aims of the Bill for next year and succeeding years in its current form. What the amendments seek to address is an important principle, which is that you should not be able to make a significant change to tax or national insurance without
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The Government argue that we are being too squeamish and that parliamentary scrutiny is adequate—or would be adequate even in those circumstances—because the Government would have to introduce an affirmative resolution statutory instrument to implement the change. Our contention is that a statutory instrument does not give adequate parliamentary scrutiny for a change of this nature. Those who have participated in statutory instrument debates know that they are of a different type from normal debates on the Floor of the House except in very rare circumstances. The possibility of amending a statutory instrument is nil. The possibility of overturning a statutory instrument is extremely small. Incidentally, if one should attempt to do so, the Government always make the case that it is a constitutional outrage that one should try to do it. Frankly, therefore, we do not believe that the argument that the statutory instrument is a sufficient safeguard in terms of Parliament’s rights and powers is adequate.
If one takes that view, how can one constrain the Government? The noble Baroness has come forward with a relatively straightforward approach. In some respects it mirrors the Rooker-Wise amendments and we are extremely sorry that we do not have the benefit of the advice of the noble Lord, Lord Rooker, this afternoon as to whether he thinks this would be an appropriate addition to the Rooker-Wise principle. However, it is a straightforward way of proceeding. Why would the Government object to it?
The principal arguments advanced by the Government are essentially practical. No doubt they have technical issues about the drafting of the amendment, but the practical argument they advance, which has some substance, is that, because national insurance is collected on a weekly rather than an annual basis, and because for that purpose you have to legislate for changes in national insurance before rather than during the year in which the changes come into effect, you run into huge problems because you will not have time to legislate for changes in cases where the threshold is going up by more than the rate of inflation before the end of February, when the national insurance changes have to come in.
This is not an insuperable problem: there are at least two ways round it. First, the Chancellor could announce changes for the following year’s Budget, as he did last year. Noble Lords will remember that he did that with the abolition of the 10p rate—he just did it a year early. You could announce that in a Budget in, say, March and the legislation for national insurance for the following tax year could be introduced in, or around the same time as, the Finance Bill for the first year. The second option, as currently happens anyway, would be simply to announce it at the time of the Pre-Budget Report, leaving aside the problem of ridiculously late Queen’s Speeches. If we had the Pre-Budget Report after the Queen’s Speech, a Bill could
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When we discussed this in Committee, the Minister said:
“Programming Bills into the system is often not that easy, particularly with the competing priorities that always confront Governments”.
It is not necessarily easy but nobody said that life was easy. This would probably be a relatively infrequent occurrence, and I am sure that the Chancellor would be able to persuade the Legislative Programme Committee to include such a Bill. The Minister raised a second objection about parliamentary scrutiny. He said that this,
- “would amount to a huge increase in parliamentary oversight”.—[Official Report, 9/6/08; col. GC 117.]
That is a good basis on which to proceed. We are therefore happy to support the amendments.
3.45 pm
Lord Forsyth of Drumlean: My Lords, I did not have an opportunity to contribute to this debate at an earlier stage but I support my noble friend’s amendments. I agree with everything that she said and almost everything that the noble Lord, Lord Newby, said, which is comparatively unusual, wise though he is.
The Government are in a great fiscal hole and the temptation to use the increase in the national insurance threshold is going to be almost irresistible for the Chancellor. I suppose that this measure borders rather closely to protecting the people against further burdens of taxation. I have no concerns about supporting the amendment for that reason.
National insurance contributions are one of the great frauds perpetrated on the people of this country. They are called national insurance contributions but they are in fact a tax by any other name, and their impact is as a tax. It is commendable that the Government have gone down the road of simplification. The reduction in the basic rate of income tax to 20p and the abolition of the 10p band was a great step forward in terms of simplification. It all went wrong, of course, because they did not raise the threshold to the level of the 10p band and as a result the Government are in their current difficulties, including those that arise because of the lack of cash. I would be prepared to wager quite a lot that two things will happen between now and the end of the year: first, we will have a new Chancellor of the Exchequer and, secondly, his successor will increase the national insurance threshold in order to get the cash to achieve that purpose. The Government’s declared policy, which they abandoned, was to align the rates of national insurance and income tax; that was a good
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It is, however, a bit of a halfway house. The real prize is to integrate national insurance and tax and have a universal taxation system. There are great problems with that because of the impact on pensioners. I can also see that that would present great political difficulties for any Government. However, with the best will in the world, the Government’s credentials as committed simplifiers are getting a little worn, not least because the Chancellor’s predecessor, the Prime Minister, seemed reluctant to stick to a policy and pursue it with a degree of confidence and predictability which would make life easier for the business community. All the arguments that the Minister made against this at an earlier stage of the Bill, to which my noble friend referred, particularly those about national insurance being paid weekly and so on, are for integration in the long term.
I support my noble friend. These amendments are an important protection. I cannot for the life of me imagine why any Government would wish to resist them unless there is a hidden agenda to raise the burden of taxation, which, at the moment, would be catastrophic for the many families up and down the land who are already struggling to pay their bills.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord McKenzie of Luton): My Lords, I thank the noble Baroness for her amendments and congratulate her on the ingenious formulation of an issue which we discussed in Committee. As I will explain, however, we do not believe it does the trick.
I shall start by making a few general comments to pick up on some of the points. The noble Lord, Lord Forsyth, talked about the current UK tax burden, but in every year since 1997 and throughout the forecast period of the previous Budget the tax-to-GDP ratio has been well below the peaks reached in the mid-1980s.
The noble Baroness said that this was represented as being part of a simplification package. Indeed, that is exactly what it is; it was not a tax-raising measure.
Lord Forsyth of Drumlean: My Lords, I am grateful to the Minister. With regard to the point about the tax-to-GDP ratio, can the Minister confirm that, had the tax burden remained the same as it was in 1997, the average family would in real terms be £5,170 better off a year?
Lord McKenzie of Luton: My Lords, you have to look at the distribution of the overall tax take. The poorest families in our country have benefited significantly from the tax and benefits policies of this Government.
Just to put it clearly on the record, the proposal to align the national insurance rate was part of a simplification package which, as we know, dealt with the 10p rate of income tax. It reduced the basic rate of income tax from 22p to 20p; it increased the upper earnings limit for national insurance by £75 a week above indexation; it raised the aligned higher-rate threshold and upper earnings limit by £800 a year above indexation; it raised personal allowances for
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The noble Baroness said that she did not disagree with the policy, and I believe that was echoed by the noble Lord, Lord Forsyth. I welcome those comments, but if you do not disagree with the policy then you achieve it by one of two ways or a combination of them: either you raise the upper earnings limit for national insurance contributions or you reduce the limit of the basic rate of tax. You cannot do it any other way. One way or another, if the noble Baroness supports this policy, I presume that she is saying that she would have done the same sort of thing.
I shall come on to the issue of stealth taxes in a moment but perhaps I may go back to the specifics of the amendment. As has been explained, its objective is to allow the UEL to be aligned with the higher-rate tax threshold for income tax for the 2009-10 tax year announced in the Budget. Perhaps I can confirm that, as I think that the noble Lord, Lord Forsyth, said that we had abandoned that principle. The Government remain committed in principle to aligning more closely the income tax personal allowance with the national insurance primary threshold and the national insurance contributions system to improve fairness and coherence, reduce administrative burdens and make them easier to understand. We await further announcements from the Chancellor at the PBR, but that remains the policy.
The amendment goes on to propose the insertion of new Section 5A into the Social Security Contributions and Benefits Act to apply for 2010-11 and subsequent years. The new Section 5A would allow the upper earnings limit to be increased by RPI and rounded up to the nearest pound. The UEL could then be adjusted by an amount not exceeding £2 for the purposes of aligning the annualised upper earnings limit with the sum of the personal allowance and the basic rate limit under Sections 20 and 35 of the Income Tax Act 2007 for the tax year. This would provide a maximum adjustment of £106 in any tax year. I have not done the same calculations as the noble Baroness has on the range in which that threshold works, but I accept what she says.
I should like, first, to address the main difficulty with the amendment. I think that it was brushed aside by the noble Lord, Lord Newby, but it is real. Under this formula, from 2010-11 the UEL can be raised only by up to an increase related to the RPI and only if the personal allowance and basic rate limit are correspondingly increased by the RPI. A difficulty would arise should the Chancellor decide that it would be appropriate for the personal allowance and/or basic rate limit to be changed by a figure other than the change in the RPI, and other than that automatically allowed under the Rooker-Wise convention—I hesitate to say this in the absence of my noble friend, and I hope that he does not read the record, but I think that that convention should more strictly be called the Rooker-Wise-Lawson convention—and to make the necessary changes through the Finance Bill. If such a
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The second major difficulty with the amendment is one of timing. NICs regulations have to be in place for the start of the tax year because contributions are paid on an earnings-period basis. However, if the tax thresholds were increased by more than the RPI through a Finance Bill, they would have not received Royal Assent until after the NICs UEL regulations were needed. In some circumstances, you might change the whole budgetary process and try to do that a year or two in advance, but as a practical, ongoing basis for dealing with fiscal policy I do not think that that is realistic.
Even if the first difficulty could be overcome, a further NICs Bill would be needed to deliver the sought-after alignment. As changes to social security legislation require programme Bills, it is unlikely that a slot for a Bill could be found at such short notice or that it would complete its passage through Parliament in time for the regulations to be in place for the start of the following tax year so as to enable employers to make deductions of NICs at the new level.
In my view, it would not be a sensible use of limited parliamentary time to have a short NICs Bill every time we wanted to change the UEL by less or more than the RPI. As I have explained, the rounding rule in step 3 of proposed new Section 5A could provide insufficient flexibility. I do not believe that it would be a sensible use of limited parliamentary time to have a NICs programme Bill every time we wanted to make that change. If such a restriction had been in existence over the past 20 years, it would have necessitated a further two NICs Bills between 1997 and the 2007 Budget and a further seven NICs Bills in the 10 years preceding 1997 when either the personal allowance or the basic rate limit was increased by either less or more than the RPI.
I am bound to say to the noble Baroness and her colleagues who accuse us of stealth taxes that those were serial freezes of the basic rate limit and the personal allowance. The basic rate limit was frozen in 1991, 1992-93, 1993-94 and 1994-95. It was overindexed in 1996-97, which coincided with an election, but over that 10-year period adopting this formulation would have required seven programme Bills, so there are practical difficulties to be faced.
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I will touch on some minor technical flaws, which could readily be put right. The first is that the amendment requires the Secretary of State for the DWP to determine the level of adjustment; it would have to be the Treasury. In addition, the Budget resolution that moves the basic rate limit is in Section 10(5) of the Income Tax Act 2007 and not Section 20. Those flaws could be fixed.
I would also like to return to the rounding formula in step 3. As I mentioned earlier, that allows the UEL to be adjusted by an amount not exceeding £2 for the purposes of aligning the annualised upper earnings limit with the sum of the personal allowance and basic rate limit, meaning an adjustment of £106 at the maximum. As no provision has been made to uprate
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If affirmative resolutions are brushed aside as having no significance, why are we as a Government often pressed to change a negative process into an affirmative one when debating Bills? The scare story is that the Delegated Powers Committee spends a lot of time looking at these things yet we brush it aside, and that this is about the potential to raise £8.5 billion without proper parliamentary scrutiny. The noble Lord, Lord Newby, said that these debates were not routine, except in rare circumstances. If the Government were attempting to raise such money in the way that the noble Lord suggested, do you seriously not think that the House would vote down that proposition? Of course it would. There is protection built in.
I do not see that that the change proposed in the Bill should give anyone cause for concern in terms of parliamentary scrutiny. The House always considers extremely carefully affirmative resolutions that come before it. The Delegated Powers Committee has expressed no concerns about the powers in the Bill. That committee is diligent in the way that it goes about its work. We are frequently on the receiving end of its recommendations. It made no adverse comment on the powers.
The Chancellor has said that he will return to the tax and NIC rates and limits for future years in the PBR. The commitment remains to align the UEL with the level at which higher-rate tax becomes payable. In the context of the Government’s commitment to aligning the UEL with the higher-rate tax threshold, the amendments do not work because they could lead to misalignment which would require a further NICs programme Bill. I therefore urge, without any great prospect, the noble Baroness and the noble Lord not to press their amendments.
Baroness Noakes: My Lords, the Minister is right about one thing. I thank the noble Lord, Lord Newby, for his support for the amendments. What he said put a lie to the practical issues that the Minister raised about how difficult it would be to bring forward legislation on a short-term basis. We do not see that as a huge issue. The PBR is not tied to the Queen’s Speech. It often comes early, as it did last year. There is plenty of time for a Bill to get through. The Minister said that the Bill had to be programmed, but who programmes Bills? The Government do, and it is easy for them to do so. The Minister said that historically there would have been a requirement for several Bills. Having indexation on the face of the Bill may provide an incentive for Government not to go through the performance of trying to mess around with the levels each and every year. When the Chancellor wanted to realign income tax and national insurance, a special Bill would have to be brought forward. If that alignment were reasonable, I am sure that both Houses would co-operate with Government in seeing that through.
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My noble friend Lord Forsyth, whom I thank for his support, pointed out that the real problem with this Bill is the irresistible temptation that it provides the Government to do away with or to increase significantly the upper earnings limit and thereby raise large amounts of what is in fact taxation, but which we have to call income tax. He is quite right to say that it is a form of fraud. This latest increase raises, as I said, £1.5 billion. It will go into the National Insurance Fund, which is already in surplus because national insurance contributions have been raised by an amount greater than needed for the purposes of the fund.
We do not see the affirmative procedure as providing anything like the protection of primary legislation for those who pay national insurance. The amendments are entirely reasonable because they give no limit to what the Government can do next year. The Government can realign as they want next year. I have been entirely reasonable in giving the Government headway to do the alignment and then to let indexation kick in and protect national insurance payers after that.
The Minister anticipated that I would not be convinced by his arguments. I wish to test the opinion of the House.
4.06 pm
On Question, Whether the said amendment (No. 1) shall be agreed to?
Their Lordships divided: Contents, 189; Not-Contents, 134.
Addington, L. [Teller]
Alton of Liverpool, L.
Ampthill, L.
Anelay of St Johns, B. [Teller]
Armstrong of Ilminster, L.
Ashcroft, L.
Astor of Hever, L.
Attlee, E.
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