National Insurance Contributions Bill
(13 years, 9 months ago)
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The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, I am pleased to open this debate on the Bill before us today, which has two purposes.
The first part of the Bill introduces a 1 per cent increase in the class 1 employee and employer rates, and the class 4 self-employed rates of national insurance contributions from April of this year. As some Members of the House will no doubt remember, this was announced by the previous Government in their 2009 Pre-Budget Report. If the increases were to be introduced as the previous Government had intended, they would have led to an increase in the cost of labour. I reassure the House that this Government intend to reverse the impact of the previous Government’s tax on jobs by increasing the employer national insurance threshold, the primary threshold for employees and the income tax personal allowance.
At the Emergency Budget in June 2010, my right honourable friend the Chancellor confirmed that the personal allowance would be increased by £1,000 from next April and that the employer national insurance contributions threshold would rise by £21 a week over indexation. At the same time, my right honourable friend confirmed that it is our intention to raise the employee national insurance contributions threshold by £24 a week above indexation and to raise national insurance contribution rates by 1 per cent.
The first part of the Bill before the House sets out how the increase in rates of 1 per cent will apply. First, it increases the employer rate from 12.8 per cent to 13.8 per cent. This 1 per cent increase will also apply to class 1A and 1B contributions that are paid by employers on benefits in kind and pay-as-you-earn settlement agreements. Secondly, it will increase the employee main rate from 11 per cent to 12 per cent. The same 1 per cent rise will also apply to class 4 contributions paid by the self-employed, which will rise from 8 per cent to 9 per cent. Thirdly, the additional rates of employee class 1 and self-employed class 4, payable on earnings or profits above the upper earnings limit and the upper profits limit, will rise from 1 per cent to 2 per cent.
Compared with the plans that this Government inherited, over £3 billion a year is being returned to employers once our changes are fully implemented. Indeed, our actions will mean that some 880,000 low earners in the UK will be taken out of income tax altogether; that around 950,000 low earners will no longer pay national insurance contributions, while their benefit rights will be protected; that employees earning under £35,000 a year will pay less income tax and national insurance; and, that employers will pay less national insurance on all workers earning less than £20,000 a year.
The second part of the Bill encourages employment and enterprise in areas of the United Kingdom that are most reliant on public sector employment. Our aim is to help these regions move to a more sustainable economic model—one based on private sector growth, enterprise and investment. That is why we are introducing a holiday from employer national insurance contributions, with the aim of providing support for qualifying new businesses in targeted areas of the United Kingdom. This action will reduce the costs of taking on new staff and provide support in the vital early stages of business development. In order to ensure affordability, the holiday will be limited to the first 10 employees taken on in the first year of business. For each of these workers, the holiday will last for 12 months, unless the closing date for the scheme, 5 September 2013, is reached before the 12 months have elapsed. The maximum amount that an employer can profit from any single employee will be limited to £5,000. At the time of last year’s Budget, it was estimated that start-up companies would save around £940 million worth of national insurance over the next three years. This is money that they can use to hire additional staff, expand their businesses or invest in our nation’s economic recovery.
This is both an important and a necessary Bill. It will go some way towards enabling the reduction of the taxation of labour in targeted areas, to help support employment and secure the recovery. In short, the Bill is good for growth and good for jobs. I beg to move.
Lord McKenzie of Luton
My Lords, I thank the Minister for his explanation of the Bill, which, he will have gathered from proceedings in another place, we will not seek to oppose. Notwithstanding that, there are a number of issues that we intend to press.
First, there is the economic context of the Bill. We have heard about the Government’s proposals relating to the deficit. Objective observers would acknowledge that when the coalition Government took office, the country had spent almost three complete quarters out of recession and borrowing was falling. Our approach to the deficit was, and would be, to ensure that there was sufficient private sector momentum before the public sector cuts began, cutting back more carefully with genuine protection for the poor and vulnerable. For us, jobs and growth need to come first, which is why we oppose the VAT increase and opted for increases in national insurance contributions—but not until April 2011. That is why we now support the increase in national insurance rates included in the Bill. We proposed it when in Government, as we have heard, as part of the tough choices that had to be made to tackle the deficit, but we were clear that those with earnings under £20,000 would be protected by a rise in the primary threshold. Given the vehemence of the attack on our proposals during the general election, it is somewhat surprising that we see the Government retaining these proposed increases and retaining them without fully increasing the secondary threshold for employers, which it was purported would negate the effect of the increases for employers. Can the Minister confirm that the amounts to be raised from employers from the increases proposed in the Bill will be greater by some £1.4 billion than the savings employers will obtain from increases in the secondary threshold? I suggest that praying in aid the cost of the increase in the income tax personal allowance does not help, because that is focused on individuals’ circumstances and because it is dwarfed by the cuts to benefits and tax credits that the IFS said will lead to dramatic increases in poverty—some £18 billion, focused on the poorest.
So much for the allegations that increasing national insurance rates will kill off the recovery. It is the arrival of the VAT hike, the onset of deep cuts in public expenditure, the certainty of job losses in the public and private sectors and the plummeting of consumer confidence that are endangering growth. As the CIPD stated, the VAT rise could be considered more of a tax on jobs than the rise in employers’ national insurance, but this Government have now given us both. We should be greatly concerned that Britain’s recovery has now ground to a halt.
The increases in national insurance rates in the Bill are consistent with what we proposed—a 1 per cent increase on employer and employee contributions, applicable to class 1 and class 4 contributions. The Bill also provides for a 1 per cent increase in the additional rate paid by employees and the self-employed above the upper earnings limit. The proceeds of this additional rate, introduced in 2003, have hitherto been used entirely to contribute to NHS funding. I shall say more on that later.
Before moving on, though, one might just record that it is unusual to have debates on issues of national insurance without at some stage a discussion about the contribution principle, the merging of national insurance with income tax and the size, scope and nature of the surplus in the National Insurance Fund. I will resist it for this afternoon, except to inquire how the Government see the relationship of national insurance to income tax thresholds going forward.
Back in 2007 it was proposed that simplification of the tax and national insurance system could be achieved by alignment of the income tax personal allowance threshold with the employee and employer national insurance thresholds, and the higher-rate tax threshold with the national insurance upper earnings limit. For a variety of reasons this has fallen by the wayside, but where does this aspiration stand now? Anywhere?
A critical relationship is that between the lower earnings limit and the personal allowance threshold. If there is the prospect of the personal allowance heading for £10,000 and the LEL being dragged upwards, this has significant consequences for the contributory principle and other issues for those on low pay and with part-time jobs, the majority of whom will be women. Perhaps the Minister will let us have his views.
As we have heard, the second part of the Bill covers the introduction of the employers’ national insurance holiday for certain new businesses up to a limit of £5,000 per employee for up to 10 new employees. While we see merit in this proposal, it hardly amounts to a plan for growth. We have some concerns, particularly around the targeting of this initiative. A key cause for complaint in the other place, which we echo, is the crude exclusion of businesses that are principally carried on in Greater London, the south-east region or the eastern region. Excluding these areas from its application creates unfairness and unnecessary bureaucracy. It will be complicated enough to ensure that the holiday is focused on genuine start-ups and new employees, without the further complication of having to ensure that the principal place at which the business is carried on is not in any of the excluded regions.
It seems somewhat inconsistent to define excluded areas by reference to regions when the Government are themselves in the process of scrapping regional development agencies and calling forth local enterprise partnerships, some of which will cut across regional boundaries. Take the case of Luton in particular. It will be part of the South East Midlands LEP, which includes parts of three regional areas, two of which are excluded from benefiting from the start-up incentive while one is not. Where is the sense in that? If the enterprise partnerships are supposed better to reflect economic communities, how will one handle having part of its area potentially benefiting from the holiday and part not?
The Minister will no doubt have read the contributions of honourable Members in another place, identifying areas in their constituencies that have higher levels of deprivation and unemployment or higher levels of reliance on public sector jobs, but which are excluded under these definitions in comparison to some which are included. My honourable friend David Hanson in another place identified more than a dozen constituencies that are in the top 60 constituencies for public sector employment but are not covered by the scheme. Examples were provided of areas that included pockets of deprivation that could benefit from the scheme, but their disadvantage is subsumed into wider regional boundaries. Of the top 12 most deprived local authorities, seven are excluded.
Noble Lords will doubtless also have received representations from Thames Gateway, a hugely important regeneration project which is also to be denied the advantage of this scheme. This makes clear that within the Gateway partnership area there are areas of extreme deprivation and high reliance on public sector involvement. The basis for excluding certain regions rests on identifying regions that are particularly reliant on public sector employment, although we have heard no evidence that this automatically equates to a weak private sector. Using this as a criterion also seems to overlook the growing blurring of the boundaries between the public and private sectors. The fact that a local authority may have outsourced certain activities to the private sector may not make that provider any less vulnerable to cuts. Outsourcing aside, much of what the public sector is responsible for is provided by the private sector, especially on capital projects, and where Building Schools for the Future plans have been savaged, for example, might identify areas of public sector dependence which have become vulnerable.
Any scheme of this nature which is time limited, confined to start-ups, restricted geographically and applicable to only some employees will inevitably need robust rules. On the face of it, the Bill includes clearly defined boundaries as well as a general anti-avoidance provision. We will want to test these in Committee. However, the more complex the scheme, the greater the cost of implementation and the less the likelihood of businesses availing themselves of the benefit. Removing the excluded regions would be one way of simplifying the contributions holiday. The Government estimate that there will be take-up by some 400,000 employers for 800,000 employees, with a potential benefit of £940 million, as we heard from the Minister. It is anticipated that an extra 240 full-time employees would be required to operate the scheme. Of course, the clock is already ticking as the scheme is retrospective to June 2010 and has just two and a half years to run. Will the Minister please update us on the take-up of the scheme to date and what monitoring and reporting arrangements are planned? Early reconsideration of the scope would be in point should the aspiration for take-up not be realised.
Our concern is about the targeting of this initiative. In its defence the Minister will no doubt argue that there is only so much money for the scheme and to extend it would be costly. That does not necessarily follow. It could be spread in a different way. The Minister might also consider how much of the expenditure is dead weight when it is available for areas where unemployment is low and business survival rates are strong.
We have a further concern about the Bill which is prompted by Clause 3. This reduces the amount of the additional primary and self-employed contributions which go to the NHS. These contribution rates are increased by 1 per cent and apply from a lower starting point with the UEL reduced to £817 per week. Hitherto, the whole of the amount raised has been hypothecated to the NHS, but the Bill reduces this to just 50 per cent. This is a proposition which the Government may regret. The coalition agreement pledged to,
“guarantee that health spending increases in real terms in each year of the Parliament”.
Noble Lords will be aware that on any objective analysis when taking account of the diversion of £1 billion of funding for social care, the NHS is facing a real terms cut over the spending review period, and this at a time when it is faced with government imposed increases in VAT and the impact of inflation on the costs of treatment as well as the costs of the planned reorganisation. Is not the reality that this is in danger of becoming another dishonoured coalition pledge? By this reduction in the rate of hypothecation the Government have not made it easier for themselves.
As I have said, we will not oppose this Bill. We support the national insurance increases. However, the national insurance holiday is poorly targeted and should be improved and changes to the rules on NHS hypothecation are a missed opportunity. We will take these matters further in Committee.
Lord Newby
I thank the Minister for the clear way in which he introduced the Bill, which we support. This is not the occasion for a major economic policy debate but I wish to respond to the comment of the noble Lord, Lord McKenzie, that the Labour Party’s policy—to the extent that we can discern it—is to delay and reduce the adjustment made to the public finances as compared with the policy of the coalition. However, if Japan is having its debt downgraded by the rating agencies for failing to take significant action, think how much our debt would have been downgraded by now if we had followed the prescriptions of the shadow Chancellor of the Exchequer.
As regards the rate increase proposed in the Bill, over the past 15 years we have seen considerable increases in national insurance, largely because national insurance is the ultimate stealth tax. Virtually nobody understands it and virtually nobody understands its relationship with the funding of the NHS. I doubt whether many people realise that, whereas income tax raises £150 billion, in 2009 national insurance raised £96 billion—two-thirds of the amount of income tax. Most people are largely unaware of how the system works and how much they pay.
To a certain extent, it is a pity that the raising of taxation from individuals is focused on national insurance because it is the opposite of having a transparent tax system. I would have been far more sympathetic to the previous Government if, from time to time over the past 13 years, the basic rate of income tax had been raised. However, once Tony Blair said in the run-up to the 1997 general election that he would not do that in that Parliament, it became impossible for the previous Government to do so. Politically, it has now become virtually impossible to contemplate doing so, even though that would be fairer than national insurance as a way of raising very large sums of money from the entire population.
We welcome particularly the fact that the Government are increasing the personal allowance in respect of both national insurance and income tax. I would be interested to know whether the Labour Party also supports this major measure for incentivising those at the bottom end of the income stream to pursue and take up gainful employment.
The holiday for new businesses has been greatly debated in another place. There are a number of contentious elements to it. I support the measure in principle because it will put back into the regions some £940 million. As noble Lords will be aware, I have been extremely concerned at the way in which funding for the regions has been decimated at a time when they are likely to be suffering disproportionately large job losses for the very reason that this measure is being introduced—namely, that they have a disproportionately large number of public sector workers.
The advantage of this means of putting funding into the regions over the traditional forms of regional policy is that it is entirely market-led. No money is spent unless individuals decide that they are prepared to establish a business in the regions. Therefore, the criticisms of the RDAs—I supported them but lost the battle—that a lot of money was wasted cannot, by definition, apply to this measure.
One of the big issues which the noble Lord, Lord McKenzie, raised was whether the coverage is right. Is it right to exclude the southern regions from the scope of the Bill? It probably is, for two reasons. First, there is a limited amount of money available, so it is better to put it where there is greater need. There is undoubtedly greater need the further away from London you get. Secondly, the reason we have very high levels of unemployment in particular parts of London is very different from the reason that we have very high levels of unemployment in parts of the north and has virtually nothing to do with lack of demand. London is a hugely buoyant economy, which draws in very large numbers of staff from around the world. If you live in London and have even a modicum of skill, getting a job is much easier—indeed, it is of a different order of magnitude—than if you live in Barnsley, Sunderland or Liverpool. The problems with the London labour market are largely to do with skills, and with the attitudes in some communities about what type of job people are prepared to take and where they are prepared to take it up, rather than with a deficit of aggregate demand in the region as a whole. I have no difficulty with the exclusion of London from this measure.
The criticism that has been made of the holiday, with which I have some sympathy, is that the funding might have been as well if not better targeted if it applied to micro-companies—companies with five or fewer staff—that are thinking of taking on an additional person. That is partly because the likelihood of those companies sustaining themselves over a period is greater than that of start-ups, given that a large number of those inevitably do not make it. Also, a large number of small companies, involving two or three people, are now thinking of taking on additional staff.
I declare an interest as a chairman of one such company. At the moment, we are thinking seriously about employing somebody full-time based in Birmingham, and the major constraint is simply whether we can afford it. A holiday of the kind proposed in the Bill for start-ups would help us quite a lot. The lobbying by the Federation of Small Businesses on this is pretty telling. Surveys of the federation’s members show that 57 per cent would like to employ an additional staff member in future. If that were limited simply to one person per company, it would create 800,000 jobs.
I know that money is tight and that you cannot give a blanket holiday to everybody. However, I fear that the holiday will not necessarily be taken up by as many as the large number that the Government hope for. My request to the Government is that the operation of the scheme be reviewed after a year to see whether it has been taken up by the numbers of new companies that they hope. If not, I hope that they will see whether the scheme can be extended to existing, very small companies, and in those cases possibly limit it to their taking on a very small number of additional staff. That said, this is a welcome way of incentivising job creation outside the more prosperous areas and I wish it well.
Lord Bilimoria
My Lords, not only is 2011 the centenary of the Parliament Act, it is also the centenary of national insurance being introduced by the great Liberal leader Lloyd George. Is it not ironic that we now have a coalition Government taking us back 100 years? With all the problems we face in this country today—the war in Afghanistan, a gargantuan deficit, and a fall in GDP in the last quarter to name just three—we have a Deputy Prime Minister wanting to push through House of Lords reform and a Government wanting to celebrate the introduction of national insurance 100 years ago by putting it up.
In his acceptance speech as the Republican presidential candidate in 1988, we all remember George Bush Senior's infamous words:
“Read my lips: no new taxes”.
We all know how that turned out. In the lead-up to the 1997 general election, Labour pledged to raise neither the base rate of tax nor the top rate in the lifetime of the Parliament, a pledge repeated by the then Chancellor Gordon Brown before the 2001 and 2005 elections. That pledge, however, omitted the glaring point that almost £8 billion was raised through national insurance hikes in 2003. And that is the point about national insurance—rising rates are generally not met by the public with the same alarm as increases in income tax, for which the noble Lord, Lord Newby, wishes. I quote from a note on national insurance contributions from the Commons Library:
“Many commentators have argued that NICs are poorly understood by the general public, despite the very large amount of money that they raise:
John Whiting is a tax partner at PricewaterhouseCoopers … He has a question that he tries out on people … when they talk to him about the tax system. ‘I ask them what the second biggest tax is, after income tax,’ he says. ‘People flounder. They suggest value-added tax and you shake your head. They suggest corporation tax. Wrong again. Then they start the wilder guesses and suggest petrol duties. They rarely come up with the correct answer, which is national insurance contributions.’
NICs are, in the words of Peter Bickley, technical manager of the Tax Faculty of the Institute of Chartered Accountants in England and Wales”—
of which I am proud to be a fellow—
“‘the Cinderella of taxes’. They are the unseen tax. They are a dream come true for chancellors of the exchequer. They are a tax that ordinary people, by and large, have not noticed”.
It is estimated that in 2009-10, income tax, as the noble Lord, Lord Newby, said, brought in £134 billion to the Exchequer—nearly one-quarter of all government takings. National insurance contributions brought in almost £100 billion—almost as much as VAT and corporation tax combined.
People have the impression that national insurance is a contributory system, going only into social security, benefits, pensions and even the NHS. However, Andrew Dilnot, former director of the Institute for Fiscal Studies, said in 1995 that,
“it would be hard to find much evidence of any persisting actuarial link between contributions paid and benefits received”.
In a study of perceptions of the national insurance system published by the then Department of Social Security, it was found that respondents saw no real distinction between paying national insurance and tax. Whether it be income tax or national insurance, the money is in effect going into the same pot, and the game is up. As Abraham Lincoln famously said, you can fool some of the people all the time, and all of the people some of the time, but you cannot fool all of the people all of the time.
This Government’s and the previous Government’s plans to increase primary and secondary national insurance contributions by one per cent to 12 per cent and 13.8 per cent respectively is made even more astonishing in the context of the rest of our cut-throat tax system. We have a top rate of tax of 50 per cent, which dwarfs America's reasonable top rate of 35 per cent. Research conducted by KPMG and released in October 2010 revealed that only three countries in Europe are above the UK in terms of personal income tax rates—the Netherlands, Sweden and Denmark—and that we lag behind our two big competitors, Germany and France.
How are we to compete in the international market if we do not have internationally competitive tax rates? How do we expect to attract foreign investment to our country, and attract top talent to the City, if it makes more financial sense for talented people to go elsewhere with their businesses? The Chancellor must know this. That is why he reduced corporation tax from 28 to 24 per cent—a move of which I am wholeheartedly in favour. He said:
“Corporation tax rates are compared around the world, and low rates act as adverts for the countries that introduce them. Our current rate of 28p is looking less and less competitive”.—[Official Report, Commons, 22/6/10; col. 174.]
This is the right attitude applied by the Chancellor to a much smaller area of tax. Corporation tax makes up 10 per cent of the Exchequer's tax receipts: much less than national insurance contributions.
On top of this, we have the madcap immigration cap, turning away international talent. With this national insurance hike, we are merely adding to the ever-growing list of problems that the country faces. Savage and unnecessary cuts—for example, the privatisation of forests—are raising relatively small amounts of money while hurting and upsetting so many people so much. We have a defence review during a period of wartime and turmoil and uncertainty in the Middle East; an SDSR that was rushed through in three months and has made us the subject of international mockery, with aircraft carriers without aircraft, nuclear submarines without AWAC cover and army numbers continually being cut; and the brutish and ham-handed threefold increase in tuition fees that will hurt the higher education sector—both universities and students. VAT has been put up to 20 per cent. There is uncertainty in Europe, with the PIGS countries nowhere near out of the woods and the future of the euro nowhere near certain. There is also global uncertainty and the ominous fact that the economy shrank by 5 per cent in the last quarter—weather or no weather, and whether you like it or not. We have an onslaught of more and more EU regulations and red tape; our housing market has been in the doldrums for years; we have had a prolonged period of dangerously high levels of inflation, with the Monetary Policy Committee of the Bank of England and the Governor of the Bank of England writing letter after letter, month after month, to the Chancellor, after breaching the 2 per cent target. On top of this, the Governor of the Bank of England tells us that real wages have fallen over the past six years—something that has not occurred since the 1920s. All this shows us how badly the British consumer is being squeezed. In an economy where 60 per cent of GDP is accounted for by consumer spending, the confidence of the consumer is paramount, as the noble Lord, Lord McKenzie, said.
Another concern lies in the Government’s tax plans in the lower-income and middle-income thresholds. The Minister spoke of this. However, the IFS tells us that 750,000 people are to be moved into the 40 per cent rate of income tax this year, and a further 850,000 people in 2014-15. This is due to the fact that while the Government are raising the threshold at which people are liable to pay tax, rightly by £1,000 to £7,475, they are reducing the threshold for higher-rate tax from £43,000 to £42,000.
We can all agree that the massive deficit that weighs over us needs to be reduced. No one argues with the Government about this. We, like the United States, have rightly used massive quantitative easing and reduced interest rates for a prolonged period. All this needed to be done and needs to be done. This is where the similarities with the United States end. Whereas we are increasing taxes, including national insurance contributions, the United States has been cutting taxes.
I remember that in the 1980s, after Ronald Reagan’s tax reductions, total tax revenues actually climbed by 100 per cent. After last December’s extension and expansion of tax cuts in the United States—a package of £542 billion—the IMF revised its growth predictions for the US economy this year from 2.3 per cent to 3 per cent, and for the global economy from 4.2 per cent to 4.4 per cent. In the face of all this, we in Britain raise our taxes and national insurance rates and stand by as our growth rate falters. We need to do everything we can to help the economy grow. If we made tax cuts in the UK proportionate to those in the United States, the impact would be huge, by enabling businesses, especially SMEs, to surge forward. The noble Lord, Lord Newby, spoke of SMEs. Consumers would start spending and, most importantly, consumers and businesses would have confidence, as the noble Lord, Lord McKenzie, said. The momentum would build, the economy would grow, tax takes would go up and the deficit would go down. This is the magic bullet, not the tax and NIC increases that are stifling business, stifling the consumer and stifling confidence all round.
There are elements of this Bill that I welcome; for example, the increase in the threshold. I also welcome the NIC holiday for new business start-ups to encourage the creation of private sector jobs in regions reliant on public sector employment. This is a fantastic idea. To see the Government support small and medium-sized enterprise in this way is hugely encouraging. Such businesses are the engine of our economy and deserve support. They are vital if we are to get out of these dark times. However, why not take this good idea and run with it? Why exclude Greater London and the south-east? Let us make this a national, as opposed to a regional, holiday. This gesture in the grand scheme is welcome. I hope that what the Minister said is right and that it will save about £1 billion for SMEs in times to come. If we are serious about growth, we need to decrease taxes. What happened to Chancellor George Osborne’s opinion of a national insurance increase which he said in opposition was an unwelcome tax on jobs?
In conclusion, it is appropriate now, more than ever, to quote Churchill’s opinion of taxation. He said that,
“for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle”.
I urge the Government to re-examine their approach to deficit reduction. The economy should be encouraged to grow, not be stifled by taxation. There are huge areas of public expenditure and inefficiency which can be addressed before we put our businesses and consumers at risk. Public expenditure as a percentage of GDP needs to return to the 40 per cent level. Inefficiencies in the health and welfare sectors need to be addressed. We have an overgenerous welfare system which is being abused and taken advantage of. Cuts must be made there. Instead we are cutting where it hurts the most, forcing our economy back into its shell and hurting our competitiveness.
The Government have had their chance to do the right thing. Instead, at the risk of sounding gruesome, I believe that what the Government are doing to the economy and to the British consumer could be equated to medieval torture—the ruination of this country’s economy through death by a thousand cuts and strangulation by taxation.
Lord Myners
My Lords, it is always a pleasure to speak after the noble Lord, Lord Bilimoria. I have a tendency at times to stray away from the core subject in hand, but that can be judged only in relative terms, so I hope that your Lordships will judge me to be focused. The noble Lord, Lord Newby, correctly said that this is not an excuse for a general discussion about the economy, although I am sure that the House would welcome such an opportunity in due course. My noble friend Lord McKenzie of Luton has expressed the view that the Government’s position on NIC is one that the Labour Party will not oppose in substance although we will challenge it in detail, especially when the Bill is in Committee.
The key challenge for the economy is growth and addressing the deficit. There is no doubt that the deficit needs to be addressed but that must be set in context. In 2007-08 the deficit was 2 per cent of GDP; it was only the global banking crisis that forced it up with its impact on tax receipts and increased public expenditure through the fiscal adjustment process. We are clear that the deficit needs to be addressed, and the difference between the Government and the Opposition is a matter of quantum and pace in terms of deficit reduction.
The noble Lord, Lord Newby, challenged us to ask what would happen if the deficit had not been addressed, and pointed to the credit rating agencies and their attitude to Japan. I think that those agencies are somewhat in disrepute and I would not be terribly taken by their views. Simply, the deficit was well funded and continues to be well funded. We have a 14-year average debt maturity for gilts and were funding at the time of the general election the lowest long-term rate of interest for more than 40 years. The Minister used to tell the House about how interest rates had come down, which was a sign of the world’s financial markets endorsing the Government’s policies. He has been rather more silent of late as interest rates have gone up. The UK gilt-edge market has been the worst performing major fixed-income market in the world in the past eight months. We do not hear very much from the Minister on that. It is happening because markets are becoming increasingly worried about inflation and the prospect of the economy being pushed back into recession.
The noble Lord, Lord Bilimoria, said that the last quarter of 2010 saw negative GDP of 5 per cent. It was not 5 per cent but 0.5 per cent but the fact remains that we were alone among the world’s major economies in experiencing a negative figure. We have to watch how the UK economy develops compared with other economies that seem to be coming out of the global recession. The Government will not be forgiven if their own policies force us back into recession.
My questions on the Bill are matters of detail. The holiday refers to an anticipated participation by 400,000 employers defined as being outside the “excluded regions” in Clause 4(5) and falling within the definitions in Clauses 5 and 6. Can the Minister be a little more helpful by explaining how the estimate of 400,000 has been arrived at? Can he clarify whether the cost is on the basis that the 800,000 jobs would not have been created at all or are they significantly jobs that would have been created regardless of whether the measure was adopted? My feeling is that the £940 million may be the cost but it is an overestimation of the benefit of the policy that the Government are promoting as a counterbalance against the general impact of employment on the NIC charge.
The noble Lord, Lord Bilimoria, is right about it being a tax on jobs, but it is worth keeping in mind that the OBR estimates that the impact on jobs of the VAT increase is three times as great as the estimated impact of the increase in NIC. Although it looks to be specifically related to employment, other taxes have an even more adverse impact on employment activities.
Have the figures of £940 million, 400,000 employers and 800,000 employees been audited by the OBR? Can the Minister, either now or in writing after Second Reading, tell us whether there is any evidence that this is already having an impact on employment creation? The Bill is retrospective in its impact back to June 2010, so we should have eight months’ experience already. We should see an increase in employment creation in the non-excluded regions compared with the excluded regions. I would be interested to know whether we are talking about really new jobs being created—as opposed to those which, in the natural cycle of things, would have been created—and whether there is evidence that the policy is having the desired impact.
The excluded regions worry me. I am very pleased to see that Cornwall is eligible. Cornwall has very high unemployment and, as your Lordships know, I will always speak up in this House for my home county. However, I find it odd that Torbay and Harrogate should qualify for this aid, but Southampton, Bethnal Green and Corby do not. That is the problem with something as crude as the regional definitions that we employ here.
What would the cost have been had the excluded regions not been excluded? If the Government can calculate the figure on a regional basis—I am very sceptical about how much reliance we can place on these data—for job creation in a changing environment for a certain type of employer, a certain size of enterprise, newly created and in certain regions but not all regions of the economy, they should also be able to tell us what the additional cost would have been had the excluded regions also been eligible. Then we could look at the trade-offs. Would it have been justified not to have excluded regions? Would it have been better to have a lower tax advantage or a lower threshold for the number of employees? There are a number of ways in which one could have effectively divided up the benefit proposed under the legislation.
My noble friend Lord McKenzie of Luton spoke very insightfully on the issues of regional exemptions. That said, whatever we can do for the regions is valuable, because the abolition of the RDAs is having a tragic impact on the regions. The LEPs are clearly not going to substitute for the RDAs. I welcome that support for regional economic activity.
Why are charities not included? There are 5,000 new charities established in this country every year—there may be even more with the big society. I would like the Minister to think carefully about whether newly established charities could also be eligible for the exemption. That would seem entirely consistent with the Government's position on a number of issues and would be most welcomed by those in the charitable sector, who find themselves under huge pressure as a result of changes in other taxation and general cutbacks on public expenditure.
Finally, Clause 10 deals with anti-avoidance. I welcome that. There has been much confusion between avoidance and evasion. Dr Cable and Mr Danny Alexander have often talked in terms of them being one and the same. Clearly, they are not. Anti-avoidance regulations are appropriate, and I support the Government’s intention to introduce general anti-avoidance requirements on the part of banks.
Setting things in proportion, whatever avoidance might be going on here by someone creating a business in one of the regions employing not more than 10 people, that is hardly undermining the integrity of public finance. Where avoidance is most pronounced, as the Minister will know, is in the financial sector. I ask him to confirm that the Government are as committed to pursuing avoidance strategies on the part of banks and financial institutions as they are on the part of small employers in the regions.
Let me put a very specific question to the Minister. In the past, banks and financial institutions have been very creative at avoiding NIC. One of the things they have done is to pay bonuses in gold bullion and other forms. Can the Minister confirm that the Government will be vigilant in ensuring that such strategies are not able to operate in future and that no business of which he has ever been part, employed by or worked for has ever involved itself in paying bonuses in gold bullion or non-transferable instruments?
The Archbishop of York
My Lords, I, too, should like to pose to the Minister the questions that the noble Lord, Lord Myners, asked about whether charities will be covered by the NIC holiday for new businesses. Why not include them? Their inclusion might help their businesses and activities. Joe Public might also be getting a bit worried—possibly even bothered—by this because, during the general election, one group was saying that an increase in national insurance contributions would be a tax on jobs while another was saying that a VAT rise would be a tax on jobs. Now, people will be getting both. Can we be assured that jobs are not being doubly taxed, first by the VAT rise and now through national insurance contributions? It would be helpful if the Minister could assure us that this double taxation will not increase unemployment.
Lord Martin of Springburn
My Lords, I have been very interested in what every noble Lord has had to say, including the Minister and the shadow Minister, and I am delighted that incentives are being provided to bring work to men and women. But perhaps I can ask the Minister to give employers the incentives to employ as many apprentices as possible. I feel very strongly that when young people are taken on as apprentices, they are given a great sense of dignity and worth by getting training that will last them for the rest of the lives. Self-employed businesspeople have been mentioned. A self-employed plasterer, bricklayer or electrician can easily take on an apprentice. I hope the Minister will give every thought to increasing the number of apprentices.
Lord Newton of Braintree
I had not intended to intervene—this is a bit of an overcrowded gap, and I apologise for not having given notice—but I was quite struck by the references to charities. I should declare an interest as I was until recently the chair of Help the Hospices and have a whole variety of other charitable connections of one kind or another that are listed in the register.
I understand what has led the noble Lord, Lord Myners, to make this point, but I would also say that in the charitable world in general, including in the Charities Commission, there is some doubt about whether we really want to go on encouraging the creation of more and more small charities which often end up competing with each other; and whether, in that case, we should want to give an advantage to new charities against existing small charities in the way that is suggested. It sounds good, but it needs some fairly hard thinking.
Lord Davies of Oldham
My Lords, this has been a most interesting debate. As the House will recognise, the Opposition’s case has largely been presented in the excellent speech of my noble friend Lord McKenzie of Luton. However, it is my interesting task to sum up some of the major questions that the Government need to respond to in this debate. I appreciate that the Minister still has the Committee stage to go through and that many of these questions will receive more deliberation during that stage. However, several questions were raised today which—in fairness to the excellence of this debate—he ought to answer.
I will answer one question for him, if he likes. The noble Lord, Lord Bilimoria, wondered why national insurance contributions were the great hidden tax. Where was the noble Lord in the general election? He might recall that the general election was substantially fought on issues such as national insurance contributions—in fact the Labour Party was berated by the Conservative Party because we intended to increase NICs. Subsequently, the Conservative Party, as the coalition Government, came to agree with this position, which is why we have clearly indicated that we have no intention of objecting in principle to the Bill.
We also note that what the Conservative Party did not mention in the general election, but which the coalition Government have brought into operation, is a VAT increase. My noble friend Lord Myners has reinforced the point that this will have three times the impact on jobs—it will cost 250,000 jobs—that the NIC position will create.
The real issue of contention here is the concept of how this holiday will be implemented. First, the very fact that it will not be general will increase the administrative costs and complexity. It means that there will be more of a paperchase and that more people will need to be employed in Her Majesty’s Revenue and Customs. So there are costs involved. Secondly, what are these broad categories of exclusions? Speaking from the coalition position, the noble Lord, Lord Newby, said that the London labour market is somewhat different, and that help for the regions which might be appropriate elsewhere might therefore not be appropriate for London. But he did not mention the eastern region, did he? It is losing its RDA, too, and it is subject to this exemption. Why did he not address himself to that matter? He said that the London situation is different, and it is.
One of the problems with the London situation is that far too many Members of Parliament arrive in London either at our great railway stations and are conveyed through the West End to Westminster; or they come down the great roads from Tatton, through north London and Hampstead and into Westminster; or they come from Oxfordshire on the great roads through the west of London—Kensington and Chelsea perhaps—into Westminster. They are therefore utterly oblivious of the fact that London includes eight of the most deprived areas in the country. Several of them are east London boroughs. Tower Hamlets and Hackney—to take but two—are second and third in terms of levels of deprivation.
We therefore need to take seriously the representation from Thames Gateway. Of course its area covers more than these London boroughs, but these London boroughs are part of that developmental scheme. They are suffering with rates of unemployment that match anywhere in the United Kingdom. So what is the justification for excluding these authorities and London from the provision?
The noble Lord will also recognise that my noble friend Lord McKenzie asked two quite specific questions which are general enough and relevant enough to this debate. They will certainly be pursued in due course. They are important to the structure of the debate, and the Minister ought to reply to them. My noble friend wanted to know, first, whether the increases proposed in the Bill will be greater by some £1.4 billion than the savings that employers will obtain from increases in the secondary threshold. It will not do to argue that the measures should be seen in the context of the broader taxation structure. The issue is what the Bill will do concerning demands on resources.
The second question concerned the part of the national insurance contribution that is hypothecated for the NHS. Will we get some insight here? The fact that the Bill reduces that by some 50 per cent has serious implications both for the Government’s promise that the National Health Service will be fully funded and in terms of the enormous demand on resources that that represents. Reducing the hypothecated amount is a loss of resource available to the health service. It is not a gain. So I think that the Minister ought to reply to that point as well.
This has been a most interesting debate, and I think that noble Lords have been restrained. Although he indicated that he sympathised with those who want a general debate on the economy, even my noble friend Lord Myners ensured that his contribution remained entirely relevant to the measure, at the same time as posing to the Minister some very real anxieties about the course that government policy is following. However, this is not a general economic debate. This is a debate about a particular Bill that the Government are putting before the House. We in this House never object to Second Readings, and we find the basic principle behind the Bill unexceptionable, but that does not mean that we do not have a number of questions and issues that we want to discuss in Committee.
Lord Sassoon
My Lords, this has been an interesting and high-quality debate, as is usual for this House, even if it has gone off into general economic issues on a number of occasions. Nevertheless, I am grateful to all noble Lords who have contributed.
Perhaps I may first address one or two of the questions and concerns that have been raised in connection with the national insurance contribution rate rises. I shall to try to restrain myself and not be drawn into some of the broader economic debate. My noble friend Lord Newby neatly knocked some of those concerns on the head, and your Lordships do not need another long lecture from me to explain just why the deficit reduction is necessary and what the greater construct is.
The noble Lords, Lord McKenzie of Luton and Lord Myners, referred to VAT in different ways. The critical point here is that consumption taxes are generally regarded by economists as being the least damaging to growth. If we had raised in other ways the £13 billion that it was regrettably necessary to raise out of the increase in VAT—for example, through larger increases in national insurance contributions—it would have been significantly more damaging to growth and jobs.
The noble Lord, Lord McKenzie of Luton, asked about the £1.4 billion effect on employers. This is a complicated matter, because there is a net overall benefit of £3 billion accruing from the total package, but it is the case that the way in which we have ameliorated the previous Government’s plans means that some of the benefit is switched from national insurance contributions to income tax. So, yes, there will be a net rise in national insurance contribution payments, compensated by a larger fall in income tax payments. While one can dice and slice this any number of ways, the critical point is that, in total, employers will be £3 billion better off next year, and that figure will rise in future years.
The noble Lord, Lord McKenzie of Luton, asked about the relationship of thresholds going forward. We have no plans to break the alignment of income tax higher rate threshold and the upper earnings and profits limits. Beyond this, we will review options for simplification in the light of any advice we get on priorities which are identified by the Office of Tax Simplification as and when it looks at this area.
The last main point on Part 1 of the Bill related to the important question of the funding of the National Health Service. This was also referred to by the noble Lord, Lord Davies of Oldham. I hope it is completely clear to noble Lords that nothing in the Bill affects in any way the commitment to increase NHS spending in real terms in each year of this Parliament. We can afford to do this without additional funding from national insurance contributions. I hope that gives reassurance and answers some of the specific questions raised by noble Lords on Part 1 of the Bill.
There were a number of detailed questions on Part 2 of the Bill. The first general group of questions related broadly to the scope of the holiday, both geographically and in relation to charities in particular. On the question of charities, which was referred to by the noble Lord, Lord Myners, and the most reverend Primate, it is not the case that charities are excluded from the scheme, but they must qualify in a number of respects. First, a new charity must be located in one of the relevant regions and it has to carry on a trade. In those circumstances, the holiday will apply subject to the charity meeting the other qualifying conditions.
It would be wrong to say that all charities are excluded, but I accept that non-trading charities are. If they had been included, it would have complicated the scheme and created complexity around administration, eligibility, anti-avoidance rules and so on. Any benefit ensuing is likely to be limited as we estimate that relatively few non-trading charities employing staff are likely to be set up over the holiday period.
The consistent theme is that the scheme is targeted at new businesses creating employment. If a new charity carries on a business, it will qualify.
Lord Barnett
My Lords, the noble Lord gave a definition of “trade” as “trading”. However, Clause 5(6)(a) refers to,
“a trade, profession or vocation”.
Is that not somewhat different?
Lord Sassoon
My Lords, I think it is a wider definition, so if a charity in those areas was carrying on activities that went beyond trading, my understanding is that the charity would qualify. The noble Lord, Lord Barnett, makes a point that perhaps the latitude for charities is wider than I am painting it. However, the critical point here—perhaps I am using “trading” too loosely—is that we are talking about creating new employment. If a new charity is carrying on a business that creates employment, it will qualify.
Lord Myners
The Minister said that the Government estimate very few non-trading charities will be established during the holiday period. Can the Minister let us know how many charities the Government expect to be established during this period? They have clearly done the work; otherwise, he would not have given the answer that he did.
Lord Sassoon
My Lords, I will look to see how many non-trading charities have been created in past periods. However, the noble Lord is long on these questions about what might have been the case had we done the estimate on another basis. I will come on to the critical questions of what estimates have been produced in a minute, if he will permit me. I know he likes to come in on my responses to debates with more and more questions, and I shall try to answer some of the ones he asked me earlier.
The noble Lord, Lord Myners, and other noble Lords asked questions about the geographic extent of the holiday—of course we are delighted that Cornwall is included. However, London and other areas have been excluded. My noble friend Lord Newby admirably answered the question asked by the noble Lord, Lord Davies of Oldham, about London, so I would just refer him to what he already heard the noble Lord, Lord Newby, say.
The critical thing is that we are targeting the scheme, as a temporary measure, on providing assistance to those areas that are most reliant on public sector employment as we transition to a more sustainable model of economic growth. I appreciate that if we had a much more complex scheme, which we think would be disproportionate, we could pick out smaller areas. However, given the proportionality of the scheme and its administration, cost and complexity, the targeting we have done achieves the scheme’s main objectives and consciously excludes those areas that are not so dependent on public sector employment. It amuses me somewhat to note that in plenty of other contexts the Government are criticised for not targeting areas sufficiently and here we are targeting them on those areas where the transition is going to be most difficult.
The cost of extending the holiday to other regions, on the same basis that we have estimated the other costings, would be: £250 million for Greater London, £250 million for the south-east and £160 million for the east of England. These are not inconsiderable sums.
The Archbishop of York
Will the Minister assure us that he has done some research that tells him that Tower Hamlets and Hackney—boroughs that I knew when I was Bishop of Stepney—are not solely dependent on public services? Why are they not included?
Lord Sassoon
As I have tried to explain, the issue here is that we have to take broad areas of the country to make this workable. Otherwise, the scheme would be effectively unmanageable in the way that we want it. Some remarks have already been made about the cost of administering the scheme, and while of course there are boroughs in London that are very significantly deprived—and the noble Lord, Lord Myners, has raised questions about other parts of the country—we have had to work the design of the scheme around regional units. Therefore, as I have tried to explain and as my noble friend Lord Newby eloquently explained, the relatively benign employment conditions in London mean that we have had to take regions including London as a whole.
On the estimates of cost, I can reassure the noble Lord, Lord Myners. I do not talk about the Office for Budget Responsibility as an auditing body, although he might like me to do so. That is not what it does. The OBR has independently reviewed all the key figures and looked at the £940 million, the 800,000 employees and the 400,000 employers. I assure the noble Lord that, whatever term he likes to use, the OBR has put that through its machine—
Lord Myners
I have to intervene at this point. As the Minister knows full well, it was the Chancellor of the Exchequer who used the term auditing to describe the work of the OBR in connection with public expenditure.
Lord Sassoon
My Lords, we are talking about the estimates here of the effect of the national insurance holiday. They have been put through the OBR’s estimable machinery in the normal way that the OBR does. As to the basis for the figure of 800,000 jobs, the detail of how that estimate was made and the data sources used were set out in the policy costings document published alongside the June Budget. I believe that the basis on which it was done was entirely transparent.
There was also a question whether the £940 million might be an overestimate of the benefit. It is a number that represents money that these new employers would otherwise have paid, so it genuinely reduces their labour costs and benefits them by that amount.
Lastly, I address the question about monitoring the holiday. My noble friend Lord Newby and the noble Lord, Lord McKenzie, asked about this, and the noble Lord, Lord Myners, may have touched on it. There will be monitoring and updates will be published after the end of the tax year on the operation of the scheme, including information at regional level. The Government envisage that the report will cover, from a regional and national perspective, the number of businesses applying and applications rejected, as well as the number of employees for whom a benefit is received and the amount claimed. This report will require information supplied by employers following the end of the tax year, and the first report will be published when the necessary information has been received, processed and checked to ensure that there is appropriate quality assurance. The Government aim to have these collated data and provisional findings published as soon as they become available, so it will be a comprehensive report on how the scheme is going.
Lord Davies of Oldham
Of course, the House will be reassured by the points that the Minister has just made, but does he have any comment to make on the question asked about the up-to-date position? The scheme has been running for a while now and there must, therefore, be some analysis of progress.
Lord Sassoon
My Lords, I really think that it is too early yet to have reliable data of the sort that I have indicated, which will come in at the end of the year, to make any judgments about the success of the scheme. As I have explained, we will publish comprehensive regional and national data on the scheme. It would cause there to be a disproportionate burden on the employers and the scheme if we asked them to report with greater frequency. The Government will study the data when they come in to make sure that we understand fully the impact of the scheme.
Lord Myners
Surely, the Minister will have data because applications have to be made and therefore will already have been made for an eight-month period. The Minister should be able to give us those data. I hope that, in writing to us after Second Reading, he will provide Members who have spoken in this debate with that information.
Lord Sassoon
My Lords, the scheme can be sensibly judged only when we get the full package of data on a national and regional basis that is broken down by the number of employees in the way that I have described. That will be published very transparently when there is a first basis of data on which to judge properly the impact of the scheme.
I want to address one last, important point from the noble Lord, Lord Martin of Springburn, about apprenticeships. Those have not been addressed otherwise in this debate but are of course relevant to the broader approach of the Government. His point is slightly detached from the main purpose of the Bill, but it gives me an opportunity to remind noble Lords that, in 2011-12, the Government will be providing £799 million for apprenticeships for 16 to 19 year-olds, which is an increase from the £780 million in 2010-11, and will fund 230,000 apprenticeship places for that age group. I trust that the noble Lord will recognise that this Government absolutely take on board the importance of apprenticeships. I could give the data if he wants, but I will not prolong the discussion now about the considerable amount of money that is also going into adult apprenticeships.
Lord Martin of Springburn
I welcome any help and initiative that is given to employing apprentices. On the remark about adult apprenticeships, it should not be forgotten that those who may have missed an opportunity when they left school should have an opportunity, as adults, to take up apprenticeships.
Lord Sassoon
Indeed, I think that in 2011-12 the sum for adult apprenticeships will be over £600 million. That accounts for something of the order of 430,000 apprenticeships, so the point is well made.
I am conscious of the time. I hope that I have been able to reassure noble Lords on the majority of the questions that they have raised on both parts of the Bill. I am grateful to the noble Lords, Lord McKenzie of Luton and Lord Davies of Oldham, for making it completely clear that the Opposition do not oppose this Bill. I am also grateful for having had the opportunity to explain the Government’s position on the issues in the Bill. The Bill enables the reduction of taxation on labour nationally, with extra support in targeted areas, and I ask the House to give the Bill a Second Reading.
Lord Myners
There was one final point which I raised about anti-avoidance in the larger corporate sector, through mechanisms such as paying bonuses by gold bullion and by other non-distributable or non-marketable instruments. Does the Minister endorse my view that such strategies are morally unacceptable? Will the Government use all efforts to ensure that such avoidance by large financial institutions receives as much attention as is apparently being focused here on avoidance by small employers in the regions?
Lord Sassoon
I was trying to keep my responses within the time limit and to matters relevant to this Bill but, if the noble Lord provokes me, I certainly did not receive any gold bars or anything like that from my employer. I shared that employer with the noble Baroness, Lady Vadera. Perhaps the noble Lord would also like to check with her to make sure that she did not receive any gold bars. Of course, the Government are very concerned to make sure that all taxpayers pay what is due. In respect of the banks—I did not want to be provoked into this—the previous Government greatly trumpeted a code of tax practice to get the banks to subscribe to it. They did not manage to get the banks signed up; we now have them signed up. If the noble Lord asks about it, we are very much on the case.
I ask the House to give the Bill a Second Reading.