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Lord Higgins: My Lords, I am grateful to the Minister for allowing me to intervene. A moment or two ago he said that this amendment would not affect the rights of people to certain benefits. But in his Budget Statement the Chancellor of the Exchequer made it clear
Lord Haskel: My Lords, I was referring to the current situation. The noble Lord is right in quoting the Budget Statement of the Chancellor of the Exchequer, but he was referring to the future. The regulations that we are discussing now will not affect people's rights. Future regulations may affect people's rights, and those regulations will appear as a result of future Bills. I have been provided with an answer by the Box which confirms that point. The Chancellor announced that he intended in future reforms to raise the lower earnings limit for employees to the level of the single person's tax allowance, and that remains the Government's intention.
Amendment No. 89 makes a similar change in respect of Class 1A contributions paid by employers on company cars and car fuel provided to employees. Amendment No. 100 is a new clause which ensures that the changes to the structure of national insurance contributions do not in any way reduce the occupational pensions people build up.
Noble Lords discussed general issues on contribution rebates for occupational pension schemes contracted-out of the State Earnings Related Pension Scheme during the debate on the rebate orders on 27th March. I do not intend to go over that ground today. This amendment is also somewhat technical, and again I do not propose to go into the detail here. However, I shall gladly say more if noble Lords want me to do so. In straightforward terms, the new clause will ensure that the rebates for employers with occupational pension schemes contracted-out of the State Earnings Related Pension Scheme are not reduced as a result of the restructuring of national insurance contributions. The restructuring would not in any case affect employee rebates or other types of pension scheme. The remaining amendments in this group, Nos. 75, 90 to 99, 101, 102, 105, 106 and 107, make changes to Schedules 7 and 8 by way of minor consequential amendments arising from the new contribution structure.
Before I finish I am sure that the House would find it helpful if I addressed some of the points made by the noble Lord, Lord Higgins, at the start of the Report stage last Monday. He was concerned that these national insurance measures were being introduced to the Bill at a relatively late stage. He raised questions about Commons privilege and argued that the measures might better have been included in the Finance Bill rather than this Bill. As the noble Lord said, these are important issues. I can assure the House that the Government would not wish to introduce these matters to the Bill after its Committee stage without very good reason. I set out those reasons.
First, these national insurance changes will play a major part in helping people to move from welfare into work. The changes have received widespread support. It is important that people can enjoy the benefits of the new structure as soon as possible, and for that reason the Chancellor announced his intention to introduce the
Secondly, the noble Lord argued that the changes should be included in the Finance Bill, suggesting that national insurance contributions were really no different from tax. The Government are committed to bringing national insurance and income tax more closely into line. Greater alignment eases the administrative burden on employers. These and other measures announced in the Budget will be a major step in that direction. But national insurance contributions remain quite distinct from income tax. Payment of these contributions gives individuals rights to contributory pensions and benefits.
Lord Haskel: My Lords, all people will make contributions to the National Insurance Fund. National insurance contributions remain quite distinct from income tax. Payment of these contributions gives individuals rights to contributory pensions and benefits, and there is no parallel in the tax system.
Lord Goodhart: My Lords, I am grateful to the noble Lord for giving way. I point out to the noble Lord that in his Budget Statement the Chancellor of the Exchequer described employers' national insurance contributions as employers' tax and changes to the national insurance contribution system as tax reforms.
Lord Haskel: My Lords, I can only repeat that the two are absolutely distinct. If those were the words of the Chancellor of the Exchequer in his Budget Statement, I am sure that he had very good reason for using them. They are part of the contribution that employers make towards funding the pension and benefit rights of both their employees and employees in general.
National insurance contributions are quite distinct in principle, therefore, from income tax. They are part of the social security system and are dealt with in social security legislation. Such legislation is scrutinised by both Houses of Parliament, and I am sure that this House would argue strongly against any suggestion that it does not have a role in social security matters.
The noble Lord, Lord Higgins, also suggested that these measures might better have been introduced in the Finance Bill rather than in this Social Security Bill. The scope of the Finance Bill is defined by several centuries of parliamentary tradition. This House cannot amend finance Bills as they concern aids and supplies and are a matter of non-waivable Commons privilege. Finance Bills deal with general public revenue and the finance of central government. Their scope does not
Thirdly, the noble Lord also expressed concern that to introduce these national insurance measures at this stage of the Bill ran counter to Commons privilege. It is true that contributions payable into the National Insurance Fund are the subject of Commons privilege, but it is a privilege that the Commons is able to waive and it will be invited to do so when the Bill returns there. I hope that these comments address the concerns expressed by the noble Lord about the introduction of these measures into the Social Security Bill. I also hope that the noble Lord, Lord Higgins, in particular and other noble Lords in general will welcome these important changes. The amendments will reduce the amount of national insurance paid by employees. If the new structure was in place today, each and every employee paying national insurance would pay £1.28 a week less. Existing benefit entitlements will be maintained.
The reforms will also reduce the amount employers pay on the earnings of some 12.5 million lower and middle income employees. The complicated system of four separate rates of employer national insurance will be replaced by a single rate. This will remove distortions from the system and make it easier for employers to understand and administer their national insurance.
Lord Higgins: My Lords, I should like to make it clear at the outset that we on this side of the House have no objection to the measures which are before us. On the whole, we believe that they are worthy of support. But having said that, we believe that there are fundamental objections to the way in which the Government are introducing these measures in this House at this stage. In our view, that reflects, to a considerable extent, the increasing contempt with which the Government seem to be dealing with parliamentary matters. It has become almost a hallmark of the Government's approach to legislation that there should be more and more reliance on regulations and statutory instruments. This Bill is yet another example.
One has only to look at the number of amendments of a "normal" kind--not the ones we are dealing with here--which the Government have found it necessary to introduce in your Lordships' House, to realise how badly prepared and drafted this legislation is. The number of amendments which the other place will have
I turn to the fundamental objections which I made. First, this particular set of amendments is, in effect, a complete Bill in its own right. In making this speech one is, in effect, making a Second Reading speech. These amendments constitute a Bill within a Bill. Not infrequently noble Lords have before them amendments which have not been discussed previously in the other place. The noble Baroness, in replying to a point I made on Monday, pointed out that that is so. Of course it is, but that is something of a totally different order of magnitude to what we are being asked to consider here.
This set of amendments involves something like £1.3 billion. I shall argue later that the sum which they should cover may be double that amount. These measures on such a scale are coming to your Lordships' House at this stage. The noble Lord fully accepts the complexity of the matter. The House of Commons has had no opportunity to scrutinise them in the normal way; that is, on Second Reading or, in particular, in Committee upstairs where they can consider them in detail in a way in which we cannot possibly hope to do here this afternoon.
We are dealing with these amendments now, but it is well known that one can make only one speech on Report. However deficient, complex or unclear the answer from the Government Benches may be, the ability for one to question it in a way which one can in other circumstances is very limited. I shall do what I can to pick up some of the points which the noble Lord made in his opening remarks. But clearly, on a matter of this importance, it is a wholly unsatisfactory way to proceed. That being so, there are further points that I should like to make.
The right procedure, in my view, would have been for these amendments to have been included in a separate Social Security Bill which would have gone through the House of Commons and then through this House in the normal way. We have had no explanation why that should not have been the case. In order to find a convenient way of dealing with these matters--because this Bill happened to be in this House at this time--the Government have sacrificed the opportunity to have the measure properly scrutinised.
I am not making a party point. Parliament always regrets matters when it does not give adequate scrutiny in detail to the drafting of the legislation. That is what the Government are doing in this case. The right procedure would have been to include the matters in a Social Security Bill starting in the normal way. The noble Lord, a moment or two ago, sought to justify the way in which the matter is being rushed through Parliament. These amendments will go to another place, but the scope for it to debate the detail, the nitty gritty of this group of amendments is extremely limited.
The noble Lord said that it was necessary to rush it through in this way; that the proposals are not coming into effect until April 1999, but industry will need time to prepare. The provision does not have to be on the
I suggested that the alternative would have been to include the amendments in the Finance Bill. Undoubtedly it is a major budgetary matter. The noble Lord says that there is a long history which excludes us from doing that. The distinction between social security contributions and a tax has been steadily eroded. The distinction now virtually does not exist at all. The reason for that is that the Government themselves, in these proposals, have further eroded the difference between contributions, on the one hand, and a tax, on the other. One has only to look at some of the later amendments we shall be debating in this Chamber this afternoon to see that the responsibilities for many of the measures are being transferred from the Department of Social Security to the Inland Revenue. The Inland Revenue, one feels bound to point out, deals with taxation. But there is a more important point. The more one looks at it, the distinction between contribution and taxation disappears. As the noble Lord rightly points out, the money received into the national insurance fund is used for that purpose, but not all the money in the fund comes from the contributions. Much of it comes from taxation. Similarly, there are amounts going out which do not come from contributions. So that distinction is not one which can validly be made.
The other important difference--until now--between national insurance contributions and taxation, has been the need to preserve the so-called contributory principle. That is very important because--we know only too well from talking to people in the street--people believe that their national insurance stamp, or whatever, entitles them to benefits. That is an important principle, and it has been well established over many years. But, as I pointed out in my intervention, the Government themselves, in this measure, are undermining the contributory principle. They will correct me if I am wrong, but there will be some people now who do not have all their contributions paid in the normal way by their employer. If the Government's proposals are agreed, it is the case that people will be receiving benefits to which they have not contributed. That is a fundamental change.
The Chancellor of the Exchequer in his Budget speech clearly recognised that, as a result of the changes in the amendments that we are debating, he will find some other means of restoring the link with people's entitlement to benefits which were previously contributory. He has gone ahead with the reform, but we do not know how he will ensure that people can say, "I'm entitled to this particular benefit". The clearest example is pensions.
I strongly believe that the distinction between tax and contributions has, as a result of the measures we are discussing in the Bill, virtually been eliminated. Therefore, it is arguable whether your Lordships should be discussing the matter at all. However, as the noble Earl, Lord Russell, recently pointed out, we have always
My fundamental point is that it is foolish of the Government to proceed in this way. I can think of no precedent for it. No doubt the noble Lord will tell me whether there is one, but certainly it will not be on this scale. I hope that it will not be regarded as a precedent in the future.
In the Budget Red Book much play is made of making work pay and the improvements which the reforms will make, but what appears on page 152 is remarkable. There appears a table for national insurance contributions, abolishing the entry rate for employee national insurance contributions from April 1999. There appear the years 1999 to 2000 and a sum of £1,200 million. For the years 2000 to 2001 there appears a sum of £1,350 million. That gives one an idea of the scale of the measures we are debating today.
However, there are absolutely no figures in the table relating to the extract which I read a moment ago. There is no figure for the change which the Chancellor proposes to make so that no one pays national insurance for the first £81 of their weekly earnings. All employees earning between £64 and £81 will have their rights protected. There is no figure for that change in the Red Book. An Answer to a Parliamentary Question in the other place suggests that the amount is roughly the same--just by coincidence--as the figure of £1.3 billion to which I referred.
The Chancellor clearly gave the impression in that extract from his Budget speech that there will be a relief for all employees earning between £64 and £81. There is no figure for that in the Red Book. Why not? We should like to know why not. I give notice that that is an appropriate matter to debate on Third Reading.
It would appear from exchanges in the Treasury Select Committee--I have not been able to obtain an exact extract--that the Chancellor did not confirm the firm commitment to achieve that in April 1999. If he had done so it would have been in the Red Book. But not only is it not in the Red Book for this year, it is not in the Red Book for the rest of this Parliament. Yet in the course of his Budget speech the Chancellor gave his marvellous assurance that everyone will be better off--except that the money does not appear. I give notice that we will wish to pursue the matter on Third Reading because it would seem appropriate to do so. It is like the Sherlock Holmes story about the dog barking in the night. The answer was that the dog did not bark--and the money does not appear. This is a serious matter.
There are many technical issues in these pages. The noble Lord was kind enough to fax to me what, if the measures had been contained in a proper national insurance Bill starting in the normal way, would have been the explanatory notes to clauses. Here they are; what I hold in my hand is what would have appeared in the explanatory notes to the Bill we do not have. It is kind of the noble Lord to provide them for us, but I do not know how many noble Lords have studied them in detail. One could raise many points by way of amendment and we may have to turn to some of them on Third Reading.
This is not a satisfactory way of legislating in this Parliament. I believe that it is wrong for the Government to do so and we shall pursue the matters as best we can in the unbelievably limited way in which they have been put forward.
Lord Goodhart: My Lords, this is a truly remarkable group of amendments. It is remarkable for two reasons which have been outlined by the noble Lord, Lord Higgins, with whom to a large extent I agree. First, it changes in substance, if not strictly speaking in form, tax law. The conventions of the constitution require those changes to be introduced in another place. Secondly, perhaps the most important clause in the Bill is being introduced at Report stage in the House of Lords, the Bill already having been through another place.
Perhaps I might first examine the change to the tax law. As a technicality, I accept that national insurance contribution changes are a matter of Commons' privilege which the other place can waive and are not, strictly speaking, equivalent to taxation. But national insurance contributions are unquestionably a tax. The principle is that tax is a matter for the other place. Over the years, the distinctions between contributions and tax have become increasingly blurred. It is true that the original national insurance scheme resembled insurance; one paid flat rate contributions in return for which one received flat rate benefits. We then moved to graduated contributions which led to graduated benefits. We now have graduated contributions, but have returned to flat rate benefits. The result is that the link between contributions and the amount of benefits has been broken. The only major benefit where the amount is linked to the amount of contributions is the state earnings related pensions scheme. That scheme is, and I believe, rightly, under threat. Once the link has been broken, contributions change from insurance premiums and become tax. That was recognised by the Chancellor of the Exchequer in that part of his Budget speech which I mentioned. Again, administration is now a matter of tax rather than the previous separate contributions system. It is many years since we stopped paying national insurance contributions by way of stamps and started paying those contributions through the tax system; that is, PAYE for employees and the annual tax returns for the self-employed.
We now have proposals, which indeed we support, that the Contributions Agency should be moved from the DSS to the Inland Revenue. There are other changes in the Budget of which, of course, the amendment which we are now debating is the most important, which also bring national insurance contributions closer into line with income tax on earnings.
It is of course true that national insurance contributions go into the National Insurance Fund, but that is not a true fund; it is merely an accounting device. I would describe it not as a reservoir but as a pipe. It is not isolated from general taxation, as the noble Lord, Lord Higgins said, but it is frequently topped up from general taxation.
The second reason that I say this is a remarkable amendment is because, as I said, it is the most important clause in the Bill. It creates fundamental changes in the structure of national insurance. It was something which was in the forefront of the Chancellor of the Exchequer's Budget Statement and, as such, it surely requires full consideration. We are having some debate today in what is a fairly thinly attended House.
The only opportunity that this House will have to table amendments will be on Third Reading, which is not satisfactory. The only opportunity the other place will have to debate those changes will be on consideration of Lords' amendments. The result is that neither your Lordships' House nor the other place will have an adequate opportunity to consider this clause. Outside bodies were not alerted to the Government's plans to include this clause in the Bill until 30th March. Since then, the Easter holidays have intervened. I do not believe that outside bodies, such as the CBI, have been given an adequate opportunity to comment on the proposals. What has happened is that, for the convenience of the Government, this clause has been spatchcocked into a Bill which is already 80 per cent. of its way through Parliament.
However, I wish to look not only at the procedure but also at the substance. As this is our first opportunity to look at the clause, I believe that it is my duty to do so; and, as the noble Lord, Lord Higgins, said, this is in effect the Second Reading of an important Bill.
The substance consists of two elements--employees' national insurance contributions and changes to the employers' contributions. The changes to the employees' national insurance contributions plainly make a great deal of sense. The eventual alignment of the lower earnings limit with the single person's allowance for income tax is something which we support. The removal of the entry fee by the abolition of national insurance contributions for the slice of earnings below the lower earnings limit is plainly correct. The flat rate on earnings between the lower and upper earnings limit, again, is plainly correct.
Those changes will cost money and the Government plan to get that money back by increasing employers' national insurance contributions above the threshold from 10 per cent. to 12.2 per cent. I do not believe that on this occasion it is right to go into the question as to whether there is, in the present financial circumstances, a need to claw back the cost of the changes. But assuming that there is such a need, that is not necessarily the best way of doing it.
First, employers' national insurance contributions are a tax on jobs. The Government have rightly been critical of non-wage employment costs incurred in mainland Europe. While I appreciate that there is no net change in national insurance contributions, we should be looking at shifting from taxes on jobs to taxes on pollution and non-renewable resources. That could have been done by leaving employers' national insurance contributions at 10 per cent. and increasing green taxes. That is a missed opportunity.
Secondly, there is a problem that a change in the system will hit bodies such as universities and high-tech companies. The change means that there will be an increase in the tax burdens on employers with a relatively well-paid workforce and a reduction for employers with a relatively poorly-paid workforce.
The cross-over point--the point where the higher rate of employers' NICs exceeds the savings from the employers' NICs on the first £4,195 of annual income--appears to be a salary level of little more than £23,000 per contracted-in employee and a little more than £22,000 for a contracted-out employee. If that means that it will cost more to employ a city banker, that is absolutely splendid. But universities employ many academic and administrative staff on salaries above the cross-over point. Lecturers are not well paid by the standards of people with equivalent qualifications working in commerce and industry, but they are still above the cross-over point except for the most junior of them.
The Committee of Vice-Chancellors and Principals currently estimates that the annual net cost of those changes to the higher education sector will be £20 million. That may not seem a great deal of money but in a sector which is being squeezed as hard as higher education, even £20 million is a serious loss. Therefore, the squeeze on the universities is a serious matter and the increase could even hit some secondary schools.
Therefore, I hope that the Government will at least undertake to provide money which will fully compensate organisations, such as the higher education bodies, which are supported by public funds and which suffer as a result of the increase in employers' NICs.
I am conscious of the time that I have taken with these comments, but I make no apology because of the importance of the issues involved. As I have made clear, I have doubts as to the propriety of bringing in an amendment of such importance at such a late stage. That would not be sufficient to justify your Lordships' House, on those grounds, rejecting the amendment. In any event, the rejection of the amendment may well be inappropriate because it would be an interference by this House with the Government's powers to levy taxes if they did not achieve a majority in another place. In addition, I welcome the substance of the amendments in relation to employees' NICs, although I am uncertain about the changes to employers' contributions.
Certainly I believe that the latter changes need fuller and more informed discussion than it will be possible to give them today. Therefore, while we intend to support the amendment, we may well table amendments to the amendment in order to obtain a further debate on this matter at Third Reading.
Lord Newton of Braintree: My Lords, I intervene briefly to indicate my support for some of the concerns expressed by the noble Lord, Lord Goodhart, and especially by my noble friend Lord Higgins from the Opposition Front Bench. I ought to admit that in private conversations within the department when I was Secretary of State I heretically observed from time to time, in very much the same terms as the noble Lord, Lord Goodhart, has, that the distinction between national insurance contributions and taxation was rapidly becoming unsustainable and, indeed, was gravely undermined by the disappearance of earnings-related benefits quite a long time ago.
However, I have to say--and this echoes some of the remarks made by my noble friend Lord Higgins--that in a position where not only is that distinction becoming increasingly difficult to maintain intellectually but also where we now find that the Treasury has, in effect, formally taken over responsibility for the setting of national insurance rates and the collection of national insurance through the Contributions Agency, it is virtually indefensible for it to be treated, whether legislatively or in any other way, as something distinct and separate from taxation. I well understand the Treasury's long-standing resistance to having anything to do with national insurance in the Finance Bill because--to be honest--I tried, from time to time, to persuade it to take some of my national insurance proposals into finance Bills, with notable lack of success. However, I do not think that it will be sustainable in the world into which we have now been moved by the last Budget and the changes associated with it.
The only other comment I wish to make relates to what I thought was a very compelling series of questions posed by my noble friend Lord Higgins about the apparent hole in the Government's figures for delivering something that was presented as a kind of flagship, so to speak, in the context of the proposals and their attractions for the people as a whole and, in particular, the less well paid. Again, I have no great quarrel with the principle of what is proposed. Indeed, much of it seems to me to build in one way or another on things that we also sought to do in modifying the national insurance system and in seeking to reduce both the adverse impact on low-paid people and the disincentive for employers to take on people at relatively low rates of pay who might otherwise not be employed at all.
As I said, I have no quarrel with that. But if, as my noble friend Lord Higgins was saying, no financial provision has been made for such measures--whether or not they have been costed--and, therefore, they are a kind of "goody" which is postponed into the indefinite future, that is a significant point. We need to be clear as to what the Government are bringing forward in these amendments before determining the attitude that this House or, indeed, the other place may take.
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