Fourth Standing Committee
on Delegated Legislation
Tuesday 23 January 2001
[Mr. Eric Illsley in the Chair]
Draft Social Security (Contributions)
(Re-rating and National Insurance Funds Payments) Order 2001
The Paymaster General (Dawn Primarolo): I beg to move,
That the Committee has considered the draft Social Security (Contributions) (Re-rating and National Insurance Funds Payments) Order 2001.
Good morning, Mr. Illsley. It is delightful to see you in the Chair and I hope that you will enjoy keeping us in order.
I am pleased to introduce the order, which deals with various national insurance contribution rates and thresholds. First, it reduces from 12.2 per cent. to 11.9 per cent. the rate of secondary class 1 contributions payable by all employers from April 2001, as part of a package to recycle revenues arising from the introduction of the climate change levy. It will thereby help to protect United Kingdom competitiveness.
Secondly, the order raises the small earnings exception for the self-employed, below which, depending on the level of profits, they may claim exemption from class 2 contributions. The exception will rise next April broadly in line with prices, from £3,825 to £3,955 a year. Given that the rate of class 2 contributions for 2001-02 will remain at £2 a week, many people may choose to pay the contribution to protect their benefit entitlement. Nevertheless, the increased exception will be of real assistance to the lower-earning self-employed.
The draft order also sets the profit limits between which self-employed people pay class 4 contributions. The lower limit at which such contributions become due will rise in line with income tax personal allowance, from £4,385 to £4,535 a year. At the other end of the scale, the upper profits limit will continue to match the upper earnings limit for employees, at £29,900 for 2001-02. That ensures that the self-employed pay class 4 contributions on much the same range of earnings as employees liable to class 1 contributions and is an essential element in making the national insurance system fair for everyone.
Thirdly, the draft order deals with the weekly rate of voluntary class 3 contributions, which help those with insufficient contribution records in any given tax year to make up a ``qualifying year'' for benefit purposes. The rate of class 3 will rise next April by 20p to £6.75, a standard re-rating in line with prices.
A review of contribution rates is accompanied by a report from the Government Actuary detailing the effects of the draft order, and of the draft order to up-rate benefits laid by my right hon. Friend the Secretary of State for Social Security, on the national insurance fund. I am pleased to say that, for the third year in a row, there is no expectation that the fund will need a Treasury grant. Nevertheless, a prudent minimal provision is made in line with advice from the Government Actuary.
As happened last year, there is a single draft order for Great Britain and Northern Ireland. Northern Ireland has a separate national insurance scheme from Great Britain, but the two schemes are closely co-ordinated and maintain parity of contribution rates. Following the transfer of policy, Northern Ireland's social security legislation was amended to enable the draft re-rating order to include corresponding measures for the province.
I commend the draft order to the Committee.
Mr. James Clappison (Hertsmere): First, I associate myself with the Paymaster General's remarks about what a great pleasure it is to serve under your chairmanship this morning, Mr. Illsley. We may have had a false start in the past, but hopefully we will be able to get around the course this morning.
As the Paymaster General has outlined, the order is annual, and deals with changes to national insurance contributions. We believe that the changes contained in the order will result in substantial burdens being placed on self-employed people. The changes in paragraph 2 were announced some time ago by the Government to mitigate the effects of the climate change levy. Those changes are part and parcel of a wider policy that will result in significant additional burdens being placed on manufacturing industry.
The climate change levy is being introduced on 1 April 2001. The Government propose to compensate United Kingdom firms for the introduction of that levy by reducing the main rate of employer national insurance contributions. Paragraph 2 does that, reducing the main rate from 12.2 per cent. to 11.9 per cent. However, as the Paymaster General accepted in her opening remarks, that should be seen as part of a package of measures relating to the climate change levy.
From an early stage in the evolution of the climate change levy into Government policy, there has been concern that the recycling of the proceeds of the levy through a reduction in national insurance contributions would not be neutral as between the manufacturing industry and the public sector. As far back as July 1999, which was fairly soon after the policy had been announced, the Select Committee on Trade and Industry produced a report that set out its concerns on this score. It said:
We have been disturbed by the unprecedented scale of the reaction to the Government's proposal. We share the view expressed by several witnesses that without appropriate modifications and exemptions, the levy could prove a blunt instrument which does considerable damage to sectors of the British economy already struggling to maintain their profitability.
For evidence of the fragility of the competitive position of some sectors of the United Kingdom manufacturing industry, we need look no further than the demonstrations that took place last weekend at Luton about the future of General Motors. Notwithstanding the reduction in national insurance contributions in paragraph 2, the climate change levy will impose a net burden on the car industry as from 1 April. The same is true of other sectors of manufacturing industry--witness the words of the Engineering Employers Federation, which states:
We are concerned that a sizeable proportion of Engineering Employers Federation member companies will be substantial net losers under the levy/national insurance rebate system. This will cause many United Kingdom engineering and manufacturing companies to become uncompetitive in international markets.
On the recycling mechanism for national insurance contributions provided for in paragraph 2 of the order, the Trade and Industry Committee concluded:
We received the distinct impression that there was considerable confusion over the meaning of the phrase `revenue neutral' and that some witnesses had wrongly assumed that it was intended to convey the impression that no firm or sector would lose out as a result of the introduction of the levy. The phrase is not even an accurate description of the levy's effect on public finances, since there will be a net saving on public expenditure, due to the public sector's reduced liability for national insurance contributions.
Will the Paymaster General tell us whether she shares the analysis of the Trade and Industry Committee, and if she shares our concern about manufacturing industry? Does she agree with our conclusion that manufacturing industry will be the loser in all this? That will be especially true of manufacturing industry that is vulnerable to foreign competition from firms that do not necessarily have to bear the same costs.
I shall give a brief example of how the order could affect manufacturing industry. The Confederation of British Industry estimates that the cost of the climate change levy to the china clay industry in Cornwall will be £5 million. Under paragraph 2, the industry will receive a benefit of £300,000 through a reduction in the national insurance contributions that it has to pay, but that will still leave it substantially out of pocket. The industry faces, and will continue to face, stiff competition from producers in other parts of the world, including Ukraine and Brazil, and it is doubtful whether those countries will face that additional cost. Many fear that the combined effect of the levy and the reduced national insurance rate will be insufficient to compensate the industry for the introduction of the levy. That will result in a net loss and lower production of china clay--also known as kaolin--with the consequent loss of jobs to countries where environmental standards may be lower.
In answer to a parliamentary question about the cost of the climate change levy to the china clay industry, the Financial Secretary referred me to a parliamentary answer, in which he stated:
All businesses, regardless of energy intensity, will benefit from the 0.3 percentage point cut in employers National Insurance Contributions, the energy efficiency funding and the enhanced capital allowances for energy saving investments. They may also choose to benefit from the exemptions for renewable or combined heat and power energy.[Official Report, 12 December 2000; Vol. 359, c. 118W.]
As the Paymaster General said, the Government see the 0.3 per cent. reduction in employers' national insurance contributions as part of a wider package that the Government have designed allegedly to mitigate the effects of the introduction of the climate change levy. Given that other parts of the package, including the enhanced capital allowances, will require clearance from the European Union on state aid grounds, perhaps the Paymaster General will tell us about the progress of the Government's application for state aid clearance from the EU. That will be of great interest to many sectors of manufacturing industry, given that we are now up against the timetable for introducing the climate change levy on 1 April.
The Chairman: Order. I have listened intently to the hon. Gentleman's comments, but I suggest that he is going slightly wide of the order in speaking of certain industries and of European state aid.