My Lords, you have to look at the distribution of the overall tax take. The poorest families in our country have benefited significantly from the tax and benefits policies of this Government.
Just to put it clearly on the record, the proposal to align the national insurance rate was part of a simplification package which, as we know, dealt with the 10p rate of income tax. It reduced the basic rate of income tax from 22p to 20p; it increased the upper earnings limit for national insurance by £75 a week above indexation; it raised the aligned higher-rate threshold and upper earnings limit by £800 a year above indexation; it raised personal allowances for pensioners by £1,180; it raised the threshold of the working tax credit by £1,200; and it increased the threshold of working tax credit to make work pay. The net cost of that to the Exchequer was £2.2 billion, before the additional cost that ensued as a result of the increased personal allowance.
The noble Baroness said that she did not disagree with the policy, and I believe that was echoed by the noble Lord, Lord Forsyth. I welcome those comments, but if you do not disagree with the policy then you achieve it by one of two ways or a combination of them: either you raise the upper earnings limit for national insurance contributions or you reduce the limit of the basic rate of tax. You cannot do it any other way. One way or another, if the noble Baroness supports this policy, I presume that she is saying that she would have done the same sort of thing.
I shall come on to the issue of stealth taxes in a moment but perhaps I may go back to the specifics of the amendment. As has been explained, its objective is to allow the UEL to be aligned with the higher-rate tax threshold for income tax for the 2009-10 tax year announced in the Budget. Perhaps I can confirm that, as I think that the noble Lord, Lord Forsyth, said that we had abandoned that principle. The Government remain committed in principle to aligning more closely the income tax personal allowance with the national insurance primary threshold and the national insurance contributions system to improve fairness and coherence, reduce administrative burdens and make them easier to understand. We await further announcements from the Chancellor at the PBR, but that remains the policy.
The amendment goes on to propose the insertion of new Section 5A into the Social Security Contributions and Benefits Act to apply for 2010-11 and subsequent years. The new Section 5A would allow the upper earnings limit to be increased by RPI and rounded up to the nearest pound. The UEL could then be adjusted by an amount not exceeding £2 for the purposes of aligning the annualised upper earnings limit with the sum of the personal allowance and the basic rate limit under Sections 20 and 35 of the Income Tax Act 2007 for the tax year. This would provide a maximum adjustment of £106 in any tax year. I have not done the same calculations as the noble Baroness has on the range in which that threshold works, but I accept what she says.
I should like, first, to address the main difficulty with the amendment. I think that it was brushed aside by the noble Lord, Lord Newby, but it is real. Under this formula, from 2010-11 the UEL can be raised only by up to an increase related to the RPI and only if the personal allowance and basic rate limit are correspondingly increased by the RPI. A difficulty would arise should the Chancellor decide that it would be appropriate for the personal allowance and/or basic rate limit to be changed by a figure other than the change in the RPI, and other than that automatically allowed under the Rooker-Wise convention—I hesitate to say this in the absence of my noble friend, and I hope that he does not read the record, but I think that that convention should more strictly be called the Rooker-Wise-Lawson convention—and to make the necessary changes through the Finance Bill. If such a decision were taken, the amendment would prevent the Government setting a UEL for NICs, as it would not be possible to achieve the alignment within the tolerance set at step 3 of new Section 5A.
The second major difficulty with the amendment is one of timing. NICs regulations have to be in place for the start of the tax year because contributions are paid on an earnings-period basis. However, if the tax thresholds were increased by more than the RPI through a Finance Bill, they would have not received Royal Assent until after the NICs UEL regulations were needed. In some circumstances, you might change the whole budgetary process and try to do that a year or two in advance, but as a practical, ongoing basis for dealing with fiscal policy I do not think that that is realistic.
Even if the first difficulty could be overcome, a further NICs Bill would be needed to deliver the sought-after alignment. As changes to social security legislation require programme Bills, it is unlikely that a slot for a Bill could be found at such short notice or that it would complete its passage through Parliament in time for the regulations to be in place for the start of the following tax year so as to enable employers to make deductions of NICs at the new level.
In my view, it would not be a sensible use of limited parliamentary time to have a short NICs Bill every time we wanted to change the UEL by less or more than the RPI. As I have explained, the rounding rule in step 3 of proposed new Section 5A could provide insufficient flexibility. I do not believe that it would be a sensible use of limited parliamentary time to have a NICs programme Bill every time we wanted to make that change. If such a restriction had been in existence over the past 20 years, it would have necessitated a further two NICs Bills between 1997 and the 2007 Budget and a further seven NICs Bills in the 10 years preceding 1997 when either the personal allowance or the basic rate limit was increased by either less or more than the RPI.
I am bound to say to the noble Baroness and her colleagues who accuse us of stealth taxes that those were serial freezes of the basic rate limit and the personal allowance. The basic rate limit was frozen in 1991, 1992-93, 1993-94 and 1994-95. It was overindexed in 1996-97, which coincided with an election, but over that 10-year period adopting this formulation would have required seven programme Bills, so there are practical difficulties to be faced.
I will touch on some minor technical flaws, which could readily be put right. The first is that the amendment requires the Secretary of State for the DWP to determine the level of adjustment; it would have to be the Treasury. In addition, the Budget resolution that moves the basic rate limit is in Section 10(5) of the Income Tax Act 2007 and not Section 20. Those flaws could be fixed.
I would also like to return to the rounding formula in step 3. As I mentioned earlier, that allows the UEL to be adjusted by an amount not exceeding £2 for the purposes of aligning the annualised upper earnings limit with the sum of the personal allowance and basic rate limit, meaning an adjustment of £106 at the maximum. As no provision has been made to uprate the £2 amount, it will inevitably lead to a reduction in the flexibility of setting the UEL over time and primary legislation will be needed to amend it. Coupled with proposed new Section 5A, the requirement for affirmative procedures on regulations for setting the upper earnings limit amounts to a huge increase in parliamentary oversight.
If affirmative resolutions are brushed aside as having no significance, why are we as a Government often pressed to change a negative process into an affirmative one when debating Bills? The scare story is that the Delegated Powers Committee spends a lot of time looking at these things yet we brush it aside, and that this is about the potential to raise £8.5 billion without proper parliamentary scrutiny. The noble Lord, Lord Newby, said that these debates were not routine, except in rare circumstances. If the Government were attempting to raise such money in the way that the noble Lord suggested, do you seriously not think that the House would vote down that proposition? Of course it would. There is protection built in.
I do not see that that the change proposed in the Bill should give anyone cause for concern in terms of parliamentary scrutiny. The House always considers extremely carefully affirmative resolutions that come before it. The Delegated Powers Committee has expressed no concerns about the powers in the Bill. That committee is diligent in the way that it goes about its work. We are frequently on the receiving end of its recommendations. It made no adverse comment on the powers.
The Chancellor has said that he will return to the tax and NIC rates and limits for future years in the PBR. The commitment remains to align the UEL with the level at which higher rate tax becomes payable. In the context of the Government's commitment to aligning the UEL with the higher rate tax threshold, the amendments do not work because they could lead to misalignment which would require a further NIC programme Bill. I therefore urge, without any great prospect, the noble Baroness and the noble Lord not to press their amendments.