Clause 1

National Insurance Contributions Bill – in a Public Bill Committee at 10:30 am on 7th December 2010.

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Question proposed, That the clause stand part of the Bill.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I welcome you to the Chair, Mr Brady, on a brisk and frosty morning, and that is just in the Committee room. We had a useful evidence session, which is an interesting innovation to the Committee stage that I have not previously been used to in years gone by. Clearly, having had the benefit of the wisdom of the witnesses, the detail of the clauses now makes much more sense.

Clauses 1 and 2 set out the principal changes to the rates of national insurance, and that will have a big impact on all our constituents, whether employees or employers. Clause 1 relates to the primary contributions to class 1 of national insurance, which largely affects employees. On Second Reading, the Opposition accepted the need for those changes. The previous Chancellor of the Exchequer, my right hon. Friend the Member for Edinburgh South West (Mr Darling), announced the measures and the current Government are introducing the legislation on them. It was my right hon. Friend’s choice to tailor the then Government’s approach to the deficit reduction not only to include gradual and temperate changes to public expenditure, rather than the harsh and speedy cuts to public services that the current Chancellor has chosen, but to reflect the need for the tax system to bear a measure of the strain as well, hence the changes that have come forward. I could not let the clause pass without acknowledging that we accept that that is necessary. Such a measure will never be welcomed with open arms by taxpayers up and down the country, but it is necessary given the wider fiscal and economic climate.

I was not a Member during the previous Parliament, so I was not able to question my right hon. Friend the Member for Edinburgh South West about the changes to national insurance that he was introducing. This is my only opportunity to ask those questions, given that the Minister is presenting the Bill. As I understand it, the national insurance fund represents all the revenues from the national insurance system, which was set up after the second world war as part of the Beveridge report, and it was designed to support the universal insurance system for the British people.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I was trying to describe the national insurance fund, but the historian on the Back Benches may know more about it.

Photo of Stephen Williams Stephen Williams Liberal Democrat, Bristol West

May I correct the hon. Gentleman’s history? National insurance was set up in 1911 by my political hero Lloyd George.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I am corrected on that fact. Perhaps a function of the national insurance fund changed after the second world war, but the hon. Gentleman makes an interesting point that echoes the issue that I was about to raise. As I understand it, the income from the national insurance fund comprises the contributions from employees, employers and the self-employed, plus interest on its own investments. Each year, those amounts are paid into those funds. As I understand it, there is currently a surplus on the fund—in other words, more money is being paid into the national insurance fund than is being paid out of it.

Will the Minister update the Committee on the current state of the national insurance fund? Over the years, various Government Actuary predictions have suggested that the fund is growing in surplus at an exponential rate, but I am not sure whether the recent credit crunch and recession changed that profile of expectations. Is the Minister able to set out how the fund stands? I think that is relevant, because my understanding is that the surplus on the fund is loaned to the Government—to the Debt Management Office, which includes the Commissioners for the Reduction of the National Debt—and interest on those invested moneys is paid back to the national insurance fund, which is quite a substantial amount of money in itself. The previous Administration had what was colloquially known as the golden rule; any borrowed moneys, including a surplus from the national insurance fund, were not to be used to finance current expenditure but were only to be used for investment, in particular capital investment such as infrastructure.

My second question to the Minister, if he can bear with me and give us a general update on the national insurance fund, is to ask him what the Government’s policy is on the use of the surplus. Given that much of the background to the debate on the changes to national insurance in clauses 1 and 2 has been a discussion about deficit reduction, it might be expected that it could count as part of current expenditure. As I understand it, however, the rules and conventions of the Treasury mean that that is not the case.

If we are embarking on legislation that changes national insurance rates and brings in revenue, yet there are constraints on how that revenue can be used, it is important that we know about them. If it is a continuation of the previous Administration’s policy that that money is for investment, so be it, and that is fine, but it slightly changes the prism through which we see many of the changes. I should be grateful if the Minister would set out the state of the fund and the position regarding the use of the surpluses.

Photo of David Gauke David Gauke The Exchequer Secretary

It is a great pleasure to serve under your chairmanship, Mr Brady. On a point of consensus, I agree with the hon. Member for Nottingham East that it is a cold morning in here. To use his word, I hope that proceedings will be brisk, but time will tell.

Clause 1 amends sections 8(2) and 9(2) of the Social Security Contributions and Benefits Act 1992 and the Social Security Contributions and Benefits (Northern Ireland) Act 1992. The clause increases the main percentage rate of class 1 contributions paid by employees from 11% to 12% and increases the additional primary percentage rate of class 1 contributions paid by employees with earnings above the upper earnings limit, which is currently £844 a week, from 1% to 2%. It increases the class 1 secondary rate, which is the employer contribution, from 12.5% to 13.5%. Those increases run from 6 April 2011 and, as the hon. Gentleman pointed out, they were announced by the previous Government so I am not entirely surprised that he supports them. Indeed, as we learn more about the Opposition’s policy and their belief that in the balance between spending cuts and tax rises more should be raised from taxation than they had planned at the time of the most recent general election, one might even expect them to want to increase the rates further.

Photo of Kelvin Hopkins Kelvin Hopkins Labour, Luton North

If I may follow that point, some have suggested—indeed, I have suggested —that the upper earnings limit on national insurance contributions ought to be lifted on a standard percentage, or even a progressively increasing percentage, all the way up. Have the Government considered that possibility, and how much revenue it might raise?

Photo of David Gauke David Gauke The Exchequer Secretary

That was the policy of the hon. Gentleman’s party in the 1992 general election, although it did not meet with notable success. We do not intend to go down that route, because of the potential disadvantages. As a whole, this Government believe that the previous Government got the balance wrong, in terms not only on the ratio of spending cuts to tax increases but on the increases in taxes on labour that that represents. Although it is not part of the Bill, we will raise the thresholds through a regulatory order. That will mean that much of the increase on labour will not occur, which is consistent with the 2010 Conservative manifesto pledge.

As I have said, this is not a particularly controversial element of the Bill, but I will try to answer the questions raised by the hon. Member for Nottingham East on the national insurance fund. He is right to say that there is a projected surplus for the national insurance fund, which is currently projected to be £50 billion for 2010-11. That surplus, however, will change as a result of policies announced in the emergency Budget, including the triple-lock pensions guarantee and the reduction in the secondary threshold. It is important that we do not make decisions on the national insurance fund by looking just at the balance as of today; it is important that we are prudent. Pensions will be paid from the fund, so we need to look at projections over the longer term.

The hon. Gentleman also asks whether we are using the national insurance fund surplus to fund other Government commitments and what our position is on that. The national insurance fund is run on a pay-as- you-go basis, with current income paying for current expenditure. Although national insurance contributions fund contributory benefits, they also come within the wider fiscal framework. It would be imprudent to use the surplus in one year to increase benefits without regard to the long term. Obviously, we cannot have benefits going up and down according to short-term conditions and how much money is coming into the national insurance fund. We have a surplus, but it is  sensible to use that to reduce the deficit in the short term, which clearly is to the long-term benefit of the UK’s public finances.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

That is the crux of my inquiry. In general terms, people have used the shorthand that the surplus, national insurance changes and the derived income are used to reduce the deficit. My point was that if there are constraints on the use of the surplus, surely that does not offset the general current expenditure fund. Those moneys are specifically earmarked for capital investment. If the Minister is not able to walk us through the line-by-line detail of Government accounting practice, perhaps he could simply confirm that Government policy remains as it has always been, with the surplus being used solely for capital investment.

Photo of David Gauke David Gauke The Exchequer Secretary

Nothing in what we are doing is a change to the usual practice on the national insurance fund, but for reasons that all Governments have recognised, the amount of money going out of the fund and the amount of money going into the fund do not match on a year-by-year basis. Having a surplus does not give us the opportunity to increase spending in a particular area, and I do not think that the hon. Gentleman is suggesting that it does. Without walking him through the details of Government accounting, there is no change to the approach that all Governments have followed—I suspect, since 1911, although I cannot entirely confirm that.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury) 10:45 am, 7th December 2010

I am grateful to the Minister for that explanation. It is important to have on record that the approach taken to the national insurance fund has not changed and that, essentially, the rules and the way in which the fund is accounted for remain as they did under the previous Administration. Many people are sceptical and think that national insurance is simply another form of income tax by a different name. It is, therefore, important to reiterate that there are certain constraints and rules related to the amounts of national insurance paid by employers and by employees.

Question put and agreed to.

Clause 1 accordingly ordered to stand part of the Bill.