Clause 1 — Amount to be specified as upper earnings limit: Great Britain

Orders of the Day – in the House of Commons at 2:16 pm on 31st January 2008.

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Photo of David Gauke David Gauke Shadow Minister (Treasury) 2:16 pm, 31st January 2008

I beg to move amendment No. 8, page 1, line 5, at end insert 'and

(c) in subsection (6), at end insert "and may not include any increase in the upper earnings limit in excess of the increase in the retail price index, in percentage terms, for the year to September of the preceding tax year."'.

Photo of Alan Haselhurst Alan Haselhurst Chairman of Ways and Means

With this it will be convenient to discuss the following amendments: No. 10, page 1, line 5, at end insert 'and

(c) after subsection (6) insert—

"(7) Any regulations made under this section which increase the upper earnings limit shall be reviewed by the Treasury not later than 6 months after the date on which those regulations come into force to determine whether the upper limit, when calculated on an annualised basis, exceeds the level of earnings at which the higher rate of income tax becomes payable.

(8) If this review so determines, the Treasury shall make regulations which set the upper earnings limit, when calculated on an annualised basis, at a level which does not exceed the level of earnings at which the higher rate of income tax becomes payable.

(9) Any regulations made under subsection (8)—

(a) shall be made by statutory instrument which is subject to annulment in pursuance of a resolution of either House of Parliament, and

(b) must be made not later than 1st January of the tax year in which they are made and have effect in respect of the following tax year."'.

No. 9, in clause 2, page 1, line 18, at end insert 'and

(c) in subsection (6), at end insert "and may not include any increase in the upper earnings limit in excess of the increase in the retail price index, in percentage terms, for the year to September of the preceding tax year."'.

No. 11, page 1, line 18, at end insert 'and

(c) after subsection (6) insert—

"(7) Any regulations made under this section which increase the upper earnings limit shall be reviewed by the Treasury not later than 6 months after the date on which those regulations come into force to determine whether the upper limit, when calculated on an annualised basis, exceeds the level of earnings at which the higher rate of income tax becomes payable.

(8) If this review so determines, the Treasury shall make regulations which set the upper earnings limit, when calculated on an annualised basis, at a level which does not exceed the level of earnings at which the higher rate of income tax becomes payable.

(9) Any regulations made under subsection (8)—

(a) shall be made by statutory instrument which is subject to annulment in pursuance of a resolution of either House of Parliament, and

(b) must be made not later than 1st January of the tax year in which they are made and have effect in respect of the following tax year."'.

Photo of David Gauke David Gauke Shadow Minister (Treasury)

These amendments offer alternative ways to deal with what we perceive to be a significant problem with the Bill. I shall set out in detail how they would work, but before I do so I shall put the problem in context.

All hon. Members are aware of how important taxation is as a constitutional matter, and the House guards very jealously its right to raise revenue. In the broad historical sweep, for instance, the English civil war and the American revolution could be considered relevant to this discussion, although I shall not refer to them in detail. All parties in this House consider the proper scrutiny of revenue-raising measures to be very important.

This country has two forms of taxation on income—income tax and national insurance—and it is worth taking a moment to look at the different ways in which they are dealt with in this House. Income tax was introduced as a temporary measure in 1798; it was abolished five years later and then reintroduced on a permanent basis in 1842. Partly as an historical overhang, since 1860 we have renewed income tax every year, although previously it had been renewed over groups of three or seven years on a number of occasions. However, the review of income tax is also part of Parliament's power over the Executive, as the Crown cannot raise revenue if Parliament is dissolved. Corporation tax is subject to the same restriction.

In essence, this debate is about thresholds. Since the introduction of the Finance Act 1977, when the Rooker-Wise amendment was implemented, thresholds and personal allowances have increased in line with inflation; they do so unless Parliament expressly states otherwise. The clear intention was to prevent stealth taxation, as thresholds and allowances are both diminished by inflation. Of course, inflation in 1977 was somewhat higher than it has been for some few years now. We still have fiscal drag within a year, but not from year to year.

Parliament retains the ability not to uprate allowances and thresholds in line with inflation. Indeed, it exercised that power as recently as 2003-04, but it must do so explicitly. It does so through a Finance Bill. This is where I would like to make a comparison with national insurance contributions. With income tax, from the point of view of the taxpayer, the concern is that thresholds will not increase in line with inflation. Our practical concern with national insurance contributions is with the upper earnings limit increasing faster than the rate of inflation. There is also a concern—it is probably more theoretical than practical—that the lower earnings level or primary threshold could fall, but at a practical level the political debate over many years has been about whether the upper earnings limit might increase more rapidly.

The contrast between national insurance contributions and income tax is considerable in that respect, because thresholds regarding national insurance contributions are determined by regulation, as opposed to primary legislation or a formula that can be amended through such legislation. Section 1 of the Social Security Pensions Act 1975 provides a safeguard, however. The upper earnings limit cannot be increased by more than seven and a half times the lower earnings limit, or by less than six and a half times the lower earnings limit. Why? Such an arrangement prevents abrupt changes in the scope of national insurance contributions without proper parliamentary scrutiny.

On looking at the debate on Second Reading and in Committee on that legislation, I noted that the concern expressed in Committee was that the provisions were unduly flexible and that six and a half to seven and a half was too wide a band to permit the Government to vary the national insurance contributions upper earnings limit. I also noted that representing the Opposition on that occasion in 1975 was my right hon. and learned Friend Mr. Clarke, who raised some important points about flexibility. It shows that things do not necessarily change as much as they might do. The concern in 1975 was that the provisions were too flexible. Clearly, Parliament was provided with an opportunity to restrict the power of the Executive to vary the upper earnings limit unduly and rapidly to increase the upper earnings limit to make a substantial increase in the tax on income that people in the United Kingdom would face.

That brings me to one of the major problems that we have with this Bill. Clause 1(1) abolishes the ratio and the protection that mean that only so much can be done by regulation.

Photo of Mark Field Mark Field Conservative, Cities of London and Westminster 2:30 pm, 31st January 2008

It gives us insight to have that perspective on the matter. Indeed it shows that there is a comparator, albeit in different contexts, for national insurance and income tax. Would my hon. Friend like to go into detail as to why he believes the Government have sought in that way to break down the safeguard to which he has referred?

Photo of David Gauke David Gauke Shadow Minister (Treasury)

My hon. Friend asks a good question. We raised that issue in Committee. Under the new procedure for Public Bills, we were able to ask both the Financial Secretary and her officials that question at the evidence session. The answer was somewhat limited. All we heard was, "It gives us greater flexibility." Let me quote the Financial Secretary:

"We see no reason to reintroduce an arbitrary ratio, given our proposal that future changes to the upper earnings limit will be subject to approval by both Houses of Parliament." ——[Official Report, National Insurance Contributions Public Bill Committee, 15 January 2008; c. 44.]

However, that is not a satisfactory justification, because if an arbitrary ratio was good enough for Barbara Castle, and indeed for my right hon. and learned Friend the Member for Rushcliffe, in 1975, I do not see why a ratio is not appropriate for us now. The arguments remain the same.

Photo of Mark Field Mark Field Conservative, Cities of London and Westminster

We had an excellent engagement in the evidence session in Committee. Is my hon. Friend saying that the reality is that we should respect the notion of a ratio, but there is an argument that suggests that the bands within that ratio be changed? Surely it cannot be the view of the Government, and I would imagine that it is not the view of Opposition Members, that the notion of a ratio itself is defunct.

Photo of David Gauke David Gauke Shadow Minister (Treasury)

I do not think that the argument for abolishing the ratio has been made; at least, not terribly persuasively. I shall come in a moment to the detail of our amendments, in which we have attempted to outline alternative ways to address that concern. I am not saying that I am necessarily wedded to the idea of a ratio, but that is how Parliament's position has been protected for the past 33 years, and it may be the best way to protect it in future. We can examine other ways. My hon. Friend will recall that we considered the ratio argument in Committee.

I understand that the Government are trying to align national insurance contribution rates and bands with those for income tax. Although I am concerned that their way of doing it is motivated principally by the aim of raising revenue, the objective of aligning the two is a perfectly respectable and honourable one to which we have no particular objection. It is fair to say that publications such as the Forsyth report were instrumental in encouraging the Government to go down that route or at least to place greater emphasis on simplification. We do not have any problem with that, so we are keen to be helpful to the Government, notwithstanding our concerns about the revenue-raising element. We are willing to help the Government achieve their objective while providing some protection for Parliament; that is the basis of the amendments that we have tabled in Committee and today.

Various calculations were done on widening the bands. For the first time in some while, I got out my calculator and tried to work out what ratio would be needed, given that the upper point is seven and a half times what is now the primary threshold. It is a difficult sum to calculate in some respects, because one must look at future years and so on, but it is clear that if the existing ratio is breached, it will be breached by only a relatively small amount. One idea, which I think Mr. Browne proposed, was that the primary threshold could always be increased a little if the ratio would be breached only by a small margin.

One of our proposals in Committee was to widen the bands, as my hon. Friend Mr. Field mentioned, so that eight would be the top point rather than seven and a half. Quite possibly Treasury officials have done the calculations—if so, I should be interested to hear what the Minister says about it—but I do not think that there is any doubt that a ratio of eight times the primary threshold as the maximum point would cause the Government any difficulties in achieving their stated objective. One approach would be to consider that ratio. We debated and voted on that proposal in Committee, so it could not be brought back on Report, but it is an idea to which we are sympathetic.

Photo of Mark Field Mark Field Conservative, Cities of London and Westminster

To clarify the issue, is my hon. Friend saying that abolishing the ratio will entirely do away with the protection put into place a third of a century ago that allows Parliament to have its say on the matter, and that as a result this House will have no say on whether to hold back from an arbitrary correction—from the Government's perspective—of national insurance thresholds, particularly at the higher end?

Photo of David Gauke David Gauke Shadow Minister (Treasury)

My hon. Friend sums up the position well. For the sake of completeness, let me add that there is the matter of regulation, which would be introduced through the affirmative procedure. No doubt the Minister will make that point.

It might be helpful to compare two very similar tax changes—a failure to uprate the threshold for income tax in line with inflation and an increase in the upper earnings limit. A failure to uprate a threshold for income tax would be announced in the Budget. Under the previous Chancellor it was unlikely that it would be announced in the Budget speech, but it would appear in the Red Book. There would then be four days of debate on the Budget, followed by a vote on a Budget resolution that, as I understand it, would include the income tax element. The resolution would be implemented through a Finance Bill. There would be a Second Reading debate on the Bill, and the income tax element would be a major part of the Bill. One can imagine an Opposition opposing a Finance Bill on the grounds of a failure to uprate income tax.

That would almost certainly be one of the issues debated by a Committee of the whole House considering such a Finance Bill. The issue would presumably not be debated in Committee, but would certainly come back on Report and Third Reading. So by my reckoning, in the circumstances that I set out, a failure to increase the threshold for income tax would be the subject of up to seven days' debate on the Floor of the House and at least four votes of the House—not of the Committee, but of the House.

By contrast, a tax increase on income, which is in many respects similar to the case that I described, such as raising the upper earnings limit, would be the subject of one debate in Committee, lasting perhaps two and a half hours, followed by one vote in Committee. In one case there would be a much superior method of parliamentary scrutiny. There is hardly any comparison between the two cases, and that is difficult to justify.

Photo of Mark Field Mark Field Conservative, Cities of London and Westminster

Is not one of the biggest concerns the fact that the change is pretty high profile in people's minds and affects everyone in the workplace? Whatever their level of earnings, they pay national insurance. As a result, if the Government had their way on the matter and did not allow full scrutiny, the measure would go through on the nod and would not be scrutinised as it should be, not just on the business pages, but beyond. It would not be treated like other matters following a Budget. I do not believe that the Government are being dishonourable or disrespectful, but the change goes to the heart of what many of our constituents feel about paying tax in the broader sense—income tax or national insurance. These issues should therefore be at the forefront of a readily understandable Finance Bill debate, rather than discussed in a Committee Room.

Photo of David Gauke David Gauke Shadow Minister (Treasury)

My hon. Friend is right. The matter would be at the heart of any debate about our finances and our taxation system.

In Committee we touched on the 1992 general election, which some hon. Members remember better than others and some remember more fondly than others. The Labour party, which was in opposition at the time, was proposing the abolition of the upper earnings limit. Clearly, the Government's position has changed. I regret that amendments tabled by John McDonnell, which would have had the effect of reverting to the 1992 position by abolishing the upper earnings limit, were not selected. The proposal may well return. I would argue against the abolition of the upper earnings limit for reasons of concern about tax burden, but it is a perfectly respectable position to take.

It is not this Government's position, but it is not inconceivable—it is unlikely, however, and certainly would not be in Britain's interests—that a Government with a manifesto pledge to abolish the upper earnings limit will be elected. Clearly, that Government would be entitled to abolish the limit, but they should be able to do so only if there were proper parliamentary scrutiny and if all the expected procedures were gone through. The Bill does not provide that protection.

Photo of Peter Viggers Peter Viggers Conservative, Gosport 2:45 pm, 31st January 2008

In a throwaway line in his Budget, the previous Chancellor of the Exchequer put a tax of some £1.5 billion on middle-income families; he simply referred to a change in the upper earnings limit. Does my hon. Friend agree that if the safeguard is removed, that can only lead to the conclusion that the Government are preparing, and intending one day, to use the changes in respect of the removal of the safeguard? Perhaps they will come back with a proposal under the negative procedure, which does not require any debate on the Floor of the House. Having been bitten once, we should fear being bitten again.

Photo of David Gauke David Gauke Shadow Minister (Treasury)

I am grateful to my hon. Friend, who raises a concern that many have. To be fair to the Government, their position is explicitly that the issue is part of the realignment process and that the upper earnings limit will not exceed the point at which people start paying higher rate income tax. The Financial Secretary gave that commitment in Committee, and I do not doubt her integrity.

However, we all move on at various times. In the words of Robin Day, we are all "here today, gone tomorrow" politicians to some extent, although I am sure that the Financial Secretary would move on only to even greater things. We find ourselves in the position of not having the legislative protection in the system. We are relying on a commitment—and that is unsatisfactory, given that previously we have had real protection in the system.

Photo of Mark Field Mark Field Conservative, Cities of London and Westminster

We have had a hypothetical debate about the abolition of the upper earnings limit, but there is a slightly more relevant and recent point and it would be interesting to have an idea of how the Government would treat the issue. Four or five years ago the decision was made to invest in the national health service and it was decided that there should therefore be an increase of 1 per cent. right the way through national insurance, effectively abolishing the upper earnings limit in respect of that 1 per cent. additional element. Will my hon. Friend say what safeguards were put into place then and how they might differ if the Government get their way in the Bill?

Photo of David Gauke David Gauke Shadow Minister (Treasury)

My hon. Friend makes an interesting point, which leads me to this observation. I will not dwell on the point, but a certain Labour Government had been elected on a pledge that they would not increase the rates of income tax. They then increased national insurance contributions and said, "Well, that's not income tax." Given that precedent, if at a future election a party—it could be either party—made a pledge not to increase income tax, could anything stop it increasing national insurance contributions above the upper earnings limit or abolishing the limit? That is an interesting point, which relates back to what my hon. Friend Peter Viggers said. There is a suspicion that a door is being left open. We know from yesterday's Institute for Fiscal Studies report that the Government's public finances are in a mess; there is an £8 billion black hole.

Photo of Sylvia Heal Sylvia Heal Deputy Speaker

Order. I hope that the hon. Gentleman will not stray far into that report.

Photo of David Gauke David Gauke Shadow Minister (Treasury)

I am grateful, Madam Deputy Speaker; I think that I probably said what I wanted to say. Clearly, there is a concern about public finances, and in such circumstances suspicions may grow.

I should also say—I assure you that I will make this point very briefly, Madam Deputy Speaker—that although the Government have made a commitment not to increase the upper earnings limit above the point at which higher rate income tax is payable, they also made a commitment at the last general election to have a referendum on the European constitution.

Photo of Mark Field Mark Field Conservative, Cities of London and Westminster

You will be glad to know, Madam Deputy Speaker, that I am not going to respond to that point.

The issue is not whether there are commitments, important though they are against the backdrop of a general election and thereafter, but whether there is a proper means of scrutiny on the Floor of this House instead of necessarily going upstairs into Committee. Will my hon. Friend confirm that the risk of going down the route proposed by the Government is that we will not have the opportunity for scrutiny that we have had in the past in relation to changes in the national insurance regime?

Photo of David Gauke David Gauke Shadow Minister (Treasury)

My hon. Friend is being very helpful. That is exactly the issue. I do not particularly want to debate the rights and wrongs of abolishing the upper earnings limit—nor, I suspect, is it in order to do so—but if that were to happen, or even if it were merely to be increased substantially, would the House have the opportunity to scrutinise it properly? We have such an opportunity under the existing legislative framework, but we will not if the Bill is passed in its current form. That is an important point. I stress that we object not to Parliament's ability to change the upper earnings limit—of course Parliament should have the right to do that—but to its not being able to do so by regulation, even by the affirmative procedure.

We have set out two alternative approaches—they do not run together—for ensuring the scrutiny that we want. In amendment No. 8—which is mirrored by amendment No. 9 because we need to change two Acts in this process, one relating to England, Scotland and Wales and one relating to Northern Ireland—we suggest that there should be no increase in the upper earnings limit in excess of the retail prices index in September of the previous year. When we tabled a similar amendment in Committee, the Financial Secretary said that the reference date for national insurance contributions is December, not September, so we have rectified that error. She also said that December was not feasible because it would cause various IT costs and so on. That was essentially her argument against the link with the RPI. This is similar to the Rooker-Wise approach whereby thresholds for income tax increase in line with the RPI for September in the previous year. If the higher rate income tax threshold rises along with inflation, based on the RPI in September, and the upper earnings limit rises along with inflation using the same measure, they should continue to go hand in hand, which would enable the Government to fulfil their objectives.

Neither of our sets of amendments aims to prevent the Government from achieving their stated policy objective of aligning the point at which the upper earnings limit exists and the point at which one starts paying higher rate income tax. The Financial Secretary might argue that they do not quite reflect the provisions that relate to income tax and the Rooker-Wise amendment. If so, would she object to the principle of the amendments, given that her objection to the equivalent amendment in Committee was essentially that December was the wrong date and that it should be September? Now that we have rectified that problem, does she have any objections to the amendment?

The wording of amendment No. 10 is replicated in amendment No. 11. Depending on what the Financial Secretary says, we might well press amendment No. 10 to a Division. We might press for a vote on amendment No. 8, too, but I will wait to hear what she says before reaching any conclusions.

Amendment No. 10 is a development of an amendment that we tabled in Committee to probe the Government. At that point, we proposed to allow the upper earnings limit to be increased as long as it did not exceed the level at which higher rate income tax becomes payable.

The Financial Secretary advanced two arguments—two technical points—about why that would not work. The first was that national insurance contributions are calculated weekly whereas income tax is calculated annually. She construed our amendment—possibly a little harshly, but I concede that there was an ambiguity in it—as meaning that the relevant income tax level of, for example, £43,000 a year would be treated as a weekly limit. That was not our intention, and I believe that we have ended any ambiguity on that point.

I concede fully the right hon. Lady's second objection, which was that national insurance contributions are determined by regulation before the beginning of a tax year. Income tax is not formally determined until the Finance Bill is enacted. Our proposal in Committee that the national insurance contribution upper earnings limit should not be raised above the point at which higher rate income tax becomes payable did not work because at the point where a regulation would have to be passed the Finance Bill would not have already gone through, even though an announcement would have been made in the Budget and there may be Budget resolutions.

We accept that argument, which is why we have come back with a different solution. It is not the most elegant piece of drafting that has ever come before the House, but it attempts to address in good faith an entirely legitimate concern. We propose that within six months of the regulation setting the upper earnings limit—in other words, six months into the financial year—the Treasury will be required to review whether the upper earnings limit is above the level at which higher rate income tax is payable. If it is, we would then require the Treasury to bring forward regulations to reduce the upper earnings limit below the higher rate of income tax as existed at that time for the following year.

That proposal would cause considerable inconvenience to the Treasury, and I make no apologies for that. The purpose of the amendment is to provide a deterrent to prevent any Government from activating the mischief to which I referred earlier. A Government would be able to raise the upper earnings limit through primary legislation, but if the limit were increased by regulation higher than the Government said that they intended, they would have to go through the embarrassment of producing a further order stating that they were wrong and that the upper earnings limit would be brought down the following year.

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

The hon. Gentleman is making a thoughtful speech and I am listening carefully to his suggestions. Does he accept that a review is already conducted in the late summer or early autumn in the form of the pre-Budget report?

Photo of David Gauke David Gauke Shadow Minister (Treasury) 3:00 pm, 31st January 2008

I accept that a review takes place. However, amendments Nos. 10 and 11 deal with circumstances in which a Government raise the upper earnings limit with intent, not accidentally. One can imagine a meeting in the Treasury around this time of year in which the view is expressed. "We need to raise a bit more revenue—how are we going to do it?" Someone then comes up with the bright idea of increasing the upper earnings limit. An investigation takes place to ascertain how that can be achieved and what is to prevent it from being done through regulation.

Until now, the ratio to which I referred earlier prevented that, but, in future, that protection will not exist. Someone could therefore say, "Let's bung up the upper earnings limit from £43,000 to £50,000 or £60,000 and we'll get the extra revenue." If the amendments were accepted, and Ministers and officials considered that proposal, another bright spark in the Treasury—where there are many bright sparks—would say, "Hold on. We'll have to go through the review in early October and introduce a further regulation, which means that, next year, the upper earnings limit will be reduced." That would be an uncomfortable experience.

The amendments would be effective if an error or a misalignment by a small amount occurred, but they apply mainly in the case of a brazen breach of a commitment made by Government. As I have said, they would not be binding for ever, but they would cause some inconvenience that should dissuade a Government from taking a path that hon. Members of all parties do not believe any Government should follow. That is the essence of our case. I stress again that it would not prevent the upper earnings limit from being changed, but it stops that happening by regulation and inadequately.

Let us make a comparison with income tax, which is similar to national insurance contributions. We know from the evidence-taking session that the Government have no proposals to merge them. We all acknowledge that there are great similarities between them, but a comparison of the parliamentary scrutiny that both get shows that national insurance contributions already get substantially less consideration. That will be reinforced if the Bill is passed in its current form. Our amendments attempt to rectify the problem to some extent and without jeopardising the Government's stated objectives.

We offer two alternative routes. Unless some mechanism is put in place—restoration of the ratio or either of the two amendments—the Bill will be dangerous and leave our taxation system open to abuse from a Government, whether the current one or a future Administration. We will therefore press one of the amendments to a Division, depending on the Financial Secretary's comments.

Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

I am grateful for an opportunity to speak briefly in the debate because there is a reasonable amount of consensus, which is perhaps reflected in the absence of a fevered atmosphere in the House.

My party supports the overall principle of simplification in the tax system. We regret, however, that the simplification has been given something of a bad name by the proposals before us, because it has been achieved as a by-product of an increase in overall tax revenue of about £1.5 billion. The public respond well to the idea of being better able to understand the tax burden that is placed on them, but not when a degree of sleight of hand is deployed to relieve them of some of their income in the process. The Budget left millions of losers: more than 5 million people were net losers. I always object when people talk about the abolition of the 10p rate of income tax. In my view, the 10p rate was not abolished; it was doubled in the budgetary proposals. That is the context in which we are having this conversation today.

National insurance is, in the view of most people who look at their payslips, to all intents and purposes a different form of income tax. We can debate at great length why it is different because of how it is calculated and when it is collected, but when people look at the total amount of their pay before taxation, I think that most would agree that the two amounts taken off at the bottom of their payslip have a broadly similar effect.

The 7.5 per cent. multiplier acts as a useful restraint on the Government and perhaps prevents some sleights of hand—or, to go a bit further, potential abuses—that might otherwise take place. The view that I took in Committee, and continue to take today, is that removing that multiplier at the upper limit—the 6.5 to 7.5 per cent. band—will present certain hazards of which we should be mindful. Mr. Gauke ran through them for our benefit this afternoon.

The hon. Gentleman has effectively tabled two amendments on this matter. Amendment No. 8, which links the increases to the rate of inflation, is the better of the two, and my party would be minded to support it for the reasons that he gave, and because we wish to see proper scrutiny and some restraint placed on this Government and future Governments in this regard. I understand the motivation behind amendment No. 10, but I am perhaps slightly less optimistic than he is about the effectiveness of a process that would involve the Treasury conducting a review of itself before taking any action. My inclination is to believe that such a review would conclude what those who had set up the review wished it to conclude, at its inception.

Photo of David Gauke David Gauke Shadow Minister (Treasury)

I should like to make a point in defence of amendment No. 10. Does the hon. Gentleman agree that it is a question of fact—I believe that there is sufficient certainty for this to be practical—whether the upper earnings limit exceeds the point at which higher rate income tax becomes payable? If that were simply a question of fact, and not one of interpretation, it would be unfair to suggest that the Treasury would not look at the matter with complete integrity. This is therefore a test that has sufficient certainty at the very least. This is not a complicated matter; it is a question of doing some sums. Given that we should set the requirement that the Treasury do the sums, I am confident that it would come back with the correct answer.

Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

I am genuinely grateful—I am not merely expressing the customary courtesy of the House—to the hon. Gentleman for that intervention. It was most useful. I take his point that, if we were measuring something that was a matter of fact—a number—the review would have much less scope for flexible interpretation.

The hon. Gentleman was good enough to refer earlier to a comment that I made in Committee—that if the Government of the day wanted greater flexibility at the top of the range, they could achieve that by increasing the number at the bottom of the range. The 7.5 per cent. multiplier would therefore go higher up the scale, if one wished to see it in those terms. I regret that the Government are seeking extra leeway in regard to placing a tax burden on people earning about £40,000, but not seeking to establish a corresponding loosening of the tax burden on those at the lower end of the scale who would benefit the most from being able to spend a greater proportion of their own money as they saw fit.

That said, I do not think that this Bill is the most controversial item of legislation that we will consider in this Session of Parliament [Interruption.]—or even this week. It is worth scrutinising properly, however. We looked at it in detail in Committee and I continue to take the view that, although the Government are not seeking to abuse their position, the safeguards in the amendments provide a useful way of ensuring that that remains the case in the future as well.

Photo of Peter Viggers Peter Viggers Conservative, Gosport

The attitude of Mr. Browne to the Bill is fairly friendly, but mine is not. I believe it to be a nasty little Bill, whose effect will be to impose taxation of £1.5 billion on those earning between £37,000 and £43,000. It was introduced as an afterthought—or rather to give the appearance of being an afterthought—to the Budget. The amendments so ably spoken to by my hon. Friend Mr. Gauke would be effective in helping in one way, but the main thrust of the damage will remain.

Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

To clarify my earlier point, one may or may not believe that the changes in taxation are objectionable—I happen to think that there is some sense in not having a huge dip in the marginal rates of someone earning £38,000; the rates are more advantageous than for someone earning £28,000—as one can legitimately debate them. However, I was saying that the Bill to enable the Government to make those changes is not necessarily as objectionable as the hon. Gentleman might find the changes themselves.

Photo of Peter Viggers Peter Viggers Conservative, Gosport

Indeed, but for this Government, harmonisation is always harmonisation up in respect of taxation rather than harmonisation down or evenly.

The origin of the lower and upper earnings limit and the six and a half and seven and a half multiple limit on the size of the UEL lies, of course, as my hon. Friend the Member for South-West Hertfordshire pointed out, in the transition from national insurance contributions to an earnings-related contributory system in the mid-1970s. When national insurance contributions were first introduced in 1911, they were flat rate and continued to be so until world war two, although they were varied by age and sex. Partially earnings-linked graduated contributions were added to the structure in 1961, but it was not until 1975, as my hon. Friend said, that national insurance contributions became fully related to earnings. As part of that reform, lower and upper earnings limits for contributions liability were introduced.

A lower limit was required for practical and administrative reasons and to concentrate contributions and benefits on people who depended substantially on income from work. The lower limit was linked to the level of the basic retirement pension and an upper limit was required to prevent excessive burdens and the acquisition of very high benefit entitlements. Those limits had been set in statute and considerable thought was given to them, as my hon. Friend noted, in the 1975 legislation. At that time, the Government deliberately set themselves a longer-term framework within which national insurance contributions were to be levied.

The press notice put out by the Treasury at the time of the Budget is worth citing:

"Current Social Security legislation requires the maximum UEL to be less than seven and a half times the Primary Threshold. The Primary Threshold is the point at which Class 1 NICs become due. Changes to the UEL below this amount are made by Regulations annually. Any change to the UEL above this maximum requires primary legislation in a NICs Programme Bill", which is, of course, what we are facing now. It continues:

"The first step in the alignment of the UEL...with the amount at which higher rate tax is payable will be made in 2008 by Regulations and the Re-rating Order respectively. The second step for the UEL alignment will be made in a NICs Programme Bill in time for a start date of April 2009".

By setting a framework that made it necessary for the Government to come back to the House with primary legislation before raising the national insurance contributions upper earnings limit, the Government deliberately set themselves a structure that would be self-inhibiting in preventing them from raising taxes lightly—because national insurance contributions are indeed a tax.

My hon. Friend has pointed out the deliberately cumbersome legislative programme that would be necessary were the seven and a half times limit to be broken. For us to agree, as the legislation proposes, that it should be possible for the Government to come back by way of affirmative resolution would make it so much easier for them to increase the burden of taxation on individuals in this country.

The amendments proposed by my hon. Friend—of those, I prefer amendment No. 8—are well judged. Amendment No. 10 would oblige the Treasury to audit its own procedures, which might introduce a rod for its own back, had it not fulfilled the requirements of those procedures. I do not share my hon. Friend's confidence that the Treasury could do that and create, as it were, a burden for itself. I much prefer amendment No. 8, which I strongly support.

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury 3:15 pm, 31st January 2008

I thank Mr. Gauke for tabling the amendments. I also compliment the House business managers, who arranged for this debate to take place after the debate on Holocaust memorial day. That allowed me to come and listen to one of the best debates I have heard for a long time—after this one, of course.

The amendments are prompted by concern that the Bill will somehow reduce parliamentary scrutiny of secondary legislation setting the upper earnings limit, by abolishing the restriction. As Opposition Members described, that restriction limits the raising of the upper earnings limit to seven and a half times the primary threshold. The hon. Gentleman advanced his case in a spirit of helpfulness, for which I am grateful, and broadly based his arguments around the premise that Britain should be protected from a Government who might be motivated to use the upper earnings limit as a tax-raising opportunity, if it were not tied in some way to the lower limit.

It is perhaps worth noting that there was once an upper earnings limit for employers—Members will know that national insurance contributions are paid by employees and by employers—but in 1985 the Government abolished it. The abolition of that upper limit and the introduction of that principle netted the Government £1 billion at 1985 prices. It is also worth noting that that proposal was not in their manifesto. I make those remarks gently.

The point that the hon. Gentleman made and the principle that he put forward are valid for debate, and I am sure that we would be advancing those arguments were I in his post, but we should take a moment to describe what happened. Historically, the lower earnings limit was set at a quarter of average earnings, whereas the upper earnings limit was set at one and a half times average earnings. That ratio was broadly maintained, but greater flexibility was introduced when the lower earnings limit was statutorily linked to the basic category A state pension. Its uprating then followed the switch from the link with earnings to that with prices.

Treasury Ministers announce the NICs rates and thresholds for the forthcoming year at or around the pre-Budget report. The Government Actuary's Department then produces a report on the impact on the national insurance fund of the changes announced, particularly whether the balance of the fund will be 17 per cent. of benefit expenditure, because the fund cannot borrow.

The report is then laid before Parliament, and a set of regulations and an order, which make the changes to national insurance rates and thresholds, are laid in January, or thereabouts. I think the next measure to be debated will be dealt with in February. The Department for Work and Pensions then lays regulations, which change the contributory benefit rates at the same time. Decisions made in this context are often scrutinised not just publicly but in the House. The timing of the regulations gives employers and payroll providers time to prepare for 6 April. I made that point in Committee, and I note that the hon. Member for South-West Hertfordshire has accepted some of the case that I made then. Like Mr. Field, who is not in the Chamber—no doubt he has been called away—he was keen to ensure that proper scrutiny took place.

We are not attempting a sleight of hand or a Macchiavellian move. Our intention is to align the lower earnings limit for national insurance contributions with lower tax rates, and to align the higher limit with higher tax rates. Our purpose is to simplify the tax process, not to use it as a potential for future tax increases.

All income tax changes are discussed at length in the Budget and Finance Bill debates. National insurance contributions have always been arranged by means of regulation, and over time that has proved an effective way of allowing parliamentary scrutiny. Although such scrutiny never seems adequate to those in opposition, I assure the hon. Member for South-West Hertfordshire that a Minister feels well scrutinised as a result of statutory instrument debates. If on occasion they do not last as long as they might, that may be because the issues are not as controversial as people fear that they might be if the Government abused the process.

A strong case has been made for amendment No. 8, which aims to restrict the rise in the upper earnings limit. I realise that the hon. Member for South-West Hertfordshire has changed the proposed date in response to what I said in Committee, but we have similar problems with this amendment. We would not be able to align the upper earnings limit for 2009-10 with the point at which higher rate income tax becomes payable, which we announced that we would do in the 2007 Budget. The limit could not be raised by £800 plus the retail prices index. That would remove the main purpose of our Bill, and a significant simplification of the tax and national insurance contributions system would be lost.

Accepting the amendment would cost about £700 million, which is no mean matter. That would restrict the Government's ability to take further action on, for instance, child poverty and lifting pensioners out of tax, as proposed in the personal tax package announced in the 2007 Budget.

Peter Viggers described this as a mean little Bill—I paraphrase his comments—and spoke of the tax hit on those earning at or above the upper earnings limit. I can reassure him that the large majority of taxpayers will be no worse off, as the reduction in the basic rate of income tax from 22p to 20p—the lowest rate for more than 75 years—will compensate for the increased amount of national insurance that they will pay.

Photo of Peter Viggers Peter Viggers Conservative, Gosport

I think the Financial Secretary said that no one would be worse off, but the statistics show that 5.3 million people will be worse off. She told the Committee that 3.5 million people would be worse off by less than £3 a week, which means—if my arithmetic is correct—that 1.8 million people will be worse off by more than £3 a week. Is that correct?

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

I did not seek to imply that nobody would be worse off, but the vast majority of taxpayers and pensioners will be better off as a result of the reforms in the 2007 Budget. Most employees earning at the upper earnings limit or above will be better off, using the 2008-09 tax year as an example. The loss of the starting rate band means that they are better off by £232 per annum. The raising of the upper earnings limit to £770 means that they are better off to the tune of £390 a year. The reduction of the basic rate to 20 per cent. means that they are £673 worse off. So overall they are £51.60 a year better off.

There are groups that are worse off—about 300,000 taxpayers at the upper earnings limit—and I have answered questions recently that make that clear. We anticipate, however, that the vast majority would be better off or no worse off as a result. Our intention in making the changes was to introduce a much simpler personal tax system—one of the simplest in Europe and the developed world.

Amendment No. 10 would also amend clause 1, and is an alternative to amendment No. 8. It would allow the upper earnings limit to be set without the current restrictions and subject to approval by both Houses of Parliament. However, it would then introduce the review, which we have had exchanges about. Under the amendment, after the regulations came into force the review would examine whether the upper earnings limit calculated on an annual basis exceeds the level of earnings at which higher rate tax becomes payable. If there is such a difference, the Treasury would need to make new regulations by the following January that would apply from the following April. Broadly, that is what the amendment asks us to undertake.

In principle, I have no objection to the Treasury's reviewing its work. It conducts such work thoroughly and there should be no reason for anybody to doubt the integrity of any review, but the amendment is unnecessary. The upper earnings limit and the level of the higher rate tax threshold will be announced at the time of the pre-Budget report. Announcing the levels then is necessary in order for changes to national insurance contributions legislation, guidance and software changes to payroll systems to be put in place for the next tax year. The regulations that set the level of the upper earnings limit will already be subject to affirmative resolution. I have argued that that is a perfectly proper means of parliamentary scrutiny.

The change suggested by the amendment would be inconsistent with the Bill's objective, which is to allow alignment of the upper earnings limit with the level at which higher rate tax is paid. The change proposed in the Bill should not give any cause for concern in terms of parliamentary scrutiny. We have the necessary parliamentary controls in place because the regulations will be subject to careful scrutiny under the affirmative procedure. The Bill provides the correct balance between allowing appropriate scrutiny and not putting pressure on limited parliamentary time for other legislative objectives. I therefore hope that the hon. Member for South-West Hertfordshire will withdraw the amendment.

Photo of David Gauke David Gauke Shadow Minister (Treasury)

I am grateful to the Financial Secretary for her thoughtful response. That has been characteristic of the tone throughout the progress of the Bill; we have managed to maintain a reasonably cordial and thoughtful approach. However, I must respond to one or two points. On her comment that the employers' upper earnings limit was abolished in 1985, I am running the risk of asking a question when not knowing the answer, but I do not know what the process was and whether it was done through primary legislation. The essence of my argument is that if steps such as those we are discussing are to be taken, that must be done through primary legislation. I should add that I was probably 13 at the time, so I do not feel too responsible for what was done then. If my right hon. and learned Friend Mr. Clarke were present, he might be able to tell us more.

I shall deal with the Financial Secretary's arguments on amendments Nos. 8 and 10. She makes the case that national insurance contributions were debated on a large number of occasions, but again, they were all during Committee. She says that such contributions have always been handled by regulation, but that has always been done within the framework of the restrictions that I described.

The Financial Secretary's argument on amendment No. 10 was essentially that it is unnecessary and that there is no cause for concern. I shall not repeat my arguments as to why there is a cause for concern, because we will not reach agreement. She also said that it was inconsistent with the objective of aligning the national insurance contributions upper earnings limit with the point at which one starts paying higher rate income tax. The purpose of amendment No. 10 is to ensure that they are aligned. As long as they are aligned, the procedure set out in amendment No. 10 will not come into play, so I am not convinced by her argument.

I am often convinced by the remarks of my hon. Friend Peter Viggers, with whom I served on the Treasury Committee for some months. I always listen closely to his remarks. The fact that they coincided with the comments made by Mr. Browne is neither here nor there. He particularly liked amendment No. 8.

The Financial Secretary's arguments against amendment No. 8 seemed to be that the Government's objectives in increasing the upper earnings limit could not be fulfilled. I acknowledge that point, but I can see no reason why the Government could not table a further amendment in the other place to enable them to do what they need to do for 2009-10—I believe that was the year to which she referred. There is no need for legislation for 2008-09, because the ratio would still apply. I do not find her arguments on amendment No. 8 convincing. Given the mood of the House and the comments of my hon. Friend the Member for Gosport, I am inclined to press amendment No.8, rather than amendment No. 10, to a Division.

Question put, That the amendment be made:—

The House proceeded to a Division.

Photo of Sylvia Heal Sylvia Heal Deputy Speaker 3:30 pm, 31st January 2008

I ask the Serjeant at Arms to investigate the delay in the Aye Lobby.

The House having divided: Ayes 148, Noes 260.

Division number 65

See full list of votes (From The Public Whip)

Question accordingly negatived.

Order for Third Reading read.

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury 3:48 pm, 31st January 2008

I beg to move, That the Bill be now read the Third time.

We have reached the final stage of this House's deliberations on the National Insurance Contributions Bill, which will ensure that the personal tax package can be fully operative. I think that it will be helpful if I outline the details of the package again, as some hon. Members have focused on only a few aspects of it.

Since 1997, the Government have delivered a comprehensive programme of reforms to the tax and benefit system. Their aim has been to simplify the system, to tackle child and pensioner poverty and to make work pay. Budget 2007 announced the next stage of the reforms as part of a rebalancing of the tax system to offer more support for work, families and pensioners.

The package simplified income tax and national insurance contributions. It increased the personal allowances for those aged 65 and over, and it changed the rates and threshold for child tax credit and working tax credit. It was carefully balanced, so that the tax credit changes focus on those whose need is greatest, including low-income families with children. The personal tax changes provide a simpler system with a modest impact on most sectors, and increased support to pensioners over 65. Each change should not be looked at in isolation.

Alongside producing the lowest basic rate of tax for over 75 years and one of the simplest personal structures in the developed world, that package results in four out of five households being better or no worse off, with the average household gaining £100 per year. A lone parent with one child will see their annual gain from returning to work rise by up to £350, and 200,000 children have been removed from poverty. Households with children in the poorest fifth of the population will be on average £340 per year better off, and around 600,000 fewer pensioners will pay income tax than would otherwise be the case, so that in total only 43 per cent. of pensioners will be taxpayers.

In helping to deliver that package, the Bill first allows the upper earnings limit to be aligned with the point at which higher-rate tax starts to be paid, significantly simplifying the United Kingdom's tax and national insurance contribution systems. From April 2009 there will be just two main rates of income tax, and they 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.

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 accrual point, the Bill returns the timetable for the removal of earnings-related state second pension to that recommended by the Pensions Commission. That will mean that by around 2030 the complex earnings-related structure of the state second pension will be withdrawn, leaving a flat-rate scheme that will be simple to administer and to understand for both contributors and pensioners.

I got a little carried away during my earlier contribution; I blame it on the flu. In trying to reassure Peter Viggers, which I patently failed to do, on winners and losers in respect of the upper earnings limit, I got the figures the wrong way round. The loss of the starting rate band and the upper earnings limit being raised mean that those people are worse off by the amounts that I gave. However, they are better off as a result of the basic rate being introduced at 20 per cent. I know that he knew that; he just did not want to cause me embarrassment in the debate. However, I was right to say that, overall, they will be £51.60 better off.

I am grateful to hon. Members for the way in which this Bill has been debated. It is a short Bill. It makes the two changes that I have described, for the reasons we have debated. I am pleased to be able to conclude that the Bill has had thorough scrutiny. As I have said, I have been impressed by the constructive contributions. I thank hon. Members on both sides of the House for their contributions to the debate.

Photo of David Gauke David Gauke Shadow Minister (Treasury) 3:53 pm, 31st January 2008

As the Financial Secretary said, we have had some good scrutiny of the Bill, but Opposition Members remain concerned about what the Bill seeks to achieve and the manner in which that is being done. As the right hon. Lady also said, there are two elements to the Bill. The first relates to taxation, in the sense of the change to the provisions on the upper earnings limit. The second relates to changes to pensions.

On the first point, we have already debated at some length—I do not intend to repeat the points that were made—our concerns about the lack of proper scrutiny that may occur should there be other increases in the upper earnings limit, and the fact that the restrictions in existing legislation provide some protection to ensure that there is an opportunity in this House, and particularly within this Chamber, to examine any changes to the upper earnings limit. There is no doubt that the Bill will weaken that ability, and we are considerably concerned about it.

It has not been an entirely happy week for the House of Commons, to put it mildly. I do not want to be hyperbolic, as there have been other issues of even greater concern, but we are unhappy about the effect of these provisions on future scrutiny. There is a broader point about the increase in the upper earnings limit: it is a stealth tax increase, part of what turned out to be the Prime Minister's final Budget as Chancellor, in which he produced a rabbit out of a hat for political effect, and £1.5 billion a year will be raised from middle earners as a result.

Photo of Adam Holloway Adam Holloway Conservative, Gravesham

Does my hon. Friend agree that we are in effect legislating for a £1.5 billion tax rise? We were told that the Bill would simplify the tax system, end child poverty, address inequalities in our society and so on, but it is a tax increase, not for the super-rich but, yet again, for middle-income families.

Photo of David Gauke David Gauke Shadow Minister (Treasury)

My hon. Friend makes a good point. We have been rather consensual this afternoon, as we were in Committee, when discussing areas of disagreement between us and the Government, but some of the debate on Second Reading was slightly more feisty, and the accusation was made that the Conservatives, in raising concerns, were on the side of the wealthy. Actually, as my hon. Friend points out, the people who will lose out as a consequence of both the package as a whole and the measures dealing with national insurance contributions are those who earn about £39,000 to £40,000 a year. That is certainly what the Institute for Fiscal Studies concluded. So we are talking about police officers—they are not receiving a full pay increase as it is—senior nurses and teachers, not the very wealthy. It is middle England, to some extent, that will suffer as a consequence of the increase.

I want to make it clear that we do not object to aligning national insurance contributions with higher rate income tax. The idea seems sensible, and I made the point earlier that debate on the matter has been led by my hon. Friend Mr. Osborne, the shadow Chancellor. The Forsyth report, which advocated something similar, has been influential, but those proposals were based on the use of fiscally neutral measures. As my hon. Friend Mr. Holloway made clear, the measures in the Bill are not fiscally neutral. They are intended to raise more tax revenue, which we know the Government need to do. I shall not stray too far into yesterday's Institute for Fiscal Studies report, which showed that there is an £8 billion black hole in the Government's finances, and that taxes will need to increase to ensure that the Prime Minister's fiscal rules are met; the point is that the measures are primarily a tax increase, and not one that will be paid by the wealthy. Looking more broadly at the Budget 2007 package—I shall not dwell on this point—we see that it is the low earners who make up the majority of those who will lose out.

We know that 5 million households will lose as a consequence of the measures. I do not think that we ever got an answer to the question asked at a Committee evidence session about how many of those 5 million households would be in the £39,000 to £40,000 income range. I do not know whether the Financial Secretary has an answer, but it would be interesting to know how many households within that band will lose out. Of course, it is the way in which national insurance contributions are being aligned with higher rate income tax that will cause that loss.

The second element of the Bill is the separation of the upper accruals point from the upper earnings limit. We all speak of the consensus on all sides about the Turner package of pensions reform, and there is a fundamental consensus on the thrust of what we need to do. The reason why we have expressed concern about what the Government propose in the Bill is not because of any abandonment of the consensus, as was alleged on Second Reading. We believe that there should be a restoration of the earnings link to pensions, and have advocated that idea for some time. We have also accepted the principle of separating the upper earnings limit from the upper accruals point as part of a package—as part of a set of proposals that would enable us to finance the restoration of the earnings link.

However, what we see in the Bill is the breaking up of that package, and we are legislating now on separating the upper accruals point from the upper earnings limit at least four years before the implementation of the restoration of that link. That will not happen until 2012, the date that the Government are working on. The Financial Secretary reiterated in Committee that it remains the intention and expectation of the Government that the link will be restored in 2012. The caveat on which the former Chancellor, now the Prime Minister, insisted was that the Government could not restore the link unless economic conditions allowed.

Given the green budget produced by the Institute for Fiscal Studies, one must seriously question whether those economic conditions will permit that in 2012. If not, it could be another seven years before the link is restored, yet we will already be paying the cost—people will be paying contributions to a contributory system, and their contributions will count for nothing. Those will no longer be contributions, but tax payments.

The Pensions Policy Institute raised the issue following the 2007 Budget when national insurance contributions were increased by the increase in the upper earnings limit, and made it clear that as a consequence, unless something was done, the flat-rating would be delayed until 2035. On Second Reading and in Committee we explored in some detail whether the Treasury was fully aware that that would happen. We were told explicitly that the Treasury was aware. In the Red Book showing the financial implications of every policy announced in the Budget, the additional costs of the increase in the upper earnings limit—in other words, the additional rebates that would be paid to funds for those who had opted out of the second state pension—were scored.

That being the case, it is surprising that the Treasury, which with the left hand had identified that there was an issue, had not done more with the right hand to address it. It was conceded by the Treasury officials—whom I take this opportunity to thank for their clear evidence and their help to the Committee—that the Red Book made no explicit reference to the problem. We know that the Treasury was aware of it, yet no proposals were made at the time of the 2007 Budget. One cannot help concluding that the 2007 Budget package was somewhat rushed, and that not all the implications were appreciated or, if they were, not all the necessary mitigating steps were taken to address those consequences. That Budget looks increasingly flawed—

Photo of Sylvia Heal Sylvia Heal Deputy Speaker

Order. I remind the hon. Gentleman that we are discussing the Third Reading of the Bill, not the 2007 Budget.

Photo of David Gauke David Gauke Shadow Minister (Treasury)

I take your guidance, Madam Deputy Speaker.

I move swiftly on to our essential concern about that second element of the Bill. A number of people—not the very wealthy—will be paying more in contributions but not receiving the benefit, because they will reach the upper accruals point. We have asked one question throughout. The Government's explanation is that we need to ensure that we revert to 2030-31 as the point at which flat-rating comes in. What has never been satisfactorily explained is why that 2030-31 date is so important. I appreciate that it was part of the original Turner package, but that was based on the assumption that the national insurance contributions upper earnings limit was not going to be increased as it subsequently was. Why was 2030-31 so sacrosanct that it had to be maintained?

My hon. Friend Mr. Dunne, who is detained on important constituency business today, raised that very question in Committee. The Minister answered that it would have led to higher earners receiving a greater than intended benefit for the state second pension. That is absolutely right, but those higher earners, as she describes them, were contributing more in national insurance contributions than had been anticipated. Why should they not also receive additional benefits? I hope that that point will be explored further in another place.

The Bill will raise additional revenue from national insurance contributions. It will weaken Parliament's ability to scrutinise further tax increases in this area, and it means that—in a manner not anticipated by the Turner report and the consensus that arose from it—people will pay more in national insurance contributions but not receive additional benefits as a consequence. For those reasons we remain concerned that the Bill is flawed, and we will oppose Third Reading.

Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury) 4:07 pm, 31st January 2008

Today is 31 January, and tax simplification is probably on the minds of many millions of our fellow citizens. In my party there is an appetite for greater simplification of the tax system, and since 1997 we have consistently criticised the Government on the issue.

Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

I shall give way to any Member who has taken an interest in the Bill for the past few hours; otherwise, I shall make progress.

A criticism that can be made of the Government in respect of the past 11 years or so is that a lot of additional complication has been added to the system; if some of that is now being reversed, that is welcome. I suppose I can boil our criticisms down to four succinct points. First, the simplification has come with a large sleight of hand; as has been pointed out, the Bill is part of a process that enables the Government to raise something in the order of £1.5 billion of additional revenue.

The situation was fairly anomalous before, when the marginal rate of tax being paid by people earning in the region of £38,000 or £39,000 was considerably higher than that paid by those earning in the region of £28,000 or £29,000. That dip in the graph in that income area could have been seen by many on lower incomes as being unfair on them if they took the view, as I do, that national insurance contributions are, to all intents and purposes, income tax under a different guise. I understand the argument that they are not the same because they are calculated and levied on a different basis. However, many people looking at their payslips at the end of the month will find it anomalous that some people on higher incomes pay lower marginal rates than some of those on lower incomes. I understand the logic of that aspect of the changes, but had the simplification been revenue-neutral, it would have been more widely welcomed than this measure, which combines it with a large additional tax take.

Our second objection is that abandoning the multiplier of 7.5 per cent., which Members who have been consistently interested in the Bill have discussed at length, represents a loss of discipline. It is always easier to loosen one's belt than to regulate one's diet. The Government would have been better advised, having raised the level of tax take beyond what would have been considered conceivable by Chancellors prior to this Government's coming to office, to look more often at how they can maintain and impose greater discipline on themselves instead of looking at ways to raise the tax take further.

My third point has been discussed at length by Mr. Gauke—the ability of this House to scrutinise changes that may take place in future. We share the concerns that Conservative Members have expressed in that regard. Even if one takes the view that the current Government are benign and benevolent in all their intentions—certainly, most people take that view of the Financial Secretary, if not of the Government—one can see that it is nevertheless desirable that safeguards should be put in place to prevent future abuses. I think that most people would agree that those safeguards are now less onerous than would otherwise have been the case.

My fourth point is about part 2, which we have not discussed at such length. As the Conservative spokesman said, as regards the state pension we are getting the pain at least four years before we get the gain. He did not say, of course, because Conservatives never do, that the need to reconnect the link with earnings and price increases has come about because the Conservative party broke it in the first place. Passing over that for the time being, it remains the case that these provisions are being coupled together in the minds of the public, yet we cannot expect the state pension to have that link restored until 2012 at the earliest. My party does not think that the provisions in the Bill are sufficient for pensioners, particularly poorer pensioners and women pensioners.

The Bill is not the most controversial measure, principally because it is a means to an end rather than an end in itself. Those who object to the Chancellor's Budget and to the Government's overall tax policy, and have rushed into the Chamber to make those objections, have good reasons to do so in many cases, and those are legitimate debates. However, the Bill is about enabling these changes to take place, and that is a separate argument from whether the changes have merit in themselves. I have plenty of views about the merits of the Government's policies and their last Budget. I also have reservations about aspects of the Bill that I feel less strongly about. The Bill is not particularly controversial, but it does have limitations that give us cause for concern; that is why we will not support it.

Photo of Mark Field Mark Field Conservative, Cities of London and Westminster 4:14 pm, 31st January 2008

It is a great pleasure to follow Mr. Browne. I suspect I may be getting into the spirit of things, and perhaps reflecting the concerns that my hon. Friends the Members for West Chelmsford (Mr. Burns) and for Bournemouth, East (Mr. Ellwood) wished to raise earlier, when I say that the fact that the hon. Member for Taunton is here on his own shows either that his 62 fellow Liberal Democrats are convinced of the case for simplification or that they are all hurriedly filling in their tax returns in advance of the deadline this evening.

One way or another, it has been a pleasure to have served briefly on the Committee considering this Bill. The evidence session that we had was an excellent innovation. It was the first time I had dealt with a Bill where there was quite that level of interplay between Ministers, officials and Members of Parliament. Such sessions are considerably more revealing than the stylised debate form, even within the relatively informal surroundings of a Public Bill Committee. The session that we had allowed some deeper questioning, and far more clarity. That ensured that the process was rather more revealing and, I suspect, more straightforward than it would have been if we had to constrain comments within the confines of stylised amendments. It was a useful process, and I thank the Minister and her officials for ensuring that we had that sort of debate.

My hon. Friend Mr. Gauke made some important points in his contribution today, and in Committee. He repeatedly pressed the Minister on the changes made in the 2007 Budget, and on the fact that there were clearly winners and losers thanks to the changes. It seemed to me that the Financial Secretary accepted that there would be as many as 5.3 million losers due to the budgetary changes, as stated by a senior civil servant to the Treasury Committee. It was interesting, however, that the Prime Minister refuted that figure. We will see how matters pan out.

The debate on national insurance and pensions is important. It will go on for many years and decades to come, so it is perhaps a little perverse that the Government have rather hysterically held on to this idea that we must have everything sorted out by 2031. I respect the idea, and very much agree with it, that we need long-term thinking in this area, but the world of work, pensions, national insurance and taxation will be very different in 23 years' time. If we consider the situation almost a quarter of a century ago, we find that the accepted norms of tax rates were higher, and that we were living in a less globalised world. One thing of which we can be sure is that the next 23 years will bring even greater change, with the emergence of China and India as great economic superpowers—

Photo of Sylvia Heal Sylvia Heal Deputy Speaker

Order. I am sure that the hon. Gentleman knows that he is going wide of the Bill. I hope that he will confine his remarks on Third Reading to the matters contained in the Bill.

Photo of Mark Field Mark Field Conservative, Cities of London and Westminster

Thank you, Madam Deputy Speaker. I stand duly admonished by you. With that in mind, the concept of simplification is very much to be admired, whether in speaking style or in relation to the Third Reading of the Bill.

I support the recommendation of my hon. Friend the Member for South-West Hertfordshire that we vote against the Bill because there is a sneaking doubt on the part of myself and my colleagues that it is driven by a desire to raise revenue more than anything else. As the hon. Member for Taunton pointed out, a mechanism could have been put in place to ensure that the process was revenue-neutral, instead of raising £1.5 billion or more as a back-door tax increase.

The Bill is very useful, but I hope that it is a starting point for a broader debate that needs to take place on fiscal drag. There are now almost 4 million people who pay higher-rate tax, compared with just 2 million just 10 years ago. I am probably taking words out of the Minister's mouth, but she may suggest that that is a sign of great affluence, and there is an element of truth in that. However, it seems to me that the lowest-paid in our society pay far too much tax as it is. It is not just an issue for higher-rate tax payers, but for those at the lower end of the band. Detailed thought is required, through this sort of legislation and in Finance Bills in years to come, to ensure that the lowest-paid pay far less tax. Certainly in my constituency in central London, taxation is a massive disincentive to the lowest-paid, especially those in social housing, to get any job, notwithstanding benefits such as tax credits and the minimum wage.

I look forward to the Bill reaching the statute book, as I am sure it will. We will vote against it and I hope that some of our arguments will hold sway in the House of Lords and that the Government will make some of the changes that we suggested.

Photo of Peter Viggers Peter Viggers Conservative, Gosport 4:19 pm, 31st January 2008

I do not look forward to the Bill reaching the statute book. It is a nasty little measure. The Exchequer Secretary described it as a technical measure and, although it is short, it is complicated. A website on the subject begins: "Prepare to be baffled". It says that the state second pension is the most ridiculously complicated benefit on the face of the planet.

"Prepare to be baffled" is the correct phrase, as is "Prepare to be taxed". The Bill will especially disadvantage those who earn between £37,000 and £43,000. As has been said, the overall measures in the Budget, including the Bill, will involve raising a tax of some £1.5 billion and creating 5.3 million losers. The Financial Secretary has pointed out that 3.5 million of those losers will lose less than £3 a week, but it follows that 1.8 million people will lose more than £3 a week.

Hon. Members will remember the French statesman Talleyrand, who was widely believed to be incapable to telling the truth. He was extremely devious and everyone tried to work out a second motive for everything that he did. When he died in 1838, Metternich is reported to have said, "I wonder what he meant by that." I felt that way when I listened for more than 10 years to the Budgets of the then Chancellor of the Exchequer, now the Prime Minister.

Let me quote from the Budget speech of 21 March 2007. The then Chancellor said that he was

"creating a tax system for income that has just two rates and two thresholds."

He also said that he was creating a system

"to reward work, to ensure working families are better off and to make the tax system fairer".—[ Hansard, 21 March 2007; Vol. 458, c. 827-28.]

First, he said the basic rate of tax would be cut by 2 percentage points from 22 to 20 per cent. and the 10 per cent. starting rate of income tax on earnings would be abolished from 2008-09. Consequently, income tax and earnings would be charged at two rates—the basic rate of tax at 20 per cent. and the higher rate at 40 per cent.

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Photo of Sylvia Heal Sylvia Heal Deputy Speaker

Order. I was allowing what I believed to be a passing reference, but I remind the hon. Gentleman that we are considering Third Reading of the National Contributions Bill. Perhaps he will relate his remarks accordingly.

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Photo of Peter Viggers Peter Viggers Conservative, Gosport

I am grateful to you, Madam Deputy Speaker. The then Chancellor of the Exchequer also said—this is the key point, leading to the introduction of this Bill—that the upper earnings limit for national insurance contributions would be aligned with the higher rate threshold. It is those words alone that led to the Bill. My quote showed the then Chancellor's typically glutinous preening, which contrasted with the comments that are behind the Bill.

It would have been helpful if the then Chancellor had developed the capacity for telling things the way they were. He made a great pitch for presenting the whole picture to the House. He made a great point about simplifying. He said that the upper earnings limit for national insurance would be aligned with the higher rate threshold for tax. However, he was not genuinely simplifying. He is simply bringing the rates together—aligning the rates but not the systems. Two systems remain—an annual taxation system and a weekly system for national insurance. It was therefore incorrect to claim that he was simplifying.

The system remains too complicated. We were told that the Bill and the other measures relating to the 2007 Budget were part of a package. We have been told many times, including today by the Financial Secretary, that we must look at the relief of child poverty and at lifting pensioners out of poverty. "Child poverty" is rather a misleading expression. A child might ask his father, "Daddy, are we quite rich?", to which the reply might be, "Well, I'm quite rich, but you, like all children, are incredibly poor." We are not talking about child poverty; we are talking about family poverty, which includes children. The expression is therefore misleading.

Tax is too complicated at the moment. Pensioner tax credit take-up is very low, and for Ministers to—

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Photo of Sylvia Heal Sylvia Heal Deputy Speaker

Order. I must remind the hon. Gentleman that he must relate his remarks to the contents of this Bill.

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Photo of Peter Viggers Peter Viggers Conservative, Gosport

Thank you, Madam Deputy Speaker. The Bill is of course part of the overall Budget measures, and this is a revenue-raising issue. The amount of tax, and revenue generally, taken by the Budget is too high. The Bill is part of that—

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Photo of Sylvia Heal Sylvia Heal Deputy Speaker

Order. That might well be the hon. Gentleman's view, but I must remind him once again that it is pertinent to discuss only the contents of this Bill on Third Reading.

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Photo of Peter Viggers Peter Viggers Conservative, Gosport

I am grateful to you, Madam Deputy Speaker.

I oppose the Bill, which, among other things, will give the Government the opportunity to raise further national insurance contributions without coming back to the House and introducing primary legislation. One of the purposes of the Bill is to allow the Government to come back with regulations to increase national insurance, and on that basis and for the other reasons that I have given, I shall readily vote against it on Third Reading.

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Photo of Tobias Ellwood Tobias Ellwood Shadow Minister (Culture, Media and Sport) 4:26 pm, 31st January 2008

I pay tribute to the comments of my hon. Friend Peter Viggers. He was right to point out the larger context in which we should place the Bill, and the errors that we have found creeping into the last Budget that we have been faced with. It is important to put in context the consequences of the Bill to the person in the high street and the people in our constituency. These consequences must be placed in the context of council taxes, increased fuel bills and so forth. This is not a tax-neutral measure, as the Government would have us believe. They might be able to convince the Labour Members that it is, using the figures in the Red Book, but the middle-income earners who will be hit by it will end up out of pocket.

We strongly support the idea of tax simplification. As my hon. Friend the Member for Gosport pointed out, we have a very complicated tax system, and it behoves us all to try to simplify it. There is a consequence to the Bill, however; it is the price tag that is associated with it. That is why the Conservatives will not support it on Third Reading.

If we were to ask any of our constituents exactly what national insurance contributions were, I doubt that they would be able to give us a proper definition. Some might say that they were supposed to link in with the original desire to protect against unemployment, or that they had some connection with the health service. Others might say that they had a link with pensions. The system is now so confusing, with all its smoke and mirrors, that it is seen simply as another stealth tax. It is a confusing tax that is used to raise more funds for the Government.

As we have heard from my hon. Friend Mr. Gauke, the impacts of the proposals will be twofold. The first will involve the changes to the upper earnings limit. This has come about because of the curious gap that has emerged between national insurance contributions and the higher rate of income tax. Simplification of the tax system is, of course, important, but we see this as a clever way of introducing a stealth tax that will give the Government a revenue increase of about £1.5 billion, which will be taken directly from middle-income earners. It has been estimated that that will affect about 5 million households across the UK, involving people who earn between £39,000 and £40,000 a year.

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

Does my hon. Friend share my curiosity about a question that we pursued in Committee? We asked how many of the 5 million households that will lose out as a consequence of the Budget would be in that £39,000 to £40,000 range, and how many would be in the lower range, involving people earning under £18,000 a year. I do not think that we have yet had an answer to that question.

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Photo of Tobias Ellwood Tobias Ellwood Shadow Minister (Culture, Media and Sport)

I know that my hon. Friend posed that and many other questions in Committee to which he did not get an answer —[Interruption.] I see that I have gained the Minister's attention. Perhaps she would—

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Photo of Sylvia Heal Sylvia Heal Deputy Speaker

Order. The hon. Gentleman may well not have received an answer in Committee, but as I said earlier, we are now on Third Reading of this particular Bill.

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Photo of Tobias Ellwood Tobias Ellwood Shadow Minister (Culture, Media and Sport)

I am grateful for your guidance, Madam Deputy Speaker, but I seek the Minister's indulgence to clarify how many middle-income families will be affected by the Bill. When she responds, perhaps she will allude to that important aspect. According to our calculations, the groups most affected by the Bill will be teachers, doctors, senior nurses and fire services personnel, who have just had a horrendous funding review. In Dorset, for example, firemen have an increase of only 2.5 per cent. over the next three years—1 per cent. in the first year, 0.5 per cent. in the following year and—

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Photo of Sylvia Heal Sylvia Heal Deputy Speaker

Order. Let me remind the hon. Gentleman once again that he must relate his remarks to the content of this narrowly drawn Bill.

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Photo of Tobias Ellwood Tobias Ellwood Shadow Minister (Culture, Media and Sport)

Once again, Madam Deputy Speaker, I appreciate your clarification, but as I pointed out earlier, it is the Red Book that misleads us by ignoring some of the other factors that affect our constituents.

The second aspect of the Bill is its impact on pensions, particularly in respect of the upper earnings accruals point, about which my hon. Friend the Member for South-West Hertfordshire spoke at length earlier. The House will be pleased to know that I will not go into any further detail at this stage. [Hon. Members: "Hear, hear.] I am pleased to hear that confirmation. Suffice it to say that the consequence of this second aspect of the Bill is an effective raid on the rebates of the state second pension to the tune of about £400 million. That is not an insignificant amount of money for a Government who say that they want to help those groups of people.

In conclusion, let me say that the consequence of simplifying the tax system comes with a price tag—a price tag of £1.5 billion.

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

Does my hon. Friend agree that when the Government talk about tax simplification, it is time for the rest of us to start counting the spoons?

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Photo of Tobias Ellwood Tobias Ellwood Shadow Minister (Culture, Media and Sport)

Once again, my hon. Friend gives us pearls of wisdom. This is a day on which we should be returning our tax forms, and it seems that that is exactly what the Liberal Democrats, who appear to be absent, are doing. It is also a day on which a green budget has been produced by the Institute for Fiscal Studies, saying that there is a black hole in the nation's finances of £8 billion—

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Photo of Michael Lord Michael Lord Second Deputy Chairman of Ways and Means

Order. Perhaps the change in Deputy Speaker will manage to persuade the hon. Gentleman that he is once again wide of the mark. If he is not going to return to the Bill, this may be a good time for him to think about concluding his remarks.

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Photo of Tobias Ellwood Tobias Ellwood Shadow Minister (Culture, Media and Sport)

I will take your advice, Mr. Deputy Speaker.

We are seeing not only a price tag, but a loss of scrutiny, so I recommend that every hon. Member vote against the Bill.

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Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury 4:34 pm, 31st January 2008

With the leave of the House, Mr. Deputy Speaker, I thank hon. Members for their kind words to officials, and I add my own thanks for their hard work, inspiration and assistance with the Bill.

Mr. Field and a number of other Members berated us for taxing more higher-rate taxpayers as a result of this package, but I have to say that the fact that more higher-rate taxpayers are paying higher taxes is a sign of economic success, increased national prosperity and record employment levels. Since 1997, there have been—

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T

This reasoning is incorrect: The amount of money earned in no way indicates changes in standards of living since the value of money changes over time - it would be entirely possible for someone's salary to decrease but their wealth to increase. Further, the whole point of banded taxation is to tax those who have a are likely to have more expendable income more. If more people enter a higher tax band it suggests...

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Photo of Michael Lord Michael Lord Second Deputy Chairman of Ways and Means

Order. I am sure that the Minister would expect me to be even-handed in these matters, so let me give her the same advice that I have given to Opposition Members.

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Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

Thank you, Mr. Deputy Speaker.

I have written to members of the Committee to provide the further details that were requested earlier. I leave the House with this final thought. This is what Robert Chote of the Institute for Fiscal Studies said about the Budget package that has been the subject of today's debate:

"To reform the system in a useful way within tight financial constraints and with only modest gains and losses should be a cause for congratulation rather than criticism."

I commend the Bill to the House.

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Question put, That the Bill be now read the Third time:—

The House divided: Ayes 256, Noes 147.

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Question accordingly agreed to.

Bill read the Third time, and passed.

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