Examination of Witnesses (Questions 180
TUESDAY 23 APRIL 2002
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,
(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 thingseven
ex postand 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.
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
(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
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
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 suggestingit is not my view but it is their view,
widely heldthat 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
(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.
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
(Mr Holgate) I think it would be best to wait for
the Bill to be published.
(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.
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.