Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 380 - 399)



  380. I will let other people draw their conclusions from that exchange but to come on to the other issue of fairness that people are concerned about, what people are saying is that you were driven by the promises you made in 1997 and in 2001 in your manifesto not to increase income tax rates and, therefore, you had to change to another tax, employee NICs and employer NICs, which they are arguing have damaging economic effects compared with income tax. We have discussed the employment issue already and I will not go back to that but I am not sure that your theory stands up to much. Let us look at the issue of fairness now: I understand how you tried to address the impact of employee NICs on fairness by effectively abolishing the upper earnings limit but there is still—and I notice you do not challenge that?
  (Mr Brown) Sorry—I am about to answer your question. The upper earnings limit remains. I announced the upper earnings limit in the Budget itself.

  381. I think that is the subject of another question.
  (Mr Brown) Do you want me to run through the figures? It has risen from £30,420 to £30,940. That is the upper earnings limit.

  382. Chancellor, since you insist on raising it, you will be aware very well of what the definition of the upper earnings limit is, and I refer you to Tolley's National Insurance Contributions which is the standard reference: "The upper earnings limit. . . is the maximum amount of weekly earnings in respect of which [employee]. . . contributions are payable." It is clearly not the case that that is the maximum because you pay them all the way up the scale, so the upper earnings limit has been abolished—
  (Mr Brown) I think it says "payable for contributory benefits" actually, if I can just clarify that.

  383. Employee contributions.
  (Mr Brown) Yes, for contributory benefits.

  384. The definition of which, under Tolley's, is employees, and I am very happy to take the time to argue that out.

  Chairman: Could you wrap this up?

Mr Laws

  385. Let us go on to discuss this issue of fairness. The way you have chosen to impose this tax increase to employee NICs means that wealthy people who are not in employment will get off making a contribution, and you will be aware that examples were cited in the newspapers this weekend of Lord Sainsbury who receives his income not in a way that will cost him in terms of National Insurance contributions.
  (Mr Brown) I think you mean that he does not take a salary for being a Government minister, therefore he does not pay National Insurance on something he does not take as a salary.

  386. No. This is referring to his work at Sainsbury's and I will read it to you: "He pays income tax on this money but avoids having to pay National Insurance contributions because he is not an employee of the company". Now, there are many other examples of people who receive their income from sources other than employment, and all of those people will avoid paying this additional charge. Does that really make any sense?
  (Mr Brown) We chose National Insurance, as you know; we have excluded pensioners from making a payment because it did not seem to me right that pensioners should pay more when they were older towards the National Health Service if we could avoid it, and therefore the National Insurance route seemed the right route to take. In addition, through National Insurance employers and employees pay some share towards it and, while you may disagree that employers should not pay any contribution, I think, given the nature of health care systems around the world where employers in almost every system pay some contribution to health care costs, it was right to do it in that way. As you also know, historically, since the 1940s, in what has been a very complex system of National Insurance from the Beveridge Report to the original implementation of the National Health Service Act, there has always been a certain element of National Insurance set aside for the National Health Service.

  387. But it is not fair, is it, that somebody who is retired from work and has a large amount of investment income is able to make no additional contribution whereas somebody on low income in work will make a contribution?
  (Mr Brown) You are acting as if there are no other taxes levied on anybody. People—

  388. We are talking about the extra amount for the National Health Service.
  (Mr Brown) Yes, but people will pay their other taxes in the normal way—

  389. Of course. Nobody is questioning that.
  (Mr Brown)—and, therefore, they will pay their tax as before. The question, however, was what was the best way of improving the resources available to the public services, and the National Insurance system excludes pensioners but also includes employers and employees.

Dr Palmer

  390. In today's forecast by the European Commission, they are predicting that unemployment will rise very slightly in the current year by 0.2 per cent but interestingly, after the National Insurance rise comes in, it will not rise further. In fact, they are saying they are expecting a tighter labour market in 2003. You have not specifically been asked about unemployment so far. Does this correspond roughly with your assessment of a likely trend?
  (Mr Brown) We never make forecasts about what is going to happen to unemployment and I am not going to start this practice now, but I think the record is that the European Commission probably predicted that unemployment would rise last year and it did not. Unemployment has continued to fall. I think this is something to do with the operation not just of the general economy but of the welfare to work programme which is getting more people back into work who might otherwise not have jobs, and I do think that the changes we made in the Budget including making work pay with the new employment tax credit are responsible for a large number of people who might otherwise not work, particularly the over 50s, choosing that it is worthwhile to come back into the labour force.

  391. In the same report, the European Commission is predicting UK growth of 2 per cent which is 0.3 higher than their previous report a few months ago. Do you feel this reflects a general pattern of expectation that the current financial year is going to be stronger than previously anticipated?
  (Mr Brown) Yes. I think what is happening is that the European Union had a lower forecast than us at the time of the Pre-Budget Report. Their forecast has risen from November to April from 1.7 to 2: equally they are now predicting that 2003 will see 3 per cent growth, so they are coming quite close to our own forecast. The independent average is moving up all the time as well and that is a reflection of the world position where the American economy is looking stronger than it used to, world trade may recover more quickly than people expect, and therefore I think that the optimism of our forecasts at the end of last year are being borne out by independent and other forecasters coming towards us.

Mr Fallon

  392. Chancellor, you referred to a claim earlier that you had not broken any election promises. I do not know if you watched a programme during the election called "Powerhouse" where I appeared with Mrs Hewitt on 29 May and she said, and I do remember it vividly because I was sitting beside her, "We have no plans at all to raise that ceiling to the National Insurance contribution. It is not going to happen". Did you watch that?
  (Mr Brown) I did not although I gather it is my brother that edits the programme!

  393. He has not edited out that quote!
  (Mr Brown) Mrs Hewitt has subsequently, I think, given a whole series of interviews saying that she holds to the election manifesto that we put forward.

  394. She did not on that occasion.
  (Mr Brown) She holds to the election manifesto put forward. She said that in an interview only a few days ago.

  395. Let us take your own words last week. You said, "Save for this one per cent contribution, the ceiling remains in place". How can it remain in place if you have added one per cent?
  (Mr Brown) Because the ceiling is there for the 10 per cent that people pay and I have just given you the figures for the new ceiling as a result of the changes that you do during the course of every year. It is rising from £30,420 to £30,940 and I gave that figure in my Budget statement so that it was absolutely clear what we were doing.

  396. But you also said, "save for this one per cent contribution". How can you have a ceiling if there is then one per cent on top of it? How can you describe that as a ceiling? That is sophistry, is it not?
  (Mr Brown) You have to go back to the Wanless Report and the decisions we had to make about the right levels of public spending for future years. When we received this information about what was necessary for the Health Service and public services for future years we had to make a decision on what was the fairest way of doing this. Actually, the Beveridge Report said that, when you were looking at health care—I think it was the Beveridge Report; it was in the 1940s—you spread the contributions expected as widely as possible, and it seemed to me when looking at this issue that it was right that employers made some contribution, but not the whole contribution obviously because it is only a part of the contribution; it was right that we asked something from the self-employed as well because they benefit from the Health Service; and it was right that we had something from the employees. It would seem to me in this instance, when we were raising money for the public service and particularly for the Health Service, that the one per cent should go right up the income scale but, as far as National Insurance for the 10 per cent is concerned, the ceiling is as I read it out to you—just over £30,000.

  397. I am not challenging the policy but your pretence that nothing has changed. The ceiling is in place and you put one per cent on top of the ceiling.
  (Mr Brown) The one per cent is right across the board because that is a fair way of making provision for public services for future years.

  398. So it is on top of the ceiling?
  (Mr Brown) The ceiling does remain for the ten per cent and I think everybody now understands that pretty clearly.

  399. Chancellor, are you aware of figures I have just received from the Inland Revenue showing that when you started you had 2,080,000 people paying top rate tax and that taking your Budget into account next year, 2003-4, for the first time ever in this country, you will have 3,070,000 paying top rate tax—an increase of 50 per cent in five years. Are you aware of those figures?
  (Mr Brown) These are estimates, of course, because we do not know how the economy is going to perform. The reason why people are earning more and are, therefore, within the top rate bracket is as a result of the success of the economy. They are earning more and, therefore, they are falling within that bracket. I think you will find that we have not frozen the allowance for the top rate; we have frozen the personal allowance for a year but that has a very small effect indeed on the numbers of people.

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