Orders of the Day — National Insurance Surcharge Bill

Part of the debate – in the House of Commons at 12:00 am on 6th December 1976.

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Photo of Mr Ian Stewart Mr Ian Stewart , Hitchin 12:00 am, 6th December 1976

I appreciate the intricate analysis of the implications of the Bill of the hon. Member for Gloucestershire, West (Mr. Watkinson). He spoke a good deal of sense about some aspects of money supply and the borrowing requirement, about which there is probably not much difference among hon. Members.

I wish to return to the question of the consequences of the announcement of 22nd July. The first thing which needs to be done is to point out the incongruity of discussing the Bill and measures in this way at the beginning of December when they were introduced in July and we are now in the shadow of new economic measures which will no doubt be presented to the House within a matter of days. Therefore, to be discussing the economic and unemployment effects of major financial measures of this kind in a vacuum, as it were—because we are without a great deal of the information—makes it difficult for us to reconcile the figures which have been given to us by the Government since July. I have no doubt that it makes it equally difficult for the Government to answer our questions, but it does not make the questions themselves any less relevant.

We are dealing with measures which were presented in the heat wave of the summer when, with a rosier outlook for the future, it was expected that unemployment would level off and would fall next year and the year after. It was felt at that time that companies in the private sector would be able to stand the addition of a payroll tax—much of which would fall to be paid in the private sector. It was thought that inflation and interest rates would come down and that the situation in the corporate sector of the economy would be different by the time that the measures took effect.

The other night the Financial Secretary reminded us that one of the attractions, if that is the right word for it, of this type of measure—a means of reducing the borrowing requirement—was the delayed effect so that the impact would not be felt until the economy was in a position to take it and the manufacturing sector was able to take the unemployment effects in its stride.

Naturally, it is on the effects on employment that much of the discussion has concentrated. Even now, after question and answer and comment and counter-comment, I find it extremely difficult to reconcile the arithmetic which has been given to us. In his original proposals, the Chancellor of the Exchequer referred to an overall figure of 60,000 unemployed resulting from these measures, but the way that he put it gave the impression, not that there would be an increase of 60,000 in unemployment, but that unemployment would come down by that much less over a period of a year or two. Of that 60,000, he attributed 10,000 to the effect of the so-called National Insurance Surcharge. However, we rapidly entered rough water, because the Secretary of State for Employment was reported as having quoted the much higher figure of 115,000 as being the likely consequence of these measures.

Opportunities were soon taken by hon. Members to ask questions of the Government and by the General Sub-Committee of the Expenditure Committee to question Treasury officials about the meaning of the figures. I do not think that they were much clearer by the end of it.

First, there was the question of what was meant by a 60,000 change in the level of registered unemployed. If one uses the Treasury forecasting manual, which apparently points out that there is only a 40 per cent. registration ratio for unemployment, it means that, to give a recorded change in unemployment of 60,000, the gross figure would be 150,000 because the "registration ratio" means, in simple language, the number of unemployed people who bother to sign on. So immediately a much larger figure was being discussed.

When the Chancellor of the Exchequer talked about the figures, he said that he thought that they would apply perhaps to early 1978. When he said that, early 1978 was 18 months hence, but now it is not much more than a year hence, and many things have changed. The right hon. Gentleman said—and it was significant—that the effect could be greater by 1979. He stated: First of all, the increase in national insurance contributions will affect unemployment with a considerable delay. I have therefore agreed that by, say, early 1979—that is nearly three years from now—the effect could be bigger. But by that time I would expect the period of high unemployment to be behind us anyway. That is certainly the objective of our policies". —[Official Report, 2nd August 1976; Vol. 916, c. 1249.] It may have been the objective then, and perhaps it is the objective even now, but in practice we all have to face the fact that these projections have not so far given cause for confidence in what has happened since. But the whole of the strategy of the July measures was based on these projections.

Indeed, Mr. Michael Posner, the then Deputy Chief Economic Adviser to the Government—whose name has been mentioned on a number of occasions in the discussions of these measures, and who has an extraordinary way with figures —said that it was important to get control of the public sector borrowing requirement because this was a matter of confidence. He felt that the employment problem would be resolved in a year or two's time and that therefore the effect on unemployment of the surcharge would not be serious.

In fact, he tried to make a virtue out of this, because he said that he thought the announcement in July would be of considerable importance in reinforcing confidence. I repeat that because it is such an astonishing statement. He thought it would be of considerable importance in reinforcing the confidence about which I have already spoken; an announcement now having an effect if used through time of helping to release resources at a slightly later time in the recovery when we think it should be necessary to do so". The thinking of those who were advising the Government in the hot days of the summer was that it would actually be necessary to shake out some people from their jobs in order to provide the resources for the economic recovery which was then foreseen. But if the whole prospect now for the level of employment has changed, clearly the figure of unemployment, as well as the financial assumptions on which the measure is based, must be revised. We have not yet had such a revision.

My mental arithmetic is not very rapid, but if there were to be 100,000 more unemployed next year than had been supposed six months or so ago, if they were not in employment, and therefore no surcharge were being paid in respect of them, it seems to me that it would mean a reduction in the revenue from this new tax of perhaps upwards of £50 million in a full year. That is a quite considerable figure in relation to the net effect on public sector borrowing requirements of £700 million, which the Financial Secretary mentioned earlier in the debate.

With regard to the more specifically financial implications, the Financial Secretary mentioned, as I understood him that there would be a revenue of some £950 million starting in April 1977, and that this would rise to £1,030 million in a full year. How exactly does that work? For those of us who are not privy to the technical details of the raising of this tax, it is a little curious that we have a new measure imposed at the beginning of a financial year and that the revenue in the first year is not the same as the revenue in a full year.

It may be that there is some administrative reason for this, but in a Second Reading debate it would be helpful to have an indication from the Minister of State, when he replies, as to how it works. How exactly is the tax to work? How is it to be levied?

It is in the form of a surcharge on the national insurance payments, but in the Social Security Act 1975, on which this Bill relies, there are pages and pages and schedule upon schedule of technical details as to the way in which the Class 1 secondary contributions, to which the surcharge attaches, are actually to be paid. It would be helpful to have made clear in simple language from the Treasury Bench exactly how this money is likely to end up in the Treasury.

In Schedule 1, paragraph 5, of the Social Security Act, there is power to combine collection of contributions under the Social Security Act with tax. This means that the money would then go to the Inland Revenue. Paragraph 5(3) states: The Inland Revenue shall, at such times and in such manner as the Treasury may direct, account to the Secretary of State" — that is the Secretary of State for Social Servicesfor, and pay to him, the sums estimated by the Inland Revenue, in such manner as may be so directed, to have been received by them as contributions in accordance with regulations made by virtue of this paragraph. Under this new Bill, the Secretary of State has to pay it all back again to the Treasury, in terms of Clause 1(2). I have no doubt that the whole thing will end up in a ledger and that this will be done by book entries. But, as this is a new tax involving a large amount of money, it would be helpful to have a clear statement as to how the money will find its way to the Treasury, and as to the current administrative arrangements, under the Social Security Act, in relation to payment of national insurance contributions when combined with other forms of tax.

Concerning the change in the yield of this tax from July, as it was estimated then, I have a feeling that a figure of £910 million was quoted at that time for the first year, and that now it is now £950 million. Has that figure been up-rated because of inflation or because wage bills have turned out to be higher than they were then expected to be? What is the reason for the change in those figures?

I have no doubt that there is a good reason, but how exactly have we got back to the figure of £700 million for the reduction of the public sector borrowing requirement? It would be helpful to the House, in considering the Bill, to have the information at this stage. After all, there will not be many later stages of the Bill and we have not much time in which to think about it.

Again, how much—I expect that this question ties up with what I have just asked—will be offset against corporation tax? It would be useful to know how much of the tax will fall on companies which would be paying corporation tax on that amount of profit which will not now accrue to them, for the reason that before it becomes profit it will have been paid in this surcharge. We should also like to have up-to-date information from the Government about the effect on local authorities.

In answer to a Parliamentary Question some time ago, a gross figure of £145 million in, I believe, a full year was quoted, and it was estimated that this would be about £50 million net. It would be useful to have an up-to-date assessment of the figures involved.

In introducing the Bill this afternoon, the Financial Secretary said that this surcharge would be allowable under the Price Code in accordance with existing terms. The existing terms are complicated, and the question was raised in the Ways and Means debate recently as to the effect on retailers. Perhaps the Government would spell out exactly would what would be the position of retailers, and whether under the existing terms they will be able to offset the effects of this charge.

Hon. Members in all parts of the House have today raised one of the most fundamental aspects not from a financial point of view but more from a moral point of view, namely that of charities. I had the experience—one might almost call it a pleasure—of discussing, for many hours earlier this year, with the Minister of State aspects and details of the development land tax. I thought that he made an honourable attempt to defend the dishonourable measures contained in the Development Land Tax Bill, as it passed through the House, with regard to the taxation of gains accruing to charities. It was possible, as he did, to present the argument that the development gain was at least in part provided by the community and was of a special nature, and that there was not much difference whether a charity or any other owner of property or land achieved the amount involved, so that in such circumstances it would not be right to make a special exemption for charities and churches.

But the Minister of State said, in words which have been quoted by my hon. Friend the Member for St. Ives (Mr. Nott), that there was no intention to extend the treatment of charities in this way for tax purposes. The hon. Gentleman intervened earlier in this debate to say that his words did not apply to indirect taxation. Perhaps that is so. But it is fair to say that the whole tone of the Government's case which he presented on the development land tax was that there was nothing to worry about because that tax was a special animal, and that for administrative reasons it was not possible or right to exclude from it charities and Churches.

Yet here we have, for the second time within a year, an imposition on charities. I believe that this represents a fundamental change in Government and Labour Party thinking about the attitude to charities. In 1966, when selective employment tax was introduced, charities were eventually exempted. The original proposal to tax charities through SET was strongly resisted and in the end they did not have to pay it.

This surcharge is not a selective employment tax but a general employment tax, and surely it is much more important that charities should be exempted from it, and not just because it is a substantial amount of money for the charities to find. For example, £100,000 is a tremendous sum for the Spastics Society to find. Although it is not very much to the Government, it is crucial to the society. How can it pass on the tax in prices? If the Government and the Labour Party wish their claim that they are not slowly but surely undermining the principle that charities should be exempt from tax wherever possible to be credible, they should act on this point.

It is not good enough that we should have to have proposed amendments to these measures passed to Downing Street via Lambeth Palace because we in this House have not the opportunity, in time or procedure, to table the necessary amendments and to debate them on the Floor of the House.

I ask the Government to think again. They are not giving the Bill much time. I was much in sympathy with what the hon. Member for Kingswood (Mr. Walker) said. It would indeed evoke a response in all parties if the Government were to abandon for once the tidy convenience that they claim to be one of the great virtues of the Bill in this method of taxation, and realise that there will be a severe crisis of confidence in the attitude of the Government towards charities unless they do think again, and quickly.

The circumstances in which we are discussing the Bill are fundamentally changed from those which existed at the time these measures were announced. Indeed, I wonder whether it makes much sense for us to be hammering this legislation through in advance of the measures which are now contemplated to be brought before us either next week or at any rate before Christmas.

Let us recall the circumstances in which these measures were announced. There had just been a restatement of industrial strategy at Chequers. The Government, the CBI and the TUC were all to cooperate and to get British industry moving again. But at the last minute the Chancellor found that he did not think that the effects on the public sector borrowing requirement of his thin slice of cosmetic salami in July would be enough, so he said that we must have this surcharge, making it as far as possible in the future so that it would not have an immediate effect. It might not have an immediate financial effect in financial terms if the Government's projections about the economy had been fulfilled, but there is now another factor—the effect on confidence.

At that time, the whole industrial strategy was in the melting pot. It still is. Firms are still waiting for gestures of good faith, sustained over a period, by the Government to show that they really mean what they say—that they want their industrial strategy to work. Mr. Posner has talked about reinforcing confidence. I do not know what sort of confidence the Government think can exist when, having come to a concordat with industry about the future, they impose heavy measures of taxation almost immediately afterwards.

It is equally ridiculous for the House to have to discuss this Bill now when the circumstances in which its measures were introduced have been fundamentally changed and when we know that a sword of Damocles is hanging over our heads in the form of what comes out of the Cabinet wranglings and the to-ing and fro-ing with the International Monetary Fund.

I do not want to sound uncharitable, but I can conclude only that the Government want to muzzle discussion on the Bill. When the July measures were announced, no Government time was made available for their discussion. The Opposition had to use a Supply Day and the technique of a motion on the Chancellor's salary in order to get them discussed on the Floor of the House. Yet that was for a package approaching £2,000 million, half of it in taxation. Then we had a Ways and Means Resolution late at night, and we have been stampeded into Second Reading without even enough time to work through the technical implications of the Bill, let alone to reconcile the economic and employment consequences. We are to take the further stages within 48 hours, so that nothing worthwhile can be done about the Bill.

When we complain about the consequesnces of these proposals, the Government say "What would you do?" or "They are not as bad as other measures we might take". But they cannot seriously complain of the consequences of their own folly. Up to as late as last July they were staking everything on recovery and boom, which they hoped would get things going. They were wrong. They staked their funding plans on the expectation that there would be lower rates of interest. They were wrong. They staked their hopes for the balance of payments on the value of sterling and the terms of trade. They were wrong. They have been wrong so many times. They have been wrong in the whole of the economic assumptions on which their measures were introduced, yet they have the effrontery to complain when hon. Members point out that those measures are damaging. That takes a pretty thick neck.

The Government have done their best to put the boot in to charities. The Financial Secretary to the Treasury has told us that they have abandoned hope. What now remains? Faith. I am afraid, however, that the country has little faith left in the Government.