Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 180 - 199)

TUESDAY 23 APRIL 2002

MR GUS O'DONNELL, MR NICHOLAS MACPHERSON, MR NICHOLAS HOLGATE, MR ALEX GIBBS AND MR JOHN KINGMAN

Mr Cousins

  180. Taking the National Insurance contributions changes in the round, do you have any estimates of the job losses that will be caused?
  (Mr Holgate) Any impact on employment will depend on behaviour of employees and employers. Given the really remarkably robust state of the labour market, and not in any way wishing to sound complacent but merely cautiously optimistic, I think it is perfectly possible that there will not be a major, if any, significant impact on employment.

  181. Yes. I would like to see those words actually written down. If I have understood that, it is perfectly possible that there will be no significant change to employment.
  (Mr Holgate) Correct.

  182. So that means it is likely that there will be some change. What will that be?
  (Mr Holgate) I would not go for your corollary I am afraid. I think we have to look at what has happened to the labour market in the last few years. As you may know, there has been a 1.5 million increase in total employment since spring 1997, and employment at the moment is close to record highs and unemployment is close, if not at, record lows.

  183. These are very general figures with which we are all entirely familiar. Are you really trying to tell us there will be no impact on employment from the changes in National Insurance contributions in the round?
  (Mr Holgate) I think it is very much a question of whether employers and employees will reach responsible pay settlements set in accordance with what is affordable. It is up to a lot of people out there taking real decisions over the next year or two as to what, if any, impact there will be on employment.

  184. I notice you had that written down in case you hit a time of trouble. It is an interesting statement. Bearing in mind Mr O'Donnell's earlier comment about labour hoarding that he felt was going on in the economy, do you not think there will be some impact on jobs from the National Insurance changes?
  (Mr Holgate) If you move on from the labour hoarding issue to say what is going to happen to the economy in the next few years, I think the forecast is one of continued growth. In the short term I think it is growth above the long term trend. So in that sense, as I say, like the healthy labour market, those are forces helping to ensure that there should be little, if any, impact.
  (Mr O'Donnell) Could I add one rider to that?

  185. Mr O'Donnell, you are hoping that a return to incomes policy will mitigate the employment effects of the National Insurance changes.
  (Mr O'Donnell) No. The academic economists will give you arguments that depend on the incidence of profit versus wages but what I was going to say is, when we try and look forward and estimate the kind of thing you are doing, we have to take into account the fact that there are lots of changes to incentives going on which are not just this one change, so it may be going forward it will be very difficult to estimate this effect because not least the fact that NICs were revised pretty substantially earlier in this Parliament. Those changes are coming through. You have changes at the lower end, and when you do this sort of analysis of employment effects, what you get is that when you make big changes at the lower end they can make a difference but at the middle it is very difficult to pick up labour supply effects.

  186. So to summarise there will not be any effect on employment but, even if there is, we will not be able to work out what it is?
  (Mr O'Donnell) I was just saying it is very difficult to estimate the separate effects of these different things—even ex post—and that is the nature of the science.
  (Mr Holgate) The working tax credit has quite a big role to play here in the gains to work for people who you might say whose attachment is at its weakest.

Mr Tyrie

  187. It was a very interesting notion that a breach is not a trickle but a flood. Could you help us on what is the definition of the upper earnings limit on National Insurance contributions?
  (Mr Holgate) I would say it is the point at which 11 per cent stops and 1 per cent starts with respect to employees.

  188. It is the point at which the flood stops and the trickle starts?
  (Mr Holgate) Yes.

  189. That is very helpful. I have several more questions on National Insurance contributions decisions. On page 124, paragraph 6.42, the first line says, "the NHS has always been and will continue to be funded in part from NICs". Is that all of the NHS? Is that part of it, and which part of it?
  (Mr Holgate) As you may know, when Sir William Beveridge wrote his report in 1942 he envisaged that National Insurance contributions would contribute towards the Health Service. I think the figures then were that he expected the NHS to cost £170 million in its first year and that National Insurance contributions would contribute £40 million, so he was anticipating a contribution of the order of 20 per cent. In recent years, the portion of National Insurance contributions that goes to the Health Service has funded roughly between 12 and 13 per cent of the NHS, and obviously this increase in National Insurance contributions will ensure that the proportion of the Health Service funded by NICs will rise.

  190. Do you think the National Insurance fund has any meaning an accounting notion?
  (Mr Holgate) Yes, I do. We produce accounts on it and as an accountant I am obviously in favour of producing accounts. The National Insurance fund has accounts produced on it every year which show what people pay in, what benefits have been paid out, and various other adjustments, including a surplus on the fund.

  191. I have got their accounts here and their report in front of me. It is signed off by Sir John Bourn as saying that "in all material respects the receipts and payments have been applied to the purposes intended by Parliament. . ." The statutory background paragraph says the National Insurance Scheme was established "to provide unemployment benefit, sickness benefit, retirement pensions and other benefits in cases where individuals meet the contribution and other qualifying conditions." If the National Insurance contributory principle were extended so deeply in the NHS, are we not going to find ourselves in the position where, at least theoretically, people should only get access to the NHS if they make National Insurance contributions?
  (Mr Holgate) I find that highly unlikely because the Government says at numerous points in its Budget documentation that we are aiming for an NHS free at the point of need, accessible to all.

  192. Do you not think it would be a good idea to wind up the National Insurance fund and admit that it is now part of general taxation? Do you think that the trickle is sufficiently large for the last bastion, the last barrier that used to distinguish National Insurance contributions from taxation of income has now gone? Maybe the flood has not yet arrived but the pressure will build up and indeed we have had members of the Committee this morning suggesting—it is not my view but it is their view, widely held—that we might have a much clearer picture if we abandon what the vast majority of people consider to be accounts that are virtually fictional?
  (Mr Holgate) I think that is a very interesting and wholly speculative question. The only point I would make in reply is that National Insurance contributions do go towards entitlement to contributory benefits, including the state pension and incapacity benefit for example, but there are others, and there would be quite a considerable rearrangement or unwinding or some other means whereby you linked what people did during their working lives with benefits that were payable at times of crisis or in retirement. It is not just a matter of asking whether there is a National Insurance fund or not; it is a question of whether you wish to radically reform the contributory principle, which is something for which there is quite a lot of support.

  193. I will ask one last question on this to see whether we can get some greater clarity. What increase in the one per cent would there have to be for a trickle to become a flood?
  (Mr Holgate) I do not think my knowledge of water dynamics is sufficient to give you a good response to that!

  194. But it is somewhere between one and ten, is it not?
  (Mr Holgate) I think that you are making an assumption about what might happen in many years to come and we have no way of casting any light on that.

Chairman

  195. You are a rare breed, Mr Holgate, you are a funny accountant and that is good! Could I just ask a last question on National Insurance. Will the National Insurance Bill be framed in terms that any increase in the one per cent will require further primary legislation?
  (Mr Holgate) I think it would be best to wait for the Bill to be published.

Mr Fallon

  196. Why?
  (Mr Holgate) I do not mean by that to build up any sense of anticipation but merely to say that it would be wrong on my part to say something about a Bill the detail and clauses of which have not yet been published.

Chairman

  197. Could you be bolder, Mr O'Donnell?
  (Mr O'Donnell) I could not, I am afraid. In terms of parliamentary privilege that is the right way to do it.

  198. A very silly question to end, when did the cycle start? What year?
  (Mr O'Donnell) Cycles have started in many years but we think in this one we hit a trend point in 2001, Q3. That is when we were at trend according to our estimates. Part of the problem is that the ONS, for example, revised all of last year's growth numbers pretty dramatically. When that happens we will have to go back and revise when we think cycles were. In that sense it is not just the future that is difficult to predict, it is the past as well.

  199. Does Mr Holgate have any idea when the Bill will be introduced?
  (Mr Holgate) Very imminently.


 
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