Draft Social Security (Contributions) (Re-Rating and National Insurance Funds Payments) Order 2001

[back to previous text]

Mr. Clappison: At least some of the elements to which the hon. Lady has referred in the package of measures for industries require EU state aid permission. I do not expect her to have the details at her fingertips, but it would be helpful to have them if she does. If not, will she write to tell me the timetable for obtaining EU state aid clearance, given that we are close to the deadline of 1 April? If industry does not know the position on EU permission, there will be damaging uncertainties for investment.

Dawn Primarolo: I am happy to look into that and to draw the matter to the attention of my hon. Friend the Financial Secretary. Should there be information that is not on the public record, I will ask him to respond. The normal procedure is that every member of the Committee would receive a copy of the letter.

The hon. Member for Hertsmere asked how long the 0.3 per cent. reduction in employers' national insurance contributions would stay in place. As with all national insurance rates, the Government can review the employers' secondary class 1 contributions annually. There has already been an announcement of our intention next year to reduce the employers' rate by a further 0.1 per cent. Given the huge interest in the climate change levy and the importance of monitoring its progress, hon. Members will understand the necessity to do that.

The hon. Gentleman made a number of points about the various levels of national insurance. He said that in April the Government reduced the class 2 rates from £6.55 to £2—a substantial reduction. Then he said that the class 4 rate was a tax on the self-employed. I do not agree with him. The rise in the upper profits limit was not concealed. It was announced in the usual way in the March 1999 Budget. I do not see how much more public or transparent an announcement can be. If the Opposition did not notice it, that is not down to the Government.

Mr. Clappison: Will the hon. Lady give way?

Dawn Primarolo: I shall give way, and then I must make progress.

Mr. Clappison: The Paymaster General will recollect—and if she does not she can look at the record—that the Chancellor did not see fit to refer to that measure in his pre-Budget statement. If I missed that, perhaps she would refer us to the part of his pre-Budget statement in which he did so.

Dawn Primarolo: My point was that the Chancellor had already announced it. The purpose of a pre-Budget statement is to look forward to measures that the Government will take in the future or how they will build on changes that have already been made. If the pre-Budget statement had to repeat everything that we had done since our election in 1997 before announcing future developments, hon. Members would be a little cross at the amount of parliamentary time that that took.

The hon. Gentleman is entitled to take that view, but it is wrong for the Opposition to highlight one element of the package for the self-employed and to pick the little bits with which they do not agree, and then say that the whole package does not work. The new structure represents a good deal, particularly for the self-employed with low profits. The hon. Gentleman did not make any distinction between those on low incomes through self-employment and those on higher incomes. It is also widely recognised that the self-employed as a group still under-contribute compared with those employed under PAYE.

The various other changes that have been made in this order ensure that about 1 million low-paid employees will be taken out of the charge to national insurance, of whom about 750,000 are women. The vast majority of people who contribute to the national insurance fund are on PAYE, and it is important to strike a fair balance between the self-employed who earn small and large incomes and in class 1 contributions for employees. That balance must be reflected across the classes of national insurance.

Opposition Members did not acknowledge the fact that massive numbers of people have gained under the new structure. As a result of the abolition of the 2 per cent. entry fee in April 1999, 16 million employees whose earnings exceed the lower earnings limit will benefit enormously from this measure.

The final point—

Mr. Jack: Will the Paymaster General give way?

Dawn Primarolo: I wanted to move on to deal with the national insurance fund, which was also mentioned. This is the last time I shall give way.

Mr. Jack: I am grateful to the hon. Lady for giving way. She chastises us for not referring to certain incomes. Why is the explanatory memorandum so sparse on the details that the Paymaster General is only now bringing before the Committee?

Dawn Primarolo: The points of detail that I am bringing before the Committee are already in the public domain, and relate to the reforms of the national insurance contributions that the Government have made over the past two years. Opposition Members have focused on a few points in order to undermine the changes. I am setting the matter in context. I have not so far said anything that is not on the record and has not been the subject of previous debate.

The final issue raised by the hon. Member for Hertsmere concerned class 4 contributions and the entitlement to contributory benefit. He is right that class 4 national insurance was introduced in 1975 to provide a progressive element in the national insurance liability of the self-employed. The contribution helps to make sure that the self-employed pay a fair share of national insurance. If class 4 were abolished, one alternative would be to increase class 2 contributions, but that would hit disproportionately the lower income group of the self-employed. I presume that members of the Committee accept that we should ensure that those on lower incomes do not have to pay disproportionate contributions.

The right hon. Member for Fylde asked a number of questions about the national insurance fund and the report of the Government Actuary, the first of which was about the surplus. The quinquennial review--the next one is about to begin--gives details of the surpluses in the fund, and there is a surplus of £10 million in the current year. That is a matter or record, and has been referred to in parliamentary questions. However, the Actuary acknowledged that the report did not take into account the Tax Credit Act 1999, the Welfare Reform and Pensions Act 1999, and the reform of the pension structure in the Child Support, Pensions and Social Security Act 2000. They will have an effect on the fund, but there was no time to assess that effect in the quinquennial review. Naturally, as would be expected of any Government, we exercise prudent management of the national insurance fund and we maintain a healthy balance. As the right hon. Gentleman knows, there can be dramatic swings, and huge income may flow into the fund or there may be a sudden requirement to pay moneys out of it. Indeed, the Conservative Government experienced a massive swing in 1993-94, when they had to put £7.6 billion into the fund in order to keep it in balance.

The Government follow the advice of the Government Actuary on prudent levels and forecasting demands on the fund. We will not spend money now only to find that we are unable to meet commitments later. As the right hon. Gentleman knows, the national insurance fund is a pay-as-you-go fund. It is not permitted to borrow. Its only other income is from a Treasury grant. It will be clear from Government statements that, although a Treasury grant is not expected, prudent management requires us to hold ready on the level of contributions that may be necessary.

The right hon. Gentleman asked why national insurance contributions were being increased for the self-employed if the fund is healthy. Nobody would dispute that the fund is in a good state, but, as I have already stated, we have to consider the problem of spending money this year only to find that changes cannot be maintained year on year.

On that basis, I commend the order to the Committee, and I hope that, despite the important issues raised by Conservative Members, they will not vote against it.

11.33 am

Mr. Clappison: I have a few brief remarks to make that arise from the debate. It has been a short but interesting debate, and I am grateful to my right hon. Friend the Member for Fylde for his characteristically well informed remarks about the horticulture industry and the national insurance fund. In his intervention, he hit the nail on the head when he referred to the respective positions of this Government and the Conservative Government.

I want to make it clear that we do not like the climate change levy, which is the subject of paragraph 2 of the order. We are in favour of taking action to deal with the problem of climate change, but, like many others, we question whether loading costs on to British industries and exporting jobs to other parts of the world, where environmental standards may not be as high, is the right way to deal with the problem. We are not great fans of the climate change levy. The Government have set out what they regard as mitigating features, which they say are designed to help industry. Obviously we want industry to benefit from that, which is why I pressed the Paymaster General on the point about state aid clearance from the EU. I am grateful to her for offering to write to me and other members of the Committee setting out the timetable for that. She will accept the importance of industry knowing about that timetable and about the future. If industry is to avail itself of capital allowances, that will depend on investment decisions that will be taken in the forthcoming financial year. We want industry to have as much information as possible to guide their investment decisions.

The remaining part of the package—paragraphs 3, 4 and 5—deals with self-employed people. The Minister referred to class 2 contributions—the entitlement to contributory benefits of self-employed people. She was right to refer to the reduction that took place in those contributions in the previous financial year. I think that the record will bear out that I acknowledged that in my opening remarks. If not, I am happy to acknowledge it now.

In the various calculations that I put before the Committee of the overall impact of the package on self-employed people, I took account of the effect of the reduction in class 2 contributions. We need to look at the overall impact. The increase in class 4 national insurance contributions will outweigh considerably the effect of the reduction in class 2 contributions. I do not mean this as a criticism of the Paymaster General—it is a criticism that has been made of the Government on other occasions—but we have become accustomed to the Government using statistics selectively. Members of the public, such as the self-employed, want to know the position in the round. They do not want to hear that one contribution or tax has gone down and find out in the small print that another has gone up by twice as much. The calculations that I gave the Committee on the overall position were based on the reduction in class 2 and the increase in class 4 contributions—it was a whopping increase.

I hope that I made it clear that that increase has taken effect in particular at the higher end of the scale for self-employed people paying class 4 contributions. The Paymaster General implicitly accepted in her remarks, because she said that she wanted the self-employed to make more of a contribution to the national insurance fund —she will correct me if my interpretation is not right—that if we take the changes to class 2 and class 4 overall, there is a cost for the self-employed. The Institute for Fiscal Studies estimated that the revenue-raising effect of the measure would be £250 million. Overall, the changes raise revenue and impose a cost on self-employed people.

I gave examples of people who were earning £30,000 a year, which is just above the upper level limit. The Minister asked about the effect on people at the lower level. For these purposes, it is necessary to consider the effects of the changes of the past two years. In the present financial year, there was a substantial reduction in the lower limit of class 4 contributions to bring more lower earnings into the band that is taxed with national insurance contributions. This year, there has been an increase at the upper end by more than inflation—from £27,800 to £29,900. If we take those two effects together, the national insurance liability of someone earning £20,000 a year—I gave the example of someone earning £30,000—will increase over two years by £97.75.

The Minister is right, lower down the scale, there will be some reductions, but people earning £10,000 a year—[Interruption.] The Minister smiles, but there are people who earn £10,000 a year, although most self-employed people earn more than that. As a result of this and the previous year's order, national insurance contributions for such people will decrease over two years by the princely sum of £2.25.

Overall, the measure raises revenue from the self-employed. The Minister is taxing people—this is, in effect, a tax—at the higher level that much more, which creates a disincentive to hard work, enterprise and wealth creation. The self-employed know that if they work hard, as many of them do, and push their earnings up that little bit, they will pay far more in national insurance contributions.

The Paymaster General compared the position under the previous Government with that under this one. As I said, someone on earnings such as I described will pay approximately £500 more in national insurance contributions. Let us consider the extent of the profits of self-employed people and the width of the band on which and the rate at which national insurance contributions under class 4 are paid. In the last financial year of the previous Government, 1997-98, the lower limit for national insurance contributions was £7,010, and the upper limit was £24,180, paid at a percentage rate of 6 per cent. For the present financial year, those bands are £4,385 and £27,820, paid at a rate of 7 per cent., and for the forthcoming year the band is being extended even further, as it is being increased at the top level from £27,820 to £29,900.

The self-employed as a sector are paying far more through their national insurance contributions. That is the big picture, or the overall story. Considering the changes together, not singly, especially over the past two years, many self-employed people face a whopping increase, and the sector as a whole faces an increase.

Who are the self-employed? They include many of the people on whom we rely for new technology. Many of those involved as consultants in computing and new technology choose self-employed status. They also include people with whom we have been familiar for a long time in the economy—painters and decorators, small builders, plumbers, tradesmen and taxi drivers. I should like to be a fly on the dashboard when the Paymaster General gets into the back of a taxi cab, and hear her explain to the driver of a taxi who earns, say, £25,000 or £30,000 a year why what he pays under class 4 contributions has increased by hundreds of pounds. Such people will shortly be able to express their opinion of the Government and the whopping increases that the Government have imposed on them.

11.42 am

Previous Contents Continue

House of Commons home page Parliament home page House of Lords home page search page enquiries ordering index

©Parliamentary copyright 2001
Prepared 23 January 2001