Orders of the Day — National Insurance (Contributions and Earnings Limit)

– in the House of Commons at 10:15 pm on 13th December 1979.

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Photo of Mr Reginald Prentice Mr Reginald Prentice , Daventry 10:15 pm, 13th December 1979

I beg to move, That the draft Social Security (Contributions, Re-rating) Order 1979, which was laid before this House on 22 November, be approved. The draft order is closely related to the Social Security (Contributions) (Earnings Limits) Amendment Regulation 1979, which my right hon. Friend the Secretary of State for Social Services made on 20 November 1979 and laid before the House on 22 November 1979. The order and the regulations both affect the contributions of employees and their employers, and the Government Actuary's report accompanying the draft order sets out the likely effect on the National Insurance Fund of both instruments. I therefore seek leave of the House to discuss the regulations as well as the order during this debate.

My right hon. Friend has carried out the review of national insurance contributions which he has to make each year under the Social Security Act 1975, and the draft order now before the House provides for the changes in contribution rates and earnings and profits limits which he considers are necessary from next April.

I shall start by giving details of the changes and how they will affect individuals. I shall deal first with class 1 contributions—that is, those paid by employed earners and their employers. The order proposes increases in the rate of class 1 contributions of one-quarter per cent. for both employed earner and employer. The proposed increase in the employer's contribution will, however, be partially offset by a reduction of ·05 per cent. in the employment protection element of the contribution which has been proposed by my right hon. Friend the Secretary of State for Employment under separate regulations.

The lower earnings limit for class 1 contributions will be raised from £19·50 to £23 a week and the upper earnings limit from £135 to £165 a week. These changes to the earnings limits are in line with the requirements of section 1 of the Social Security Pensions Act. Thus the lower limit approximates to the rate of the basic retirement pension, which is now £23·30 a week, while the upper limit is about seven times that rate.

I think that the House will be aware that the upper limit under the terms of the Act should be between six and a half and seven and a half times the current basic pension rate.

For employees earning up to £135 a week, the increase in contribution will range from 4p to 43p a week. Employees earning more than £135 and their employers will, in addition, have an increased liability because of the raising of the upper earnings limit to £165 a week.

The combined effect of the changes to the contribution rates and to the earnings limits will result in a maximum increase for the employee—at earnings of £165 a week—of £2·37 where the employment is not contracted out and £1.69 where it is contracted out. It is the nature of the scheme that, when the upper earnings limit is raised, those at the higher end of the limit have a once-and-for-all higher increase than is due for the average employee.

I now turn to the position of the self-employed. The draft order provides for the class 2 contribution to be increased from £2·10 to £2·50 a week. No change is proposed in the rate of the class 4 contribution, but the range of profits or gains on which the contribution is levied is being raised. Under the draft order, the range will be from £2,650 to £8,300 a year in place of the present range of £2,250 to £7,000 a year.

The effect of these changes is that for contributors with profits of up to £2,650 there will be an extra liability over the year of up to £21·20. For those with profits of between £2,650 and £7,000, there will be very little overall change because over this range of earnings the combined class 2 and class 4 contributions will still represent about 5 per cent. of earnings. For those with profits above the old upper limit of £7,000, there will be varying increases rising to a maximum of £66.20 a year at the new upper limit of £8,300.

There are two remaining changes which the draft order makes. It raises the level of earnings below which a self-employed person may be excepted from liability for class 2 contributions from £1,050 to £1,250 a year. It also raises the amount of the voluntary class 3 contribution from £2 to £2·40.

These changes fall into two broad categories. The changes to the flat-rate contribution rates and to the earnings and profits limits are to enable them to keep pace with rises in the general level of earnings and with increases in benefit rates. Those to the percentage class 1 contribution rates are necessary, as the Government Actuary's report makes clear, to ensure that income and expenditure of the National Insurance Fund remain broadly in balance in 1980–81.

There are two main reasons to anticipate higher expenditure from the fund during that year. One is certain and the other is probable. First, there is the fact that the pensions and other benefits were increased by about 19½ per cent. a few weeks ago. This will lead to extra expenditure in the financial year 1980–81 of about £2¼ billion. The second reason is that we have had to make a working assumption of higher unemployment. For this purpose, an average figure of 1·6 million has been adopted for the financial year 1980–81.

It might be argued by some hon. Members that the fund has a big surplus at the moment and that it should be possible to run it down. I put the surplus into perspective. The figure of the proposed balance under these changes—nearly £4½ billion—sounds large. It should be seen in the context of the fund, whose income and expenditure are each expected to exceed £15 billion in 1980–81. Although the balance has been increasing in cash terms, it has been falling steadily in terms of the demands on the fund. The balance represented 37 per cent. of annual expenditure at the end of the last financial year. As the Government Actuary's report makes clear, this figure is expected to fall to 34 per cent. by the end of the current financial year and to 29 per cent. of expenditure in 1980–81 by the end of that year.

The increase in class 1 rates is the maximum which can be made by order under the Social Security Act 1975. The Government are considering what action to take now that this margin has been used up. The increases in contributions will obviously be unwelcome—as they always are—to contributors, but they are necessary to permit the scheme to pay its way while protecting benefits against inflation. I therefore commend the order to the House.

Photo of Mr Jeff Rooker Mr Jeff Rooker , Birmingham, Perry Barr 10:25 pm, 13th December 1979

The Opposition think that it is right to debate this order on the Floor of the House for the same reason as Government Members thought it necessary to do so when they were in Opposition. We are dealing with substantial sums of public money. We are discussing an increase in the National Insurance Fund of about £2 billion between the years 1979–80 and 1980–81.

We also want to debate the order because it is the first example under this Government of what is, in effect, a tax increase. That is contrary to all the loud talk during the election campaign and since about their being a tax-cutting Government. We are discussing a tax increase. On 5 December last year the Secretary of State said that, strictly speaking, the sums involved were not taxation. He said that he suspected that for most people their national insurance contributions had more of the quality of taxation than they used to have. That remains the case.

This is not a minor order. Some people will have to pay substantial increases as a result. Those increases will wipe out most, if not all, of the tax cuts in the Budget. Government Members have complained about this order. I make no complaint, but we must discuss it.

The Minister said that the increased earnings limit above which national insurance contributions are not paid at the normal percentage is about seven times the lower limit. He said that the law requires that this is done within a certain band. There have been changes because last year, during a debate which I did not attend, the Secretary of State said that there was nothing immutable about the ratio of seven. Clearly, it is immutable because it is in legislation. That is why many people will have to pay higher national insurance contributions.

Someone earning £165 a week will have to pay £2.37 a week maximum increase. The employer will pay £3.33. My personal view is that there should not be an upper earnings limit. If we abolished the upper limit we should collect £7 million or £8 million extra, which could be used for the National Health Service. It is no good the Secretary of State mumbling. Government Members have criticised the order. An early-day motion, tabled by the hon. Member for Northampton, North (Mr. Marlow) and supported by one other hon. Member, the hon. Member for Newark (Mr. Alexander), states that the increase wipes out gains in the Budget and should not be proceeded with for people of that earnings level. The motion states that it should be reduced forthwith.

The Government cannot have it both ways. I accept that they are justified in Imposing the increases because benefits have to be paid for; there is no dispute about that. We wish that more benefits were in the pipline, because in a Bill that we are to debate next week the Government will seek to cut benefits to pensioners, and that will have a direct effect on national insurance contributions in the future.

The Minister has made clear the other reasons for the increases. The Government were instructed to make certain assumptions. It is assumed that prices will increase by 14 per cent. in the next year, that earnings will increase by 14 per cent. and that there will be a catastrophic increase in the average level of unemployment from 1·25 million up to 1·6 million. Those are averages. The figures will be substantially higher than that at the peak. If there is any variation, the figures will be thrown haywire.

In his report, the Government Actuary stated: The assumption on the total number of unemployed shows an increase to a level higher than in recent experience. It is therefore unusually difficult to estimate the proportion of the total who will not be entitled to benefit from the National Insurance Fund. Therefore, there is every possibility that, with such a large increase in the assumptions given to the Government Actuary, before the end of the financial year the National Insurance Fund could be in trouble. Of course, there is a surplus, and the balance is being run down. As the Minister said, it is 29 per cent. of expenditure forecast at the end of 1980–81 compared with 37 per cent. at the end of 1978–79. That is a substantial decrease in anyone's estimation. Of course, the then Opposition criticised the previous Labour Government for forecasting the decrease, which has taken place this year, to only 34 per cent.

Although the Government Actuary has been given these assumptions on which to work, it must be made clear that the figures that he provides for the House and the Government are only as good as the assumptions that he is given in the first place. As the right hon. Gentleman said last year, when he referred to feeding computers, if one puts rubbish in, one will get rubbish out.

Having been given a large increase in assumptions of unemployment such as this one, I must ask the Minister to assure us that there will be no cutback in benefits if unemployment goes above the average of 1·6 million, as we have seen forecast. Clearly, the Government will not want to propose tax increases, which, in effect, is what they are doing tonight.

The obvious alternative mooted by some Ministers—leaked in the press—is to cut the benefit; in other words, to cash limit the National Insurance Fund. We would like to know the Government's thinking on this matter, bearing in mind the large qualification that the Government Actuary has put in paragraph 9.

There is another legitimate point that should be raised, but I suspect that the Government will pooh-pooh it. It is raised every time we discuss public expenditure and the raising of the taxation to pay for it. I refer to the fact that we do not discuss the raising of taxation at the time that we discuss the form of the expenditure. Will the Secretary of State consider allowing us to debate the benefits order increase at the same time as the ratings increase? He will realise that, for the Opposition, it would be extremely useful to debate both together, because he made the same point last year. He is now a member of the Government but he has not been able to do anything about it in the short time that he has been in office.

The Secretary of State for Social Services (Mr. Patrick Jenkin): We are bound by previous legislation.

Photo of Mr Jeff Rooker Mr Jeff Rooker , Birmingham, Perry Barr

The Government are in control of legislation. They have the Social Security Bill before the House. If they are bound by previous legislation, they can change it. They have obviously changed their tune since they moved from the Opposition to the Government Benches. They realise that it is inconvenient for an Opposition to raise the two sides of the balance sheet if they are debated several months apart—July to December. Nevertheless, it is a legitimate point. It is raised generally in terms of the public expenditure White Paper and the Chancellor's annual Budget.

We are dealing with substantial sums of money. The inflow and outflow are in excess of £15 billion. It is one of the largest areas of Government expenditure, and that is where the Government are looking to make cuts. They are looking to make cuts not in defence but in areas of massive expenditure controlled by the DHSS. This time, we have a team of Ministers who are not fighting in the DHSS corner. Therefore, we know that it will be walked over. Cuts in that Department will be easy to achieve. I suggest that it is legitimate to debate the income to the the fund at the same time as the benefits. We shall come back to this point in the legislation that is going through the House this year—and next year, if necessary.

It would certainly be out of order to widen the scope of the debate. Nevertheless, the Government have broken many promises since they came to power.

Photo of Mr Jeff Rooker Mr Jeff Rooker , Birmingham, Perry Barr

Yes, promises. This is another promise that they have broken by raising taxation. I do not disagree with that. The largest burden is on the broadest backs—people earning in excess of £8,000 a year. We are not complaining about that. The Government are saying to middle management "We have given you this incentive Budget", and a few months later they are taking away all the supposed gains from that Budget. [Interruption.] Of course it is within the order. If the hon. Gentleman wishes to intervene, I will gladly give way to him. It is in the order, which he clearly has not got with him, so I think that he had better keep quiet while in a sedentary position. The people who the Government said would gain most from the Budget are, if they lost then, now losing the rest of what was left as a result of the order.

I make no complaint about that. The fact is that the Government have taken this action to raise taxation. The idea of the earnings-related scheme was that there would be an inflow into the fund and that it would not be necessary to keep changing the percentage rates. As the Secretary of State said when in Opposition, we almost had a bipartisan policy on pensions. We clearly do not have such a policy on the uprating of pension benefits. We now have ping-pong politics on pensions.

The Secretary of State said when in Opposition that there would be an inflow into the fund because as earnings increased they would pay for the outgoings. This has not happened, and because of the forecast increase in unemployment it has been necessary to make some savage increases.

Last year there were great complaints about the increase that the self-employed would have to pay. I calculate that they are now being required to pay an increase of about 19 per cent. on their class 2 contribution. The other limits have been increased by 18 per cent., 22 per cent. and 17 per cent—substantial increases in anyone's book. They are increases that this Government were pledged not to make.

The two hon. Members who tabled the early-day motion were clearly tipped off—certainly other Conservative hon. Members were—not to sign motions contradicting the Government. They are not here tonight to put their words or even their votes where their mouths were on that motion. It is a tragedy that this has happened. I did not give them notice that I would refer to them; I did not think that there was any need to do so as they had tabled an early-day motion.

When this order comes before us, with its substantial increases to be paid by people whom this Government were pledged to look after with their tax-cutting Budget, it should be known to the country at large that this Government have broken yet another election promise.

Photo of Frank Field Frank Field , Birkenhead 10:37 pm, 13th December 1979

The Minister said that the order was largely a measure increasing contributions and that it would be welcome for that reason. But I welcome the fact that I shall be paying increased contributions, because it we are to do a fair deal by the poorest in the community we must ask "Who will pay for it?"

We are debating an increase in contributions at a time when our attitude to the poorest is changing fundamentally. That can be seen by the fact that we are changing our legislative commitment to the poor. We are changing the formula of the Labour Government, which was to raise most national insurance benefits in line with prices or earnings, to one which is in line with prices. We now have murmurings from the Conservative Back Benches that even that commitment should be scrapped.

Our attitude to the most hard-pressed in the community vary, from the view that we are our brother's keeper, through the Government's present proposal, which is to tolerate the poor, to the idea that the poor are simply a burden, which is how some people view them.

I have few hesitations about supporting the order, which is to pay for increased benefits for larger numbers of hard-pressed people in the Welfare State, but I should like to put two questions to the Minister. I shall be grateful if he will consider them and perhaps write to me.

Photo of Mr Jeff Rooker Mr Jeff Rooker , Birmingham, Perry Barr

It must be made clear that while there has recently been a substantial increase in old-age pensions and long-term benefits, which must be paid for, the basic reason for the order to raise contributions is not to grant extra and new benefits; it is the catastrophically high levels of unemployment that this Government are about to create.

Photo of Frank Field Frank Field , Birkenhead

Certainly, but we are drawing funds from the National Insurance Fund, and from the fund we also at present pay those who are entitled to national insurance unemployment benefit. I am pleased to make my contribution to those who are bearing my share of today's unemployment. The Government have already embarked on an ambitious reform of direct taxation. In the last Budget, we saw many of the ideas that they put together in Opposition brought to fruition. We also understand that Lord Cockfield is about to report on the reform of capital taxation. The only area of direct taxation that has not come up for review by the Government is the poll tax, the national insurance contribution.

There are two powerful reasons why a similar review of this form of taxation should be undertaken by the Government. First, this is the most regressive form of taxation. The Under-Secretary was kind enough to provide me with figures earlier this Session. The poorest women contribute 6·5 per cent. of their earnings, whereas the richest women workers who earn three times the average earnings contribute only 3 per cent. of their earnings. The poorest pay at more than twice the rate paid by the richest. I hope that all hon. Members are concerned by that.

A more worrying reason for initiating a review is the effect of the poll tax on the poverty trap, the overlap of taxation and benefits. The introduction of the reduced band of tax is totally wiped out for low-paid workers once national insurance contributions are added. The loss of fares and free school meals plays but one important part in the poverty trap into which low-paid workers find themselves increasingly falling. The Government should think carefully about undertaking a review to raise necessary funds for the social security budget.

As with other Ministers, the right hon. Gentleman performed the usual trick at the Dispatch Box when he was talking about the surplus of the fund. He told us that the surplus will disappear. When we table questions, we are told that the National Insurance Fund is in significant surplus. Will the Minister tell me, not necessarily tonight, given that at any one time the fund is in considerable surplus, for what purpose the surplus is to be used? Is it to be used by other Government Departmens to reduce public sector borrowing, or is it to be left to lie idle? Perhaps that is part of the answer why Ministers of both parties are loth to run the surplus of the fund at a lower level than the current level.

I promised to make a brief contribution. It has been almost a brief contribution. I rose to support this crucial measure to pay for benefits in the Welfare State.

Photo of Mr Reginald Prentice Mr Reginald Prentice , Daventry 10:42 pm, 13th December 1979

With permission, Mr. Deputy Speaker, I shall speak briefly again. I should like to comment on the two speeches that have been made. The hon. Member for Birkenhead (Mr. Field) lectured us about the change in attitude to poor people. I wish that we did not have to listen to these sanctimonious sermons from him and other hon. Members, unless they are backed up by evidence. A few weeks ago we saw the highest increase in pensions and other benefits in the history of the scheme. That increase is no more or less than would have been introduced by the Labour Party if it had won the election. Let us not have pensioneering on this point. I do not claim to have given a penny more than a Labour Government would have given, and Labour Members know that they would not have given a penny more than we have given.

Photo of Frank Field Frank Field , Birkenhead

I apologise to the House if I sounded sanctimonious. I shall try to do better next time. As, whenever I speak, the right hon. Gentleman normally spends his time laughing and giggling on the Front Bench, I am amazed that the points registered with him. The Government were committed to a certain increase in benefits by the legislation that was on the statute book. I have no objection to the Government claiming credit for that as they introduced it. However, they were legally bound to do so.

We now see a change of that commitment from the most favourable one of raising benefits in line with prices or earnings to a level in line with prices only We are now hearing from Government Back Bench Members the suggestion that even that commitment should be scrapped. That was what I meant by a change in attitude. I was not trying to derive a political advantage. It is a worrying trend. That was why I rose tonight, with pleasure, to support the order.

Photo of Mr Reginald Prentice Mr Reginald Prentice , Daventry

I understand that the point the hon. Gentleman makes has nothing to do with the order. The speech he made tonight is one which he would like to make if he is called in the debate next week. If he is called to speak and makes that point, or if other hon. Gentlemen make it, we shall answer it. We have a case to make which, I think, is overwhelming.

The hon. Member for Birmingham, Perry Bar (Mr. Rooker) asked whether we would review the whole financial basis of the national insurance scheme. The short answer is "No". We are operating the 1975 Act, which was agreed between, the main parties in the House after too many years of the swapping of rival pension schemes between the parties. The system deserves to stand the test of time. We should not be doing a service to present or future generations of pensioners by the root-and-branch change to which the hon. Member referred.

I was surprised when the hon. Gentleman referred to the need to raise the upper earnings limit and, indeed, to abolish it.

Photo of Mr Reginald Prentice Mr Reginald Prentice , Daventry

It is slightly curious that a Front Bench speech should contain a personal view, although that is not necessarily out of order. In a debate of this kind, one would expect to hear the views of the Opposition rather than a personal view being put from the Front Bench.

The basis of the 1975 Act was agreed between the parties. Its main architect in the then Labour Government was the late Brian O'Malley, who made a tremendous contribution to progress in this area. The scheme was agreed between the parties. It included the concept of an upper earnings limit. It should stand the test of time.

Photo of Dennis Canavan Dennis Canavan , Stirlingshire West

The right hon. Gentleman has changed parties.

Photo of Mr Reginald Prentice Mr Reginald Prentice , Daventry

I have not changed at all.

This evening I put forward an order within the terms of the 1975 Act. If it were not within those terms, I should not be in order in moving it in this fashion. We have not changed the Act. We have no proposals to do so. We are asking the House to approve a regulation made under the Act, just as 12 months ago the Labour Government moved a similar order to approve an uprating within the terms of the 1975 Act.

I was asked what use was made of the surplus. The short answer is that it is invested in Government and local government bonds. It earned for the funds, based on the last year for which figures are available, £442 million. That is an additional reason to the others that I gave earlier for having a substantial surplus, as it serves this purpose.

We again heard the cliche about the Government breaking promises. On the contrary, the November uprating was promised in the election. We promised to do it within the terms of the law, the 1975 Act, as it stood, to pay for it from the National Insurance Fund and to replenish the fund as required. That was the promise, which has been carried out.

I am becoming tired of the constant cliche from the Labour Benches about broken promises. If hon. Members are going to make that accusation, not only from the Opposition Benches but in the frequent and monotonous appearances of the hon. Member for Grimsby (Mr. Mitchell) in party political broadcasts, they should prove it. We are repeatedly told that promises have been broken, but we are never told what those promises are. The Opposition should be specific. If they have a case, they should attempt to make it. We will answer it. They should not indulge in generalised smears. These bring only further discredit on the Labour Party.

Photo of Mr Robert Mellish Mr Robert Mellish , Southwark Bermondsey

I can point to at least one issue. It has nothing to do with this debate, but the right hon. Gentleman has asked for proof. What about mortgage rises? That is a broken promise.

Photo of Mr Reginald Prentice Mr Reginald Prentice , Daventry

That is not true. The point does not arise in this debate. It is, nevertheless, not true that any specific promise was made on the figure of mortgages.

Photo of Mr Robert Mellish Mr Robert Mellish , Southwark Bermondsey

The right hon. Gentleman should read his party's manifesto.

Photo of Mr Reginald Prentice Mr Reginald Prentice , Daventry

I should like to return to the point that this is a form of taxation. I took the trouble to read the speech of my right hon. Friend the Secretary of State in the debate a year ago. He will be glad to know that I enjoyed reading it and agreed with everything he said. My right hon. Friend said that people nowadays regarded the deduction for national insurance purposes as a form of taxation. I am sure that this is the psychological truth. It was true a year ago. It is true today.

That does not mean that the order a year ago had to be opposed. Indeed, my right hon. Friend did not oppose it any more than the Opposition are opposing the order today. But we recognise that people see the gross and net figures on their pay packets and are concerned about the difference between the two. They do not always analyse the component parts in detail.

To say that these increases in contributions wipe out the tax concessions of the Budget is to get the figures totally wrong. A direct comparison cannot be made. The tax concessions in the Budget dated from April 1979 and the increases about which we are talking will date from April 1980. Even if one put the two together and took the most extreme case of someone earning £165 a week, there would still be a net gain, within a year, of between £136 and £185. For the vast majority of people, there would be a much bigger net gain, depending on their rate of pay.

I should like to comment on the timing of debates. I am sure that everyone agrees with what my right hon. Friend said a year ago—that it would be much more satisfactory if a way could be found of debating contribution changes and benefit changes at the same time and in the same context, taking the package as a whole. That objective has eluded successive Governments. It eludes us today for the practical reason that benefits are increased in November. There is no practical possibility of that being changed. The level of the increase is bound to be part of the Budget arithmetic and is normally announced during the Budget speech. On the other hand, contributions are changed at the beginning of the tax year because their collection is related to the tax system and a decision has to be made and announced now to give people proper notice.

These two sets of decisions, under Labour and Conservative Governments, have been made some months apart. There does not seem to be any practical way of meeting the dilemma. If there were, we would try to achieve it.

The hon. Gentleman said that the estimates of the Government Actuary could be wrong. The Government Actuary has to make a number of assumptions. They are assumptions given to him by the Government. In the past, many of them have turned out wrong. The most common error has occurred in the likely increase in earnings. We have gone through a period of inflation in which, in more years than not, earnings have increased to a greater extent than had been assumed. The prospect for earnings in 1980–81 has to be seen alongside the prospect for unemployment.

The assumption of an unemployment level of 1·6 million may be too high or too low, but if we are to stand a reasonable chance of its being lower the most important requirement is that wage and salary settlements over the next few months should be within reasonable limits. The experience of recent years shows that inflation is the mother and father of unemployment.

If Labour Members wish to serve the community and the pensioners, they will argue for restraint and good sense in wage bargaining in the coming months.

Question put and agreed to.

Resolved,

That the draft Social Security (Contributions, Re-rating) Order 1979, which was laid before this House on 22nd November, be approved.