Budget Statement - Motion to Take Note

Part of the debate – in the House of Lords at 5:17 pm on 14th March 2017.

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Photo of Lord Willetts Lord Willetts Conservative 5:17 pm, 14th March 2017

My Lords, I draw the House’s attention to my entry in the Register of Members’ Interests and particularly my post as executive chair of the Resolution Foundation. I shall draw on some our Resolution analysis in my brief remarks.

I welcome the Budget, and we at Resolution particularly welcome the steps, however controversial, on the reform of national insurance contributions. The back-drop to this measure is an increasing tendency for companies to try to shift their employees into self-employed status so as to save on employer national insurance contributions. This is a significant and growing gap in national insurance revenues. At the beginning of this Parliament that gap was perhaps £3.2 billion. We estimate that it could be as high as £5.7 billion by the end of this Parliament. I would love to believe that this trend reflected a fantastic and sudden growth in the spirit of entrepreneurship in our country. The evidence, however, is that whereas in 2002 22% of the self-employed had employees, now that is down to 11% of the self-employed having employees.

Of course we need to promote entrepreneurship, and I would welcome any measure specifically aimed at providing incentives to entrepreneurship, but that is not the origins or the purpose of the way in which national insurance contributions are set for self-employed people. The purpose of the different national insurance contribution rate for the self-employed was supposed to reflect the fact that their benefit entitlement is more modest, as we have heard already from the noble Lord, Lord Macpherson. However, over years the entitlements to benefits of self-employed people have grown—most recently, of course, with the single tier pension. It has been calculated that, if the self-employed national insurance contribution rate were set below 12% to reflect their more modest benefit entitlement, it would be 11.8%. So the logic of this in the contributory principle is clear—the 9% rate was not justified. That is why I support the proposal. I very much hope that, in the course of the summer, when we have Matthew Taylor’s review published and the wider consultation that the Government are committed to, we will see that important reform in a wider context.

I pay tribute to the personal commitment to productivity of my noble friend Lady Neville-Rolfe. I know that throughout her ministerial career she has pressed on that; she is fortunate in having as Secretary of State Greg Clark, who is personally committed to it, and we heard an excellent intervention from the noble Lord, Lord Bhattacharyya, supporting some of the measures to boost productivity. The cliché that hangs over this debate is the remark of Paul Krugman:

“Productivity isn’t everything, but in the long run it is almost everything”.

That is not as straightforward as it sounds; I draw the Minister’s attention to the fact that, although compensation in total has broadly tracked productivity, it is not the case that median earnings have tracked productivity. Indeed, in the last decade or so, median pay has gradually fallen behind productivity and is now 18% lower than it should be if it had just matched productivity improvements since 2002. So we do not just have a productivity problem in this country—it is not getting through to people in their pay.

There are two main reasons for the problem. One reason is that an increasing proportion of the improvements in pay are being secured by the more affluent employees, so it is not feeding through into median pay. That is a problem that needs addressing because, if we want people to be motivated to make their contribution to improving productivity, it is reasonable to expect them to have a share in the improvements and benefits. But there is another reason as well that is even more important. We reckon that out of that 18% falling behind in median pay, 5 percentage points or so are attributable to the fact that median pay has underperformed compared with wages as a whole, but 8 percentage points are attributable to wages in general falling behind compensation. An increasing element of compensation is not coming in the form of wages at all; an increasing share of compensation has been taken in pension contributions and less is being taken in pay. For the generation to which I belong—the baby boomers—when we were at our peak earnings there were contribution holidays, because company pensions were supposed to be in surplus, so we enjoyed the period when an unusually high proportion of total compensation went in pay. Now we have discovered deficits in pension schemes and instead an unusually low proportion of compensation is being taken in pay. That means that younger workers are working hard to generate revenues that do not flow into their pay packets but go to plug deficits in pension schemes to which they do not even belong.

I draw the Minister’s attention to a consultation document produced by the Department for Work and Pensions the other week, specifically looking at company pension schemes. Among other issues, it looked at whether the generous inflation rules for uprating company pensions could be justified. The sole consideration in that document was whether or not the companies would go bankrupt if they were obliged to pay these very large sums into their pension schemes to plug deficits to enable this generous inflation protection to be delivered. There was no discussion of the wider issue of the fair distribution of economic returns between generations and no consideration of the fact that the younger workers in those companies may not be enjoying any pay increases at all, while at the same time pensioners are protected in that way. Will the Minister assure me that, as part of the consideration of that consultation document, the Treasury will look at the perspective of fairness between the generations? I wholeheartedly support her commitment to productivity improvements, and I hope that it is matched by a similar commitment to ensuring that improvements in productivity feed through into the living standards of all age groups in our country.