I beg to move, That the Bill be now read a Second time.
This short Bill has two purposes. First, it allows us to deliver the package of personal tax reforms announced in this year's Budget. By allowing the upper earnings limit to be aligned with the point at which higher rate tax starts to be paid, the Bill makes it possible to simplify the UK's tax and national insurance system significantly. From April 2009, there will be just two main rates of income tax. They will apply to the same bands of income as the two rates of national insurance contributions, thus creating one of the simplest personal tax structures of any developed country. Income tax will be just 20 per cent. for those earning less than £43,155 a year.
Secondly, the proposals in the Bill are central to the Government's commitment to provide a solid and simpler state pension. By bringing forward the introduction of the upper accruals point, the Bill returns the timetable for the removal of the earnings-related state second pension to that recommended by the Pensions Commission. That will mean that by about 2030, the very complex earnings-related structure of the state second pension will be withdrawn, leaving behind a flat rate scheme that will be simple to administer and simple to understand by both contributors and pensioners. I should like to explain each of those purposes in a little more detail, starting with the changes to the upper earnings limit.
As the House will know, the changes are part of a package of reforms to the personal tax system announced in this year's Budget by my right hon. Friend the Prime Minister. That package is not for debate today, as the majority of the changes will be legislated for in next year's Finance Bill, to which I look forward, albeit with some trepidation. The reforms will take 600,000 pensioners out of income tax altogether, and will help to lift 200,000 children out of poverty. A central part of the package is the alignment of the national insurance upper earnings limit—that is, the point at which national insurance contributions become payable at 1 per cent., rather than 11 per cent.—with the level at which higher rate income tax becomes payable. The same will happen to the upper profits limit, which is the equivalent point for the self-employed—the point at which national insurance contributions become payable at 1 per cent., rather than 8 per cent.
Moving both those limits will be a two-stage process. In the 2008-09 tax year, the upper earnings limit will be increased to £770 a week. In 2009-10, it will increase again, to align with the level at which higher rate income tax becomes payable. The second stage of that increase requires a change to primary legislation, and that change will be made by the Bill. At present, the maximum upper earnings limit is restricted to seven and a half times the primary threshold—the point at which national insurance contributions start to be paid. To align the two systems from 2009-10, that restriction needs to be removed, and the Bill makes that possible. It means that by 2009, the two main rates of income tax will apply to the same bands of income as the two rates of national insurance contributions, creating one of the simplest personal tax structures of any developed country.
The House will want to know that there will be effective parliamentary scrutiny of the upper earnings limit once the restriction on it being more than seven and a half times the primary threshold is removed. I am pleased to be able to tell the House that the annual regulations setting the upper earnings limit will be subject to the affirmative procedure, so Members of both Houses will have the chance to debate any increase.
I should like to deal straight away with the claims that the increase to the upper earnings limit represents a stealth tax rise. As we have made clear, the measure should not be seen in isolation, but as part of a package of reforms that will leave four out of five households better or no worse off, and that will take 600,000 pensioners out of income tax and 200,000 children out of poverty.
I now turn to the Bill's second purpose.
There will be some losers as a result of the personal tax package, but the overall net effect of the changes to the Exchequer will be a cost of about £2.2 billion, so the idea that there will be a greater tax take overall simply does not stand up to real, detailed scrutiny. However, I may not have the answers to technical questions such as that asked by the right hon. Gentleman at my fingertips. I give way to Mr. Heald.
I am grateful to the right hon. Lady for giving way. Is she seriously saying that £1.5 billion does not ring a bell? That is the amount that the measures will bring in to the Treasury in 2009-10—an extra £1.5 billion. It is laughable to suggest that we can consider the measure in 2007 prices, and then say that it will cost the Treasury £2.2 billion.
The hon. Gentleman is right: increasing the upper earnings limit for national insurance by £75 a week above indexation from April 2008 raises £1.5 billion, when one adds in the fact that, from April 2009, it will be fully aligned with the higher rate threshold. My point is that taken overall, the simplification package is a serious, significant step forward. In particular, it allows us to target our assistance on people on the lowest incomes, and on households in the greatest need of support.
I shall take that in the spirit in which it was intended.
The Minister said at the beginning that the Bill simplifies the system, and clearly it does. We have aligned rates and thresholds, but national insurance for employees and income tax are still very different taxes. One is annual, one is weekly, they have different tax bases, and employers often say that they do not see why they have to levy two taxes on their employees. They would prefer to levy one. Do the Government have any plans to consider whether the two taxes should be merged in the name of simplification?
We do not have any plans to make that change, but we can of course debate the point. Income tax and national insurance contributions serve two separate purposes. We base our assessment of an individual's entitlement to benefits on national insurance contributions. If we were to merge the two, we would have to reinvent systems for making that assessment, and I would have to be persuaded that it would be a benefit all round, and that it would not create further complexity of the sort that we are trying to remove.
I return to matter of the state second pension and the Bill's second purpose. At the time of the pre-Budget report in October, my right hon. Friend the Chancellor announced that the introduction of the upper accruals point would be brought forward to
However, the upper accruals point needs to be introduced earlier in order to ensure that the state second pension reforms can be introduced as intended, with a flat rate state second pension from around 2030. This is the result of the above-inflation increases in the upper earnings limit that we have just been discussing, which would otherwise have a knock-on effect and would have delayed the timetable for delivery of a flat rate state second pension, because the upper accruals point would have been at a higher point in 2012 than was originally expected.
The above-inflation increase in the upper earnings limit would also have meant higher earners potentially making anomalous gains in their pensions, over and above the White Paper pension reforms, because the state second pension accrues on the portion of earnings between the lower and upper earnings limit—a band that will become wider.
When the right hon. Lady talks about an anomalous benefit, does she not mean that when people paid their national insurance contributions, they would get something in return, whereas under the arrangement that she is putting in place, between the accruals point and the upper earnings limit, they will get nothing for their money?
There was a high degree of consensus about the pensions reforms that were introduced as a result of the pensions White Paper last year. Part of that was a consensus about a flat rate state second pension. The change that we are making today is to get us back on track to achieve that by 2030.
My point is that by bringing the accruals point forward three years to 2009, the Chancellor is taking the opportunity to trouser some money—about £2 billion. That is the truth of it, is it not?
That statement would be acceptable if the Government were using the extra £2 billion that will be raised over the next few years to introduce the earnings-related pension link much sooner. Why are they not doing that, rather than trousering the extra £2 billion?
It is true that we are bringing forward the state second pension upper accruals point, which raises £0.3 billion from higher rate taxpayer contracted-out rebates. However, by raising the personal allowances for pensioners by £1,180, we are taking the allowances by 2011 to around £9,770 for anyone over 65, and with a further increase, to £10,000 for anyone over 75. That costs the Exchequer £0.9 billion. That is why I say that I do not recognise the description offered by either hon. Gentleman.
The increases which I have described as the anomalous gains in their pensions that higher earners might have made were not the intention of the personal tax package that was debated at length in this place and the other place earlier this year, and they would have been counter to our objectives of concentrating resources on providing a more generous flat rate state pension for all.
A further effect would have been a larger than expected increase in the band of earnings on which contracted-out rebates are paid. This is because the rebate reflects the state second pension forgone, and is again paid on earnings between the lower and upper earnings limits. Again, this was never intended to be the effect of the personal tax package.
By introducing the upper accruals point in 2009 rather than 2012, the Bill prevents most of those anomalous gains, as I tried to explain in our exchanges, as well as returning the timetable for the removal of the earnings-related state second pension to that recommended by the Pensions Commission. The new point—the upper accruals point—will be introduced at the level of the upper earnings limit in 2008-09, which is expected, as I said, to be about £770 per week.
From that date, the upper accruals point will replace the upper earnings limit as the threshold for the calculation of both state second pension and contracted-out rebates. It is proposed that it will be frozen in cash terms at its introductory level, so that the band of earnings on which the current earnings-related state second pension and contracted-out rebates are based will reduce year on year.
I am grateful to the Minister for giving way again. Can she remind the House how much worse off somebody will be when they get to their state second pension if they are earning a sum above the current upper earnings limit? They will lose their earnings-related element and go over to the flat rate, as I understand the scheme.
My right hon. Friend is being extremely patient. Is not the political import of the total package that the Government propose a certain rebalancing, so that the prosperous in our society may pay a little more and the less prosperous may obtain a little more? If that be the case, does she share my surprise at some of the comments from both main Opposition parties about trousering an extra £2 billion, when both parties, on paper, are in favour of lessening the inequalities in our society—as the Government rightly are as well?
I agree with my hon. Friend's point and thank him for making it. It is true that the package of changes results in some people paying slightly more income tax, but overall the changes that we have put in place since 1997 mean that households are very much better off than they were previously, as a result of all the reforms that we have introduced.
May I say to Mr. Redwood that no one loses out because of the withdrawal of the earnings-related element of state second pension or because of the new cap on state second pension or national insurance contributions rebate? The introduction of the upper accruals point would affect the state second pension entitlement or contracted-out rebates only for high earners and their employers—those earning above the upper earnings limit of about £35,000 a year. The right hon. Gentleman's point is taken. However, as I have said, in the context of the whole range of changes that we have made, higher earners will still—even in the short term—receive a slightly higher state second pension entitlement or contracted-out rebate compared with the intended pensions White Paper outcome, as they will still receive a small gain in state second pension or contracted-out rebate between 2008 and 2012. There are a number of swings and balances that in the end lead to benefits rather than negatives.
Right. Well, I want to make it clear that the HMRC impact assessment refers to the 2.1 million people with earnings above the upper earnings limit who have contracted out. The assessment states:
"These individuals will either see a reduction in their take home pay (as they will get a lower rebate on their NICs than would otherwise have been the case) or a reduction in the money that goes into their pension scheme compared to not introducing the UAP until 2012/13."
Does the Financial Secretary agree?
We will be able to discuss the detail in Committee. Members from Opposition parties, and perhaps some on the Government Benches, will want to probe a number of points in detail. Although we are simplifying things in carrying out this change, there are complexities around it and interplaying factors in respect of how individuals are affected— [Interruption.] I am trying to say that I accept that there are criticisms of the package that we have put forward. However, when it is taken in the round and in the context of the reforms that we have introduced over a long period, few will be absolute losers as a result of the overall package.
The changes will mean that from
In conclusion, the Bill is important and necessary. It allows us to implement a personal tax package that reduces child poverty, in which I am particularly interested. I am proud of that. It also takes pensioners out of income tax and creates one of the simplest personal tax structures of any developed country. Furthermore, it allows us to return to the timetable for the introduction of a simple flat rate state second pension scheme. I commend it to the House.
It is a pleasure to speak on this Bill, although it will not catch the headlines as some do. Today there have been three oral statements and 24 written statements—we are getting close to the recess, and it seems to be Government "put out the trash" time. The Bill may not even lead the debates on specifically Treasury issues; we have had the Poynter review, the security breach in Coventry and the row between the Treasury and the Bank of England on Northern Rock.
However, we are debating the last legislative business before the end of the year—and I am delighted that we are. Although the Bill has been described as essentially technical, we can see from its contents and the story of how we got here a number of the attributes of the Government, and they go a long way in explaining some of the difficulties that the Government face.
The first difficulty is that the Bill is, for all its technicalities, about a tax increase—two of them, in fact. As we have heard, the first increase relates to the national insurance contribution changes announced in the 2007 Budget. Hon. Members will recall it well: the then Chancellor announced with a flourish the 2p cut in income tax, and perhaps he achieved a tactical success. However, it soon emerged that he had made a strategic error, as the Budget became known as being about a tax con, not a tax cut. The national insurance change was part of that package of measures. As we listened to the then Chancellor on
"I will align the income tax system with the national insurance system, with its ceiling set at the same threshold of £43,000".—[ Hansard, 21 March 2007; Vol. 458, c. 826.]
I do not know whether it was clear to other Members—it was not entirely clear to me—but he had just announced a tax increase of £1.5 billion a year.
The argument for the alignment is that it promotes simplicity, and it is good to argue for simplicity; the Conservatives have been doing so for some time. We approve of simplicity. However, by aligning national insurance with income tax in that way, the Government have essentially imposed yet another stealth tax. The Chancellor has argued for simplicity in the reform of capital gains tax, although he does not do so as much these days. When the Government talk about simplifying the tax system, taxpayers need to start checking the spoons.
The second tax rise is the reform of S2P, or the state second pension. I shall return to the details a little later, but as my hon. Friend Mr. Heald pointed out, contributions that were once made towards earnings-related benefits now contribute towards nothing—they are just contributions to the Exchequer. The Exchequer will raise an additional £500,000 a year on rebates to opted-out schemes. Earlier, I quoted from the HMRC impact assessment. It said that 2.1 million people with income above the upper earnings limit are contracted out of S2P and that:
"These individuals will either see a reduction in their take home pay (as they will get a lower rebate on their NICs than would otherwise have been the case) or a reduction of the money that goes into their pension scheme".
Do I take it from what the hon. Gentleman has said that the consensus on pension reform is now broken and that the Tory Front Bench position no longer supports having a flat payment for the state second pension by 2030?
Later in my speech I shall address in greater detail the particular issue with pensions, but I should say that we support flat-rating as part of a package. The point is that this change is breaking that package up. That is one of our many difficulties with the Bill.
I am grateful to the hon. Gentleman for showing his usual generosity and politeness in giving way. Is the Conservative party in favour of the redistribution of wealth to address some of the inequalities in our society, or is it not?
We believe in addressing poverty.
Let me address the issue that we face. The distinction between the two elements and the breaking up of the package are a consequence, it would appear, of an enormous oversight that goes back to the Government's changes to national insurance contributions announced in the March Budget. The Government's position is that as a consequence it is necessary to change S2P as proposed in the Bill in order to address the matters mentioned by the Financial Secretary.
That prompts the question why the proposals were not identified in March 2007. The Pensions Policy Institute identified the issue in its briefing published shortly afterwards, as well as the concern that the approach appeared to be inconsistent with what the Government were attempting to do. My hon. Friend the shadow Chief Secretary to the Treasury raised the matter some months ago, long before October, in a number of parliamentary questions.
The apparent oversight and the fact that the Treasury did not spot the problem is striking because of the fact that when the revenue impact of the Budget announcements was calculated, which the Treasury would have had to do as part of the process of producing the Red Book, it presumably should have taken into account the additional liability for additional earnings-related benefits and, in particular, the additional rebates for those who have opted out. I assume that that was done.
If I am wrong, I hope that Ministers will correct me in the course of the debate. If it was not done, the figures in the Red Book are clearly inaccurate. We have had no indication from the Government that that is the case, so I assume that the figures in the Red Book are accurate, and that they took into account the fact that additional rebates would have to be paid over the years ahead. However, once it was spotted somewhere in the Treasury that that was an issue, it would appear that nothing was done about it.
Why was no announcement made in March? As is so often the case with the Government, we are left to ask whether there was some kind of concealment or whether the problem was incompetence. I do not take the cynical view—certainly not in this case. However, some hold the view that the then Chancellor was on the brink of becoming Prime Minister and did not want any further tax increases, particularly in connection with pensions, where his reputation was perhaps not all that it might have been; he therefore glossed over the issue and left it for his successor. I do not hold that view. I think that the problem was just not spotted. Perhaps Ministers could confirm that it was not spotted.
I believe that the problem was not spotted, particularly because of the suspicion that there was a breakdown of communication between the Treasury and the Department for Work and Pensions at the time. Even at the best of times, the then Chancellor—now Prime Minister—has not been renowned for his openness with other Departments. He is not necessarily the easiest person to work with. After all, the then Secretary of State for Work and Pensions, who is now the Secretary of State for Business, Enterprise and Regulatory Reform, was the Cabinet member who was widely believed to have said that the then Chancellor would make an "awful Prime Minister"—I spare the House the other adjective used.
I hesitate to bring the hon. Gentleman back to the Bill, but may I clarify? His position is that there are two elements in the Bill, the first of which is a national insurance increase, which he opposes, and the second of which is a cut in rebates and state second pension entitlements, which he opposes. Will he therefore vote against the Bill today?
As my hon. Friend says, we cannot go home early. I am sorry to disappoint hon. Members.
This is not just to do with incompetence. It would appear that the problem was incompetence because of the secretive and distrustful way of working of the former Chancellor, who failed to consult and isolated his internal opponents.
To reinforce my hon. Friend's point that this is a tax increase and not a pension contribution, will he confirm that the money will not only be collected before the pensions are paid out but will be spent on general Government expenditure and not saved for future pensioners?
I am grateful to my right hon. Friend, as he brings me to the issue of pensions. He is absolutely right. The Government should have been sensitive on the subject of pensions. Another of the Government's attributes is that they have inflicted great unfairness on those saving for pensions. Of course, I refer to the £5 billion tax raid on pension funds. I know that an announcement on occupational pensions was made today, and I am grateful for it, but the Government have been dragged kicking and screaming to make those concessions. I congratulate the campaigners who have achieved that.
The rebates provided for those who opt out of the state second pension are less than the value of those recommended by the Government Actuary's Department. Fairness on the subject of pensions is not something of which the Government can be proud. There is unfairness here, too. The essential point is that the S2P is a contributory system but that people will make additional contributions without receiving additional benefits.
May I finish my point? The Government argue—I suspect that this might be the point that the Exchequer Secretary was about to make—that flat-rating was part of the package under the pensions legislation. Absolutely. However, it was part of a package. It is being brought in now when we may not see the rest of the package until 2012 at the earliest, and possibly 2015. We have to remember that that will all be dependent on the economic conditions at the time and on whether the fiscal circumstances will allow it. It is a long way off, and I am certainly not going to make any predictions about the economic conditions, but it is perfectly possible that in 2009 these proposals will come in and that the upper earnings limit and upper accruals limit link will be broken, while the rest of the package is delayed for six years, or even more.
Will the hon. Gentleman answer the question that I asked before? The changes restore the original nature of the pensions package because of the changes to the upper earnings limit. Is he telling the House that the cross-party consensus on flat-rating the state second pension by 2030 is now broken because his party has decided that it no longer supports it?
We support the principle of flat-rating as part of a package. The Government broke up that package because of the incompetence of introducing a measure in March 2007 when they had not worked out the pensions contributions. The Government got themselves into this mess. The only way in which they can resolve it is by unfairly levying national insurance contributions on earners who will not receive any benefits as a consequence. Earnings-related contributions will not receive earnings-related dividends. The Government are imposing that unfairness on 2.1 million people because they failed to understand what they were doing in March 2007. They may say that it was always the original intention to make this move, but it was as part of a package; and now we have to take it on trust that the Government will actually deliver on these measures, because, rather than doing everything all at once, the Government have got themselves in a muddle.
If economic conditions do not permit the implementation of the Pensions Act, will these provisions be reversed? There would be a logic to that. Ministers say that this is all part of a package being implemented over a period of time, but I doubt that that will happen. That is a good reason for being sceptical about the proposals, and for not giving them our support.
If the Bill receives its Second Reading—which is quite likely, given the mathematics of the House—it will go into Committee. If that were to happen, and as it is an enabling Bill, would the Conservatives support it if it were amended to give it a commencement date of 2012 at the earliest, rather than of 2009, which has been announced verbally but which I do not think is in the Bill?
We would look carefully at such a proposal, but we have other concerns with the Bill. We shall certainly want to examine a number of amendments in Committee. The hon. Gentleman has raised an interesting point, and perhaps we shall have an opportunity to examine the full implications of it if he serves on the Committee. From my previous experience of serving with him, I very much hope that he will.
A further attribute of the Bill is that it demonstrates that the role of Parliament is not being taken quite as seriously as it might be. For all the talk about strengthening Parliament's position that we heard from the new Prime Minister when he first arrived in his new post, we have seen little action to support it. The Bill will weaken Parliament's position. At present, the upper earnings limit must be no more than seven and a half times the level of the primary threshold. Clause 1 abolishes that ratio and provides for the upper earnings limit for 2009-10 and beyond to be set by means of secondary legislation. The Financial Secretary said that that would be done by the affirmative resolution procedure, but we could nevertheless be faced with a situation in which potentially substantial tax increases could be achieved by Committee. For example, what would stop a Government substantially increasing the upper earnings limit by secondary legislation? It might interest Rob Marris to learn that, as far as I can see, they could increase the higher rate band of income tax—if we take income tax and national insurance together—by 11 per cent. through secondary legislation. That is not something that the Conservatives would welcome.
Although the Bill proposes to abolish the ratio, we would certainly want to examine in Committee whether there was any good reason why a new ratio could not be inserted, and why the Government should have the freedom that they are proposing for themselves to enable any changes to the upper earnings limit to be performed by secondary legislation. That seems to represent a weakening of Parliament at a time when the Government are professing to be in favour of strengthening it.
Here we have a Bill that will increase taxes, and do so stealthily. This story demonstrates incompetence and a failure of internal communications. It demonstrates that those saving for pensions will not be rewarded, and it weakens Parliament. Given that it is nearly Christmas, perhaps I may summarise the Bill as follows, as we hear: the same old things, more stalling words, a squeeze on pensions, tax double charge and a partial cut in S2P. [ Laughter. ] Well, it is Christmas, and if I can put a smile on the face of both the Ministers, I think I have achieved something this afternoon. However, we will oppose the Bill, because it is flawed, it will introduce yet another stealth tax, and it does nothing for the long-term good of Britain's pensions.
As the Financial Secretary said, the Bill has two purposes, and it is part of a package introduced in March by the then Chancellor of the Exchequer, now the Prime Minister. I accept that, in dealing with the Bill, we have to take the whole package into consideration. I also understand that there will be many proposals in next year's Finance Bill that we shall be able to support. In particular, we would support proposals for any system that simplifies the tax and national insurance systems.
I am grateful to the hon. Gentleman for giving way so early in his speech. I would like to probe him a little on what he has just said. This is not a package, because the Government are not prepared to offer the pensions part of the package at all, probably because it is not affordable. The Prime Minister knows that. Is not the hon. Gentleman being conned, because we are getting only the tax side of the equation?
As the right hon. Gentleman said, he has intervened on me right at the beginning of my speech. I intend to talk about the second part of the Bill and, in particular, the proposals to introduce the upper accruals limit. I think that he will find, when I get to that part of my speech, that there are points of agreement between us.
I welcome the hon. Gentleman's comment about simplifying the national insurance system. Would it not be even simpler to introduce a standard percentage all the way up the income scale? That would generate a lot more income for the Treasury, which could then be given to pensioners, the health service or whatever.
It is easy to say that, but I am not sure whether having such a straightforward system right at the beginning would work. My understanding of the principle of the contributory system is that it has always been graduated up to a point. We support the Bill's attempt to align the upper earnings limit with the national insurance contribution. The difficulty that I have, however, is that, rather than saying that this is about equalising and, yes, raising more income to be used for other purposes—which we find fair and reasonable—the Government are dressing the measure up as a simplification. It is a simplification, but it also means that some high and middle income earners will be paying more money. That is fair and reasonable, and we do not object to it, but I wish that the Government would just be straight with us and admit that that is what will happen. That was certainly not what the Chancellor said in his statement; he did not admit that that was one of the purposes of the Bill.
The hon. Gentleman mentioned middle and higher income earners. The Bill will not do very much to higher earners, but it will do a fair amount to middle income earners. I welcome the Bill, but would it not be better to have a go at the higher earners in a big way as well?
The hon. Gentleman will obviously support some of our tax proposals, and I look forward to seeing him do so in due course.
The Bill will raise £1.5 billion, which is not an insignificant sum. When taken in conjunction with the tax proposals in next year's Finance Bill, this will mean that some people will get a maximum gain of £325 a year, and that there will be a maximum loss of £223. We are not talking about huge sums of money, but, as the Financial Secretary said, that money will go towards increasing the amount of disregard for pensioners and taking more children out of poverty. My view, however, is that the Government are not going to meet their target for eliminating child poverty. The proposals so far have been put forward in a piecemeal way. Whether we are talking about this Bill or the Child Maintenance and Other Payments Bill, it means hundreds of thousands of children being taken out of poverty, yet there are more than 2 million affected by child poverty, which the Government should be tackling if they want to meet their target of halving child poverty by 2010. Notwithstanding that difficulty, we accept the point of the first part of the Bill, which we believe is sensible in setting out what it is trying to do, transparent and produces a clear link. As the previous Chancellor said, it provides two thresholds and two points of payment, which is acceptable.
We have more problems with the second part of the Bill, particularly the proposals to introduce the upper accruals point. We do not say—and nor am I about to say—that we wholly disagree with consensus on pensions. We believe that it is very important, especially for longer-term issues, to achieve a broad consensus about the direction of pensions policy. People need certainty; they need to be able to plan. We accept the principle of having the state second pension as a flat rate pension and we understand why the Government are making the change to introduce the upper accruals point at this point—in order to keep that alignment. That change nevertheless raises £290 million extra a year rising to £450 million a year—an extra tax take. Earlier, I asked the Financial Secretary what that money would be used for, because my understanding from reading the papers was that the proposals were broadly cost-neutral when taken together.
We are disappointed with the proposed change because, although we are moving forward the date for the introduction of the upper accruals point, we are doing nothing to tackle pensioner poverty. The difference between the Liberal Democrats and Labour has been the Labour Government's insistence on using pension credit as a means of tackling pensioner poverty. If we compare child tax credit with pension credit, we find that the former is claimed almost universally by those who are eligible for it. It is a flat rate payment; it is not means-tested. We have had a long-standing aim—we want it to be met earlier than the Government do—initially to restore the link between earnings and pensions and secondly to introduce a citizen's pension. We believe that the Government are taking far too long to achieve that and that far too many existing pensioners are in poverty. We would have liked the additional sums of between £290 million and £450 million to be used precisely to achieve that. In 1950, the pension was worth 18.4 per cent. of the average wage. Today, the pension is worth only 15.9 per cent., which means that today's pensioners who rely solely on the state pension—and we should recall that up to 40 per cent. of those entitled to pension credit do not claim it—are worse off.
The hon. Gentleman mentions the proportion of average earnings received by pensioners, but does he not recall that at the peak time when the link was in place, the figure reached 25 per cent. of earnings—a much bigger proportion. Does he not agree that we should aim to restore the pension at least to that figure?
I totally agree. As I explained, although the Government are committed to the proposal that I described, our difficulty is that it will not happen until 2012 at the earliest and it could be as late as 2015. While the Government are moving the upper earnings accrual point to keep the state second pension in tune, we would rather the sums raised were used to begin to restore the value of the state second pension.
Is not the whole point of this measure that those earning between £37,000 and £43,000 will have to pay national insurance contributions at 11 per cent. of that slice of income, yet get nothing for it?
I think that the hon. Gentleman is forgetting that this is part of a package. It is not my job to defend the Government, but I have quoted the figures, which range from a top gain of £325 a year to a maximum loss of £223 a year. Yes, there is a loss, but our argument—very different from that of the Conservative party—is that we would rather have seen the savings to the Exchequer of between £300 million and £400 million being used to restore the link between the state pension and average earnings. We want that link restored immediately, which we believe would cost something in the order of £450 million to £500 million. The sums involved are therefore roughly comparable and we believe that it is an important point of principle to take serious measures to tackle pensioner poverty.
The hon. Gentleman has been saying that pensioner poverty is worse and that pensioners are worse off then they used to be, but will he admit that the Government have spent £11 billion a year more in real terms than in 1997, with the greatest help focused on the poorest pensioners? In fact, millions of pensioners have been lifted out of poverty by the huge amounts of extra money that the Government have spent on them.
I would make two observations. First, we do not believe and have never believed that pension credit, which is a means-tested way of paying pensioners, is the best way of tackling pensioner poverty. I return to my earlier point that 40 per cent. of eligible pensioners do not claim it. It is also a fact that even if we grant all the Government's proposals, 50 per cent. of all pensioners will still be means-tested in 2030. I have already spoken about the importance of having a pensions consensus and I believe that my party and the Government have much more in common, but the Government need to move further towards accepting the principle that people are entitled to a certain level of pension regardless of the contributions that they have paid or the amount that they have earned. We need to get all pensioners up to a level where they can live with dignity without having to undergo what they consider to be the indignity of putting their income and all their savings through tests.
Secondly, we also know that pension credit is hugely expensive to administer in comparison with child tax credit, which costs virtually nothing.
In her intervention, the Exchequer Secretary quoted the figure of £11 billion, but as we all know, both economies and numbers of pensioners grow. Will my hon. Friend ask her to confirm that the share of national income going to each pensioner in Great Britain has fallen under Labour?
The hon. Gentleman will be aware that in the past 10 years, the average pensioner's income—I appreciate that he is focusing on one end of the scale—has increased by 37 per cent. in real terms, whereas the average wage earner's income has increased by 18 per cent. in real terms. As for the pension as a proportion of the average national wage—I think he referred to a figure of 18 per cent. in 1950 and 15.9 per cent. now—will he say what the percentage is if one includes pension credit and the winter fuel allowance? That would be a more accurate comparison.
The hon. Gentleman knows full well that 40 per cent. of all eligible pensioners do not claim pension credit, and it is costly to administer, costing far more than child tax credit. The pension consensus should therefore be to give all pensioners, regardless of who they are, what they have earned in the past or what contributions they have made—thereby including many women who take time out to have a family—a decent citizen's pension. [Interruption.] Well, the pension credit does not work. It is not being claimed. The test of the success of any benefit must be whether it is understood and claimed. Whether the Government like it or not, the reality is that pension credit is not understood or claimed as it should be.
While we have no qualms about accepting the first part of the Bill, and we applaud its simplification and redistributive elements, the second part of the Bill is inadequate, does not go far enough and does not address pensioner poverty. It is another example of a tax grab without a benefit. We are not prepared to support a Bill that does not deal with the fundamental issues, which we shall consider later in relation to the Pensions Bill, of ensuring that all pensioners have a decent and fair pension. As we have made clear, we are not against the pensions consensus, but we will not support the technical proposals in this Bill if there is a vote.
May I start in a Christmassy and benevolent way by paying tribute to the civil servants in the National Insurance Contributions Office who do such scrupulous and careful work maintaining complex records, especially those involved in the difficult work concerning pensions? The work concerning the winding-up of pension schemes needs to be particularly carefully dealt with.
When we consider pensioner poverty, it is important, as Paul Rowen said, to look at the reality on the ground. As he mentioned, a lot of people entitled to pension credit do not claim it. When pension credit was introduced, Members in all parts of the House were concerned about that issue. Take-up has never been satisfactorily dealt with, and that issue should be continually raised. The Government have signally failed to tackle an important issue for some of our poorest pensioners.
The Bill is part of the story of broken promises that is the history of the state second pension. Anyone who bought into the vision of Barbara Castle and contracted into the state earnings-related pension scheme would feel that they had been cheated over the years. They have seen reduction after reduction in their legitimate expectations of benefits: the loss of half the widow's benefit; the loss of the 20 best years rule; and now the fact that above a certain level of income, they will pay national insurance contributions and get absolutely nothing for it.
I would be the first to agree that it was possible to form a consensus a couple of years ago about the way forward with pensions. There was the idea of having a more solid block of flat rate state pension at the bottom, better inducements to individuals to save, and some sort of personal account, which is undoubtedly needed to encourage low and medium earners to save. Far too many people—7 million or so—do not save enough for the sort of pension that they want in retirement.
We would all accept that there is a case for a simpler system that is more robust and has trust in it. That is why the Bill is a disappointment. Those in the pensions world are beginning to use terms such as "sleight of hand" and "conjuring" to describe the way in which the Government behave. The sort of dressed-up proposal in the Bill, which is really about trousering money for the Treasury, is not the way forward, and does not respect the agreement reached in all parts of the House.
Before the hon. Gentleman moves too far away from the question of SERPS and represents history in a format that I do not recognise at all, may I tell him that my father was a blue-collar engineer for many years and still regards his investment in SERPS in the early '70s and throughout his working life as one of the best that he made in his entire life? He would be the first to take issue with the hon. Gentleman, as he regards the mis-selling to persuade people to come out of that scheme in the '80s and '90s as one of the worst pieces of financial advice that people of his generation ever received.
Of course, we can trade histories. All that I would say to the right hon. Lady is that the original SERPS was presented as the way forward, and I agree that many people benefited from it, but she must accept, as it is what her Bill is saying, that it has ultimately proved unaffordable, and that promises have consistently been broken to individuals who put their trust in the scheme. I think that Barbara Castle would have had to be dragged kicking and screaming to the House to make the proposal that the Government are now making, because she believed in her scheme and her vision. I did not support it at the time, because I felt that it was unaffordable, but it is right to note that the Bill is an admission by the Government that the Barbara Castle scheme was unaffordable and not the way forward. It is typical of the Government that, having formed a consensus with other parties in the House, they should want to attempt this sleight of hand to trouser the money as I have described, and to put forward a Bill that is about something for the Chancellor and nothing for the contributor.
As the Financial Secretary has said, the Chancellor describes the Bill as part of a larger simplification and tax reduction package. Of course, they have to say that, but many will think that the package was designed to take £1.5 billion extra by 2009-10, and that the element of "conjuring" was to suggest that the package was a tax-cutting measure at all. What the Prime Minister relied on was the continuing public support for the contributory principle. As the authors of the leading text on the matter, Ogus and Barendt—the fourth edition, for the benefit of Steve Webb who takes a great interest in the book—said recently:
"People are prepared to subscribe more by way of contributions, which they see as offering returns in the form of personal and family security, than they would be willing to pay by taxation, which might be diverted to a wide variety of uses."
It is also clear that the public know very little about national insurance and are not very questioning about it. Tolley's tax notes make the point that
"Nearly a century ago, David Lloyd George stood before Parliament and introduced...the novel concept of National Insurance...as a 'temporary expedient'....It is a curious fact that despite the size and permanence of this levy, very many people know little about it".
Of course, the people who do know about national insurance are Chancellors of the Exchequer. It allows them to talk about a low standard rate of income tax, while conveniently forgetting the very large tranche of money taken in the form of national insurance burdens. That follows the Colbertian maxim—which I thought worth mentioning at this time of year—that plucking as much as you can from a goose without its squawking is the key principle of tax collection.
The current Prime Minister has long had his eye on removing some extra money through the national insurance system. In the 1992 Labour manifesto it was suggested that the party should remove the upper earnings limit without allowing contributions above it to confer any additional benefit entitlement. On that occasion the public saw through it completely, which was one of the reasons why Labour lost the election so badly. The public did not want to undermine the contributory principle in that way. Ever since then, however, the Prime Minister has had on his mind taking more money from national insurance contributions. It was very noticeable that at the time of the 2001 general election, when asked to do so, Labour refused to rule out taking more money in national insurance contributions.
Simplification of taxes is to be welcomed, but not as an excuse for a stealth tax. My right hon. Friend Mr. Redwood, who was present earlier, has recently revealed the increased complexity of the tax and benefits system under the current Prime Minister. Simplification is indeed welcome, but it must be acknowledged that in this instance it is being used to mask a tax rise.
The original proposal was to introduce the new upper accrual point in 2012 at the same time as the start of the uprating of the basic state pension in line with earnings. I can tell the Financial Secretary that that was the deal. The end result of an early introduction of the upper accrual point in April 2009 is that we shall pay more national insurance up to the higher earnings limit, but receive none of the benefits that that should entail. As Taxation magazine has remarked,
"I don't know about you, but that looks like a straightforward tax increase to me."
It is also important to consider the effect on contracted-out occupational pension schemes. It has been estimated that the amount of national insurance rebate being paid into such schemes will be reduced by about £2 billion between 2009 and 2014. The National Association of Pension Funds has observed that that could
"increase the cost to employers offering a Defined Benefit salary-related pension."
Given that the Government have already undermined occupational pension schemes by carrying out a £5 billion-a-year pension tax raid in ending dividend tax relief, reducing protection for members by twice cutting the minimum funding requirement, and failing—until today—to accept our proposals for a pensions lifeboat for those who have lost their pensions, thus putting those people through misery, is it really right that they should now be taking further measures that will cut confidence in occupational pensions by increasing the cost to employers? There is a serious question to be asked about whether the Government understand pensions at all.
It is widely accepted that as many as 7 million people are not saving enough. Occupational pensions have been the bedrock of good pensioner provision in retirement. Nothing should be done to push employers into closing their schemes, and they should not be offered inducements to do so. The aim must be for more people to save more, and the best way of ensuring that that happens is to encourage employers to operate good work-based pension arrangements and open them to all employees.
On another day, we shall have a chance to debate personal accounts. I hope that they will be developed with employer contributions that do not involve employers who already provide a good pension scheme. We do not want workplace schemes with good benefits to be closed, and members to move down the scale into personal accounts. There is a real risk of diversion.
Let me end on a seasonal note. At this time of year I think it fair to say that with this Bill—taking tax through the back door and damaging occupational pension schemes—the Prime Minister has moved from being Mr. Bean to being Mr. Scrooge, and all I would say to him is, "Bah, humbug!"
It is a delight to be called with another three hours ahead of us. So often in the Chamber I fear that I shall be given only the last five minutes at the end of the debate before the start of the winding-up speeches, but my Whip has told me that I can have up to two hours. I will not take two hours, however, because I am well aware that a number of my colleagues want to get back to their families and homes to embark on their Christmas constituency engagements. A lot of nonsense is talked about our going off on holiday tomorrow, but actually we are not doing that. We will all be in our constituencies for the next week, bringing great joy and warmth to those whom we represent.
I am a very simple chap. I do not claim to be a great brain, or to have a great understanding of financial or Treasury matters. But I smell a rat here: I believe that this is a tax rise. I smell that rat because the Treasury has sent its two nicest and most charming Ministers to sell it to the House. We are talking about considerable sums. Various figures have been mentioned, but one of the higher ones is £1.5 billion, which is almost the equivalent of a penny on income tax. My constituents are entitled to suspect that they will be paying rather a lot of the additional £1.5 billion in national insurance contributions, because that is what has been happening for the last 10 years. They seem to have paid more and more tax, while being told by the Government that they are jolly lucky to have the privilege of paying more and more.
I am slightly concerned about this national insurance increase, because I believe that it will fall most heavily on such people as junior doctors, police inspectors, deputy heads of primary schools, taxi drivers—of whom there many in my constituency—and skilled artisans such as electricians and plumbers. Over the past decade, particularly in Hertfordshire, those people have seen the tax contribution that they are expected to make increase dramatically, and they will be nervous about the possibility that once again they will be asked to pay more and receive less, or nothing, in return.
We have, of course, seen national insurance increases before. I think that there was one of about £8 billion that was meant to fund the national health service. That may have been a very good thing, but the money has certainly not gone towards funding the national health service in Hertfordshire. On Wednesday this week, we will discover that another of our hospitals is scheduled for closure. Chase Farm hospital in Enfield, north London, was earmarked for a significant scaling down last week. Again, my constituents are right to be concerned about the possibility of a national insurance increase, because one thing is almost certain: that money will not be spent in Broxbourne, although it may be spent in other parts of the country. It may be spent in Scotland, for example, where expenditure per head is 40 per cent. more than it is in Hertfordshire.
My constituency and the hon. Gentleman's are not too far apart. I believe that in Hertfordshire health spending is above the fair funding target, but in my constituency it is below that target. Does the hon. Gentleman accept that some of the extra cash might help my constituents in Luton?
I should be delighted if it went towards helping the hon. Gentleman's constituents. I am referring to all the additional national insurance money that we are discussing in relation to the Bill—I wish to remain within the bounds of the debate, Mr. Deputy Speaker. However, I should also be delighted if my constituents, too, could partake of the additional bounty, and we could keep one of their hospitals open.
The hon. Gentleman has touched on the subject of spending in Scotland, which of course gives more to the Treasury than it gets back, as figures have shown; in fact, the south-east of England gets more than Scotland and many other areas of England. However, Scots also pay national insurance, and if the hon. Gentleman is so concerned about it, will he support our drive for independence, which would solve the problem?
I shall crack on, Mr. Deputy Speaker. I am not quite aware of the hon. Gentleman's figures. In my constituency, spending per head is £5,800, whereas in Scotland it is £8,200. I would be happy to have that debate with him at a later date.
The Financial Secretary said that pensioners are so much better off under this Government. If so, why are they so cheesed off in Broxbourne? Very few pensioners to whom I talk have anything good to say about the Government. Many have seen their standard of living decrease because council tax has gone up because of underfunding from the Treasury, and the cost of fuel has gone up. The Government are being a little disingenuous when they say that pensioners are better off than they have ever been. I am not sure that that is the case. Do not take my word for it; go and ask the pensioners.
With that, I wish you all a very merry Christmas, and I shall see your smiling faces in January.
It is a pleasure to be able to wind up the debate on behalf of the Opposition. It seems that it is another week, another emergency statement from the Treasury, but this afternoon's debate has been more about what Labour in government does best: imposing stealth taxes and hitting hard-working people across the country. In the midst of the incompetence that we see almost daily across government and truly embedded in the Treasury, there is one thing that the Government do with aplomb and vigour—tax people who do not even realise it and then, in customary Government style, dress it up as somehow doing those people a favour.
As my hon. Friend Mr. Gauke pointed out, this measure was part of a Budget that was represented as some sort of tax cut but eventually emerged in its true form as a tax con. The Bill represents a stealth tax on savers and on those who are trying to provide for themselves in retirement. It is a stealth tax because, on the one hand, it ratchets up significantly the national insurance contribution from middle and higher earners—by £1.5 billion, a not insubstantial amount, in 2009-10 alone—by aligning the national insurance upper earnings level with the higher rate taxation level. On the other hand, the Bill goes further and makes sure that people paying extra NI contributions will see little, if any, of them in terms of their additional state second pension rights accrued.
Combined with the backdrop of a weak Chancellor buffeted by events, today's date was apparently destined to be a lively one. In reality it proved less so because, unfortunately and disappointingly, not one Labour Back Bencher took the time to contribute to this debate—
I thank the hon. Lady for giving way. She has been fairly critical of the Government's inching in what I think is the right direction. Presumably she has some comprehensive alternatives that will make a tremendous difference to pensioners' incomes. I should certainly like to hear them.
As the hon. Gentleman knows, our party supported the broad pension reforms brought forward by the Government, but our concern is that the Bill undermines that consensus and decouples the restoration of the earnings link from the bringing forward of the flat-rating of the state second pension.
The contributions today have been limited in number but helpful. As I said, we did not have one from a Labour Back Bencher. The Liberal Democrat spokesman, Paul Rowen, said that he accepted the Government's alignment of the upper earnings limit and the higher rate tax threshold for paying national insurance, but had issues with the upper accruals point and concerns about pensioner poverty. He talked about introducing a citizen's pension but failed to say at what level that pension would be introduced. He also did not say whether there would be any limits on who would receive the pension—
This is not really a debate about pensions, but it is interesting that the hon. Gentleman did not answer my question or mention any details of a residency test for his citizen's pension. As and when the Government ever get around to calling an election and going to the people to find who they want running the country, we will debate our pension proposals.
I thank the hon. Lady for giving way once more. She suggested that the Liberal Democrats were not saying the level at which their citizen's pension should be set. However, Liberal Democrat Members nodded vigorously in agreement when I suggested that we ought to aim for the basic state pension to be at least 25 per cent. of average earnings, the level it was at when the Conservative party broke the link with earnings. Would 25 per cent. be a good figure?
The hon. Gentleman obviously thinks it is. It is interesting to see the collegiate working between the Liberal Democrats and the Labour party on this matter. Perhaps it is symptomatic of what we will see when the Liberal Democrats get their new leader.
My hon. Friend Mr. Heald talked about broken promises and today we are seeing another, although it may be more of a moving of the goalposts, which is concerning Opposition Members. He talked about the "conjuring" that we have seen in the Bill—a very apt word. We all accept that simplification is to be welcomed, but we are concerned about the way in which the Bill delivers it. We are also concerned about the fact that although we have made progress in discussing pensions and pensions reform, that consensus has been tested today.
My hon. Friend Mr. Walker, in a customarily witty and wide-ranging speech, said that he smelled a rat, but did not link that with any specific Member, which was reasonable of him. He also linked the Bill with health care in his constituency, which was some achievement.
There is no doubt that the Bill increases the national insurance contributions that higher rate and some basic rate taxpayers will make, particularly those who are on about £40,000 to £43,000 a year. As my right hon. Friend Mr. Redwood mentioned, there are particular income levels at which people will be paying more national insurance as a result of the Bill—
The Minister says it is small, but Mike Warburton of Grant Thornton has said that some people may see their national insurance contributions increasing by £946 per annum on the previous tax year. Grant Thornton calculates that people on £41,000 are going to pay nearly £500 a year more than in the current tax year, a 15 per cent. increase. It does matter.
In discussing the alignment of the upper earnings limit with the higher rate tax threshold in the 2007 Budget, the same Mike Warburton said that this was a stealth tax and that
"everyone has to remember this is a finance-raising measure."
"It is quite clear that the Government is now treating national insurance as an extra bit of income tax."
My hon. Friend the Member for North-East Hertfordshire referred to that, too. This is no minor stealth tax; it will raise £1.5 billion in additional national insurance revenue just in 2009-10. As my hon. Friend the Member for South-West Hertfordshire mentioned, the secondary legislation protection that we now have, for the move to have an upper earnings limit that is not set through primary legislation causes some concern to those on the Opposition Front Bench, and we will want to get assurances on that in Committee.
I am listening to the hon. Lady citing august bodies. Will she also recognise the comment of the Pensions Policy Institute, an industry-funded research body, which described the proposal she is currently talking about as
"a technical change introduced to restore the flat-rating of" the state second pension
"back towards the path originally envisaged in the Pensions Act 2007"?
In other words, it restores the cross-party consensus to put into effect the pension reforms.
The hon. Lady is right to highlight the fact that the PPI spotted that this course restores the original plan to flat-rate the state second pension back towards the original Pensions Act 2007 path, but in fact the PPI also identified that this was a problem back in April 2007. The question is why the Treasury did not apparently identify that—which is why it is having to bring this in the context of the pre-Budget report, rather than mentioning it in the original Budget.
Did I hear my hon. Friend correctly? Did she indicate that one of the clauses in the Bill will allow future increases in the upper earnings limit to be made by means of secondary legislation, which presumably means that unlike other aspects of tax change, which are normally dealt with in the Finance Bill each year, in future upper earnings limits can be raised at the whim of the Government without being properly debated?
That is a correct understanding. Obviously, the national insurance changes are not taken through the Finance Bill because they relate to a different aspect of Government finance, but it is correct that the Government have had to take this out of primary legislation in order to go above the pre-existing ratio of the upper earnings limit in relation to the primary threshold. Previously, that had been between 6.5 and 7.5 times the primary threshold.
Earlier the hon. Lady raised an important issue of principle, saying she objected to the raising of additional national insurance above the current upper earnings limit with no consequent increase in benefits, essentially treating it as a tax. So does she think that when the Thatcher Government did the identical thing by creating a national insurance surcharge, that was immoral as well?
Members always know they are on to a winner in this House when other Members start going back in time, and when that is the only critical point they can make.
Although Conservative Members broadly supported the pension reform and we all recognised that achieving some political consensus was important, what we are worried about is that after that consensus has been reached the goalposts are being moved. That does not give us the confidence we had at the time of the Pensions Act 2007. That point is not dissimilar to the serious point the hon. Gentleman's Front-Bench colleague raised earlier. This is a serious point, which is why it is right to challenge the Government on it.
I thank the hon. Lady for giving way—and I apologise for intervening so much, but she is making points that provoke me. She asks why we should go back into history. I think history is quite important, particularly as the Conservatives broke the link with earnings, at which point the basic state pension was 25 per cent. of average earnings. A woman who just became 60 on the full pension at that time would now be 87, and she would have lost a vast amount of income during that time simply because the hon. Lady's party broke the link with earnings.
Listening to the hon. Gentleman's remarks, one would not think that the current Government had been in power for 10 years and still had not restored that link. I wish later to probe and press the Ministers here today to try to discover their latest plans in respect of re-establishing the link, and whether they are able to confirm that it will be re-established. However, all we know from this Bill is that one half of this pension package—the flattening of the state second pension—is being brought forward. We have no additional comfort from the Government on the other half of it, which is crucial in providing an overall package that we would be happy with: the re-establishment of the link between the state pension and earnings. My party proposed that at the last election, before the Government accepted it. That is the key part of this jigsaw, and we are concerned that Ministers are not giving us the assurances we seek about it. Frankly, the Prime Minister is the main roadblock to our being able to get assurances on when that earnings link will be re-established; perhaps now that he is in his elevated position as leader of this Government, we will be able to get some more assurances, but I will wait to find out about that later in the debate.
I have addressed the first piece of this package: the stealth tax of £1.5 billion. The second piece was the incompetence aspect of the Bill—or what we think could have been incompetence, judging by the fact that although the desire to align the upper earnings limit with the higher rate tax threshold was announced way back in March in the Budget 2007, somehow the Treasury forgot that in having people pay so much more national insurance they also needed to consider alongside that the relevant state second pension accrual. It does not appear to me that that accrual definitely was considered by the Government, and perhaps they can confirm whether it did make an appearance in the Red Book. It certainly did not do so in the narrative aspect of the Red Book. We have seen figures in the Red Book which it could be a part of, but can the Minister confirm whether those amounts that appeared in the pre-Budget report were already accounted for in the Red Book figures we had earlier in the year?
When asked by the then shadow Secretary of State for Work and Pensions, my hon. Friend Mr. Hammond, whether that had been discussed at the time of the Budget, the then Secretary of State gave a vague answer that a range of pension measures had been discussed between the Treasury and the Department for Work and Pensions. However, it does not appear that the particular aspect we are discussing today was one of them; otherwise, presumably it would have been part of the public finance figures earlier in the year. Instead it was clearly identified as an issue in public only when it was raised by our Front-Bench team and other experts such as the PPI.
In its briefing, the PPI states that unless the link between the state second pension and national insurance contributions is broken before 2012
"it will also increase the annual build-up of S2P for people earning above the old UEL of £34,840...Those earning above the new UEL of £40,625 will build up a pension of £2.83 a week in 2009 compared to £2.38 without the Budget changes."
So way back in April the PPI had already clearly seen this problem of the lack of understanding of the consequential impact of what was brought in in the Budget 2007. If the PPI and the Opposition could see it, why could the Government not see it? Perhaps in the wind-up tonight, we can be given a little more insight into the stage at which that was discussed in detail and whether it was before or after the Budget 2007. The sense I have is that it was after.
Of course, this is no insubstantial consequential change from the Budget 2007; it amounts to £730 million. The bring-forward of this upper accruals limit from 2012 to 2009 which was announced in the pre-Budget report in October had just one sentence devoted to it in the entire statement made by the Chancellor. I appreciate that at the time of the pre-Budget report statement the focus of the Government's attention was on responding to a highly successful series of tax proposals by the Opposition, but even in this statement the new Chancellor drew precious little attention to the consequential amendment in the second half of the Bill. As my hon. Friend the Member for South-West Hertfordshire has set out, we are waiting to hear whether that omission from the Budget 2007 announcement was simply a case of the Treasury team not understanding the impact of its own national insurance changes, or whether the then Chancellor simply did not have the guts to be honest about this change with the public.
I realise that, as we have already touched on, the flat-rating of the state second pension was part of an overall pension deal that would see the state pension once again linked to earnings—something that my party pushed the Government to do before the last election. However, they have always been reticent about confirming exactly when the earnings link would be re-established. The Turner report suggested that the date should be around 2009 or 2010, but in responding to those proposals, the Government talked about a time line of 2012 or, at any rate, of taking action before the end of the Parliament, subject to affordability.
I remember when I was still serving on the Work and Pensions Committee pressing the then Secretary of State for Work and Pensions on the impact of the affordability test and whether that was the core test that had to be passed. He was very keen not to box himself into any commitments one way or another, but given the changes that we are now faced with in this Bill, can the Minister say on what date the earnings link with the basic state pension will be re-established, in line with the pension reform deal that this House agreed?
The PPI has estimated that the pull-forward of the second half of this provision—flat-rating the state second pension earlier—to 2009 will cost the public £2 billion, so there will be a big impact. It will mainly affect employees and employers, who will not now receive the level of contracted-out rebates that they had planned to receive. That is no way to thank organisations and individuals who have made efforts to provide better for themselves, rather than relying on the state. As I said earlier, when the original commitment was made last year to re-establish the earnings link, the Government set themselves the key test of affordability. Most people can only say that since that time public finances have worsened, so can the Minister confirm when this link with earnings will be re-established? This is an issue of trust, and it is very important if we are to maintain the consensus on pensions that we achieved earlier in the year.
Let us not forget that the cost to business of introducing this Bill will be £30 million. Such businesses—the overwhelming majority of which will be small businesses—will face that cost three years earlier than was originally planned. The Minister needs to take that on board and—particularly given the capital gains tax debacle and the increase in corporation tax for small businesses—give us a sense of what she plans to do to help businesses cope with costs that they will have to bear earlier than they were expecting.
The impact assessment points out that this change will cost the Treasury £10.7 million. Given that this is an IT change, does that figure have built into it the inevitable disaster costs that we are so used to with this Government when they try to use IT to achieve anything? I hope so, because based on past and current—and no doubt future—performance, that money will be needed.
This Bill sums up the Treasury as we so often see it today—stealthily taxing people, and combining that with a dash of incompetence. Small businesses hit by the capital gains tax grab will attest to this, and after today so will millions of pensioners. The former Chancellor was keen to go out with a flourish, and this Bill is rooted in the changes that he made in his final Budget earlier this year. He wanted to give the British public the impression that he was a tax-cutting Chancellor, but we all now know better. He may have celebrated his elevation to the office of Prime Minister, but his Treasury legacy will be stealth taxation and incompetence, which is a toxic tax cocktail for the British public to have to stomach. With this Government, simplification has become a byword for raising tax and the cover under which businesses and people saving for pensions are all too often made the victims of Treasury daylight robbery. Worse, this Government have destabilised the consensus that we are hoping we achieved in reforming pensions. Put simply, it is not good enough. We are not buying it and all the signs are that the British people are not buying it, which is why we will be voting against this Bill tonight.
I want to begin by wishing all Members who have given the Chamber priority as we approach the Christmas period, a happy Christmas; I hope that they have a nice break. The compliments of the season to everyone.
We have had an extraordinary debate today. We see that the Conservatives are going to vote against a Bill that helps to put into effect a tax cut that will benefit, or not disadvantage, 21 million people; that will take 600,000 pensioners out of tax completely, a point that was not even mentioned this evening; that will take 200,000 children out of poverty—child poverty did not feature much, either; in fact, I am not sure that it was even mentioned by Conservatives—and that will help to make work pay.
Although the Bill is a technical measure, it is a key part of the process that puts into effect the announcements made on national insurance and pension provision in the Budget 2007. Many Opposition Members have spent time talking about the Budget, and this Bill is one of the enabling provisions that will ensure that the personal tax measures announced in the Budget can be put into effect. It is therefore only fair and right for me to set out the wider context of the changes that were announced and that the Bill will help to put into effect, so that those who are listening get the whole story, rather than a partial, tiny bit of it, which is what we heard during most of today's debate.
If the hon. Lady is talking about the context of the 2007 Budget, she will remember from when we were both members of the Treasury Committee the evidence given to us by the Institute for Fiscal Studies showing that 5.3 million households, most of which were among the lower-paid, lost out as a consequence of that Budget.
The IFS also said at the time of the Budget that the
"income tax and NI package has been cleverly designed to limit the number of losers to one-household-in-five at a modest overall cost to the Exchequer".
So there was actually much praise from the IFS for the overall balance of the package that this Bill helps to put into effect.
Mr. Gauke talked about simplicity and said that we should be wary of it. He also shied away from a direct question. I had to ask him more than once about the Opposition's attitude now to the pensions consensus that had been developed, and which was put into effect during the passage of the Pensions Act 2007. I asked him a direct question—whether the flat-rating of the state second pension was still part of the consensus, and whether the Opposition had now decided that they did not wish, in opposing this Bill, to see that crucial part of the Turner commission reforms put into effect.
In the light of the hon. Gentleman's refusal to answer that question, we have had a huge flip-flop from the Conservative party on what was meant to be a consensus. When the Pensions Bill, which referred to this exact—
I hope my hon. Friend will forgive me for feeling slightly uncomfortable about having a consensus with the Conservative party on this matter. If, by breaking and moving beyond the consensus, we are making a more progressive move, which will help those who are less well off, is that not a good thing?
My hon. Friend, whom I admire and respect, should have a close look at what the distributional effects of flat-rating the state second pension are. Such an approach ensures that those paying over the upper earnings limit will not receive earnings-related extra accruals after 2030. Flat-rating the state second pension is a progressive thing. It appears that the Conservative party, after being in a consensus, has decided that it does not want something as progressive as that.
Interestingly, when the state second pension consensus, which the Bill puts into effect, was being forged, the Conservative spokesperson in Committee, Mr. Waterson, said that
"abolition of the S2P and state earnings-related pension scheme rules would result in marginal reductions in second pensions for some older workers, but that is more than made up for by the earnings-uprated basic state pension." ——[Official Report, Pensions Public Bill Committee,
By that argument, he blew out of the water all today's claims about the Bill being a stealth tax, because he explained precisely the balance of the personal tax package that the Bill helps put into effect. Although the upper earnings limit increases cost money, that money is recycled and given back to people by the later changes in pensions uprating and the earnings relation.
"a new stealth tax on retirement".
He said that despite the fact that his party supported flat-rating the state second pension when the Pensions Act 2007 was going through Parliament. The Conservatives are now voting against it, so what are we to make of the opportunism demonstrated by the position that the main Opposition party has taken today? We can conclude that the Conservatives are searching for press releases and headlines. They are giving one impression one minute and the opposite impression when they are in front of audiences. They say what they think a particular audience wants to hear, hoping that nobody will put two and two together and realise that they are saying one thing to one audience and completely the opposite to another.
Where will that approach get the Conservatives? It will mean that few people will take seriously their pronouncements on cross-party consensus and on their approach to these policy matters. If they are in favour of flat-rating the state second pension, why have they been so hostile today to the measure that implements it? If they were so against it in the first place, why did they not even bother to vote against it when it was debated during consideration of the Pensions Act 2007?
The hon. Members for South-West Hertfordshire and for Putney (Justine Greening) asked whether we knew at the time of the Budget that there was an issue about aligning the state second pension flat-rating the, upper earnings limit, and the changes that the Bill brings into effect to prevent unintended windfalls for those who earn above the higher earnings limit. We knew that that was the case, so this is not, as has been alleged, incompetence; in fact, the figures featured in the Red Book as part of the national insurance contributions calculations. We were aware of the issues involved, but we had to work up the policy options in detail to come to a workable solution in this complex area of public policy.
The arithmetic in the Red Book took account of it. We knew that there was an issue about increasing the upper earnings limit faster than had been expected. We also knew the implications that that would have in terms of unlooked-for and unearned windfalls for higher rate taxpayers with respect to the state second pension. We were working through policy on this, but if the hon. Lady were to look, she would see that the issues are taken account of in the Budget arithmetic.
The hon. Member for South-West Hertfordshire made no real mention of child poverty or pensioner poverty, but he was very concerned about the small number of people earning above the higher earnings limit who may make minor losses because of some of the changes to the state second pension. That again proves that the Conservative party is for the few and not for the many.
Paul Rowen made an interesting speech, in which, to his credit, he talked about child poverty and his concerns about whether the target could be reached. He also made some comments about pensioner poverty, and I tried to bring those to his attention at the time. He said that he supported the Bill in theory and that he liked the first part of it but not the second. He supported the increase in the upper earnings limit, but then said that his party was going to vote against the Bill anyway; that seems an odd thing to do. He said that he had problems with the upper accruals point and the state second pension point. Again, we can talk about that, although the Liberal Democrats have a distinct policy on a citizen's pension, which he discussed and which has been consistently put forward. It involves some difficulties and issues, but it has been their policy for a long time.
I cannot understand why the hon. Gentleman feels that the Bill needs to be voted against when he supports at least half of it. If he wished, he could have raised some of these issues in Committee. We could have debated whether his concerns could be accommodated in some way and whether we could make progress, but he has decided, despite supporting at least half the Bill, that he must vote against it.
I am happy to make an offer to the Minister across the Floor of the House. Will she give us a guarantee that the money that will be saved by the upper earnings accrual will go straight into ensuring that the state pension is, from next year, put back to being related to earnings? Does she agree that that would be a progressive move that all parties could support?
I am not so certain that hypothecation of income in that way is exactly as progressive as the hon. Gentleman says it is. Despite his interest in child poverty, by voting against the Bill he is saying that the 200,000 people who are being raised out of poverty by the changes as part of the personal tax package that the Bill puts into effect should not be. He refused to talk about the 1.8 million fewer children who are in absolute poverty as part of the changes that we have made in the past 10 years, including the 600,000 fewer in relative poverty. Perhaps he and I could agree that that is better than the doubling of child poverty that we saw in the previous 18 years. After all, we have a consensus on some things across the Floor of the House.
The hon. Gentleman had some surprising thoughts about pensioner poverty increasing hugely, when in fact we spend £11 billion a year more in real terms than was spent on pensioners in 1997. That money has been focused on those in need and we have lifted close to 2 million pensioners out of absolute poverty. Nor did the hon. Gentleman mention that, as part of the changes in personal taxation that the Bill helps to introduce, 600,000 extra pensioners will be taken out of tax completely. That means that once these reforms have been introduced 57 per cent. of pensioners will pay no tax whatever. I hope that he might now admit that he should have at least recognised the progress that this Bill will make in that regard.
The Minister was given notice about an hour ago of this question and I hope that she can now answer it. Can she confirm that every pensioner in Britain is getting a smaller share of national income now than each pensioner was getting 10 years ago? She has had a chance to receive a note, so is that true or not?
The hon. Gentleman should realise that this is the first Government ever to cut the link between age and poverty. People over 60 are now no more likely to be in poverty than any other cohort in society. That is an achievement of which this Government can be extremely proud, and the hon. Gentleman should applaud that achievement.
It is not true that pensioner poverty has not been tackled. We have spent a great deal of money on tackling it and we have made a big difference to the poorest pensioners, who have seen the largest gains. The hon. Member for Rochdale should at least admit that we will spend £15 billion a year more by 2020 under the pension reforms. As I have said, 57 per cent. of pensioners will pay no income tax from 2008.
Mr. Heald made one of his usual contributions, which I always enjoy. He and I have been in the House a long time and spent a lot of time on Select Committees together bantering about our different views of politics and how society should be run. However, I have never known him be so cheeky as to pray in aid Barbara Castle. He also talked about SERPS—the state earnings-related pension scheme—and professed great outrage that it had been cut so often, but he failed to remind the House that the Tories introduced the largest ever cut in SERPS in the Social Security Act 1986. That was in between cutting the link with earnings and telling people, as they descended into poverty, with child poverty doubling and pensioner poverty soaring, that if it was not hurting, it was not working. I congratulate the hon. Gentleman on his sheer brass neck.
On the Government proposals to claw back money by introducing an upper accruals point early, the flat-rating of SERPS was one of the recommendations of Adair Turner's Pensions Commission, and it had cross-party consensus when it was published. There was a statement in the House and the Conservatives said that they agreed with it. The Bill will essentially achieve that, but all those who have spoken tonight have said that they are against it. What are we to believe? The hon. Gentleman mentioned increases in national insurance contributions, but the biggest increase was in 1985, when the Conservatives abolished the upper earnings limit for employers. That was done by Nigel Lawson.
I know that Barbara Castle, who was a doughty fighter for social justice, a fantastic Labour Minister and a particular heroine of mine, would have congratulated the Government on their work in attempting to abolish pensioner poverty. She would also have noted with interest the effect of the state second pension and the pension reforms. Many people underestimate the radical nature of those reforms. The Bill is in essence a paving Bill that will ensure that the reforms to the pension system can be put in place. When they are completed they will reduce the number of years of contributions required before individuals qualify for a full pension from 44 years for men and 39 years for women to 30 years for everybody. That is a substantial and progressive change that Barbara Castle would have been proud to introduce herself. I am sure that she would have congratulated this Labour Government on doing so.
Another aspect of the pension reforms with which the Bill will assist is the crediting in of those people caring for older people and those with disabilities, as well as children, for the first time. That is something that Barbara Castle campaigned on all her life. Indeed, she used, as a main reason for the original introduction of SERPS, the broken earnings records of many women. The changes involved in the state second pension and other pension reforms will, for the first time, ensure that women are not disadvantaged by broken earnings records. Crediting in will start in 2010, and we can look forward to the once unthinkable achievement that 90 per cent. of women, like 90 per cent. of men, will qualify for the basic state pension in their own right by 2020. Barbara Castle campaigned for that all her life and she would be extremely proud that it is to happen.
Mr. Walker smelt rats and talked about stealth taxes, as did the hon. Member for Putney. However, if they agree that there should be a balanced package as part of the pension consensus, it is unfair to try to claim that the bits that increase tax are bad while failing to mention the bits that return that income in the form of the tax changes that are part of the package. It is important to consider the package as a whole. I reject the view of many Opposition Members that the measure is part of a stealth tax. Actually, it is part of an extremely balanced package that will enable the pension reforms that I have just mentioned to be brought into effect at the same time as the changes in personal tax rates. That will lead to our having the lowest rate of income tax in 75 years and will mean that we get 200,000 children out of poverty and 600,000 pensioners out of paying tax. We must continue to pursue that aim and the Bill will enable us to do that.
The hon. Member for Putney talked a lot about stealth taxes.
Does my hon. Friend agree that the phrase "stealth taxes" is completely meaningless? We in the House know what taxes are; we debate them all the time whether on Finance Bills or Bills such as this. The phrase "stealth tax" is emotive and meaningless and is typical of the empty rhetoric from the Opposition.
My hon. Friend is obviously right to call me to order on that point. I must stop internalising these heavily accented phrases and realise that any tax rise appears in the Red Book, is not carried out behind everybody's back and is there for everybody to see.
When the hon. Member for Broxbourne was smelling a rat, he said something with which I have difficulty. He said that the nicest Treasury Ministers had been sent to the Front Bench to sell this measure.
Not only does my right hon. Friend the Chief Secretary feel insulted because he does not think that he should be left out of the phrase "the nicest Treasury Ministers", but I feel insulted because the hon. Gentleman is ruining my reputation by making out that I am nice. By trying to compliment those on the Front Bench, he has succeeded in insulting us all. Perhaps that was his original intention.
The hon. Member for Putney was not the only one to say that the Bill would somehow remove parliamentary scrutiny of the upper earnings limit by abolishing the seven-and-a-half times limit on where the upper earnings limit can fall. If she had been a bit more generous, she might have admitted that the Bill will use the affirmative resolution procedure, which means that any future changes to the upper earnings limit will have to come before this House and the other place and be subject to a debate with a potential vote. I do not see that that change should give anyone cause for concern in terms of parliamentary scrutiny. The House always considers extremely carefully affirmative resolutions that come before it. I do not think that the hon. Lady should worry too much that any future increase in the upper earnings limit will somehow go through the House without anyone noticing.
The hon. Lady talked about the potential burdens on business, and she is right to say that the changes before us rely on an increase in administration. However, I have to point out to her that that will be modest even if, as with all these things, it is regrettable. The Conservative party signed up to the flat-rating of the state second pension and that will require the administrative change to be made, so the only difference is that it is being made three years earlier than planned. I assure her that we have had detailed conversations with the appropriate members of the business community to see whether we can minimise the burden.
My hon. Friend will be aware of the importance of national insurance contributions to our public services and, in particular, to the health service. Will she perhaps expand on what would happen if the Bill were defeated tonight and on how that would impact on public services?
My hon. Friend is right. I suspect that Opposition Members will have to explain to their constituents, perhaps over the Christmas period, why they went into the Lobby to vote against taking 200,000 children out of poverty and 600,000 pensioners out of tax.
As the Bill goes into Committee, clearly a number of points will have to be debated at greater length. I am sure that my right hon. Friend the Financial Secretary will look forward to having those debates. However, let me once more remind the House what the Bill will achieve. First, it will allow us to deliver a package of changes that will create one of the simplest personal tax structures of any developed country so that the two main rates of income tax apply to the same bands of income as the two rates of national insurance contributions for the first time in our history. Secondly, the Bill returns the timetable for the introduction of a simple flat rate state second pension scheme to around 2030, as recommended by the Pensions Commission, rather than its being delayed by several years. The Bill simplifies our personal tax system and it brings forward the simplification of our state second pension system. I commend it to the House.