National Insurance Contributions (Secondary Class 1 Contributions) Bill

2nd reading
Monday 6th January 2025 Lords Chamber

Second Reading

15:48

Moved by

[Lord Livermore]

That the Bill be now read a second time.

[The Financial Secretary to the Treasury (Lord Livermore) (Lab)]

My Lords, I wish all noble Lords a happy new year. It is a pleasure to open this debate. I am aware that the noble Baroness, Lady Kramer, has tabled a regret amendment expressing concern about the measures in the Bill. While I of course understand and respect the points raised in it, this Government had to take some very difficult decisions—not decisions we wanted to take, but necessary decisions to clear up the mess we inherited.

In the time I have available today, I will seek to explain why not acting was simply not an option, and why this Bill is necessary to repair the public finances, while protecting working people and rebuilding our public services.

I will begin by setting out the economic context in which the Budget decisions contained in this Bill were taken. As noble Lords will know, on her arrival at the Treasury last July, the Chancellor was informed of a £22 billion black hole in the public finances—a series of commitments made by the previous Government which they did not fund and did not disclose. Ahead of the Budget, the independent Office for Budget Responsibility had conducted a review into the circumstances surrounding a meeting it held with the Treasury on 8 February last year, at which the previous Government were obliged to disclose all unfunded pressure against the reserve.

The OBR’s review established that at that point the previous Government concealed £9.5 billion. However, as we now know, during the remaining five months they had left in office, the previous Government continued to amass unfunded commitments, which they did not disclose. By the time of the spring Budget, Treasury records show these had reached £16.3 billion. By July, they had reached £22 billion.

The Treasury has provided to the OBR a line-by-line breakdown of these unfunded commitments: 260 separate pressures which the previous Government did not fund and did not disclose. Neither did they make any provision for costs they knew would materialise, including £11.8 billion to compensate victims of the infected blood scandal, and £1.8 billion to compensate victims of the Post Office Horizon scandal.

The country inherited not just broken public finances but broken public services: NHS waiting lists at record levels, children in Portakabins as school roofs crumbled and rivers filled with polluted waste. Yet, since 2021, there had been no spending review and no detailed plans for departmental spending set out beyond this year.

Faced with this reality of broken public finances and broken public services, any responsible Chancellor would have had to act. Some noble Lords, during today’s debate, may argue otherwise: that we should have ignored the black hole in the public finances. But this is the path of irresponsibility, the path chosen by the Liz Truss mini-Budget, when mortgage costs increased by £300 a month, and for which working people are still paying the price.

That is not the path chosen by this Government. Our number one commitment is economic and fiscal stability. That is why, as a result of the Budget—and only because of the measures contained in this Bill, combined with other difficult decisions we have taken—instead of £22 billion of unfunded spending plans, within three years not a single penny of day-to-day government spending will be funded by borrowing.

Yes, it was a significant Budget, on a scale commensurate with the challenging inheritance we faced. And yes, it did mean taking difficult decisions. As a result, however—and only made possible by the measures contained in this Bill—we have now wiped the slate clean, creating a platform of stability in the public finances.

The Budget made another very important choice: to keep the manifesto commitments we made to working people to not increase their income tax, their national insurance or VAT. Compare that with the choices made by the previous Government, who chose to freeze income tax thresholds, costing working people nearly £30 billion. This Government could have chosen to extend that freeze, but that was not the choice we made. Instead, from 2028-29, personal tax thresholds will be uprated in line with inflation once again. However, keeping those promises to working people, while repairing the public finances and rebuilding our public services, did mean we had to take some very difficult decisions on spending, welfare and tax, including those in the Bill before your Lordships’ House today.

The Bill contains three key measures: first, an increase to the rate of employer secondary class 1 national insurance contributions from 13.8% to 15%; secondly, a decrease of the secondary threshold for employers—the threshold above which employers begin to pay employer national insurance contributions on their employees’ salaries—from £9,100 to £5,000; and, thirdly, measures to protect small businesses by more than doubling the current employment allowance from £5,000 to £10,500. The Bill will also expand the eligibility of the employment allowance by removing the £100,000 threshold so that more employers now benefit.

I of course understand that some of these measures mean asking businesses to contribute more, and I fully acknowledge that some impacts will be felt beyond businesses too. These are difficult decisions, and I understand and respect the legitimate concerns that have been raised, including by business. However, taken together, the measures in the Bill mean that more than half of businesses with national insurance liabilities will either see no change or see their liabilities decrease. Some 865,000 employers will now not pay any national insurance at all, and over 1 million employers will pay the same or less than they did before. All eligible employers will now be able to employ up to four full-time workers on the national living wage and pay no employer national insurance contributions. The Government are also setting aside support for the public sector of £5.1 billion by 2029-30, ensuring that there is sufficient funding for our vital public services, including the NHS.

I also recognise that concerns have been raised about the wider economic consequences of the measures contained in the Bill—concerns I am sure we will hear in today’s debate. Let me be clear: not to act was not an option. The choices we have made were the only route to putting the public finances back on a stable path, while protecting working people and rebuilding the public services. The economic data we have seen in recent months is, of course, disappointing; in particular, the recent growth figures show the sheer scale of the challenge we face. However, there would have been far greater costs to continuing with the irresponsibility and instability that has been a near-constant feature of the past 14 years: from the chaos of Brexit and the disastrous deal that followed, through to the Liz Truss mini-Budget, which crashed the economy and devastated family finances.

Let us remember that the OECD now expects the UK to be the fastest growing European G7 economy, and at the Budget, the independent Office for Budget Responsibility was clear that, with particular reference to our capital investments, the Budget will increase the size of the economy in the long term. On living standards, the OBR forecast shows that real household disposable income will increase in real terms in each year of this Parliament; the level of real wages will rise by 3% over the next five years; and the number of people in employment will rise by 1.2 million over the course of this Parliament. Our planning reforms, pension reforms, skills reforms and industrial strategy will all contribute to higher growth, but none are yet included in the OBR’s forecast.

The measures contained in the Bill also contribute to significant new investment in the NHS. That vital investment—amounting to £25.7 billion extra for the NHS over this year and next—is only possible because of this Bill. It includes £1.5 billion for new surgical hubs; more than £1.25 billion to deliver over 1 million additional diagnostic tests; over £2 billion for technology and digital improvements to increase NHS productivity and save staff time; and £880 million more in local government spending to support social care. All of that will support the NHS to deliver an extra 40,000 elective appointments a week, helping us to bring waiting lists down more quickly.

The choices we have made are the right choices. They are not the easy ones, but the responsible ones: to rebuild the public finances, to protect working people and to invest in Britain’s future. None of those things would be possible without the Bill. It is of course possible to make different choices: to ignore the problems in the public finances, to continue to neglect our public services or to fail to protect working people. Noble Lords may wish to argue for that during today’s debate, but this Government were elected with a mandate to fix the foundations of our economy. The Bill delivers on that mandate and provides a foundation of stability on which we will now build long-term, sustainable growth. I beg to move.

Amendment to the Motion

Moved by

[Baroness Kramer]

At end insert “but that, while recognising the need to rebuild public services and finances, this House regrets that the Bill risks worsening pressures in the NHS and social care by placing costs on GPs and dentists, social care providers and hospices; increases burdens on small businesses, early years providers, universities and charities; and penalises part-time work, and puts jobs and economic growth at risk”.

15:58

[Baroness Kramer (LD)]

My Lords, before I begin, I say to the House that on these Benches, we will make sure that the words of appreciation and expressions of friendship for Baroness Randerson will be passed back to her family. I am sure that they will mean a great deal to them. I suspect that on many Benches, as on our Benches, noble Lords are somewhat in shock. We have lost not just a colleague and highly respected politician but a very real friend. We give our thanks to this House for its shared respect and friendship.

We on these Benches recognise the difficult state of the public finances and the desperate need for investment in public services and infrastructure to drive growth and tackle climate change. We can see that the responsibility for the current condition rests with the Conservatives. However, in our general election manifesto we did not duck the issue of new funding. We took the approach that we must find the broadest shoulders to raise additional tax revenue—from the gambling industry to share buybacks, from big banks to big tech. We have tabled this amendment to the Motion today to make it very clear that we believe that the Government have taken the wrong approach in hiking employers’ national insurance contributions as their way to fill the funding gap, and we fear that the present plans will undermine national recovery. We ask the Government to think again.

Our amendment addresses a wide range of sectors that will be particularly badly injured by the NICs increases. Look at whom the changes impact: small businesses—bigger than micro, which get some protection, but small businesses still. These businesses, especially in hospitality, underpin the resilience of our communities. They need to be investing in growth and productivity, not struggling for survival. The changes impact many businesses that offer part-time work, which in turn is often the route out of disadvantage since much part-time work will now be subject to NICs for the first time. Almost every childcare provider will have to hike fees or cut places, forcing some parents to give up work. Universities, many already facing dire funding pressures, are struggling to cope and will face a much more difficult situation. The hikes impact charities of all kinds and housing associations, which should be focused on building new affordable and social homes.

In the course of today, colleagues will address many of these issues, as well as the impact on devolved authorities, town and parish councils and veterans. We will follow with amendments to the Bill in its next stages. However, our deepest concern, and where we will focus our efforts, is the impact on community care and social care, with significant consequences for the NHS. The Conservatives drove this sector into the ground. The Government are setting up the Casey commission, to report in 2026 and 2028, but this sector is in crisis now. We cannot understand how the Government cannot see the harm that NICs increases will do to this vital sector.

Our research has revealed that the NICs hike will cost GP surgeries some £125.5 million a year, which is equivalent to funding 2 million appointments. Hospices, which face a £30 million bill, have warned that they may have to withdraw beds. Research from the Nuffield Trust shows that the cost to adult social care alone will exceed £900 million next year. I point out to the Minister that this is more than the extra funds that the Government allocated to the sector in the last Budget. It in effect wipes it out, and then some. We risk losing many small care providers and seeing large ones cut capacity. Pharmacists and dentists will not receive compensation in full. Surely the Government must recognise that the knock-on effects will undermine their ambitions to revive the NHS; this in turn will undermine jobs and economic recovery. My colleagues will expand much further.

The last Government failed the economy, failed our public services—including the NHS and social care—and, I fully accept, pursued a scorched-earth policy with the public finances. However, this Bill is not the way forward. We ask that this House press the Government to step back and reconsider. I beg to move.

16:04

[Baroness Neville-Rolfe (Con)]

My Lords, I must start by thanking the noble Lord, Lord Livermore, for his clear explanation of this short and simple Bill, the context as he sees it, and the “happy new year” that we all hope to see, despite everything we will probably hear today.

I endorse the tribute from the noble Baroness, Lady Kramer, to Baroness Randerson: what a shock. I will come to the noble Baroness’s Motion later.

Despite the welcome increase in the employment allowance—effectively advocated by my friends at the Federation of Small Businesses—it is difficult to hide the fact that this Bill introduces a jobs tax right across the UK; it represents a £23.7 billion raid on employers. During the general election six months ago, the Labour Party claimed that, if it formed the next Government, the first priority would be to increase the rate of economic growth, and the Chancellor said that they would be the “most pro-business Government ever”—that was the promise. I attended the Times summit, and businesses were very reassured by everything the Chancellor said.

On taking office, the Government, notably the Prime Minister and Chancellor, relentlessly and consistently stressed the allegedly dire state of the national economy, constantly referring to their mythical black hole of £22 billion. I believe it would be true to state that no positive words on UK economic prospects ever passed their lips. But, as Keynes and many other eminent economists stressed long ago, economic success is in part a matter of morale. That discovery was, apparently, forgotten by the Prime Minister and Chancellor.

The Budget is the principal mechanism by which the new Government were able to give effect to their aspirations and objectives. Unfortunately, it was widely and correctly described as anti-business. It raised taxes substantially by placing large new burdens on business, most notably by way of increases in national insurance. The consequences of this pessimism at the top of government, and the extra burdens on business, are clear for all to see: a faltering economy, thought by some commentators even to be verging on depression, and an unpopular Government. That is quite an achievement when the Government are only six months old. Noble Lords will recall that in the first half of the year, the economy was growing strongly and inflation had reduced sharply from the highs created by Covid, Ukraine and the energy crisis. I suggest that gives a much more accurate summary of last year’s economics.

Sadly, the financial world is of a similar view. On 3 January, the critical measure of confidence, the 10-year gilts yield, was at 4.59%, which was higher than its peak after the Kwarteng Budget. In Germany, the bond yield rate at the end of December was 2.38%, and even in Italy it was only 3.52%. This morning, we had a stark warning from the British Chambers of Commerce that more than half of firms were planning to raise their prices in response to tax hikes announced by the Chancellor in October. Business confidence is at a two-year low.

The Government introduced several business-related measures in their Budget, and unfortunately, they were overwhelmingly negative. The increase in employer national insurance contributions, which I will come on to dissect, was accompanied by the partial removal of non-domestic business rate waivers dating back to Covid; a further increase in minimum wages; and an affirmation of plans to introduce costly new rigidities into the labour market. This was a quadruple hit on our hard-working businesses, and that is before accounting for the IHT changes that have so unsettled family businesses and our farming community.

The minimum wage is, of course, something we do not oppose, but it introduces further costs to businesses, especially small businesses, at a time when they are drowning in extra burdens. These businesses all play a crucial role in helping the British economy to grow, which is what we all want.

A number of sectors have released reports detailing the profound consequences these measures will have on their businesses, and this has highlighted the extent to which the Government fail to understand not only the private sector but how to promote and encourage a growing economy. The December growth figures from the ONS were very disappointing: down 0.1%, as were the OECD and IMF comparisons.

The noble Baroness, Lady Kramer, actually set out the Opposition’s position on the various sectors affected. However, her amendment is too kind to the Government; the NICs changes are a jobs tax on all business and not-for-profit sectors, not just a few. Passing it will have no effect on the Bill and do nothing for the groups mentioned. Instead, we need the Liberal Democrats to join us, on Wednesday, in opposing the Bill’s committal to Grand Committee. The Floor of the House is the revising Chamber that can be relied on to delve into vital detail and the perverse effects of such legislation. There is huge concern across the country and we should be debating this Bill, which can be amended—unlike money Bills—in Committee in this Chamber.

I turn to some individual sectors. The Government have angered businesses across retail. Over 70 businesses sent a letter to the Chancellor outlining their concerns. Big employers, including Tesco, Sainsbury and Next, said that:

“For any retailer, large or small, it will not be possible to absorb such significant cost increases over such a short timescale. The effect will be to increase inflation, slow pay growth, cause shop closures, and reduce jobs, especially at the entry level”.


We find it particularly concerning that the Government maintain a rhetoric that they are pro-growth and pro-business, without listening to the very businesses that can help them. If they did, they would realise that their plans have not been thought through and that they will have far-reaching consequences in closures and the prevention of growth.

The retail sector estimated that the measures introduced in the Budget will cost the sector up to £7 billion a year, and that these costs will be offset through a reduction in headcount, a freezing of wages and increased prices for the consumer. From my own retail experience and observations in recent weeks, I believe that we risk more insolvencies and empty shops on the high street. This is all too likely to have a multiplier effect on confidence and investment. Reports state that the Centre for Retail Research forecasts over 17,000 store closures in 2025, confirming my fears.

UK hospitality will also pay a high price in adapting to the new taxes. The sector indicated that it will pay at least £1 billion as a result of the increase in national insurance alone and that this will hit its far from buoyant profits. Take an example: a survey from the British Institute of Innkeeping indicates that 40% of independently operating pubs will have to reduce their opening hours as a result of this increase in national insurance contributions alongside the other harmful measures towards businesses included in the Budget. As a pub-goer, I know that turning up to a closed pub puts one off going to the pub again and that that has a multiplier effect.

The increase in NICs is unusual in causing pain to many not-for-profit sectors. They often get by, despite straitened circumstances, because of their workers’ passion and hard work. A good example is our wonderful hospices, as we heard during the PNQ. The charity, Together for Short Lives—a children’s hospice—estimated that this specific increase will put up the cost of providing such hospice care by £5 million across the sector. This will have a seriously detrimental impact on already underfunded hospices and will reduce the availability of lifeline care for children across the country. The Marie Curie charity concluded that the NICs changes will force it to reduce headcount and limit services, with more terminally ill patients staying in hospital, which is bad for them and the NHS, at a time when the debate on assisted dying has highlighted the inadequacy and unevenness of hospice provision. I hope that the Government are listening.

Regrettably, this is part of the wider picture of underfunding in social care, which has already been highlighted. The Nuffield Trust says that independent care providers will face £940 million in additional costs. That dwarfs the £600 million of support introduced in the Budget.

The Government are rightly trying to make more use of pharmacies to tackle waiting times, and yet Community Pharmacy England says that they will be hit by an extra £50 million a year. GPs are caught, as we heard: the Institute of General Practice Management estimates extra costs of about £20,000 a year for the average practice. Ironically, the BMA says that, as public authorities, they are unable to access support via the increased employment allowance. They look with envy and surprise at arrangements already made to protect the NHS and Civil Service from the NICs hikes.

Finally, there is the extraordinary impact on nurseries, where the last Government did so much to extend childcare and help more mothers into work, which boosted growth. The National Day Nurseries Association estimates that the combinations of NICs and salary increases will mean an extra £47,000 on average per nursery, and that those providing more than 50% government-funded childcare will also be deprived of the employment allowance.

I look forward to hearing from others in this debate about the effect of these changes and their unfairness and perverse impacts on so many sectors.

To conclude, we cannot support the key provisions of the Bill. It is a betrayal—yes, a betrayal—of the promise in the Labour manifesto that all reasonable people interpreted as a commitment not to increase national insurance. The stuff said about “working people’’ does not cut the mustard. Moreover, we know from the OBR that the national insurance changes alone will reduce labour supply by 0.2% and add 0.2% to inflation by 2029-30. Sadly, we are already seeing this in business recruitment plans.

We look forward to carrying out our scrutiny functions effectively as this important Bill progresses. It would be very helpful if the Government could update us with their latest view of the impact of the proposed changes on jobs, wages and prices. We are very much in favour of a proper evaluation of policies in the light of experience, and, accordingly, we will be tabling a proposed new clause requiring the Chancellor to publish an assessment of the NICs increases on the employment rate a year after the passing of the Bill. I know from my time as a Minister that such amendments are routinely resisted by the system but that they can be helpful down the road to a responsible Minister keen to do the right thing.

In short, our position is that, even if the Government thought it was right to raise many billions in taxation, this is the wrong way of doing it. The country will regret it.

16:17

[Lord Macpherson of Earl’s Court (CB)]

My Lords, I am in no doubt that taxes have to rise. The spending decisions made by the last Government—or rather the lack of them—the cost of the pandemic, higher interest rates and increasing demographic pressures all point in the same direction. Therefore, with a heavy heart, I broadly support the Bill.

In a sensible world, the Government would not have made the manifesto commitments on personal taxes that they did. For my part, I would have preferred to see an increase in income tax, as Denis Healey implemented in his first Budget, or even an increase in VAT, as Sir Geoffrey Howe and George Osborne implemented in their first Budgets. But we are where we are, and I recognise that tearing up a manifesto commitment in a first Budget rarely ends well for a Chancellor. It is much better to raise a large tax a little than lots of small taxes a lot. Those who oppose the Bill really need to explain how they would fill the void which its defeat would leave.

My main worry about the recent Budget is that it did not go far enough in stabilising the public finances. Fiscal headroom is remarkably small, long-term interest rates remain stubbornly high, and spending pressures—in particular those relating to the so-called triple lock on pensions and to the National Health Service, social care and defence—are as likely to increase as to decline. Although I remain an optimist about Britain’s long-term growth prospects, given the global move to protectionism there is every chance that the economy will underperform over the next 18 months.

I understand the concerns about the impact of this tax increase. We should be in no doubt that national insurance is indeed a tax on jobs; generally, the more you tax employment, the less you will get of it. The change will undoubtedly add cost pressures, both for the public and the voluntary sectors, which the Government will need to address. But in assessing the impact of this measure, we need to recognise that the economy is close to full employment; indeed, that is one of the reasons why it has been so easy for inflation to take root in recent years.

It is important to look at national insurance in the round. The incidence of employers’ national insurance is almost identical to that of employee national insurance. The last Government cut the rate of employee national insurance from 12% to 8% earlier this year. They should not have done so, since that only added to the deficit, but they did, and I am happy to make a virtue of its economic impact in the labour market broadly off-setting the negative impact of the measure in the Bill. The cuts in employee national insurance make it cheaper to employ people; the rise in employers’ national insurance makes it more expensive. The net effect is broadly neutral, and many have argued that it would have been a lot easier to cancel the employee cut and leave employers’ national insurance unchanged, but here we come back to the manifesto commitment.

I will confine my remaining comments to how national insurance contributions might develop from here, given that whoever is in power in the decades ahead will be under pressure to raise more in tax. First, I worry that national insurance rates are too high and income tax rates too low. During my adult life, the combined rate of national insurance has risen from 14.5% to 23%, while the basic rate of income tax has fallen from 34% to 20%. The only reason I can see for this change is a belief that taxpayers are less averse to paying national insurance than income tax. However, the evidence for that is increasingly thin. More significantly, to use the language of the last century, the trend has benefited rentiers and capitalists at the expense of the workers.

Secondly, if Governments remain determined to keep income tax and national insurance separate, I would encourage the Treasury to consider the base for national insurance contributions. As I said, it is anomalous that national insurance is not chargeable on interest income, dividends or rents. It is also anomalous that employees cease to pay national insurance at pension age. I declare a personal interest, since I will reach pension age in six months’ time.

Thirdly, there is the issue of the self-employed. I completely understand why the Government have chosen not to increase self-employed national insurance in the Bill. The last Chancellor who sought to do so was, after all, the noble Lord, Lord Hammond of Runnymede, and that was what is known in the trade as a courageous decision—I was not entirely surprised when he was forced to back off very quickly. There may have been some logic for the self-employed paying lower national insurance when we still had income-related benefits to which they were not entitled, but those days are very long gone. As the OBR and others have pointed out, the Bill will encourage employers to find ways of recasting their employees as self-employed. I therefore ask the Financial Secretary what plans the Government have to make this more difficult.

Finally, I encourage the Government to consider how the costs of an ageing population will be financed. I have long argued the case for a health and social care levy paid by employees, employers and the self-employed. The last Government were sensible enough to introduce one—indeed, its abolition is one of the only surviving measures of the notorious Truss-Kwarteng mini-Budget—and sooner or later, and probably not in this Parliament, a Government will have to return to such a levy. As and when that happens, I would encourage the Treasury to consider as wide a base as possible, the better to keep the rate down. In the meanwhile, painful though it is, I see no alternative but to support the Bill.

16:24

[The Lord Bishop of Southwark]

My Lords, I wish to make three quick points on this, the largest and probably most consequential, measure announced by the Chancellor in the Budget. My first point is very tentative, as it relates to the promises on taxation made by major parties prior to general elections. We are an unelected House, and I am deeply conscious of the peculiar pressures that political parties navigate to put across a message and compete with their opponents, but I think, wishfully perhaps, that greater restraint by parties on what they promise in the area of taxation would be appropriate since the House of Commons should have maximum freedom to pass a Finance Bill in our overall interests. I cannot be alone in thinking that placing such a burden on employer national insurance because of prior commitments ruling out other possible options is less than optimal and is already seemingly restraining economic growth.

My second point is that the Church of England agreed in 1976 to forgo the pre-existing arrangements whereby ministers of religion were treated as self-employed and embrace employer national insurance. The increases mandated by this Bill affect us as they affect others. The impact nationally for a full year, including clergy, is around £10 million, excluding large numbers of staff directly employed by parishes. For my diocese, the amount is around £390,000. Our principal income source for paying all stipend-related costs comes from voluntary parish giving, which is restricted, and we have still not heard from the Treasury whether it will extend the listed places of worship grant scheme which gives VAT refunds for listed church repairs.

Our parishes and dioceses sustain extensive social outreach as well as support for other charities. Do His Majesty’s Government appreciate the risk of staff and clergy reductions and the closure of buildings as a consequence of these measures in the worst-case scenario? This is mirrored, as I am sure the Minister has been advised and as we have already heard from other Members, by the impact on hospice care—much of which originated in Christian foundations—where the additional government help will not address the shortfall, despite the urgent need highlighted in the debate in another place on the assisted dying Bill.

However, my principal point has been raised in the briefing sent to a number of your Lordships. It is the impact of the proposed increases on the transport sector that is devoted specifically to serving children with special educational needs. As I understand it, local councils will be covered by proposed grants and compensation for the increases in this Bill where they directly employ staff in school transport. However, this does not extend to private industry, which employs some 100,000 people in this sector as drivers and passenger assistants. Many are part-time, whose employment will be caught by the provisions of this Bill for the first time. All are trained in serving special needs children and many are over 50 years of age. If contracts become unviable as a result of these measures and companies return them to local authorities, it will introduce a degree of turmoil into the lives of children, many of whom are on the autistic spectrum and for whom consistency is vital. Failure to maintain their education because of gaps in SEND transport will have serious consequences. I hope that the Minister will note this. It will further increase unemployment among the over-50s, whom we want to keep from the ranks of the economically inactive. Therefore, will the Minister consider two measures to ameliorate this situation? First, will he consider an emergency grant to local authorities for the fiscal year 2025-26 to address immediate and unplanned shortfalls arising from the increased costs to the SEND transport sector? Secondly, will he submit long-term funding provision for SEND transport services to phase 2 of the comprehensive spending review in order to extend support through to at least March 2028?

I do not intend to vote for the amendment in the name of the noble Baroness, Lady Kramer, but I am grateful for the opportunity afforded at this Second Reading to express my concerns to the House about the impact of the Bill.

16:29

[Lord Forsyth of Drumlean (Con)]

My Lords, it is a pleasure to follow the right reverend Prelate. I look forward to him tabling amendments at a later stage in the consideration of the Bill to meet the requirements that, as he has quite rightly pointed out, are essential for transport for children with special needs.

This is an unusual proceeding, is it not—that we are allowed in this House to consider a Budget measure? The reason we are able to do it is that national insurance is not a tax. I repeat: it is not a tax. It is a specific, compulsory social insurance scheme. Therefore, I was surprised to hear the Minister arguing that it was necessary to put it up to close his £22 billion black hole, which, of course, does not exist. If it did exist, it would surely be entirely inappropriate to use national insurance to meet requirements that were not specific for the purpose of national insurance.

As it is not a tax—even if this Government treat it as if it were—we are able to discuss the Bill in this House. We are able to reject it, and to amend it. The Government’s response is to put it in a cupboard, around the corner, in the Moses Room, where there will be no opportunity to amend it, in the hope that no one will notice the severe damage that is being done to our country in so many sectors, as we have heard. As the noble Baroness, Lady Kramer, pointed out, this is an opportunity to ask the Government to think again. I look forward to seeing the Liberal Democrats coming through the Lobbies with us in support of amendments to change the nature of this Bill; I think not. I think not because it is all posturing on their part; it is just empty rhetoric.

Even if we were to accept, as the OBR did not, that there was a £22 billion black hole, after all the arrangements are made to compensate very small businesses and others for the impact of this crazy scheme, the net revenue that the Government will achieve is about half of the £25 billion. Some people say it will be even less; some say it could be as little as £10 billion. Is that not a coincidence? That £10 billion is almost exactly the same figure as the cost of the inflationary pay increases given by this Government on taking office to the most militant unions in the country, including the BMA. They pretend that this is about dealing with some black hole left by the previous Government when, in fact, as the old adage—the old cliché—says, “When in a hole, stop digging”. If the Minister thought he was in a hole, why on earth did he keep digging by allowing a £10 billion inflationary increase in pay, without any requirement to improve productivity with a view to financing it?

The HMRC says—I assume that the Minister will not challenge HMRC’s figures—that 940,000 businesses will lose an average of £800 per employee, at a time when the economy is stagnant. Six months of this Government have brought growth to a complete, shuddering halt, and brought back the ghost of stagflation to our country, which we remember in the 1970s as the inheritance that we got from irresponsible government policies.

The list of organisations—private sector, public sector and charitable—in this country is endless. We have just heard from the right reverend Prelate about the problems for the Church in meeting the stipends—it might be worth reducing the contribution in reparation for alleged crimes against slavery to meet that requirement. We have heard from leading retailers that there will be major store closures. We have heard from pubs and restaurants already severely damaged by the impact of Covid, along with the rest of the country, about how they will be affected.

Faced with that—faced with the problems in the hospitality industries and others—this Government decide to reduce the schedule to people who are paid £5,000 a year in order to create a requirement to pay national insurance. They say, “We are going to compensate that because you can apply for a rebate”. That means more bureaucracy and more impediments to businesses that are struggling. In my time I have done quite a bit to support Marie Curie Cancer Care, so I know intimately how important its work is. This measure will cost that organisation £3 million. That is a lot of coffee mornings up and down the country, with volunteers raising money for charities such as Marie Curie.

There are many other examples, such as homeless charities, childcare, which has been mentioned—single parents are already struggling, yet we are told this is not going to affect working people—and universities. Then there is the nasty, vicious imposition of VAT on private schools, which will mean that many children with special needs are no longer able to get the support they need because the state sector is unable to provide it. I know the Government will say, “People who are designated will get support”, but it takes years to get an assessment and there are many kids—the right reverend Prelate mentioned children with autism—for whom a move from school is disturbing.

Then there are parish councils and GPs. I had a representation from the BMA telling me that this was iniquitous and would have an impact on GPs—absolutely so. That is the same BMA that was campaigning and striking for more money for doctors, and now it is arguing that there should be more money for GPs because the Government are saying they need the money in order to pay that obligation.

I understand that I have a different figure for the cost of adult social care. It is true that the last Government messed up on social care, and that this House was unanimous across all Benches on the need to address social care to protect the NHS. Where are the people on the Benches opposite now speaking up for social care, where I believe the costs are nothing short of £2.8 billion?

Perhaps I have been a little tough on the Chancellor, but she is right about one thing: we desperately need growth in this country. The reason we are not getting it is that the state has become too large and overmighty; it has become a cuckoo in our country’s economy. The Government said this Budget was necessary in order to stabilise the economy, but what have they done? They have not only added this tax but increased borrowing at a time when the costs of borrowing are growing as a result of the actions they have taken.

We keep hearing that Liz Truss crashed the economy because she made tax cut proposals that were not equally balanced by cuts in public expenditure and, as a result, the market for 10-year gilts went up. I have to tell the Minister that, as has been pointed out, the market for gilts is now at a higher level than it was then. So am I entitled to say he has crashed the economy because of the imposition of this tax?

Of course we all know that taxes are too high and that the previous Government allowed that to happen, but that was because we had Covid and Ukraine. The only reason why this Government are continuing to increase borrowing and so on is that they want to have a bigger state.

If we are to get Britain working again, we need to get people back to work. I actually agree with the noble Lord, Lord Macpherson, about merging income tax and national insurance because, as I hope I have demonstrated, it is a fantasy to treat it as being anything other than a tax. Indeed, the tax commission that I chaired for George Osborne in 2006 recommended that, but they were not too keen on the idea because it would make it absolutely transparent how much of people’s hard-earned money the state was taking in taxation. The noble Lord is right about that.

I also find it extraordinary that as someone—your Lordships may be surprised to hear—who is over pensionable age, I do not have to pay national insurance on my income. The Minister asked us to say what else they could have done. Well, they could have done that instead of imposing a tax on employment. It is estimated—of course, we do not have the proper figures—that more than 9 million people in this country who are of working age and capable, in theory at least, of being at work are not working. To resolve that situation by making it more expensive for people to take on others as employees seems to me an extraordinary act of madness.

The CBI, an organisation that I do not often cite, believes, following a survey of its members, that 50% of them think that the imposition of these national insurance changes will result in its members cutting the numbers of jobs, and that two-thirds of its members believe that it will curtail recruitment. Bloomberg estimates that 130,000 jobs will be lost. The noble Lord, Lord Macpherson, talked about full employment; how can we do so when we have so many people not working at all? This is a nonsense. He also talked about the importance of addressing the numbers of elderly people who now have to be supported by a shrinking working population. I have to say to him—nothing personal, you understand—that having index-linked final salary pension schemes in the public sector and increasing the burden on people in the private sector, who do not enjoy such gold-plated pensions, is simply unsustainable.

If those on the Front Bench opposite are worried about black holes, they should consider the black hole represented by that. It is a contingent liability of £1.3 trillion, which makes the £22 billion black hole look like an asteroid compared with it, or with the black hole that student loans are creating. It is estimated that the nominal debt on student loans will be more than £1 trillion in 25 years. These are the black holes that should be addressed.

The truth is that our country is running on empty. We desperately need to reinvigorate the private sector to create the wealth to meet those obligations, and we are not going to do that by hobbling and damaging the private sector with impositions of this kind. If the Government want growth, we need less bureaucracy—not a quango being created every week. We want to be encouraging investment from overseas, not penalising it and forcing people to leave by introducing non-dom taxes. I personally know a large number of people who have already left the country. There must be a huge number because I do not know that many billionaires, unfortunately.

If you tax something, it is usually because you want less of it. Taxing employment makes no sense at all. If you want to tax something and to look at other sources of revenue, deal with the unfair competition from Amazon and other online retailers with our high street retailers. Deal with gambling, as the noble Baroness said, or with welfare dependency, which is partly at the root of the problems in this country.

The Government’s great boast, they say, is “Not a penny more on payslips” as a result of this Budget. Sadly, for many there will be no more payslips and no more pay increases. I hope that the Government think again and that there will be an opportunity in Committee for us to send a message to the House of Commons to rethink this incredibly damaging proposal, which goes to the heart of the Chancellor’s pledge to get growth in our country.

16:43

[Lord Eatwell (Lab)]

My Lords, consideration of the Bill poses two serious economic questions. Regrettably, as one might have anticipated, neither was addressed by the noble Baroness speaking from the Front Bench for the Opposition. The first serious question is: should taxes be raised at all? She told us nothing either way. Secondly, if overall taxes are to be raised, should the increase take the form of the changes to employers’ national insurance outlined in the Bill, or should there be increases in other taxes? She said there should be others but told us not what they should be. How might the impact of differing tax strategies be compared? We heard nothing about these two fundamental questions that the House should address with respect to the Bill.

The issue of whether taxation should have been raised in the Budget by £40 billion, of which the national insurance increases contribute a little over half, is a question of overall fiscal balance and of the composition of the expenditure that the taxes are designed to finance. Those who argue that taxes should not have been raised must tell us whether, instead, borrowing should be increased on this scale or whether the expenditure outlined in the Budget should be cut. We can call the increased borrowing option the Liz Truss option and we can call the option of cutting the budget the austerity option. I am sure noble Lords will agree that we have heard enough, and had enough, of both those policies from the previous Government.

As everyone in this House must be aware, the increased expenditure outlined in the Budget is needed to begin the necessary repair of national infrastructure, debilitated after 14 years of persistent Tory neglect. I am aware that the party opposite has some difficulty with the arithmetic required to identify the £22 billion of unfunded commitments that are the result of its recent fiscal incontinence. It displays a strange form of intellectual or psychological denial—perhaps they should take counselling from the OBR.

The black chasm of economic failure is undeniable and obvious to all. The failure is inherent in the ever-longer NHS waiting lists and a GP service that is virtually non-existent in many parts of the country. The neglect of hospital buildings means that many are now so dilapidated as to constitute a danger to the occupants. The Budget allocates £25 billion over the next two years to start repairing those years of neglect, with £13.6 billion to invest in new buildings, equipment and technology—the largest capital investment in the NHS for over 15 years. Noble Lords of the party opposite should tell us whether they support that investment or not.

To take another example of the result of Tory neglect, consider the report of the Defence Committee in another place. What it describes as the “hollowing out” of Britain’s Armed Forces since 2010 has undermined UK war-fighting resilience. The British Army’s Regular Forces—currently about 75,000 troops—would, we are told, struggle to field even one war-ready division. That is the result of Conservative neglect of our military. The Budget increased defence spending in real terms by £2.9 billion for next year. Of course that is not enough, but it is a start, to begin repairing the damage.

I could go on. There are school buildings that are dangerous, prisoners released early because of insufficient investment in the prisons estate, court buildings in serious disrepair, our roads defined by the number of potholes, and local council budgets cut through and beyond the bone. Underinvestment and neglect of the public sector have been bywords of economic policy for the last 14 years, with capital budgets raided to fund current needs—and there, sitting opposite, is the guilty party. As all serious commentators appreciate, there is no quick fix for these problems, but the Labour Government have made a positive start in the Budget by increasing capital budgets for 2025-26 and onwards. Which of these investments would noble Lords opposite oppose?

We have heard all the standard excuses—the pandemic, Ukraine—but that will not wash when we recognise that, over the 14 Tory years, the UK suffered not only persistent public sector neglect but the lowest rate of private sector business investment in the UK. That is no accident. The cheerleaders of austerity depressed business confidence and their persistent neglect of the public sector—and public sector investment—confirmed those depressed expectations. Living standards stagnated and, without investment, growth in productivity—the fundamental key to improving living standards—was negligible. The only Conservative growth strategy was uncontrolled immigration.

So the first question is: was the budgeted increase in taxation necessary to start the long task of repair? The answer is undoubtedly “Yes, it was”. But now to the second question: was employers’ national insurance the right tax to choose? There is the obvious issue of Labour’s manifesto commitment not to increase the taxation of workers’ income. But, given both the necessity of raising taxation and the Government’s overriding objective of economic growth, let us leave the manifesto commitments aside and focus on the merits of choosing employers’ national insurance.

The key variables to secure increased growth are: efficient use of national resources, a boost to public and private investment and sustained growth of productivity. No one likes tax increases, even essential ones, but the key to investment is the confident expansion of growth of demand in a stable financial environment. The overall fiscal balance in this Budget will increase overall demand with a public sector injection of £24 billion in the next financial year and will ensure financial stability. But what of the impact of employers’ national insurance on the efficient use of resources, business costs and productivity? Here, the detailed economic analysis of the OBR provides us with a firm starting point for debate.

As all noble Lords are aware, the Conservative Government pursued a cheap labour policy, neglecting investment in skills—look what has happened to further education colleges—and relying on mass immigration to meet labour needs. This cheap labour policy de-incentivised labour-saving investment, hitting productivity growth hard. If we examine the impact of the employers’ national insurance rise, we see that the effect is quite the opposite. The OBR, in estimating the impact, assesses that firms will pass on most, but not all, of their higher tax costs to employees. Once the labour market settles down, the OBR estimates that 76% of the total cost is passed on through lower wages—that is called lower costs to business, by the way—leaving 24% of the cost to be borne by employers. Overall, the OBR expects firms to reduce the demand for labour, as we have heard.

These results will have two major advantages. First, as noble Lords are aware, there is a significant labour shortage in the UK at the moment, due in no small part to the large post-Covid withdrawals from the labour force. More efficient use of labour is highly desirable, while the overall fiscal balance will sustain aggregate employment levels. Secondly, an increased cost of labour will encourage firms to look for ways to reduce overall labour costs, economising on a scarce resource and increasing productivity. Combined with new employment rights and a higher minimum wage, the increase in employers’ national insurance will encourage investment in training and equipment, boosting productivity, especially in labour-intensive services where higher productivity is most needed.

Let us compare these outcomes with an alternative, such as increasing employees’ national insurance, or increasing income tax. That would have a direct impact on demand, reducing profitability, and there would be a reduction—probably quite a small one—in the supply of labour. There would be no incentive to increase productivity.

When noble Lords opposite actually come clean and tell us what their alternative proposals might be, they should compare them with the measures in this Bill, which will result in a relatively small increase in business costs, as the OBR points out, a more efficient use of labour and an increase in productivity.

In the face of 14 years of serious underinvestment in the foundations of economic growth—the health of the workforce, education and skills, transport, criminal justice and defence—increased taxation is a regrettable necessity. That the Chancellor has managed both to provide a fiscal boost and to stabilise government finances is to be applauded. That she has, by the measures outlined in this Bill, chosen a taxation strategy that will enhance the efficient use of labour and produce vital increases in productivity deserves not just high praise but the total support of this House.

16:55

[Lord Frost (Con)]

My Lords, we have heard a lot from the Minister and just now from the noble Lord, Lord Eatwell, about the alleged terrible situation in which the previous Government left the current Government. I have been known to criticise the previous Government myself, and there is a degree of truth in the criticism that we were too ready to resort to spending and to tax and national insurance increases. Indeed, I spoke in Cabinet against the previous effort to increase national insurance; it was one of the reasons why I left that Cabinet a few months later. However, in mitigation of the previous Government and some of their predecessors, that was not unique; it followed the trend established over the past 20 or 30 years to increase the size of the state, push up taxation and spending, and increase the pressure on the private sector.

It is that reality of the past 30 years that makes what we have heard from the Minister and the Government more broadly—the suggestion that they are fixing the foundations and marking a moment of change—so ludicrous and ridiculous. The Government like to claim that they are marking a different path, when the truth is that they are just doubling down on the path that has been set for the past 30 years. There is no change in this at all other than in size and in the energy driving us to a larger state, with higher taxes and higher spending.

The noble Lord, Lord Eatwell, talked about understanding arithmetic, but the arithmetic that I find hard to understand is why it is thought to be a change of direction when the plan in this Budget is to push up public borrowing £20 billion or £30 billion higher than it would have been under the previous Government’s plan, even though taxation is going up by another £30 billion or £40 billion every year. Despite all that, the deficit is still 1% of GDP higher than it would have been at the end of this fiscal period under the previous Government. How is that fixing the foundations? It is doubling down on the trend and making the situation worse. We know that the consequences will be lower growth, less dynamism and lower wealth for the country as a whole.

The specific tax change that we are looking at in this Second Reading debate is a major part of that problem. It is a well understood principle in economics that if you tax a thing you get less of that thing, and if you tax jobs you will get fewer jobs. Even now, Britain has one of the lowest tax wedges in the OECD—the gap between what employers have to pay employees and what they actually receive. European economies with typically higher tax wedges have many more problems with youth unemployment and long-term unemployment. Countries with very high tax wedges, such as Germany, Spain and Italy, have long-term unemployment more than one-third higher than ours. Spain’s is two-thirds higher, Belgium’s is nearly twice as high and Italy’s is highly still. With these measures—and the new employment regulation that is coming our way soon, no doubt—we are heading the same way too. Hiring is falling already, at 23% lower than a year ago. The OBR forecasts a lower participation rate—the “drag” from employer national insurance contributions, as it puts it, which boosts the decline in the participation rate by 50%.

The Government know perfectly well that this effect exists, even if they do not want to acknowledge it more than they have to. We can tell that they know that it exists because they are having to compensate the public sector to mitigate the problem. In so doing, they are reinforcing a divide that already exists between the public and private sectors. My noble friend Lord Forsyth alluded to this just now. Wages are already higher in the public sector and pensions are much more generous. Now the Government are beginning to establish the principle that the public sector should be protected from the consequences of the Government’s own decisions—just like the French nobility before the revolution, who did not pay the taxes imposed on everybody else. It did not end well for them and it will not end well for the Government, or for this country, if they create a privileged class that does not contribute to economic growth but just feeds off it.

As a result of this, we are seeing much more complexity, yet we need simplicity, not complexity, in the way our fiscal and tax systems work. The principle that is being established means that if you are fortunate enough to be on the payroll of the public sector you are shielded from some of these changes, but if you are unlucky enough merely to supply the public sector—for example, as has been said, a car firm taking special needs patients to hospital—or if you merely carry out public sector functions, such as hospices, then you will be on your own. As a result, we are going to see—indeed, we are already seeing—ever-increasing and, in many cases, entirely reasonable demands for exemptions or changes to the rules from those who happen to fall beyond this boundary. There will be new reasons to lobby, new reasons to generate complexity and new reasons to push up costs over time.

The last thing we need is more taxation. I urge noble Lords to look at the OBR’s fascinating historical public finances databank—I find it fascinating, anyway. It shows that, after the Autumn Budget, we now have public sector spending at around its highest level ever, outside the world wars and the pandemic, and taxation is at the highest level it has ever been in this country, even during wartime.

It is true that we are seeing huge strains on the public sector—courts, schools, roads, transport and so on. That is obvious, but we are seeing those not because taxes are too low but because growth is too low. We are exhausting the capacity of the economy to pay for the public goods that we all want to see. There is only one way to resolve that problem, which is to get the boot off the private sector and allow it to generate wealth. The Minister spoke of stability. We all want stability, but there are different kinds of stability and, if we are not careful, we are going to get the stability of the morgue in the British economy. We need activity, dynamism, change, energy and growth. Reversing the trends that we are on against all those things is of huge importance. That, by the way, is why it is so important that Committee on this Bill should be on the Floor of the House.

There is no manifesto commitment to this measure and it is right that we do everything possible to reduce its impact. The non-crisis British state is the biggest it has ever been, and any responsible Government will be trying to reduce it—for example, to what some, at least, regard as the halcyon days of the first Blair term, when the state was a whole 10 percentage points of GDP smaller and, not coincidentally, trend growth was a whole 1% of GDP higher. The current route of spending more and producing less will drive people out of work, crush growth and lead this country to penury, and these NIC measures will take us one further step down that road. The Government need to think again.

17:04

[Baroness Noakes (Con)]

My Lords, this Bill delivers one of the most destructive policies invented by this Labour Government. I will not deal with the fact that it breaks a manifesto promise, though it does, or talk about its impact on much of the social fabric of our land, from charities to childcare, though the damage that it will do is immense. Instead, I will focus on its impact on businesses and the onward impact on their customers and employees.

First, let us get a couple of things out of the way. The Minister gave us his usual diatribe about the so-called black hole which the Government allege that they inherited. He must be getting embarrassed about going on about this all the time. He knows that the Office for Budget Responsibility has not backed the Government’s story on the black hole. He knows that a fair chunk of the £22 billion can be ascribed to the massive pay increases given to some public sector workers in return for zero productivity. He must also know that an even bigger black hole is already emerging as the economy goes into reverse as a result of the Budget and as some spending promises excluded from it have to be funded. No more nonsense, please, about black holes.

While we are at it, I hope we will have no more nonsense about the Truss mini-Budget. It did not crash the economy. GDP certainly did not crash—in fact, its trajectory hardly budged. However, since Labour came to power, growth has ground to a halt. There was a dislocation in bond markets and interest rates peaked but, as the Bank of England’s analysis has shown, the Bank itself was to blame for at least two-thirds of that, due mainly to its negligent oversight of LDI pension strategies. As my noble friends Lady Neville-Rolfe and Lord Forsyth have pointed out, interest rates are now higher than they were after the Truss Budget, whether you look at the short-term gilt rate, the long-term gilt rate or the premium over the bund rate. All this feeds into today’s mortgage rates, and the Government need to own the fact that it is their Budget that is having an impact on today’s mortgage costs. It is very clear which Budget has been worse for people with mortgages.

The Chancellor has dressed up her dreadful policy choice on national insurance by saying:

“We are asking businesses to contribute more”,—[Official Report, Commons, 30/10/24; col. 818.]


as if businesses themselves will be paying more tax to fund the public expenditure largesse in the Budget. This has been exposed as at best naive and at worst downright misleading by a host of commentators, starting with the Office for Budget Responsibility and going on through many others. Not a single analysis shows that businesses will be “contributing more”, except in the narrow technical sense that they will be writing cheques to HMRC for the increased national insurance bills. All the analysis points to the impact ending up on jobs, prices and wages.

The OBR reckoned that, even in the first year—2025-26 —60% would be passed on to employees and consumers and that this would rise to 76% by the second year. The National Institute of Economic and Social Research has pointed to higher unemployment and weaker wage growth. This is not theory. The Bank of England’s decision-maker panel in December found that, while most businesses expect lower profit margins, over 50% expect to raise prices and reduce numbers and 40% expect to lower wages.

The policy is highly regressive, which ought to worry the Benches opposite. The Institute for Fiscal Studies has highlighted the disproportionate impact on employing people at the bottom end of the wage scale. The NI changes mean that the cost of employing somebody on the minimum wage will rise by 3.2%, compared with 2.5% for those on median wages and 1.8% for those earning twice the median wage. The Centre for Policy Studies has taken this further by calculating the tax burden on labour, known as the tax wedge: overall, the tax wedge for someone on minimum wage will rise to 21.3%, which is even higher than the figure we inherited in 2010 from Gordon Brown.

When businesses come to manage these increased costs, the option of lower wage rates does not exist for those on minimum wage, and so we can expect employers to reduce their numbers instead. Higher up the wage scale, employers will be looking to reduce wages as well as numbers. National data are already showing weak job vacancies, and recruitment companies, which are often the canary in the mine, are issuing profit warnings, as employers are already turning away from recruitment.

What does all of this add up to? The pain of job losses for employees will knock on to higher unemployment benefits; lower profits and wages will result in lower taxes for the Exchequer; and all of us will face rising prices which will feed into inflation, thereby keeping interest rates higher than they would otherwise have been. It is hard to think of a more disastrous economic policy, especially in the context of a Budget which could not have been more anti-growth if it had tried.

Business confidence has been in retreat since before the Budget. Businesses are now facing an unholy trinity of national insurance rises, significant increases in the minimum wage—especially for younger employees—and the Government’s employment law reforms. This is not an environment in which businesses will want to invest. Indeed, many sectors will face retrenchment. This morning, the British Chambers of Commerce said that many of its members expect to cut back on investment. The British Retail Consortium has warned of shop closures. Hospitality businesses will be on insolvency watch. This is no way to grow the economy. The Government’s growth mission is starting to look like mission impossible.

The Government must be wondering whether the gain is worth the pain. The OBR calculated the static yield from national insurance increases as £26 billion by the end of the Budget forecast period, but it then forecast that the net yield would fall to only £16 billion, due to the direct and indirect behavioural impacts. In addition, the Government have said that they will fund the public sector for the additional costs which will fall on to public sector employers, amounting to around £5 billion. It is inevitable that the public sector will have to pay more for public services provided by private sector suppliers when they pass on the extra costs in prices. So we have all this pain for businesses, employees and consumers, plus the opportunity cost of lost economic growth, for a net figure which is probably south of £10 billion. That is just two-thirds of 1% of the Government’s total expenditure at the end of the Budget period. Is it worth it?

17:14

[Lord Scriven (LD)]

To govern is to choose. That is what the Labour Government have done: they have chosen to implement an increase in national insurance contributions, with a 1.25 percentage point rise for many providing care and support in health and social care sectors. That choice has implications for the provision of health and social care, and the Government either are ignoring those impacts or have no idea of the consequences of NIC increases on NHS dentists, NHS community pharmacists, hospices, NHS GPs and social care providers. Any policy that impacts the financial ecosystem of health and social care deserves close scrutiny, which is what I will focus on in my contribution to this Second Reading debate.

The ripple effects of this NIC increase will be felt across the entire sector, from GPs and community pharmacists to hospices, dentists and social care providers; every corner of the health and care system will experience the impact. Of course, it is important to consider the context of the NHS and social care system left to the nation by the previous Conservative Government. Having listened to a few contributions from the Conservative Benches, I think a sense of self-reflection is needed to work out exactly what was left: a backlog of 7.75 million people waiting for NHS treatment in England; a recruitment and retention problem for healthcare and social care professionals and a failure to tackle workforce shortages; and an inability to stabilise care provision that left some care providers on the brink of insolvency.

Today, many GP surgeries are already struggling with financial pressures and workforce shortages. The British Medical Association has warned that the increase in employer national insurance contributions will exacerbate those issues. Practices will be forced to allocate more funds to staffing costs rather than patient care. As my noble friend Lady Kramer pointed out, research by my own party has revealed that the NIC hike could end up costing GP surgeries the equivalent of more than 2 million appointments a year because of the additional £125.5 million bill inflicted on them.

Community pharmacies, often the first point of contact for minor illnesses and health advice, already operate on tight margins. The new national insurance contributions increase will mean an extra £50 million per annum for this sector. According to the National Pharmacy Association, rising national insurance costs could push small pharmacies into unsustainable financial territory, threatening accessibility for patients.

Hospices, which rely heavily on charitable donations and limited government funding, may also face increased financial strain. Research has highlighted that the additional costs of the NIC hike will force hospices to scale back services if they cannot attract more public donations. The cost to the average hospice is likely to be in the region of £200,000 per year.

The British Dental Association has expressed concerns that rising costs will further discourage dentists from providing NHS services, worsening the existing crisis in dental care availability.

Social care is also set to be pummelled by the rise in national insurance contributions. I declare my interest as a vice-president of the Local Government Association. It has emphasised that the social care sector, already facing a staffing crisis and chronic underfunding, will struggle to absorb these additional costs without significant reform.

The scale of the consequences of the NIC rise is worrying; it will destabilise many providers of health and social care. According to the LGA, councils in England face a combined social care funding gap of £3.6 billion. As welcome as the extra £600 million announced in the Budget for social care is, it will not even touch the surface of the problem. Also, according to the Nuffield Trust, the extra NIC increase for social care will add some £900 million in extra costs to the sector, which is more than the £600 million that the Government have put into social care. Was the £600 million meant to cover the social care costs or to ease the cost pressures that were already in the system before the NIC increase?

The British Dental Association reports that 40 million NHS dental appointments were lost during the pandemic. It points out that the additional financial pressure of the NIC hike is likely to further limit recovery efforts and drive more dentists away from NHS provision.

Before the increased national insurance costs were announced, a survey by the National Pharmacy Association found that 72% of small pharmacy owners were worried about their ability to stay afloat in the next five years. The average cost to a community pharmacy of this increase has been calculated at just over £12,000. One community pharmacist asked me to ask the Minister what she should do, as this national insurance increase will mean her having to sack 1.5 members of her staff or close for the equivalent of one day a week. What advice would the Minister give to her and to other pharmacists in a similar situation?

We on these Benches feel that this national insurance increase on health and social care provision would be self-defeating and have the unintended consequence of inflicting more misery on patients and those needing social care. We urge the Government to urgently rethink this increase in national insurance or risk the ability of some providers to continue providing the same level of care. The Minister must surely recognise that this national insurance hike will only pile more pressure on to our health and care services, which are already under enormous strain.

The Government must urgently rethink this decision, make an exemption from this hike for vital health and care providers, and not burden GPs, dentists, community pharmacists, hospices and care providers with higher costs that some will find impossible to fund. It is no good coming back with the meaningless formula of words that the Government are trotting out parrot-fashion on this issue: “This will be dealt with in the contract and funding arrangements for the next financial year”. We are talking about thousands of small businesses and charities, from GPs to hospices, that are having to make plans on service reductions now due to these NIC hikes. They need to plan and have certainty that these government-imposed increases are covered in full. The Government have made it clear that they will cover in full the costs for NHS trusts. If they can do it for NHS trusts and state very clearly now, with clarity and certainty, that they will not have to pay it, why the two-tier system for GPs, dentists, community pharmacies, hospices and social care providers?

Other choices were available to the Government in dealing with how funding could be raised to spend on health and social care, rather than this self-defeating national insurance contribution hike. My party has proposed alternative funding mechanisms. For example, we proposed several tax reforms to generate additional revenue for the health service and social care. Key proposals included a capital gains tax overhaul, introducing a progressive structure with three bands. This reform would have raised approximately £5 billion for health and social care. Implementing higher levies on banks and the very affluent would have raised an extra £9.8 billion package for social care and the NHS. Exploring these options could create a more equitable and effective funding system without clobbering health and care providers with these unsustainable extra costs.

The increase in national insurance contributions seems to represent a “make it up as we go along” policy by the Government when it comes to the effects on the health and social care sector. It brings significant challenges to many health and care providers, with no clarity or certainty from the Government. The Government must now say whether and how they will fund the full national insurance contribution hikes for GPs, hospices, community pharmacies, NHS dentists and social care providers, address the unintended consequences and give certainty in the planning of services that are now being made. Failure to do so will lead to further problems for our NHS and social care services that will have a negative impact for those seeking care.

The Minister can choose today to give certainty to those people and businesses that they will be exempted from this national insurance contribution hike. Failure to do so will mean that jobs and services will be reduced, as people are planning now. If he does not give that assurance, I will support my noble friend’s amendment if she presses it.

17:24

[Lord Blackwell (Con)]

My Lords, in contributing to the debate on this Bill, I should declare my interest as a trustee of two charitable music organisations, which, like other charities, including hospices and those that help the homeless, as pointed out by the noble Baroness, Lady Kramer, and others, will now have the challenge of raising more money to cover the additional employment costs of their charitable activities. However, that is not, by any means, the limit of my concerns. The most damaging impact of this Bill, as others have pointed out, is on businesses and wealth creation.

I confess I have some sympathy with the Minister and the Chancellor, because, as the OBR has pointed out, the escalating costs of social welfare from an ageing population and the growing number of inactive adults outside the workforce, many of whom are on long-term sickness benefits, risk creating an unsupportable rise in government spending in the coming decades without much faster economic growth than we have historically achieved. Indeed, the OBR projection showed that, without changes, government expenditure could rise, year by year, to reach over 60% of GDP by 2070, which is well above any viable level of taxation.

The current levels of government debt may be bearable, but continuing to add to that to fund ongoing deficits risks UK debt becoming unsustainable long before 2070. As a recent report from this House’s Economic Affairs Committee set out, confronting this challenge during this Parliament is essential and would have been essential whichever party was in power; it happens to be on this Chancellor’s watch to have to address it. However, that is where my sympathy ends because, as others have said, the way the Government have chosen to address it, by raising NICs on employers, is the worst possible response. It is a short-term Treasury fix that does nothing to address the long-term challenge.

Everyone agrees that a major part of the solution has to be growing the economy, which comes about only by successful businesses growing their output and creating more wealth to fund consumption and services. The left in politics have never understood that when you tax businesses, it is not a painless confiscation of surplus profits. Most businesses are competing in markets where they have to fight to earn a return on capital that they invest. As others have pointed out, raising costs on employment has real consequences: higher prices, fewer jobs, lower wages, less wealth creation; and the direct impact falls on some of the poorest in society, who suffer from the higher prices and reduced employment prospects. Another impact of adding to the costs of domestic industry is to damage exports and encourage imports, which further shrinks UK output and wealth creation. By damaging growth, this policy will therefore worsen the long-term challenge of balancing the Government’s budget deficit and not resolve it.

The Minister and the Chancellor understandably ask, if we do not like this policy, what the alternatives are. I suggest that the answer has to be supporting business wealth creation by keeping business taxes low, while taking determined action to check the runaway costs of public spending that the OBR projections show. There are two areas that are critical to achieving this. First, there is an urgent need to restructure our broken benefits system, which too rapidly abandons support for those who suffer temporary sickness or unemployment and simply passports them through to long-term sickness benefits. Sadly, once people are on those benefits, there is little practical help and encouragement under our current system to support them in getting back to an active role. They are, in effect, abandoned and stranded, with high personal cost to them and high and growing budgetary costs to the Exchequer. That has to be fixed. I am pleased that Ministers have been open in acknowledging this challenge—it is a start—but we need urgent action to address it. Can the Minister give any update on the timetable for the Government’s review of the structure of the benefits system?

Secondly, we need to confront the overall problem of public sector productivity. A recent report by the Resolution Foundation calculated that public sector pay is now 6% higher than in the private sector, but sadly this is not reflected by higher public sector productivity. Over the 20 years up to the end of 2019—I picked that year because it was prior to the pandemic—ONS data shows that productivity per hour in government services fell by an average of 0.3% per year. That is a reduction in output per hour worked of almost 7% over those 20 years. While it has recovered from the low point of the pandemic, public sector productivity today is still below 2019 levels. By contrast, the productivity of production industries grew by an average of 2.9% per annum over the same 20-year period. This matters because public sector employment is forecast to rise again under this Government to almost 19% of the workforce.

Our productivity challenge in the UK is not primarily a private sector problem; ite of tmost businesses have been fighting to improve costs, year in and year out. This country’s productivity problem is primarily a public sector drag on the economy. Dealing with it is not only critical to avoid this and future tax rises but essential to growth. It is an inescapable equation that our overall GDP is simply the size of the workforce multiplied by its productivity, so unless we grow productivity, we will not raise living standards. If we grow public sector spending without productivity gains, we will make this drag on growth only worse.

I recognise that neither party in government has a great record on public sector productivity, but all the fall in productivity in the 20 years I referred to earlier happened during the first 10 years of the last Labour Government. The Labour party is proud of its relationship with the trade unions, the members of which have to deliver these productivity gains. I ask the Minister if the Government will work with the unions to set a target for public sector productivity gains in this Parliament to match those in the private sector. Nothing else will solve our long-term problems.

These are the real actions needed to address the sustainability of public finances. Instead, we are looking at a proposal that is the worst possible response to the challenges we face, undermining rather than fixing the foundations of the economy and damaging some of our most vital charitable and other service institutions. I urge the Government, even at this late stage, to think again.

17:33

[Baroness O'Grady of Upper Holloway (Lab)]

My Lords, I confess that I was intrigued by one former Conservative Prime Minister’s line of attack on the Bill. Liz Truss criticised what she described as “unfunded tax rises”. I am still trying to figure out what that means, but it is crystal clear that Liz Truss’s £45 billion-worth of unfunded tax cuts played a significant part in getting us into a mess in the first place. People will not forgive or forget that legacy: the NHS and prisons are at breaking point, mortgages are soaring and pay packets have been cut in real terms, resulting in the biggest wave of industrial strife on record in this country since the 1980s.

Turning around this sorry performance will take more than the six months Labour has had in office so far, but the new Government are already putting in place the foundations for a sustainable recovery: reform of planning and pension funds; an industrial strategy, with better education and skills; stronger trade relations with the EU; and a new deal to make work pay, which in turn will help boost consumer demand and so encourage business investment. Critically, the Bill provides for public investment to deliver fair growth in every corner of the country, to help close the prosperity and health gap. According to the Health Foundation, in 21st-century Britain, the chances are that, if you are born poor, you will die younger. I look forward to hearing from the Minister how the Bill will help tackle the obscene inequality of geography and class that Labour has inherited.

The Opposition are quick to criticise Labour’s programme to get Britain back on its feet but coy about what they would do instead. If the Conservative Party believes that a better way to balance the books is to raise taxes on working families, slash welfare for the sick, cut pay for public servants—the workers once patted on the back as Covid heroes—and usher in a new era of austerity for public services, the party should say so. In the absence of that, this debate on employers’ national insurance should at least be rooted in evidence.

I thank the House of Lords Library for its briefing. It cites HMRC figures that show, just as the Minister pointed out, that the number of employers that will see no change or that will benefit from these NI changes outstrips those that will pay more. The IFS confirms that, with the doubling of employment allowance and other support, smaller employers will be least affected. In the context of a historic squeeze on the living standards of working people, large employers are being asked to dig a little deeper to pay for a healthier, better educated and better skilled workforce, from which they will benefit too. Surely it is only right that big business pays its way.

One Conservative apparently once agreed with that principle. In 2021, Rishi Sunak announced that he would reverse previous Conservative corporation tax cuts in one leap, taking it from 19% to 25%. The then Chancellor said that it was

“fair and necessary to ask”

business

“to contribute to our recovery”.—[Official Report, Commons, 3/3/21; col. 256.]

I have heard the argument that, even in a relatively tight labour market, employers somehow will have no choice but to offload the extra NI costs on to customers and their own workforce, but there is no such automatic link between employer taxes and NI contributions on the one hand and prices and pay on the other. When previous Conservative Governments radically cut corporation tax, that did not, after all, automatically lead to lower prices in the shops or higher rewards for workers—far from it.

Businesses of course have choices about how to cover these NI increases. They can absorb them by raising productivity, they can invest in new skills, kit and technology, and they can restrain excessive top pay and profits. There is scope to do so. The latest ONS figures show that, for the service sector—the sector most affected by NI costs—the net profit rate has risen to 15.1%. Analysis of the accounts of 17,000 companies by the trade union Unite found that pre-tax profit margins were 30% higher in 2022 compared with the average across 2018 and 2019. Post-tax margins were, on average, 20% higher. Studies by the International Monetary Fund and the European Central Bank also concluded that rising corporate profits are contributing to higher inflation.

Everyone wants Britain to be a great place to work, to invest and to do good business, but to achieve that goal we need fairness and change. This country is undeniably in a dire state of disrepair. We desperately need to strengthen the NHS, schools, colleges and local communities. Businesses need cheaper, cleaner energy. Productivity and living standards must rise. To do all that we need investment, and that is what this Bill is about.

Over the Conservative Party’s 14 years in power, come rain or shine, the roof was never fixed. Now it is Labour’s responsibility—indeed, its duty—to get the job done.

17:40

[Lord Ahmad of Wimbledon (Con)]

My Lords, I first seek your Lordships’ indulgence in paying my personal tribute to the noble Baroness, Lady Randerson. As we have already heard, she was always constructive in her engagement in the Chamber but also, importantly, outside it. I know so: I worked with her on legislation during my tenure as a Transport Minister. I was also very much on the receiving end of her very insightful and quite pointed questions. She was a pleasure to work with, and, as noble Lords from across your Lordships’ House have said, she will be remembered with love and affection. Our prayers go to her friends and family, and to our colleagues on the Liberal Democrat Benches. She represented her party, her sector and, indeed, your Lordships’ House with great dedication and devotion.

We return after Christmas—the season of good will—and the celebrations of the new year with hopes in our hearts for the year ahead. Yet regrettably, as we come together for the first substantial debate in your Lordships’ House, for many across our country the words “good will” and “celebration” ring somewhat hollow. We have now had six months of a Labour Government and, despite the assurances which were given, the report card makes for disappointing reading: broken promises and, indeed, betrayals.

On education, this Government’s ill-judged education tax, which comes into play today, is shrouded in a narrative of taxing those who are more affluent to raise more for schools in the state sector. Of course we want state sector schools to improve, but, as we have heard already, this ignores the pleas of those children with special educational needs, the small independent sector schools that I know have had to close, including some in my area, and the extra burden on local authorities with no school places. It also—I emphasise this point—taxes the aspirations of hard-working parents. I say to the Minister that yes, those who choose to send their children to private school, often by making great sacrifices and using their savings, are hard-working people as well. Most significantly, this action has disrupted the education of our most important asset for the future: the next generation, our children. If, as reports suggest, there is only a 10% to 15% migration to the state sector, that means no extra revenue for the Exchequer, and yes, they will also be hit by the Government’s proposals on national insurance—the subject of today’s debate.

Sadly and tragically, Labour has also betrayed many pensioners with another broken promise over winter fuel payments at a time when those among the most vulnerable need it most—those who have worked hard and contributed to our great country’s wealth and prosperity over the years. They deserve our compassion and care, yet their pleas have also not been heard. So the message we are hearing in many sectors across society is: if you are at the start of your life in education or a pensioner seeking peace in retirement, Labour is not working; Labour is not working for you.

The national insurance hikes are having a detrimental and damaging effect on the very engines of growth that the Government claimed they supported and which fuel the economy and productivity: our private sector, our charitable sectors and, in particular, small and medium-sized enterprises—the backbone of the British economy. In the Budget, the Chancellor of the Exchequer, Rachel Reeves, said that the changes to employer NICs were necessary

“to raise the revenues required to fund our public services and restore economic stability”.—[Official Report, Commons, 30/10/24; col. 818.]

At best the jury is out on whether this will raise the necessary funds for our public services, and we are already seeing that economic stability has not been achieved. We have heard about gilt prices. Five-year gilt prices have been trading above the threshold set by the OBR itself since November. Costs of borrowing are up—points already so clearly flagged by several of my noble friends, including my noble friends Lady Noakes, Lord Forsyth and, of course, Lord Frost. Growth has stalled. Interest rates, which seek to stimulate demand and ease the burden on business and working people, have stood still. This has also meant that fiscal headroom has shrunk, so what will the Chancellor of the Exchequer do now? Will there be another tax hike?

Businesses are suffering. We can use all the rhetoric we like, but that is the bottom line. As we have already heard, the number of businesses planning to raise prices in the coming months has jumped sharply as increases in the UK Budget in tax and wage costs caused confidence to slump. The British Chambers of Commerce has confirmed this. About 55% of companies said they were planning to increase prices in the next three months—my noble friend Lady Neville-Rolfe referred to that. Prices are going up—inflation.

As my noble friend Lord Forsyth so eloquently highlighted, the cost to businesses is rising, with an increase of £800 per employee—that is the bottom line. The noble Baroness who spoke just now, who I respect greatly, talked about the overall impact on businesses, but I too read that report and it is marginal. About 200,000 businesses or so will benefit and I agree that about 800,000 will remain the same, but close to a million—900,000-odd—will see their bill increase. They will pay more across the board. That is not me as a Conservative Peer saying it; that is what HMRC is saying: they are the Government’s own figures.

The CBI warns that two-thirds of firms are looking to cut their hiring plans. It said:

“Our survey showed half are now looking to reduce headcount. And almost two-thirds are looking to cut their plans to hire”.


So, along with inflation, we now have prospects of unemployment as well. I ask the Minister for a response. These are facts; this is what business and HMRC are saying. People are suffering. You do not need to be an economist to understand that you do not get growth if you tax the people who are the very engines of growth.

On the rhetoric of a fictional black hole and a poor inheritance, which we have heard repeatedly, I say to the Minister: we are a mature House. We have reasoned, balanced debates, so less of that and more on substance. People are seeing through it. Let us get serious. People are suffering. We are dealing with real people, real businesses and real lives.

I had the privilege before Christmas to attend a dinner celebrating the success of British Asian business. I say to my noble friend Lord Forsyth that there were plenty of billionaires in that room. Indeed, there was £165 billion-worth of business at that reception. But sadly, the conversations were not about what is next and the prospects for their next steps in terms of expansion; they were about the Government’s approach to taxing what they saw as aspiration—taxing success. I know: I am part of that generation. Many who came to this country made Britain their home and became part of those very economic engines that fuel our economy today. They were talking the language of relocation and moving to other jurisdictions where aspiration and business success would be celebrated.

I commend the speech of my noble friend Lord Blackwell. I listened to his thoughtful and insightful remarks on the necessary public sector reform, which is an important element in ensuring that we move forward as a successful country and should not be forgotten.

Not a single Peer in your Lordships’ House would not agree with the sentiments I am about to express. We all love our country, the opportunities it affords and the success of our people, and we want to see our country prosper and grow. To ensure that prosperity and growth happen, we need to feed the very backbone of our economic growth—our businesses across all sectors, and SMEs in particular. They are truly the wealth creators and need to be given tools and support to survive, prosper and grow. Yet today, as many have said to me quite directly, they face daunting costs. The prospects for some are that their sheer survival is on the brink. The Government must listen and, as others have said, think again.

17:51

[Baroness Sater (Con)]

My Lords, charities of every kind are seeing massive increases in demand for their services. Many provide essential support and vital services to all parts of our society—to the vulnerable, the elderly and the homeless, and for children’s services, medical research and many other needs. I declare my interest as a trustee of the Dartington Hall Trust.

The increases in employers’ national insurance contributions, the living wage and the cost of utilities, goods and services have added huge financial burdens to charities’ budgets. Many have had no option but to cut costs, which means that services will be cut. Today, I add my voice to their concerns.

Delivering almost £17 billion worth of public services every year, many charities also provide support when public services fall short, without receiving any public funding. According to the National Council for Voluntary Organisations, the NCVO, charities employ almost 1 million people and raise money to provide services that would otherwise need to be commissioned by government. The NCVO and the Association of Chief Executives of Voluntary Organisations, the ACEVO, recently issued a letter to the Chancellor outlining their concerns for a sector that was already under considerable strain. The NCVO’s initial estimates have found that the employer national insurance contribution increases will place an annual additional bill of £1.4 billion on charities. The letter goes on to say:

“The harsh reality is that many organisations may be forced to reduce staff, cut salaries, and most importantly, scale back services for the very people they strive to support”.


By way of an example, and as my noble friend Lord Forsyth mentioned, Marie Curie needs to find an extra £3 million each year to meet the increase. Essex & Herts Air Ambulance has reported that the change will cost it an additional £100,000 that would otherwise be directed towards other missions. Bridge Support, a charity devoted to providing essential mental health and recovery services, reported that its stretched budgets will have to absorb these additional costs, while its counterparts in the NHS and other statutory services will remain exempt.

These charities provide essential services: life-saving interventions that are not just nice-to-haves but must-haves. NCVO researchers have found that almost three out of four charities are withdrawing from public service delivery or are considering doing so, and most are reducing their services to reduce costs. It is a perfect storm of cost escalation while funding is in decline.

My noble friend Lady Fraser is extremely sorry not to be able to attend this important debate. She is CEO of the charity Cerebral Palsy Scotland and is having to deal with the practical implications of this policy at the coalface. She is conducting meetings about where and how to cut staff, and therefore services, to fund the increased tax burden. Anna Fowlie, the chief executive of the Scottish Council for Voluntary Organisations, wrote that many charities

“have already had to subsidise public services with their own funds, and increasingly we are hearing of organisations having to close their doors”.

I am very worried about the future, as to me it makes little sense for the Government to hamper the ability of those picking up the slack to do so. Have the Government made provision to fill the gaps in essential services that charities provide when they are unable to do so? How will the Government fund the services presently provided by the voluntary sector? As the NCVO and the ACEVO have asked, why can the Government not commit to reimbursing or exempting voluntary organisations’ increased employer national insurance contributions in the same way as they will for the public sector? After all, the biggest assets in charities are people, the largest costs are people, and employing people has just got significantly more expensive.

With all that in mind, I ask the Minister when the impact statement for the Bill will be published. I intend to seek an amendment to the Bill in Committee to ensure that the Government provide an impact statement, unless the Minister can tell us today when it will be published.

The Government have launched their civil society covenant, which talks about resetting their relationship with the voluntary sector. It talks of the essential role of working as partners with the sector, which is welcome, but the Bill does not strengthen the foundations of a stronger civil society. Rather than taxing, we should be supporting or, at the very least, exempting.

I know the Government and the Minister want our charities to thrive, but I fear that the Bill will hurt them. So many are feeling desperate. The Government must find a way to protect and support them. Doing so would demonstrate that they mean what they say and would illustrate that they truly want a productive relationship with the voluntary and charity sector.

17:57

[Baroness Moyo (Non-Afl)]

My Lords, on a number of occasions in your Lordships’ House I have stressed that investors, be they domestic, foreign, international, private or institutional, are willing to tolerate high taxes or regulation, but not both. It is the Government’s job to calibrate and recalibrate this delicate balance in the pursuit of investment and growth.

On the rise in employer national insurance contributions, there are at least four reasons indicating that a rethink of this policy is urgently required. First, as has already been mentioned, there is the tangible impact that this tax rise will have on the economy through actual and forecast employment. The Confederation of British Industry, the CBI, expects higher employment costs to reduce jobs in the private sector by 176,000 at the end of 2026, and business investment to be down by £6 billion. Job creation in Britain is already falling, with data showing that in the three months to November 2024, job vacancies reached their lowest number since May 2021 at approximately 818,000, indicating low job creation in the United Kingdom’s economy. Clearly, a tax increase on employers will only worsen the prospects for job creation.

Secondly, this national insurance rise adds inflationary pressure. The Office for Budget Responsibility, the OBR, expects that in the near term, higher NI will add 0.2% to the consumer prices index as a result of firms passing on part of the cost to consumers. That is of particular concern as inflation, at 2.6% last November, remains above the 2% Bank of England target. Noble Lords will have seen today that Germany has already seen a rise in its inflation, which is very worrying for us. These factors make the prospects for economic growth worse, not better, particularly after the last two consecutive months of flatlining growth under this Labour Government.

Thirdly, over time and all being equal, this tax-induced low economic growth will reduce the Government’s tax take and bring real vulnerabilities around fiscal stability and the funding of public services—the very reason, we have been told, for this tax rise in the first place.

Fourthly, perhaps most damaging is the message that this tax rise sends to private sector investors and business. This tax adds to an already expanding list of reasons for investors not to see the UK as a serious destination for the levels of investment and business that could drive economic growth. Already, according to a June 2024 report by the IPPR, Britain has the lowest investment rate of any G7 country at 17% of GDP while the rest are above 20%. Worse still, this economy has trailed other G7 countries in investment for 30 years, since the 1990s. This is not making that situation better. It is worth stressing that, if the United Kingdom had maintained an average G7 investment level over the past 30 years, it could have added £1.9 trillion of investment or 80% of the country’s annual GDP.

The story gets worse. Recent reports state that the London Stock Exchange is on course for its worst year for departures since the 2008 global financial crisis. This tax does not help reverse that situation. According to the London Stock Exchange Group, in 2024 a net total of 70 companies delisted or transferred their primary listing from London’s main market. The number of new listings is on course to be the lowest in 15 years, as initial public offerings remain scarce. It is impossible to see a path to long-term sustainable economic growth without a vibrant capital market. Therefore, it is essential to make the UK more attractive to companies, employers and broader capital market formation, but this tax does not do that.

Meanwhile, as has already been intimated, small and medium-sized enterprises are the centrepiece of any country’s economic success and clearly of this economy too, yet more than 80% of Britain’s 5.5 million SMEs will be impacted by this tax. These trends underscore a more fundamental and structural point that the UK is in danger of being seen as a place where investment and risk-taking are inadvertently discouraged and where risk-takers face unlimited downsides but their upside is constrained by taxes and curtailed by what is seen as an unwelcoming business and investment environment. Furthermore, this tax will undermine efforts by the Government to boost the UK’s attractiveness through their proposed market reforms. If this Bill ultimately progresses it adds to the UK’s growing reputation as a place where you can certainly lose but not easily win.

I began my remarks today by stating that business can accommodate high taxes or high regulation but not both. The Government have spoken about reducing regulatory burdens, and this is to the point about what we should be doing instead. Reducing regulatory burdens is an obvious one. This is where the Government should focus their efforts and accelerate this process. The Government must reconsider this increase in employer’s NI, specifically looking at, for example, raising the threshold above £5,000. This alone will go some way to reducing the negative impacts that are clearly already being felt across this economy.

18:04

[Lord Howard of Rising (Con)]

My Lords, I declare an interest as an employer who will be adversely affected by the employer’s national insurance contribution increase and the proposed reduction in the threshold for paying it.

Market economics is simple. It is a fact that, as you lower prices, you sell more goods. You need only look at supermarkets to see daily evidence of this, whether it be two for one or prices being slashed. Conversely, if you increase the price of goods or services, they become more difficult to sell. People resist price increases. There are, of course, exceptions because of special circumstances, but the marketplace sooner or later inevitably reverts to normal. Do His Majesty’s Government understand this very simple fact that putting up prices reduces the amount of goods or services sold? If the Government cannot understand this, should they be entrusted with running the country? If the Government do understand the way in which market economics work, why do they not understand that increasing the cost of employment will lead to a reduction in the number of those employed in the same way that a supermarket putting up a price will lead to a reduction in sales of that item?

Today we are debating the proposed increase in employer’s national insurance. This comes on top of the increase in the minimum wage in the previous Budget. An increase in the minimum wage does not affect just the lower paid but means an increase all round. Your skilled worker does not want to be paid the same as a less skilled colleague; he or she wants to maintain the differential. The compounding effect on costs of even a small increase in the basic wage is dramatic. If the increase we are debating today is passed, we will end up with fewer people employed and the Government will consequently collect less tax. They will also most likely end up with a larger number of those requiring state assistance as redundancies are made. I would be most grateful if the Minister would be good enough to explain how these increases in the cost of employment will defy market economics. How will there not be a detrimental impact on employment and the economy as a whole? The Minister said in his opening remarks that the Government’s plans will wipe the slate clean—fat chance of that; they will make things worse.

18:07

[Baroness Bray of Coln (Con)]

My Lords, it is a pleasure to follow my noble friend Lord Howard. I am delighted to participate in this important debate. I should say straightaway that I am absolutely opposed to any rise in employer’s national insurance contributions, especially at this time when we need to get the economy growing, which we have heard a lot about this evening.

This increase stems, I think, directly from an outdated political stance that has always failed to recognise that there are inevitable costs for employees that come from raising the cost of their employment. In April, the rate is to rise by 1.2% to 15%, and payment kicks in at a much lower threshold of £5,000, down from £9,100, which is a significant rise in employers’ costs.

Looking back, it was rather misleading, to say the least, of the Government to try to soothe nerves in their election manifesto by telling us that there would be no rise in national insurance contributions, and it was not made clear during the following election campaign that this was actually only ever a commitment not to raise employees’ contributions. Instead, job numbers and wages will doubtless fall because of the increased cost to employers. How is that helpful to the working people who our Prime Minister is always talking about as being so important? The answer, of course, is not at all. This is indeed a tax on working people as well as their employers.

We are already seeing in advance the damaging effect kicking in. The number of jobs on offer across the country has already sunk, as we have been hearing. The Institute of Directors recently reported that business confidence has nosedived to levels last seen in April 2020, along with employer hiring intentions, and that 43% of businesses facing higher national insurance contributions are planning to reduce employment as a direct result.

The Chartered Institute of Taxation has raised concerns that businesses may turn to alternative employment models such as outsourcing, offshoring or increasing reliance on self-employed contractors. Indeed, James Reed, chairman of a major recruitment company, has warned that some companies are to his knowledge already planning to relocate tens of thousands of employee roles to countries such as India where employment is cheaper.

So, the effect of this extra cost has been immediate even before it kicks in, in April. This is to be expected when politicians eye up business finances that are finely balanced; it is an inexperienced Government who do not understand that. A Government more mindful of business needs, including the welfare of employees and financial realities, would consider measures that encouraged economic growth right across the business world rather than sticking glue-like to the old left-wing style of government which always seems to believe that higher taxes are the solutions to most problems.

Even before the Budget Statement in October, businesses were grappling with inflationary pressures, rising energy costs and wage increases. Now, these higher national insurance contributions on top will simply increase the problem of absorbing the added costs, leading to more job losses and fewer job opportunities. Higher employment costs will certainly disincentivise investment in labour-intensive industries, and businesses operating in globally competitive sectors such as manufacturing or technology may find it harder to remain competitive. That is likely to lead to reduced exports and lower foreign investment in the UK, weakening the country’s position in the global market.

As we have been hearing, there is also considerable concern beyond the business world about the impact of the rise in national insurance contributions. Charities and the voluntary sector are in line for the increased national insurance contributions and are already expressing deep concern about their ability to continue their essential work in the community. They struggle hard already to fund all the work that they do. If the all-important donations on which they depend now have to be stretched to fund increased taxes on those they employ—as they will be—they will have to cut back on the services and support that they can deliver to the community.

Many GP practices, which are businesses in their own right, are also facing these higher contributions. They say that they may need to reduce services or limit patient access to meet them. The Government have introduced additional funding to support GP practices, but the specific issue of reimbursing the increased national insurance contributions in full, which GPs are demanding, remains unresolved.

I appreciate that, for the smallest businesses, there is to be an increased employment allowance to offset the increase in their national insurance contributions, which means that some will no longer have to pay contributions at all; this will, of course, be very good news for the approximately 800,000 employers who qualify. However, smaller and medium-sized businesses will still be hit, along with all the bigger, and the biggest, employers.

The rise in national insurance contributions poses a real threat to our economy and to the best interests of our workforce: fewer secure jobs, lower pay, fewer charities with less reach and GP practices under greater pressure. How does this in any way benefit this country or its working people? The answer must be that it does not.

18:13

[Viscount Chandos (Lab)]

It is a pleasure to follow the noble Baroness, Lady Bray, for the first time. I would suggest that she look back at the speech of the noble Lord, Lord Macpherson, who set out some notable former Conservative Chancellors who raised taxes early in their term of office. I should declare the interests set out in the register where I am a director or trustee of organisations that are in some cases losers and in other cases winners from these changes.

I support the Bill and thank my noble friend the Minister for his cogent introduction of it. I say that I support the Bill, rather than welcome it, because, unlike my good friend, the noble Lord, Lord Desai, who I am sorry is not speaking today, I am not in favour of increasing taxes unless absolutely necessary. Unfortunately, it was perfectly clear by the time my right honourable friend the Chancellor came to deliver her first Budget in October that tax rises were needed to restore credibility and stability to the public finances and to fund public services at a sustainable level—even if every department will still need increases beyond the level currently proposed, as soon as economic growth and resulting tax revenues increase.

I will not dwell on the black hole or debate its size, but I will repeat the quotation that I included in my contribution to the Budget debate two months ago, because it is worth repeating. It was the evidence given earlier last year by the chair of the OBR to the Economic Affairs Committee on the forecasts made by the previous Government. He said:

“Some people have referred to that as a work of fiction. That is probably generous, given that someone has bothered to write a work of fiction, whereas the Government have not even bothered to write down their departmental spending plans”.


The Labour Government have had to restore the integrity of the budgeting process and propose plans based on independently compiled and reviewed figures and assumptions. Tax rises were an inevitable consequence of that process, and the increase in employer NI contributions represents the largest part of these. I believe that it is the fairest and most constructive way of raising the necessary revenue, particularly in light of the point made by the noble Lord, Lord Macpherson, that it offsets the reduction in employee national insurance introduced by the last Government.

In election campaigns of the past few decades, an arms race has developed of ruling out specific tax increases over the life of the subsequent Parliament. Like the right reverend Prelate the Bishop of Southwark, I regret that, but, in the world in which politics is now conducted, I recognise that it is naive to think that that is likely to change.

Had my party not made the commitments that it did, would the Chancellor necessarily have chosen to increase employer NI rather than, as some economists and the noble Lord, Lord Macpherson, have argued, reverse the employee NI cuts introduced by the last Government in a desperate and vain attempt to curry favour with the electorate? Perhaps not, but, as I said in the Budget debate, there is a strong case for asking companies to make an increased contribution to the funding of public services on which the resilience of both their customers and employees is dependent.

During the dark days of the pandemic, my noble friend Lord Eatwell and I argued that the corporate sector could afford to pay for increased resilience not only in their own supply chains and operations but in society more widely. Over the past 30 or more years, the share of GDP attributable to corporate profits has significantly increased, which I largely celebrate where it has not been at the expense of labour’s reasonable share. That general increase in profitability gives the corporate sector the ability to contribute to a more resilient society, to say nothing of paying back some part of the furlough and other support provided by the Government during the pandemic.

I regret that many in the business community have been so critical of these measures, suggesting, like Chief Vitalstatistix in Asterix the Gaul, that the sky will fall in tomorrow. It was therefore heartening to read in the Financial Times today that James Daunt—whose turnaround of the bookselling industry here and in the US, in the teeth of Amazon’s ferocious competition, is a retailing case study—said that pay inflation was “really significant” for the business, but that he backed the UK Government’s move to increase national insurance costs. I am sure that the noble Baroness, Lady Neville-Rolfe, with her deep experience of retailing, would agree that this is a significant counter to the complaints of other, perhaps less dynamic, retailers.

As a brief digression, Mr Daunt also said that, in relation to the UK, another factor remains the biggest pain, adds to the cost and complexity and makes our labour situation worse. Would any noble Lords on the Benches opposite like to guess what that other factor is?

Of course, not all employers are profitable, or even for profit, and I recognise that, for those—if they are of a size that means the increase in the employment allowance does not offset the increase in the NI rate and the lowering of the threshold—this measure is harder to absorb than for profitable corporate employers. Other noble Lords, led by the noble Baroness, Lady Kramer, in her regret amendment, have highlighted the particular impact on health and social care providers. I am glad that there have not been many arguments—the noble Lord, Lord Scriven, I think was an exception—for exempting different categories of employers from the rise. The tax system is complicated enough without new distortions. However, I hope that the Government and, in the case of charities, donors will be open to targeted financial support where necessary. The grant-making foundation of which I used to be a trustee made an additional tranche of grants two years ago to support charities at the time of the inflationary spike.

The noble Lord, Lord Blackwell, suggested that the left does not understand how tax affects business. I have to say I find that both patronising and wrong. My noble friend Lord Eatwell this afternoon gave a more compelling analysis of how this measure raises necessary revenue while driving productivity improvements, and hence growth, than anything I have heard from the Benches opposite.

I end by strongly endorsing the advocacy by the noble Lord, Lord Macpherson, of a more fundamental review of the relationship between national insurance and income tax. In so doing, I join the noble Lord, Lord Forsyth, in the belief that the pretence of NI being anything other than a tax while quacking like a tax is long overdue for dissolution.

As the noble Lord, Lord Macpherson, demonstrated so well, the path to radical reform is long and rocky, with the noble Lord, Lord Hammond of Runnymede, bearing the scars of trying and failing to enact even quite a modest change. But it is hard to reconcile with fairness the partners of a Magic Circle law firm, earning on average £2 million a year, not only paying a lower rate of self-employed national insurance than employees would but, as partnerships, not being subject to any employer’s NI, saving £300,000 a year for every partner. That is neither fair nor a loss of revenue—hundreds of millions a year from that sector alone—that the country can afford. Will the Minister consider urgently establishing a task force to examine how income tax and national insurance can be integrated and all types of workers, employed and self-employed, equitably taxed?

18:24

[Lord Horam (Con)]

My Lords, the UK remains the sixth-largest economy in the world if you look at crude gross domestic product. Sadly, the bad news is that it has slipped down the league of nations in gross domestic product per head. We are now either 21st or 28th in GDP per head, depending on how you calculate it. Taiwan and South Korea—despite its present problems—are ahead of us while, on present forecasts, we think Poland will possibly take over in about two years’ time. That is because the annual average increase in GDP per head has fallen over the decades, from about 2.5% in the 1980s to about 1.3% a year in the 2010s, to even less, 0.3%, in the 2020s.

As the noble Baroness, Lady Moyo, who has just left the Chamber, said in a speech in the Autumn Statement debate, the UK’s GDP is now lower than that of any of the 50 states of the United States. It is even lower than that of the poorest US state, Mississippi. It actually gets worse than that, because I think the noble Baroness was taking the average UK GDP per head. Unfortunately, there is a huge discrepancy between GDP per head in London and GDP per head outside. In fact, as you go outside London, GDP per head goes down by about 50% to about half what it is in London, and in the poorest regions of the UK, which are in the north-east of England and Wales, it is about one-third of what we enjoy here. So, although we in London enjoy a standard of living that is similar to many of our compatriots in Europe, in Paris, Munich and so forth, outside London and the Home Counties, the situation has become progressively more dire, and I do fear for the politics of this country while that situation continues.

Does the Autumn Statement, along with the national insurance increase that we are debating today, make any difference to that fundamental fact? The fact is that it does not—or at least not much. The noble Lord, Lord Eatwell, is always interesting, and I was very interested in his heroic defence of the Government’s measures. In particular, he made the reasonable point that, if the cost of labour goes up, it may be used more productively in the private sector. But surely the real issue here is the profligate use of labour in the public sector. That is where real efficiencies could be achieved. In the National Health Service, for example, more people are employed than ever but productivity has gone down. We are now in a situation where, in one particular public agency, the unions are threatening to go on strike because they have been asked to work three days a week in the office rather than at home. It is astonishing that the private sector should stand accused when it is the public sector that is the real problem. So I understand the noble Lord’s point, but I feel that he is aiming at the wrong target.

I agree with the Minister’s point that there is a sensible defence of the Government’s position, as the noble Viscount, Lord Chandos, has just explained and the noble Lord, Lord Macpherson, referred to, given that we are looking at a situation where there is a hole in the public finances, of whatever size—we can disagree about how big it is, but there is a hole—and there are clearly some short-term problems which were unanticipated, for example the £11 billion or so that has to be spent to compensate the victims of the infected blood inquiry, and we have run down our defence stocks and our armaments to help Ukraine. All these are factors that any Government would have to consider. It is perfectly true that Conservative Governments in the past increased taxation at the beginning of their periods of government—Mrs Thatcher did it, and it was done by George Osborne as well—to cope with factors of that kind. So there is a reasonable defence there.

The problem, as my noble friend Lady Neville-Rolfe said, is the clumsy way that this has been done. Was it necessary to antagonise farmers quite so much that they came here with all their tractors and so forth to protest about what happened? Was it necessary to further disadvantage the private education sector? Was it necessary to hit the charities? Was it further necessary to disregard poorer pensioners in a difficult winter, with all the problems they will be facing?

That is surely the reason why the measures, including this one, are so unpopular and why business is so upset. Demonstrably, business is upset, and as my noble friend Lady Neville-Rolfe also said, morale matters. If you talk people down and constantly go on about the difficulties, you will destroy morale. The Government now have the task of improving morale when they need not have been in this position.

There is a bit of a problem, which all Governments face, in how the Treasury is set up to deal with difficult situations such as this. The first part of the problem is that it combines being a finance ministry and being an economic ministry. To go back to Harold Wilson’s days, older Members will remember when he tried to untie this Gordian knot by creating the Department of Economic Affairs, so that growth was given the same emphasis that balancing the budget had. Sadly, that lasted for only four or five years. There have been various attempts since then to deal with this problem—I think that the noble Lord, Lord Birt, made one—but it remains a problem. The noble Lord, Lord Macpherson, may have much more understanding of this than I do, but I think the only way forward is to emphasise the growth unit inside the Treasury rather than establish another organisation, which the Treasury will inevitably try to fight. We have to face that problem, and I am afraid that the Office for Budget Responsibility actually makes the problem worse, because it emphasises the budget-balancing side of the Treasury’s task rather than its growth side.

There is a second point, which was recently brought out in an interesting book by Professor Paul Collier, who is professor of economics and public policy at the Blavatnik School of Government in Oxford. He made the point in his book, Left Behind: A New Economics for Neglected Places, that the people in the Treasury, given the way that it is staffed and the tasks they are given, are drawn from a very narrow circle. I certainly do not intend to make any criticism of individuals here, but they are very often people from a London background who have been to Oxford and Cambridge. How can they therefore be expected to understand the effect on farming, for example, of the national insurance increase? How can they be expected to understand the effect on charities or small businesses, when they have never run a small business? They are tasked with a narrow remit and their expertise is of a particular kind. They do a heroic job, but how can they reasonably take account of all these factors?

They are mostly economists, like me. I am an economist by background, and I think it was Angus Deaton, the Nobel Prize winner, who said that the teaching of economics has lost touch with welfare recently; it has been too keen to pursue methodological purity at the expense of social, business and other factors. That is a problem as well. We therefore need to look at this rather structural problem, as well as at the politics of decisions that particular politicians may make.

Having said all that, like the noble Lord, Lord Macpherson, I am not unoptimistic about this country’s future. For example, we have a great services sector, hardly referred to today: 80% of our GDP comes from the service sector and that sector is expanding by 8% a year universally—throughout the whole world—so there are huge opportunities. I declare an interest here. Many years ago, I started an economics consultancy specialising in metals and minerals. Frankly, the sky is the limit for what you can do if you have the right product and the right marketing. The world is literally the UK’s oyster if we get this right, and we should concentrate on it.

I liken the UK economy at the moment to the football club that I support, Manchester United. It has a glorious history but has recently been sliding down the league tables because of complacency, bad mistakes, bad recruitment and generally not doing very well. But suddenly, yesterday, the players put their back into it: they had a clear plan and worked with real aggression and intent, and they got a result. This is something which we can hope that the Government will do: turn round the British economy, in the way that the players turned round Manchester United’s fortunes yesterday. I am afraid that the Government will have to show a better understanding of the private sector than they have done so far if they are to achieve that admirable result.

18:35

[Lord Ashcombe (Con)]

My Lords, as declared in the register of interests, I work for Marsh Ltd, a subsidiary of MMC Inc, which also owns Mercer, a global consulting firm that offers solutions for investments, retirement, health and benefits. That sounds a bit like an ad but it is important in this case.

The proposed changes to employers’ national insurance contributions represent not just a fiscal adjustment but a direct and tangible tax on the future economic growth of the United Kingdom. Why? First, we must consider the immediate impact on UK businesses, which are already navigating a minefield of challenges. Rising operational costs, muted consumer spending and the lingering effects of recent economic shocks have left many companies struggling to grow. Imposing an additional financial burden in the form of increased national insurance contributions is akin to asking a runner, already fatigued, to carry an additional weight uphill. It is not just ill-timed; it is counterproductive.

In the context of global markets, the implications are even more concerning. The rise in national insurance will make the UK less competitive on the world stage. Again, why? It is because each new recruit will now come with a higher cost to businesses. For multinational corporations deciding where to expand or establish a new branch or headquarters, or for fast-growing start-ups seeking an environment conducive to scaling up, the UK is no longer the obvious choice. Instead, it will be perceived as more expensive, less attractive and a riskier proposition for those with ambitious growth plans. This is not the signal that we should be sending to the world.

Moving on to the hard-working people of this country, the financial burden imposed on businesses does not exist in isolation. Businesses facing these costs have limited options to maintain profitability. They may choose to freeze or reduce pay rises, adjust prices for goods and services, or cut back on benefits and pension contributions. There is an assumption that businesses can just cut fat from their operations, but no, as it is often now not there to cut. In every scenario, it is the workers and consumers who will bear the brunt of this decision.

Already, the data is telling. Around one-fifth of business leaders questioned in spot polls by Mercer have indicated that they intend to reduce their budgets for salary increases as a direct result of these changes. Another 17% are in a holding pattern, unable to make definitive plans for pay adjustments. Perhaps more concerning is the finding that a fifth of businesses are shelving hiring plans altogether. These are not abstract numbers. I would add, as did my noble friend Lady Noakes, that the Office for Budget Responsibility forecasts that, by 2026-27, some 76% of the total cost of national insurance contributions will be passed on through a squeeze on workers’ pay rises and increased prices.

This punitive tax, which affects all businesses, is having a disproportionate impact on sectors that employ large numbers of lower-paid workers, such as the retail, care, non-profit and hospitality sectors, to name but a few, since the threshold drop-down affects a more significant proportion of pay. The hospitality industry—one of the cornerstones of our economy and culture—is a prime example. UKHospitality has warned that a third of businesses in the sector are already operating at or below breakeven. The additional burden of the increased national insurance contributions could push many over the edge. It is not just about numbers on a balance sheet; it is about the vibrancy of our communities, the livelihoods of countless workers, and the health of an industry that has already endured so much.

Survey data from the Confederation of British Industry, representing 170,000 businesses, paints an even grimmer picture. Nearly two-thirds of firms anticipate that the hike in national insurance will negatively impact their investment plans, and half have indicated that they may need to reduce headcount as a result. Meanwhile, confidence among members of the Institute of Directors has plummeted to near record lows, echoing the sentiment of businesses at the time of the Covid-19 pandemic. The IoD has stated:

“Far from fixing the foundations, the Budget has undermined them, damaging the private sector’s ability to invest in their businesses and their workforces”.


The long-term consequences will be important. From listening to the voices of business, I note that these changes will come with significant opportunity costs. Reduced hiring and investment will not just slow growth but create a cycle of stagnation: less hiring means fewer opportunities for workers, which in turn reduces consumer spending and diminishes economic activity. No business is immune. This is not a path to prosperity but a recipe for regression.

The knock-on effects extend beyond the private sector. A sluggish economy means reduced tax revenues for the Treasury, leaving the Government with fewer resources to invest in vital public services. The irony is glaring: a policy ostensibly designed to generate revenue for public goods—the NHS, social care and so on—could ultimately undermine their funding. At a time when these services are needed more than ever, we cannot afford such a misstep.

We cannot will economic growth into existence through further taxation and burdens on businesses. Growth requires investment, innovation and a competitive environment that attracts talent and capital. The UK must be a place where businesses feel confident to expand, hire and innovate. This requires policies that incentivise growth, not stifle it.

The proposed changes to national insurance contributions represent a tax on workers, on growth and, ultimately, on the Government themselves. This policy must be rethought to prioritise measures that enable businesses to thrive. Competitive tax incentives, streamlined regulations and targeted support for key industries are just some of the ways that can foster an environment conducive to growth.

This is about not just economic metrics or fiscal policy but the kind of country that we want to be. Do we want to be a nation that penalises ambition and stifles potential, or do we want to be a beacon of opportunity, attracting the best and brightest, and empowering our businesses and workers to succeed? The answer, I believe, is clear: growth and opportunity must be chosen, with policies that support, rather than hinder, the aspirations of our people and businesses. The Government need to ensure that the UK remains a competitive, dynamic and prosperous nation. Let us reject the false economy of punitive taxation and embrace a future built on investment, innovation and shared prosperity.

18:44

[Lord Jackson of Peterborough (Con)]

My Lords, this feels very much like a knee-jerk Treasury groupthink policy, because the October 2024 Budget had the biggest tax increase we have seen for many years. It is a levy or tax and, as noble Lords have previously said, you generally tax things that you do not like. In this case, it is a disproportionate tax on jobs.

I have to let your Lordships’ House into a little secret. I am young enough to have read the A-level textbooks written by the noble Lord, Lord Eatwell—I am sorry if that gives away his age. Much as I agreed with a lot of what he said, I have to disagree with him about the unique propensity of the previous Conservative Government, of whom I have occasionally been critical myself, for creating public sector debt. Between 2007 and 2010, public sector net debt as a proportion of GDP, under a Labour Government, increased from 36% of GDP to 65%—unprecedented numbers. So, much as I agree with him on some issues, such as the disproportionate concentration on low-skilled immigration to drive growth, he was wrong on that particular issue.

A truly courageous Government with a strong and confident mandate would have responded to the challenges put by the noble Lords, Lord Eatwell and Lord Macpherson—who is not in his place—on policies to drive growth. But they also would have looked at raising money for some big policy issues, such as the policy on social care, which we will now not see till 2029, or policies on the planning system, on our dysfunctional housing and mortgage market, on our universities’ funding model, on reducing immigration and our dependence on low-skilled foreign workers, and on our worklessness crisis. As my noble friend Lord Forsyth of Drumlean said, 9 million people who could work are on benefits or are not able to work.

Those are the choices that the Government could have made. They could have made them via some really courageous fiscal decisions, which they have not made—on, for instance, the triple lock or changes in fuel duty, which they have shied away from; moving to a project-based approach to overseas aid; and, of course, my favourite one: tackling public sector pensions, which this Government will never do, for obvious reasons. This proposal is what Labour Governments always do. When they come to power, they clobber the wealth creators, the innovators, the entrepreneurs and the investors, while taking care of their trade union friends. It happened in the 1970s and it is happening again today. We thought we had had a break from that with the Blair Government, but we are now back to the bad old days.

This proposal is also an egregious breach of a manifesto commitment. My noble friend Lady Noakes did not dwell on this, but the right reverend Prelate the Bishop of Southwark did. It has broken a solemn promise—a binding contract with the electorate before a general election. In May, the now Chancellor said that Labour would not increase income tax, national insurance or VAT, and would not raise either income tax or national insurance for

“the duration of the next parliament”—

namely, the Parliament we are now in.

The distinction between working people and employers is tautology and disingenuous. It most assuredly is not a measure that will give rise to economic growth in any meaningful sense. It also betrays a fundamental misunderstanding of the impact of fiscal policy. In its pre-Budget paper on 28 October 2024, the Institute of Economic Affairs stated correctly that

“the incidence of a tax doesn’t always fall on the person who pays it. When we tax businesses, it is often workers who end up bearing the burden in the form of lower wages”.

Secondly, tax affects behaviour, and the choices people make in response to a tax increase or a tax cut can have a significant impact on how much revenue is raised. I do not think that His Majesty’s Treasury has really considered the impact on, for instance, concealed employment and forced self-employment that might arise from behavioural changes that this tax gives rise to.

Even the OBR assumes that just over two-thirds of additional business costs will be passed directly to working people, giving us higher prices, lower wages, the decision to hire fewer people and, therefore, an impact on real wages. Already, the S&P Global Purchasing Managers’ Index composite employment index shows a drop in new jobs being advertised. This policy has undermined consumer, business and investor confidence. The policy will be introduced in April against a backdrop of lower growth, rising wage/price inflation, increased debt and the potential that, within the next two or three years, tax as a proportion of GDP will hit an all-time high of 38%.

These changes are, as my noble friend Lady Noakes said, also regressive, even allowing for an increase in the national living wage. They will disadvantage almost 1 million businesses, and the figure of £25.7 billion by 2030 is illusory due to the offsets and allowances the Government have been compelled to offer. This raises perhaps £16 billion by the end of the Parliament.

Research by the Centre for Policy Studies, in its report Punching Down, published just last week on 3 January, shows that the huge tax hike for businesses will disproportionately hit those employing lower-wage employees, especially in areas such as leisure, hospitality and social care. There will be a 60% tax increase for those employing people on the lowest wages in 2024, adding £1,617 per capita in NICs for those full-time equivalents on minimum wage. A full one-fifth of employment costs will now be taken up with tax liabilities from April this year. Tesco alone will be paying £1 billion extra, and across ASDA, Sainsbury’s and Morrisons there will be an extra £1.3 billion in tax liabilities. As we heard earlier, the British Retail Consortium estimates a total cumulative cost of £7 billion across the economy.

That will have an inevitable impact on income and wealth inequality, and especially on young people. We have heard the British Chambers of Commerce say just today that 55% of companies are now planning to increase prices in the coming three months, up from 39% in the third quarter. Many are very concerned about the national insurance changes. Shevaun Haviland, director-general of the BCC, said:

“Businesses confidence has slumped in a pressure cooker of rising costs and taxes”,


and

“Firms of all shapes and sizes are telling us the national insurance hike is particularly damaging”.

David Bharier, head of research at the British Chambers of Commerce, said:

“Faced with rising costs, our survey paints a difficult picture and shows businesses are having to make some very difficult decisions”.


Because of His Majesty’s Government’s incompetence, lack of planning and ill-thought-out policy, this gives rise to a number of perverse consequences. We read last week that His Majesty’s Treasury is scrabbling around to cut sweetheart deals with public sector contractors and providers who are intending to pass on the costs to the customer—in other words, the taxpayer. They are seeking variations in their contracts to cover “legislative increases”. Either way, this represents price gouging at the expense of largely private sector-employed taxpayers. Perhaps the Minister will specifically update us on these negotiations.

We still do not have a comprehensive picture of the extent of the amelioration and offset funding available, and to which bespoke public sector organisations it applies. Whether it is £4.7 billion or £5.1 billion estimated by the end of this Parliament, it still means higher public expenditure without meaningful reform, higher inflation and an indirect tax hike for private sector employers and employees. Will the Minister also update the House on this issue?

In the last minute or so of my remarks, I will focus on two important healthcare areas impacted by the changes, which other noble Lords have already mentioned and to which I think the Government have given too little thought. GP surgeries are independently owned private sector entities delivering public healthcare services. The NHS Confederation and even the BMA have raised significant concerns about the changes that will result in a forced choice between reducing staff and increasing patient numbers. Both will have an impact on the quality of service delivery in primary care. Does the Minister have an update on the response to these concerns by His Majesty’s Treasury and the Department of Health and Social Care?

In addition, the charity sector, as we have seen, faces existential challenges and threats to its funding model and operational effectiveness as a result of these tax changes. Mencap, which specialises in delivering services for people with learning difficulties, is having to find an extra £18 million a year in the light of the national living wage, increases in NICs and the contingent pay rises for those who are already paid by them.

The final issue is community pharmacies. The national living wage, NICs and business rates mean that they have to find an extra £200 million a year in mitigation as a result of this policy, despite the fact that 90% of their work is dispensing NHS medicines and delivering NHS services. What we see is essentially a crisis in the community pharmacy sector.

In conclusion, these tax changes and the increase in job taxes are inimical to the Government’s professed aim of GDP growth. They will damage businesses and investment and destroy job opportunities, especially for low-paid working people, and are unfair and regressive. The Government must not only think again but be clear on how they help to offset these increases, and who they help in doing so. For this reason, I support the spirit of the Liberal Democrat amendment and urge the Government to bring forward an amended scheme as soon as practicable to tackle the impact of this deeply flawed, damaging, job-killing Bill, which will do nothing for jobs, growth and prosperity.

18:56

[Baroness Bennett of Manor Castle (GP)]

My Lords, I begin by joining other noble Lords in offering the Green group’s tribute to the enormous contribution of the noble Baroness, Lady Randerson, and express our sorrow at her death.

We are debating a measure—the increase in secondary class 1 national insurance contributions—that was announced on 30 October. It feels like quite a long time ago in politics, but the timing is apt—if perhaps not intentionally so on the part of the Government—given that this is what the High Pay Centre calls “fat cat Monday”: the day on which the chief executives of the FTSE 100 companies will have made more money by 11.30 am than their average worker does in a whole year. The median pay for FTSE 100 chief executives is £4.22 million, or 113 times the median full-time worker’s pay of £37,430. After 29 hours, that is an equal amount of pay. If we compare that to last year, CEOs had to work a whole further 90 minutes to get to that figure. It is getting worse; it is heading in the wrong direction in terms of inequality.

The Minister used the term “working people” eight times in his fairly short introduction. What are the Government going to do to rebalance the rewards for working people—from the cleaner to the CEO? If the Government are looking for ideas, I am happy to proffer the Green Party policy that the top-paid person in an organisation should not be paid more than 10 times the lowest-paid person. We could perhaps start by making that a requirement for bidding for government contracts. I am interested in the Minister’s thoughts on that.

This has been a perhaps surprisingly lively debate. To be noted in particular are the wise comments of the right reverend Prelate the Bishop of Southwark, not currently in his place, about parties making promises during election campaigns, particularly promises not to do things as a knee-jerk reaction when they come under rhetorical attack. The country is in an awful state—the state left by the former Government—with eviscerated public services, rampant poverty and inequality, as fat cat Monday illustrates, and terrible public and environmental health.

The country had a hope and expectation that the new Government would come in with a plan and a worked-out vision for what to do. Instead, we have this national insurance employer contribution increase, which is a large plaster—and for many crucial services, such as health and social care, a toxic plaster—on the obviously awful state of the national finances. The noble Baroness, Lady Neville-Rolfe, spoke about the importance of national morale, which is of course suffering from the rampant unfairness and desperation wrought by the two-child benefit cap and the cuts to the pensioner winter fuel payment. The depressing of the mood is coming from many directions.

On a specific point, I declare my position as vice-president of the National Association of Local Councils. At present, as I understand it, parish and town councils are not included in the Government’s public sector compensation scheme. It is now calculated that the cost of compensation for them would be just £10 million a year in England. Conversely, the absence of compensation could risk council tax rises of 1.5% to 3% for parish and town residents. Is that something that the Government are going to pick up?

My honourable friends in the other place were part of a reasoned amendment that this Bill not be given a Second Reading because the Office for Budget Responsibility has found that the increase in NI contributions will lead to stalled real wage growth and higher prices for workers and incur additional costs for the public and third sectors, and noting that the Government did not choose to pursue more progressive forms of taxation, such as full equalisation of capital gains tax with income tax rates and by introducing a wealth tax to raise revenue. The Minister suggested that anyone complaining about this Bill should suggest alternatives. I point him to the wealth tax proposed by the Green Party in last year’s election campaign, which is gathering further support around the country all the time, and to that equalisation of capital gains tax. Fat cats, by definition, have broad shoulders.

I come now to the question of what this Chamber should do. In the other place, Greens joined Liberal Democrats in backing amendments to ameliorate some of the worst aspects of the Bill, but I see no point in repeating that exercise here. I wonder what the Benches to my right would have said a year ago had Labour tried the same tactic that they are apparently planning on what is not quite a money Bill. The Green group will support the regret amendment from the noble Baroness, Lady Kramer, tonight, while regretting that the Government have got themselves into this mess by making narrow electoral calculations in last year’s election campaign.

We need courage and vision in our politics, and we need to offer hope of addressing poverty and inequality, rampant ill health and environmental damage. As Greens, we know, as we have heard from many sides of the House today, that what are all too often hollow promises of growth do nothing to address the question of who benefits from that growth and what damage is done as a result. The Minister spoke about the increased size of the economy, but the pie cannot keep getting bigger. You cannot have infinite growth on a finite planet, and you cannot rely on those now getting crumbs from the fat cats’ table getting a few more crumbs. We have to slice up the pie more fairly.

While the Treasury is used to thinking that it is fiscal levers that it has to pull and fiscal measures that it has to adjust, it will have to come to terms with the reality that the physical limits of our planet and the rapidly changing climate, which is having significant impacts on food security and supply right across our supply chains, as well as the disasters of fire, flood, drought and heat, are not responsive to any economic theories, particularly not outdated and failed economic theories that are deployed again and again to get the same result.

I spent my holidays reading, among others, the ecological anthropologist Alf Hornborg, who notes:

“Among the … obvious shortcomings of the current world order is its inclination to generate abysmal inequalities and ecologically disastrous patterns of consumption and resource use, and yet our mainstream discourse tends to represent these conditions merely as the deplorable but unavoidable side effects of progress”.


Yet the disasters are catching up with us, and this Bill and most actions of the Government are not acting to address the “abysmal inequalities”. Indeed, they risk increasing them, and are going to increase them.

19:04

[Lord Mackinlay of Richborough (Con)]

My Lords, I refer the House to my registered interests. I am an employer. I admire the noble Lord, Lord Livermore, for his patience and stamina at these debates on tax matters—and I think that there will be many more.

I am fearful that the Government are heading us down what I would call the Corinth Canal conundrum. One might wonder how I can bring that marvellous wonder of the world and national insurance into a debate. In the early 1990s, I had the great pleasure of taking a small pleasure craft through the Corinth Canal—just 3.9 miles long. I was rather surprised when I got to the other end to find that it was £92 for a boat that was about 30 feet long. I asked the lock keeper at the other end how on earth it could be £92 for such a small pleasure craft, and he said, “Ah, because nobody is using this Corinth Canal very much these days, we keep putting the price up—and, funnily enough, fewer and fewer people use it, so we then put the price up again”. I fear that this is exactly what this Labour Government will be doing over the years ahead. They have had a very large Budget proposal of £40 billion, but it will not be enough, because in so doing they have shattered and damaged the economy. We have seen that in figures in terms of growth—or, should I say, the start of recession—and there is more of that ahead.

Manifestos matter. Why do they matter? They matter because at election time they are the bond that an incoming Government try to form with the electorate. There used to be an old saying that words are my bond. That seems to be long gone. I am sure that the Labour manifesto has been quoted this afternoon. It said:

“Labour will not increase taxes on working people, which is why we will not increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT”.


That sounds quite clear to me, and I am sure that the electorate were fairly clear that tax proposals would not affect them. For this Government to be wordsmithing now, at best, and saying, “Employers’ national insurance does not count—that is something rather different”, does not convince me. But you do not need to try to convince me—you need to try to convince the electorate that something else is being proposed. I suppose that we should not be at all surprised, when we heard the then shadow Secretary of State for Defra saying that there were no proposals for changing agricultural property relief—and here we are, to the dismay of the farming community and, under BPR changes, to the dismay of the business community.

What this has shown, more than anything else, is that this Cabinet has never run a business before. It thinks that tax simply comes out of thin air, nobody is affected and we can take £40 billion out of the economy with no problem at all. I shall give an example of what this measure will really mean to, say, the mythical shopkeeper, who perhaps earns just shy of £40,000 per year. That shopkeeper has an expectation to earn that type of money. This Government are going to hit them in two ways—on the employees that they have, particularly the lowest paid of their employees, starting at £5,000, where an increased tax will be suffered. Beyond that, their business rate relief will be reduced.

So what will the earnings of that shopkeeper go down to in the face of these two taxes? Will it be to £30,000, or perhaps even less? They have a choice—they can get rid of an employee, perhaps, so we will see a rise in unemployment. They can perhaps think, “Well, that pay rise I was thinking about for the year ahead, I just can’t afford to do that any more”. What is the next thing that that shopkeeper or small business owner may do? They will reach for putting prices up. So, uniquely, this measure will depress wages while increasing inflation. Very few measures that you can come up with are that bad, yet this Government have managed to do so.

National insurance has a long history. It goes back to 1911. In those days, it was considered to be a properly hypothecated type of levy on employment: a levy so that, if you were made unemployed, you had some sort of support. I suppose that, as the NHS was created, after the war, there was also an expectation that your national insurance was somehow a proper insurance that paid for such things. I have to say that that old hypothecation has long gone. The only two remnants I can think of that exist now are the added years towards your state pension—you need 35 years of NI record to receive a full state pension and you have to have 10 years, as a minimum, to get any at all. The benefits, I suppose, would be paternity and maternity benefits, which are still framed within a work environment that your NICs have paid for. Beyond that, it has become just A N Other tax, just part of the tax pool. To call it anything else is, I think, disingenuous.

Something a little similar came to us when I was at the other end of this Palace. In 2021, under Boris Johnson’s Administration, there was the health and care levy. Proposed as a national insurance measure, it was actually rather more widespread in its effects, in some ways, than this, because it would have hit class 4 national insurance for the self-employed, proper employees’ national insurance and employers’ national insurance. It was an all-encompassing national insurance rise. To that Administration’s credit, they were at least looking at how to solve the social care problem. This new Government, having had 14 years on the opposition Benches to think about such things, have simply batted this off until 2028 or 2029 with yet another consultation. We seem to be having a consultation most weeks of this Administration so far.

There was a big discussion in the other House at the time, which I took part in, in opposition to the national insurance rise, and that was for a few reasons. The first was that it was not in our manifesto. To me, the commitment that we made to our electorate, that I made to my electorate then in South Thanet, was an important one. It was not in the manifesto, so I was minded not to support it. I understand that things change, and things changed rapidly during and after the Covid period. I get that, but this was not in the manifesto.

Generally, I feel that we should tax things that are bad, and we do a lot of that in this country. We tend to tax alcohol and tobacco—excessively, some might say—because we are trying to reduce their consumption. That is what taxes generally do: they make us do less of those things because, frankly, we have not got enough money in our pocket to spend on them. We all generally accept that taxing alcohol and tobacco, perhaps excessively, is a good thing. But should we then think that jobs are similarly bad? That went through my mind in the other place: I would not support this because I was not prepared to accept an additional tax on good things, and jobs and employment are good things.

I served on the Public Accounts Committee for two years. We had the full muscle of the National Audit Office at our fingertips and there was an independent OBR. I say to the noble Lord, Lord Livermore, that I find it all a little bit last year, all a bit 2024, to be re-raising the fiscal black hole of £22 billion. I know very few countries around this planet that have such a transparent Government, with an independent OBR, a fully fledged Public Accounts Committee that is chaired by the Opposition and the full ambit of a very big institution, the National Audit Office, at their fingertips, publishing reports regularly for all to see.

One of the discussions we regularly had, with HMRC in the room, was about the tax gap. The tax gap is very interesting and I am sure that the noble Lord, Lord Macpherson, is well aware of it. The last HMRC report stated that the tax gap was now £36.7 billion. It is in the realms, strangely enough, of what the Budget was trying to raise, and certainly higher than these NIC proposals. I will give the House the following example, which we see on every high street in this country. Among the businesses we all face, there has been a massive proliferation of barber shops and we are all familiar with hand car washes. Most of us in this place take our car to them from time to time. We have restaurants and takeaways—any number of cash businesses. There are four potential frauds going on in those cash businesses. First, the cash is not rung up: no VAT. Secondly, that cash, not rung up, does not form the trading profits for income tax or corporation tax. Thirdly, that cash is possibly used to make up the salaries, in cash, of various employees, so there are no PAYE deductions and no employers’ or employees’ national insurance. I can but imagine what increasing that rate still further is going to do to those types of businesses, which may be tempted to do such things.

The fourth fraud is of course the depressed wages that are recorded, if they are recorded at all, on monthly returns to HMRC by the employer and will then be the basis on which universal credit or tax credits are paid out to those seemingly low-paid employees. So, there are lots of places we can look for the tax gap.

My worry, which was raised by noble friend Lord Jackson, is that the status of employees is a very grey area. We have full employment and self-employment and we now have the rather widening gig economy. HMRC does not always get it right. It loses plenty of status cases in the courts. There are status tools available for employers to use, but every employment is slightly different. My worry is that tax-compliant big organisations will be tempted to say to their service providers, “Ah, let us consider you to be self-employed, because we are in a grey area”. So, instead of 15% employers’ national insurance deducted and handed over to HMRC, there will be none. Given the extent of the tax gap and my experience on the Public Accounts Committee, HMRC does not have the resources to look into every nook and cranny.

So that is my main concern: we have a tax code that is becoming more complex and rates that are becoming excessive, and that will mean that behaviour will go against tax collection. But then, this Cabinet has never run a business, so I am not surprised that it has reached for this, the worst of the tax levers.

19:18

[Lord Londesborough (CB)]

My Lords, it is an interesting optic that I am following the contributions of 15 noble Lords from the Conservative Benches and, curiously, just three from the Government Benches. I am not sure how we should interpret that but, as an objective Cross-Bencher, I could not possibly comment.

Two months ago, many of us here today took part in the debate on the October Budget, and many of us warned of the consequences for a stuttering economy. Two months on and I am afraid that those concerns are growing, from employers, business owners, entrepreneurs and investors—in fact, from those who drive 70% of our nation’s GDP. That is what I will focus on today, and in so doing I declare my interests as an investor in SMEs, as set out in the register.

Momentum is critical for sustained economic growth. We did not have much of it in the first half of last year, but what little we had appears to have evaporated. As we have heard, GDP flatlined in Q3; worse still, GDP per capita fell by 0.2%. Q4 has brought a string of disturbing indicators, raising the prospect of a second consecutive quarter of zero, or even negative, growth.

As we have heard, the British Chambers of Commerce reports that business sentiment among its members has fallen to its lowest level for two years. The number of job vacancies in November fell at the fastest rate since the start of the pandemic and the spread between UK and German 10-year bonds has now eclipsed the peak triggered by Liz Truss’s mini-Budget two years ago. The spectre of stagflation is spooking the markets, meaning that interest rates may well remain higher than expected for much of 2025.

That is the macro. I turn to the micro, in particular the impact on our SMEs. I find it extraordinary that the Government devised an NIC regime that hits the vast majority of SMEs, which employ between five and 250 staff, particularly by dropping the threshold from £9,000 to £5,000. As we have heard, particularly from the noble Baroness, Lady Kramer, it is indiscriminate, falling as it does on all sorts of undeserving organisations, including charities, hospices, care homes and GP practices. Taking together the impact of NICs and the 6.7% increase in the minimum wage, will the Minister explain how raising the cost of employment by an average of £2,390 per employee this April is consistent with boosting economic growth?

For start-ups and our all-important scale-ups, it is a punitive tax on job creation and much-needed risk taking. While I accept the argument made by my noble friend Lord Macpherson and others that tax revenues had to be increased, there were plenty of fiscal alternatives that would have caused less damage to our economy—for instance, reversing the pre-election 2% cut in employees’ NICs brought in by Jeremy Hunt, indexing fuel duty, raising VAT selectively, and, last but not least, making modest adjustments to the bands and higher rates of income tax. But the Government could not do any of that, for they had tied themselves into knots with the tax pledges in their manifesto. Once again, politics trumps economics.

I was an entrepreneur for 30 years and in the last 10 years I have backed, chaired and advised a wide range of start-ups and scale-ups. I will finish by sharing how they are reacting to the increase in NI contributions. This comes from business owners, investors and management teams working at the coalface. In summary, some say they will reduce pay increases and bonuses; some will also reduce working hours, particularly for part-time staff in hard-hit sectors such as hospitality and retail; and some will slow the rate of job creation. Those that can will pass on the increased costs of employment to consumers and their clients, as their suppliers are already doing to them. Finally, and perhaps most worryingly for productivity, investment in new projects will be reduced or delayed in many cases. This is bad news for the worker and the employer, bad news for growth and inflation, and very bad news for our future competitiveness.

19:23

[Viscount Trenchard (Con)]

My Lords, it is a pleasure to follow the noble Lord, Lord Londesborough, who has made a most interesting and thought-provoking speech. I declare my interest as deputy chairman of the Royal Air Force Benevolent Fund, which, in common with other charities, is adversely affected by this Bill.

I thank the Minister for providing this opportunity to debate the centrepiece of the Government’s first Budget: the unexpected large increase in national insurance contributions. Whether the maintenance of NI contributions as a separate tax is logical or not is a separate question. I agree with what my noble friend Lord Forsyth said so eloquently and with what the noble Lord, Lord Macpherson, and the noble Viscount, Lord Chandos, said on this subject.

If we have a separate national insurance tax paid by employers and employees, the balance between employers’ and employees’ contributions should appear reasonable in the light of what the tax is theoretically supposed to do. I submit that the Bill before your Lordships today fundamentally alters that balance. It is bound to lead to employers telling their staff—in particular their part-time staff—that their pay rises will be less than they would have been because employers’ contributions have increased so disproportionately. Even if rigidity in the labour market means that employers may not pass on all the additional costs in the first year to their employees, the OBR forecasts that workers will bear 60% of the costs of the increased contributions initially, rising to 76% in later years.

The Government claim that the increase in the employment allowance and the removal of the £100,000 threshold will substantially mitigate much of the increased burden on small companies. However, the Treasury forecasts that the increased contributions will yield £23.18 billion in 2025-26, before any behavioural changes. Can the Minister tell the House what the yield would have been if there had been no increase in the employment allowance? This would help your Lordships understand what proportion of affected workers benefit from the increase. To be precise, can he tell us what proportion of employers benefit compared to those that do not, and what proportion of employees are employed by employers that benefit compared with total employees?

The other principal effect of the changes, as predicted by the Chartered Institute of Taxation, and by my noble friend Lord Mackinlay in his excellent speech, is that employers will seek to secure the services of workers by contracting them on a self-employed basis rather than as employees. The Bill will further increase the differential in the burden of tax and national insurance between those in employment and those engaged as self-employed. The consequence is likely to be an increase in false self-employment. Does the Minister agree that, if the Government’s policy leads in that direction, it would be most unfortunate and, paradoxically, have the reverse effect on the rights of the affected workers from that which the Government otherwise seek to achieve? I am not arguing in favour of their approach to employees’ rights, only saying that under existing law employees have rights which self-employed workers do not.

It is relevant that the public sector is largely unaffected by this Bill, since public sector workers are exempt. It represents yet another huge transfer from the private sector to the public sector. The private sector will therefore have to work all the harder to generate the growth that the economy as a whole so badly needs.

The increase in employers’ NI contributions will hit small businesses in the hospitality and farming sectors hard. Farming businesses are having to sustain a double whammy anyway, as a result of the accelerated withdrawal of the direct payment scheme and the new restrictions on APR and BPR. Many small businesses in the farming and hospitality sectors do not benefit from the increase in the employment allowance. It is also relevant that they employ many part-time workers, for whom the employers’ NI contributions are increased quite disproportionately.

I ask the Minister, please, not to continue to argue that the large increase in employer NI contributions is not a breach of the Government’s manifesto commitment. It was specifically promised over and over again that there would be no increase in national insurance. It is disingenuous to suggest that a reasonable person would consider that the promise covered only the employee’s part of national insurance contributions; a reasonable person would not think that.

The OBR, the IFS, the Resolution Foundation and many others all say this is a tax on working people. Andrew Lewin said at Second Reading in another place that the Labour Party had chosen national insurance to fund the rescue that the public services need. The public spending audit, conducted by the Treasury after the general election, found that the higher level adopted for public sector pay awards accounted for an additional £9.4 billion over the amount the previous Government had set aside for this.

The Government are still talking about a so-called black hole of £21.9 billion, but the OBR’s review explains it very differently. After the £9.4 billion of unbudgeted pay increases, the next biggest component is normal reserve claims, amounting to £8.6 billion. The OBR’s review draws attention to its limited resources, which affect its interaction with the Treasury, and suggests that the degree to which the Treasury shares information with the OBR will need to change. Was it not inevitable when the OBR was set up that we would be led down this path? This will lead to a further slippage of powers from the Chancellor and Treasury Ministers to a burgeoning OBR. I wonder whether the Chancellor will not rue the day the Government introduced the Budget Responsibility Act.

The OBR had pencilled in growth of 2% for 2025-26, but recent economic forecasts point to the likelihood of some sort of recession. The economy is now suffering from the effects of the tax changes—for which businesses are already preparing—and the effect on inward investment of the coming changes in workers’ rights. The Bill before your Lordships today has already led firms to reduce plans to expand their staff and postpone new investment projects.

When the Government came to power, they promised they would be very supportive of business and that the country would enjoy the fastest rate of growth among the G7 countries. How much has changed in such a short time. We have not heard much in recent weeks about the promise made by the Chancellor that the tax rises in the Budget would be the last ones. Does that commitment still hold, or have the Government resiled from that commitment as well as others?

The high public sector pay awards have helped fuel a new boost to inflation, which has led to higher interest and mortgage rates for longer than we all hoped. As many noble Lords have said, the Government’s Budget is already damaging growth. The Minister has been asked many questions, and I am looking forward to his answers.

19:33

[Baroness Monckton of Dallington Forest (Con)]

My Lords, I declare my interests: as chairman of Team Domenica, a charity that looks after adults with learning disabilities; as a patron of the Acorns Children’s Hospice; and as a non-executive director of the Watches of Switzerland Group, a FTSE 250 company headquartered in Leicester.

To prepare for this debate, I have been in touch with several organisations across the sector to understand the devastating impact of the proposed legislation. To put my contribution into context, my career has been in luxury retail. In 1986, I opened Tiffany—the American jeweller—in this country in partnership with Tiffany’s in New York. This was a time when to be an entrepreneur was encouraged. The then-Chancellor proclaimed:

“It is the rediscovery of the enterprise culture … that will provide the only answer to the curse of unemployment, and the only true generator of new jobs”.


Little did I know at the time that this former Member of your Lordships’ House would become my father-in-law.

My noble friend Lord Forsyth of Drumlean is quite right in saying we need to reinvigorate the private sector. So, I started my research not in the luxury end of retail but in my local town in East Sussex. Heathfield Ironmongers, where I have shopped for the past 25 years, is closing on 31 January. Their website states:

“serving the local community since … 1919”.

It had suffered a drop in footfall after Covid, but the manager told me that the combination of the national insurance changes and the reduction of business rates relief was, as she put it, the final nail in the coffin.

Altus Group, the commercial real estate data provider, states that independent retailers are particularly expected to struggle this year. Around 85% of its predicted closures will be independents—that is 14,660 shops. Just think for a moment of the people who are currently employed there, and their families. What are they going to do?

I spoke to our immediate neighbour, who is a senior executive in a large insurance company. She told me that, partly because of this legislation, they will now be outsourcing most of their IT and project manager roles to India, Greece and Portugal. They are opening offices in these countries and making the UK roles redundant. They have accepted that, in order to do this, they will have to train people up to the level of competency that they have in the UK, but they say they have no choice, as their combined operating ratio—a measure of their underwriting profitability—would be too high if they retained their UK staff due to the changes in national insurance contributions.

One of the areas that is most affected—and we have heard this several times today—is the hospitality industry, in which Team Domenica plays a very small part. The group UKHospitality has calculated that the October Budget will deliver an increase to the annual tax bill of £3.4 billion, with a 10% rise in the cost of employment per person. The Institute for Fiscal Studies has said that businesses employing people on the national living wage will face the biggest hit from the increase. As an employer of 3.5 million people, hospitality is set to be the hardest hit. For example, it would cost an extra £1,140 to employ a student working 14 hours at the weekend. So, first-time workers will become unaffordable for hospitality businesses, thus removing valuable entry-level experience and training.

The overwhelming feedback I have received from across the sector is that this is just not sustainable. There were three particularly interesting points raised by the people I spoke to. First, all large businesses will be hit equally, but the Government should have considered the mix of labour costs on companies’ P&L and tiered the increase. Businesses with a high mix of labour will be hit harder and profitability will be wiped out. Secondly, businesses are significantly reducing the amount of capital they would have been spending in the year ahead as they cannot justify the level of returns, so growth will be stifled. Thirdly, inflation will accelerate as everyone is looking at increasing prices to mitigate.

On the charitable area, for my small charity alone the national insurance changes will add an extra £39,000 a year. However, for a charity like Mencap, which looks after 4,000 people with learning disabilities, the impact is huge, as my noble friend Lord Jackson of Peterborough has said. I spoke to Jon Sparkes, the CEO of Mencap, who told me that it has contracts with 80 local authorities, providing 650 different services. It has 5,000 staff, and large numbers of front-line care workers who are on the national minimum wage. Mencap’s income is £200 million a year. This is the bottom line, with no margin on the delivery of service. There is no way it can absorb these extra costs.

The impact of lowering the threshold will be £5 million, with a further £1 million due to increasing the headline rate to 15%. Jon told me that Mencap is having to give notice to 60 services and is working flat out to try to transfer them before 1 April to avoid the financial hit, but he does not think that it will be able to do that. Again, pause and think of the human cost of this: of the people who rely on these services, and of the families who thought they had found a safe haven for the people who they care most about and who are the most vulnerable. These are statutory services, so can the Minister give an undertaking that the public purse will pay for these public services?

Hospices are particularly impacted as most hospital charities have significant retail operations, employing many people close to the national living wage and people on short-term contracts. My colleague, Brian Duffy, CEO of the Watches of Switzerland Group, started the Watches of Switzerland Group Foundation. It supports a variety of charitable endeavours, most notably the King’s Trust and food banks. These organisations struggle to meet the demand for their services. They utilise volunteers where possible, but they also have permanent staffing and management costs. Brian told me that the message from the charities is that the increase in national insurance contributions can be funded only by cutting back on expenditure to those who need it most.

The outlook, frankly, is bleak. The optimistic entrepreneurial spirit will be stifled. Wealth creation will be stymied. This is a tax on employment, and the private sector is a sacrificial goat. Meanwhile, the state sector, which has decreasing rates of productivity, expands. Does the Minister agree that His Majesty’s Government should commit to the interests of wider society and not just the public sector?

During the election campaign, Keir Starmer declared:

“Small businesses are the beating heart of our economy, our communities and our high streets. Our Plan for Change will drive economic growth across the country so small businesses can thrive”.


How hollow that sounds now, and especially at Heathfield Ironmongers.

19:41

[Lord Moynihan of Chelsea (Con)]

My Lords, it is a great pleasure to follow my noble friend Lady Monckton of Dallington Forest. The pleasure is allayed slightly by the fact that I cannot hope to rise to the excellence of her speech, which I hope the Minister observed very carefully—but perhaps he was too busy.

Like my noble friends Lord Howard of Rising and Lord Mackinlay of Richborough, I declare an interest as an employer. With the proposal to further raise employers’ NICs, the Government seem to want to pursue, in a manner that is hard to understand or explain, yet another way to damage the economy. I offer the Government a few morsels of attempted sanity. Taxing business at higher rates—making it more difficult to start up, maintain or expand a business—was, I am very much afraid to say, tried by the recent Conservative Government over the last few years and it did not work. In the period 2023-24, the economy ground to a halt. Now this new Government are trying the same approach. How can we possibly expect the outcome to be any different this time?

Over the past 18 months or so, while doing research for a book I have been writing, I have studied the available literature on the impact of taxes on economic growth. The clear consensus is that the taxes that hit the economy the worst are taxes on business and the business taxes that have the most negative impact on employment are—surprise, surprise—employment taxes. The clue is in the name employers’ NICs: “employers”; you know, the ones who employ people. Many employers would be happy if they could employ others merely out of the goodness of their heart, but that is not how the world works for the private sector. To keep a private sector enterprise going, a profit must be made. For that, taxes cannot be too high or else the cost of employing an employee becomes prohibitive, the business loses money and then it has to close down. So the first law of tax is: do not tax a business so high that the employers cannot afford to employ the employees. Yet that is exactly what the increase in employers’ NICs does.

Why on earth have our new Government decided to raise employment taxes to a new high? I discern three possible reasons. The first is to achieve economic growth. That is what the Government say their number one objective is, so in theory they must have thought that increasing these tax rates would increase economic growth. The second possibility is a less noble one: to find the money to pay off their allies. After all, politics involves trade-offs, so perhaps that is why they need to do this. The final possibility is that it is just not them in charge. Rather, they are in the grip of the fabled Treasury orthodoxy, taking their orders from officials at the dreaded OBR and the Treasury.

Let us look at these three possibilities. The first is that they are doing it to achieve economic growth. That has certainly been the Prime Minister’s and the Chancellor’s chant—“growth, growth, growth”—both during the election and ever since. The trouble is that this Government have never laid out their theory of what actually creates growth. Beyond discreditable tropes about green jobs, the numbers of which will have little impact on the long-term economy, the Government have been unable to figure out what they have to do to achieve growth.

However, the answer is standing clearly in front of them. The repeated conclusion of every study on growth is: to grow an economy, you need government expenditure in the low 30 per cents, or less, of GDP, with tax revenues at around the same level; and you need light regulation that allows businesses—indeed, all enterprises—to get on with the job of providing the goods and services that the market wants, at a decent price and good quality, without having to spend all their time jumping through regulatory hoops. That is it. Economies with public sector expenditure levels in the mid 40 per cents of GDP, such as ours, taxes at the same high rate and ever-increasing regulation just do not grow fast, if at all. If this new Government really wanted to grow fast, they would be full of plans to shrink expenditure, to tax less and to regulate less. On all three dimensions, they are doing the opposite.

What is the conclusion? Either the claim that the Government are all for growth is just a chant or a slogan and not really meant, or they are so inept that, despite truly wanting the economy to grow—you have to believe that they do—they have no clue that increasing employers’ NIC will have exactly the opposite effect. I wrote an article for a Sunday newspaper yesterday, citing the instance of a friend running a 35-person high street business who, just to stay afloat after these tax hikes, has to fire two of his employees. He had planned to raise his headcount by two before this. The comments section below my article had entries from business owners claiming that they are in similar circumstances—having to fire people—or, worse, saying that the higher taxes mean, as my noble friend Lady Monckton described, that they have to close down their entire business.

As an interposition, I spoke to this friend this morning. He told me that he has been having difficulty figuring out how to fire two people. Obviously, it would not be great on either of them but, luckily, one of them resigned today. I said, “Where’s that employee going?” In an absolutely uncanny echo of what my noble friend Lord Horam said, my friend said, “Well, she’s gone to work for a local council”. She is being paid more. She can work from home for three days a week. On top of being paid more, she is getting that wonderful golden defined benefit pension. What else? Oh yes, she gets a year’s paid maternity leave.

Where is the money coming from that allows local councils and the Government, and the public sector in general, to pay for all of this? The money is not there. My noble friend talked about the fact that we are now below the middle of the advanced economies in GDP per capita. A while back, we were vying with America for the best GDP per capita in the world.

The noble Viscount, Lord Chandos, probably would have described the situation of this new public sector employee as fair, because, after all, that is what she would need for a great life. However, the money is not there for what the Benches opposite always like to describe as “fair”. The noble Lords on the Benches to my left have an inexhaustible list of societal needs that must be paid for. The noble Lord, Lord Eatwell, rightly decried the decline in our Armed Forces expenditure. But the money is not there.

Why is it not there? It is precisely because of the high-tax, high-spend, high-regulation policies that Governments—on both sides of this House, I am afraid—have pursued over the last 25 years. During that 25 years we have not grown, precisely because of spending money on what was fair and what was needed, rather than spending money that we actually had. As a result, our economy has not grown. Had we grown more—say, at the same rate as the United States did during that time—our economy would now be 40% larger than it is right now. The money would be there. There is your needed money—the money that comes from economic growth. There is the economic growth which this Government’s tax increases will instead throttle.

It is not just my friend and his small business. As has been described today, millions of organisations are affected by this tax raise, not just SMEs but charities, NHS general practices, the arts and so on. Employment losses will, over time, be in the hundreds of thousands. I offer the Government a gentle hint: economic growth comes—despite a valiant attempt by the noble Lord, Lord Eatwell, to assert otherwise—from increases in employment, not decreases.

The second hypothesis as to why the Government see it as necessary to impose this NIC hike is that, having paid off their allies so lavishly in the first few weeks after the election, they now need to find the money to pay for this; a 15% pay rise for train drivers and a 22% pay rise for junior doctors, and still those friends of theirs threaten to go right back on strike. With friends like these, I need say no more.

It is certainly true that these expensive commitments—along with so much money about to be poured down the drain on placating the green crowd and to satisfy other allies who think that the answer to the world’s problems is more and more regulation, so that a new regulator or quango is being brought into existence for every week so far that Labour has been in power—mean that an awful lot of money is being spent. With the Civil Service expanding in its thousands by the week, there are no savings in sight to help the Government pay for all these extra commitments.

We come to the third and final hypothesis: that the Government have been told what to do. Without any serious experience in this area, they therefore have no option but to succumb to their officials, but that in turn is driven by the OBR, which knows not much more about business and the economy than do the Government. It is the blind leading the blind.

The Government have created this problem. They increased expenditure in their Budget by £70 billion. Even with an increase to employers’ NICs, only half of that increase would be covered by additional taxes, and even that amount is true only if you believe the estimation of how much extra tax will be collected. It is, in fact, even worse than this. There is a large extra amount of expenditure that the Government and the OBR have persuaded themselves can be categorised in the national accounts as some form of investment, so that it is not included in the published deficit numbers. But every penny of that so-called investment money will have to be found through additional borrowing, which, added together, brings the additional level of borrowing needed to pay for all this to an extra £50 billion or so—and that is assuming that the economy grows at forecast, which an NIC hike makes quite unlikely.

The OBR asserts that, on net, some £15 billion will be raised from this NIC hike. It acknowledges, albeit to far too small a degree, that employment will decline as a result of this tax increase. That should make Labour hang its head. If the Government were to abandon the NIC raise, the OBR says that that would create a further £15 billion hole. The Government are doing what they have been told to do, and thus they proceed with this NIC raise.

The Growth Commission has contradicted the OBR’s calculation and calculates that the long-term impact of this tax increase will be negative £18 billion—and that is even before you get into the social and economic disruption of large numbers of people being laid off. To answer the noble Lord, Lord Macpherson, who is not in his place, and the noble Lord, Lord Eatwell, you pay for this by not doing it. Surely, in his extensive and distinguished public life, the noble Lord, Lord Macpherson, must have understood that ever-increasing tax and spend just does not work.

What is the conclusion? We have a new Government. They came, they saw, they paid off their allies. Without clear detail they claimed a pre-existent £22 billion black hole, but this claim served only to make their options more constrained. They have accepted what they have been told to do by their officials, but imposing this tax is going to make the economy’s position, and theirs, much worse. They still do not appear to have a clue as to what they need to do to get economic growth going in this country.

[Baroness in Waiting/Government Whip (Baroness Anderson of Stoke-on-Trent) (Lab)]

My Lords—

[Lord Moynihan of Chelsea (Con)]

I am almost finished.

I earnestly entreat the Government to set out on a search for an economic growth plan—

[Baroness Anderson of Stoke-on-Trent (Lab)]

My Lords, I am so sorry, but the noble Lord has now spoken for over 15 minutes. I suggest that he bring his remarks to a close.

[Lord Moynihan of Chelsea (Con)]

I just informed the noble Baroness that I was about to finish, and I would have finished by now had she not interrupted a second time. I remind her that it is an indicative time, and one interruption—

[Baroness Anderson of Stoke-on-Trent (Lab)]

My Lords, I am so sorry, but the Companion states that Back-Bench contributions are limited to 15 minutes.

[Lord Moynihan of Chelsea (Con)]

I thank the noble Baroness. It is an indicative time. I will finish.

[Noble Lords]

Order.

[Lord Moynihan of Chelsea (Con)]

I will finish. I entreat the Government to set out on a search for an economic growth plan that relies on the facts about growth, not on the unsupported feelings that currently seem to drive their decision-making. I thank noble Lords for their attention.

19:58

[Baroness Porter of Fulwood (Con)]

My Lords, as we have now heard numerous times this evening, the changes within this Bill will have a devastating impact on charities, the most vulnerable people in our society and the social fabric of this country.

There are over 170,000 registered charities in the UK, and many more that are not registered. Charities in this country employ somewhere around 1 million people, so the effect of this Bill on them will be hugely significant. The National Council for Voluntary Organisations has sent the Chancellor an open letter, signed by more than 7,000 charities, estimating that the changes will cost the sector around £1.4 billion. The short-term costs of a reduced charitable sector will be felt most immediately by those involved directly with charities. The downstream impacts longer term will be even more far-reaching, affecting everyone, undermining social cohesion and weakening our communities.

It is unacceptable that a change of this magnitude is being implemented with so little warning. The Labour Party made a manifesto commitment merely months ago not to raise national insurance rates, yet here we are with these radical changes due to come in from April—this was entirely unexpected.

Consider for a moment the senior execs of charities, large and small, suddenly facing such a dramatic challenge. Over time, it may be that contracts and grants can be adjusted and philanthropists encouraged to give more to make up some of the shortfall, but for now there is no time for that. The hard choices charities are confronting involve reducing staffing and cutting the services they provide; that is the reality of the situation. What charities deliver is not a “nice to have”; just how integral charities are can be seen by how deeply enmeshed they are in almost every area of our public services. More than 10,000 voluntary, community and social enterprise organisations contract to government each year, and around 70% of those contracts are from local government. There is barely a service that charities are not involved in. Whether it is helping to support those affected by domestic violence, drug and alcohol addiction, mental health issues or homelessness, or those with educational or training needs, charities are there at a local level, nimble and able to respond in a way that only they can, wrapping around what is needed within their locality.

A survey in October by the Local Government Association showed the dire financial picture in many local councils, with one in four in England saying it is likely to have to apply for emergency government bailout agreements to stave off bankruptcy in the next two financial years. At a national level, the picture is similar. The Government are releasing thousands of people early from prisons, many into the care of a Probation Service that is already under tremendous pressure. The needs of many of these former inmates are acute: they require housing support, mental health treatment, training, support to find work and more. According to the Ministry of Justice, 76% of current commissioned rehabilitation service contracts are led by voluntary, community or social enterprise organisations. How will these organisations cope, caught between the twin pressures of increased demand and increased costs?

Charities provide a structure through all areas of life that much else hangs off and depends on. They have a unique level of local and specialist knowledge, care and commitment, and the connections and social capital they generate through the commitment of philanthropists, volunteers and those working in the sector quite simply would not exist without them; the role they fulfil cannot be replicated. The Bill moves entirely in the wrong direction. It threatens to weaken further the charitable sector in this country at a time when we should be doing everything we can to strengthen it. Instead of placing completely unrealistic tax burdens on charities, the Government should look at what they can do to help them: match funding; helping smaller charities engage with contracting and grant processes; facilitating more clusters, best practice sharing and incubators; making it easier to volunteer; and the like. I urge the Government to think again on this Bill, given how grave the impact of continuing with it in its current form will be on many of the most vulnerable in our society.

20:02

[Lord Bruce of Bennachie (LD)]

My Lords, the main concerns over the Bill have been pretty well explained by most speakers so far, and I will not repeat them. I want to concentrate mostly on the impact of these measures in Scotland, but I want to make a general observation on comments that businesses made to me during the election. There was no doubt at all, many of them said, that the chaos and incompetence of the previous Government were extremely disruptive to business confidence. I have had my breath taken away by the lectures we have had from the Conservative Benches who had 14 years to prove how they could grow the economy and spectacularly failed. I do not think we need to hear any more from them for quite a long time.

Many businesses said to me that they were looking for a change of Government to provide a period of calm and stability. Regular changes in taxes, whether personal, business or consumer taxes, sadly, usually are the currency of election campaigns. Many people said to me that they wanted predictability and stability rather than constant change. Unfortunately, the first few months of this Government have not delivered stability or predictability.

The Government argue that they promised not to increase taxes on working people, so pensioners were their first target. Farmers, too, may resent being told that they are not working people. But on top of these differentials, the Government’s apparent belief that loading the lion’s share of the additional tax burden on employers’ national insurance removes the impact on working people is pretty disingenuous. The OBR predicts, as has been pointed out, that it will provoke behavioural changes that will reduce the tax take from £22 billion to £16 billion or less. More significantly, the increased costs, combined with reduced confidence, will affect staffing, wages and investment and make the achievement of growth harder.

The impact of these changes will vary across different sectors and different parts of the UK. The Government have said they will compensate public sector employers, but it is not yet clear how. In any case, it appears that for Scotland the Government may argue that the Barnett consequentials should cover this, but that is based on a simple population calculation and does not take account of the different structure of the Scottish economy with its larger public sector employment. Some 22% of employment is in the public sector in Scotland, compared with 17% for the UK. On top of this differential, the Scottish public sector is also better paid, and the Scottish Government have agreed to more generous pay settlements than the UK Government. The impact on the Scottish hospitality sector is also proportionately harsher. According to UKHospitality Scotland, pubs, restaurants and hotels in Scotland pay substantially more in business rates than the equivalent in England, in some cases 66% to 70% more.

While the Scottish Government continue to be affected by UK-wide impacts, devolution allows them to pursue a different policy strategy from the UK as a whole. This has led to a larger, better-funded and better-paid public sector, but here is the rub: unfortunately, the outcomes have not followed through. While educational performance has improved in England, it has continued to decline in Scotland. The performance of the health sector has been as bad overall as in England, but with waiting times exponentially worse and no viable strategy for changing them yet apparent.

The Scottish Government have struggled with reform of the care sector and are mired in delay and uncertainty on this. On top of all this, they have pursued a strategy of higher taxation on middle and higher incomes, which has proved counterproductive, with net revenues overall apparently falling as people avoid tax, leave Scotland or are deterred from moving there in the first place. The UK Government could say, with reasonable justification, that the Scottish Government have used devolved powers to make their bed and should lie in it. However, the unanticipated rise in employers’ national insurance adds to burdens already imposed on Scotland and risks disadvantaging the people of Scotland disproportionately—people for whom the UK Government are also responsible.

Will the UK Government engage with the Scottish Government to consider the overall impact of both Governments’ budgets and how they can together explore ways of ensuring a fair outcome? Will they indicate that the compensation for the public sector will take account of, first, not just population but the differential; and, secondly, the overall impact on the arm’s-length public agencies, which the Scottish Government have not even quantified? In those circumstances, it should be possible to get an arrangement where the two Governments agree to take measures together, which will ease the burden on businesses and the poorer communities of Scotland. The Government have set their heart on a much better relationship with the devolved Administrations; this is a good place to start.

20:09

[Lord Elliott of Mickle Fell (Con)]

My Lords, I will focus on the impact of the Bill on employment and job creation. This is of particular concern to me in my role as president of the Jobs Foundation, as noted in the register.

Before the general election, the Government committed themselves to raising the employment rate to 80%, which, as the Minister knows from previous debates, I very much support and am keen to see achieved. This commitment to getting 2 million people into work was reaffirmed in December, in the Get Britain Working White Paper. I was encouraged when the Prime Minister said that:

“Getting Britain back to work is at the heart of my mission to grow the economy”.


Given that there are roughly 800,000 job vacancies at the moment, an additional 1.2 million new jobs need to be created to achieve this objective. It seems clear, however, that increasing national insurance contributions for employers will make it immensely more difficult for us to achieve this important target. This is not just my opinion; it seems to be the growing consensus.

The former chair of John Lewis, Sharon White, who is reputedly on the shortlist to be the next Cabinet Secretary, said that these measures

“will obviously affect jobs and wages”.

The research director of the Resolution Foundation, James Smith, said that:

“This is definitely a tax on working people, let’s be very clear about that”.


The restaurateur Tom Kerridge, one of 120 business leaders to back the Labour Party ahead of the general election, said on Sky News that the NIC changes would lead to

“a huge amount of closures”.

Toby Dicker, founder of the Salon Employers Association, said:

“I am angry and sad and shell-shocked. Our industry is totally done. We can’t afford it”.


Finally, James Reed, the CEO of recruitment firm Reed—a company already mentioned by my noble friend Lady Bray—said, “We’re going to cut hiring, we’re going to make people redundant, we’re not going to invest, we’re going to offshore jobs”.

Is it any wonder then that the most recent employment index from S&P Global UK showed that, excluding the hit from Covid, we have just seen the largest fall in UK hiring since 2009? This confirmed the OBR forecast that the measures in the Budget would reduce the employment rate.

The Bill therefore seems completely at odds with the Get Britain Working White Paper and the Government’s commitment to achieving an 80% employment rate. In light of these conflicting signals, will the Minister give us some clarity on whether the Government remain committed to achieving the 80% employment rate?

I conclude with an analogy shared with me by a business leader to whom I was talking shortly before Christmas. I was talking to him about the Get Britain Working White Paper, and he was enthusiastic to do his bit to help get 2 million people from welfare into work. He suggested that this national objective requires a new Dunkirk: that a huge flotilla of businesses is needed to come together to create the new jobs, provide the training and give people a much-needed step-up in life. I know that businesses across the UK are willing to be part of such a flotilla. Business leaders want to help the Government achieve their employment target, but the Government need to support a new business environment that will help businesses thrive and create these 1.2 million extra jobs.

The business leader then concluded his Dunkirk analogy by saying, “With the Budget and the increase in national insurance, it feels like the Government have smashed our rudders and blown up our motors”. I agree with him. The Bill does not help the national effort to get people back to work, which is why I hope the Government will reconsider these measures and instead prioritise getting Britain working.

20:13

[Lord Udny-Lister (Con)]

My Lords, it will come as no surprise that I too express my absolute opposition to the Bill. If enacted, this legislation’s ramifications would be far-reaching. In bringing this Bill before your Lordships’ House, the Government have not given proper, or indeed any, consideration to the damning and unintended consequences that this rushed, additional cost burden will have on a number of sectors. I will turn my attention to some of these issues and hope that the Minister will reassure me before the end of the debate that he will pick them up.

This whole tax increase feels very much like something the Treasury digs out on occasion, saying, “Here’s a quick way to get £10 billion or £16 billion, because you are guaranteed to get it. Don’t worry about the consequences: you’re guaranteed to get the money in quickly”.

As someone who has spent over 30 years in local government, I am all too acutely aware of the existing pressures we are witnessing across the UK in, for example, adult social care. I know that many other noble Lords across the House also understand and have raised these pressures. Across the country, care providers commissioned by upper-tier local authorities are already grappling with severe underfunding, which, thanks to the Government, will now be exacerbated by a 6.7% rise in the national living wage.

It should be noted that the £600 million allocated to social care in the Budget was entirely insufficient to offset the additional financial burden the Government have already placed on this sector, let alone to provide the lifeline and reform that adult social care so desperately needs at this time. The proposed national insurance hike compounds the challenges already faced by a sector under monumental pressure and threatens the very viability and provision of care services across the UK. Local authorities will not be able to meet the demand of raising the value of contracts to meet this unjustified tax hike. Where will the money come from unless further exemptions are agreed?

In the debates on this legislation as it progressed through the other place and in the speeches today, I have heard nothing that provides any hope to the many care providers, charities and businesses warning that, without exceptions in place, their business may be forced to close. This will inevitably leave vulnerable adults without essential care. We in this House must determine whether we are willing to risk that being an indirect but very real consequence of allowing the Bill to pass without adequate assessments and mitigations in place.

Further still, although I take some comfort from the fact that local councils receive grants to cover the costs of NIC increases when it comes to staff directly employed by local authorities, can the Minister confirm whether this will also be done for staff employed directly by wholly council-owned local authority trading companies, often referred to as LATCos? I ask this as some 60% of councils now have at least one trading company, if not more, many of which deliver important services and employ thousands of local people. In his summing up, it would be helpful to hear from the Minister what assessments the Government have undertaken in this regard to evaluate the impact the Bill will have on these LATCos and councils more generally.

Given their very nature, I find it hard to believe that LATCos will find the private sector able to absorb the costs. With many councils now reliant on them for revenue generation, the House should consider how the Bill will inadvertently place additional pressures on our already cash-strapped councils, and thus could potentially and indirectly divert more funding away from the delivery of services.

The right reverend Prelate and others have raised the problem of special needs transport; a consequence of this rushed policy will be the negative impact and strain that will be placed on special needs school transport. I fear that many of these operators will not be able to retain commercial viability when it comes to the huge uplift in wage bills that they will face come April, which will inevitably lead to a potentially severe shortage in the availability of suitably qualified drivers and passenger assistants. What exceptions will the Government seek to put in place here?

Moving away from local government and turning to manufacturing, the Bill will have a profoundly negative impact on the sector. The Make UK/BDO Q4 Manufacturing Outlook survey highlights that business confidence among manufacturers has fallen at the sharpest rate due to rising costs. By reducing the NIC secondary threshold from £9,100 to £5,000, the Bill will bring many more manufacturing employees into the threshold. I fear that this will mean we lose yet more manufacturing jobs—not that we have that many—due to the Government compounding the already complex and challenging circumstances faced by the industry under the pressure of the significant cost burdens of retaining staff.

On SMEs, I urge the Government to hear the concerns they are voicing. SMEs are the backbone of our national economy, and many of these businesses already operate on the tightest of margins. I really fear that the Bill will be the final nail in the coffin for many SMEs, which are still recovering from the pandemic and grappling with inflation. We further know that the UK’s hospitality SMEs are under significant pressure at this time. They have weathered the storm of Covid, battled through the strain of rising energy costs and struggled on through one of the toughest Christmas periods yet, but many are now warning that the Bill will present a challenge too far and indeed be the final nail in their coffin.

If we take pubs, for example, the British Beer & Pub Association highlighted recently that one in three pubs is already operating at a loss. With the additional costs enabled by this legislation, we will see many pubs, restaurants and hospitality businesses shut their doors permanently.

I conclude here by highlighting that the Bill disproportionately affects SMEs, adult social services, children with special educational needs, and British manufacturing. This whole Bill, the family farm tax and the removal of the winter fuel allowances were all conspicuously absent from the Labour Party’s election manifesto—and, as I said right at the beginning, they also feel as if somebody’s bottom drawer in the Treasury has just been opened. To bring forward such consequential changes to taxation without a prior mandate completely erodes and undermines public trust in the Government. It also—this is the more serious point—undermines their democratic legitimacy.

Employers large and small, charities and local councils spanning the whole United Kingdom are calling on the Government to reverse this decision. I fundamentally believe that it is a retrograde step that will inevitably cause monumental and irreversible damage to our economic outlook, and I therefore put it to your Lordships’ House that in the national interest, this Bill needs to go.

20:22

[Lord Layard (Lab)]

My Lords, there have been two main criticisms of the Bill. The first is that it expands the size of the state and is therefore bad, and the second is that it destroys jobs. Both arguments are misconceived. I will take them in turn.

As we all know, the share of taxes in GDP has increased enormously in recent years, and this Budget will set a record high. If you say that in a certain tone of voice, that sounds deeply shocking—“That must be wrong, surely”. But, of course, it is absolutely what it should be, for, as countries get richer, people spend an ever smaller share of their income on food, clothing and other necessities and they want to see a rising share devoted to things such as health and education. But these are things that are most effectively provided by the state, so it is totally logical that a rising share of GDP should go on publicly funded goods and services.

On top of that comes spending on welfare, in the form of income transfers. As we get richer, we live longer and that increases the share of GDP on pensions. We can also afford to provide better incomes to the sick and disabled. So both public services and welfare naturally get a rising share of GDP as income rises. That is an absolutely standard finding, quite general across many countries—sometimes referred to as Wagner’s law—and it requires a higher share of GDP devoted to taxes. So it is not only a logical development but—here is a different type of evidence—it is one that is good for the nation’s well-being.

There has been a lot of research on the relationship between taxes and well-being, and, on balance, the finding is that, at a given level of income, high-tax countries are happier than those with lower tax. Nordic countries are the clearest example of high-tax countries with higher levels of happiness. But, even if you leave them out, high-tax countries are no less happy than low-tax countries with the same income. America is quite a good example of a low-tax country that is not very happy compared with other countries at the same income level.

These are quite general but fundamental arguments for political economy, but there are also some very specific reasons why we need higher taxes at the present time. One is climate change: we need public money to facilitate the transition. The second is defence: we need more for that. Thirdly, we are servicing a higher level of debt than usual. Finally comes ageing and the services that that demands. So the Government are absolutely right to be raising taxes.

The second question is whether this particular tax rise is bad for jobs. Obviously, any tax of itself reduces aggregate demand and employment—that goes without saying. You could attack any tax on those grounds, but it is pointless to do so without taking into account the rest of the measures embedded in the same Budget. The OBR said that this Budget taken as a whole was

“one of the largest fiscal loosenings of any fiscal event in recent decades”.

In other words, in plain English, this Budget will, on balance, increase employment and jobs.

In that sense, the tax will be more than compensated for by the positive elements in the Budget. It is true that, since the impact of the tax is uneven across sectors—that has come out a lot in this debate—there may be some costs of adjustment. One should not ignore that, but they will be small and short-lived. In the meantime, total employment will be sustained by the overall effects and structure of the Budget.

In the long run, looking beyond the short period when demand is the main factor affecting employment, there has been a lot of research on the effects of employment taxes on the level of employment, and the general consensus is that there is no effect on the level of unemployment associated with a higher or lower level of taxes on employment. The taxes are borne by employees and employment is unaffected.

So the Bill is both necessary and desirable. It will raise the share of taxes in GDP, which is what we need, and it will not damage overall employment either in the short run, because of the fiscal expansion, or in the long run, as I just said. This is a Bill we should strongly support.

20:28

[Lord Sharkey (LD)]

My Lords, this is an unsatisfactory Bill, not because it raises taxes—that was, and is, an obvious necessity—but because it does so in a way that exacerbates existing unresolved and urgent problems or, as in the case of social care, in effect ignores them entirely.

The provisions of this Bill will probably not help with growth, the Government’s chief objective. I say “probably not help”, but that may be a little bit generous. Many noble Lords who have spoken this evening have felt strongly that the Bill will have negative consequences for growth. Arguably, two of the most important engines of growth, or what have been and should continue to be engines of growth, are our SMEs and our higher education sector. This Bill has damaging consequences for both. I will speak a little later about our university sector, but I want here to make some points about SMEs.

My colleague in the Commons, Christine Jardine, asked the Minister at Second Reading:

“How does it help morale and positivity among small businesses, which will be vital to economic growth, if some of them see their salary bills double?”


The Minister replied by saying:

“I urge her to understand that what we are doing on national insurance is taking a tough decision to fix the public finances, while at the same time providing the stability that businesses need to invest and grow””.—[Official Report, Commons, 3/12/24; cols. 202-03.]


It is the last bit of that, frequently repeated as an explanation of or an excuse for government proposals, that is the problem.

No convincing case has been made for the proposition that the measures in the Bill will provide stability. Indeed, it is hardly surprising that many see the Bill’s measures as actually reducing stability and creating further uncertainty. In a recent survey, 44% of UK SMEs said that the NI increases would negatively affect them. As Todd Davison of Purbeck Personal Guarantee Insurance, an important operator in the SME arena, noted:

“The increase in employer National Insurance contributions … could prove to be a fatal blow to thousands of small businesses, despite the increase in the Employment Allowance”.


He went on to say:

“There will be thousands of business people who have put their home and life savings on the line by signing a personal guarantee for a business loan who will now be facing some very difficult choices”.


I note in passing that, in trying to justify the national insurance rise, the Government have pointed to the increasing availability of funds for the NHS. This is, of course, welcome, but the extra funding is being raised in the wrong way and on the wrong people—and what about carers and the care sector? Will we have to wait until 2008 and beyond for any significant progress? In the meantime, what additional support will be available to offset increased costs? What about the additional payroll cost to GP practices? The Institute of General Practice Management estimates that the NI rise will mean that the average GP surgery tax bill will rise by around £20,000 a year. How is this to be mitigated? Second Reading in the Commons did not produce an answer to any of these questions. I would be grateful if the Minister could address the issues about SMEs, the care sector and GPs when he replies.

I now turn to another critical factor in growing our economy: our higher education sector. I declare an interest as a member of council at UCL. Our university sector has a very strong international reputation, very high academic standards and world-class research output and influence. This is despite the UK spending significantly less on R&D than our rivals. We spend 1.7%, China 2.2%, the US 2.8% and Germany 3.1%. However, in the last QS worldwide ranking, the UK had four universities in the top 10 and 16 in the top 100.

The Government explicitly acknowledge the importance of the sector. The Secretary of State for Education wrote to vice-chancellors on 4 November last. She started her letter by saying:

“The institutions which you lead make a vital contribution, as education and research institutions, to our economy, to society, and to industry and innovation. They contribute to productivity growth; play a crucial civic role in their communities; and have a key role to play in enhancing the UK’s reputation across the globe. I also passionately believe in education for education’s sake: a more educated society is happier, healthier, more cohesive, and socially and culturally richer”.


She went on to say:

“I am clear that we need to put our world-leading higher education sector on a secure footing”.


She went on to speak of student numbers, international students and the financial status of the sector. This financial status is in need of very urgent attention.

The main leader in last Thursday’s Times was critical of the very large travel and expenses costs of some vice-chancellors at a time when the sector is under critical financial pressure. The leader’s chief point concerned this financial pressure. It said:

“There is no doubt that higher education is experiencing extreme financial difficulties”.


It pointed out that these extreme difficulties will be made worse by the increase in employers’ NI. The small but welcome increase in student fees will increase revenue by around £370 million. The increase in national insurance will cost universities around £450 million.

The Times went on to note that, according to the OfS, the combination of lower revenues from both home and overseas students means that nearly three-quarters of our universities will be running a deficit by the end of this academic year. Some 40% already have less than a month’s cash in the bank and 10,000 jobs are expected to be lost in this academic year. This is a genuine and pressing crisis.

If we want to maintain our large and very high-quality university sector, if we want to remain among the global leaders in the life sciences, if we want to continue to create the IP that forms the basis of new and innovative commercial ventures, and if we want our towns, cities and regions to continue to benefit from their universities, we must act. Increasing the national insurance burden is to act completely in the wrong direction.

In the absence of a coherent plan for our universities, the Government have, in an almost cavalier way, significantly worsened their already extreme financial difficulties. There is a pattern here. There is no sign of a meaningful intervention to relieve social care of the increased costs imposed by the Bill. There is no sign of a meaningful plan for social care before 2028. There is no proposal for providing significant help to SMEs. There is no proposal for helping GP surgeries to mitigate the effects of this Bill.

There are plenty of indicators and predictions about the damage that these NI changes will bring to critical parts of our economy and society, but no indication of how this damage may be mitigated or avoided and nothing positive for growth—but plenty in the negative.

There is much to regret in how and on whom the Government are imposing this significant tax, and much to regret in the effect of this tax increase on carers, on SMEs, on GP surgeries and on our universities. I strongly support the regret amendment from my noble friend Lady Kramer. If she chooses to divide the House, as I hope she will, these Benches will support her.

[Baroness Sater (Con)]

I thank the noble Lord for allowing me to make a small intervention. The noble Lord is arguing passionately against the Government’s job cuts and the damage that will be done to care providers, charities and others. Does he therefore agree with me that this Bill must be scrutinised in a Committee on the Floor of the House? Does he also agree that it is in the interests of the charitable sector for this Bill to be scrutinised as fully as possible?

[Lord Sharkey (LD)]

I think there were three questions there, so perhaps I can answer very quickly: no, no and no.

20:38

[Lord Altrincham (Con)]

I wish the Minister a happy new year and offer him our blessing in his role for this year as well. The Chief Secretary to the Treasury has suggested that the impact of the measure we are discussing is limited, but we have heard today that the impacts are likely to be quite widespread. Indeed, the HMRC estimate referenced by several Peers this evening, that some 900,000 businesses would lose out with an average annual increase per employee of £800, is not a limited impact.

Some of these issues may not come as a surprise to the Government. They would not surprise the OBR. At the time of the Budget, when general expectations were low—albeit not as low as today—the OBR modelled a tax take for this policy of £24 billion before its own estimate of mitigating actions. It notes in Chapter 3, on long-run impacts of Government policy, that the increase in NICs will have

“a persistent negative effect on work incentives and both labour demand and labour supply”,

which is why the £24 billion tax take falls to £18 billion in the first year and £15 billion in the second. As my noble friend Lady Neville-Rolfe set out in detail and my noble friend Lady Monckton spoke about so movingly, the Government’s jobs tax will have an impact on sectors all across the UK, including retail and hospitality businesses as well as charities, including hospices.

The policy, right at the start, was pushing at the likely limits of tax receipts. The OBR gives semi-official estimates from which government policy is partly made, so it is reasonable to ask the Minister whether he agrees with the estimates for tax yield in 2025-26 and 2026-27. Most of the OBR reduction to tax is based on a reduction in wages and a reduction of 50,000 people in employment. Should we assume that the Government accept that 50,000 job-loss number? It is already quite meaningful in an overall increase in employment between now and 2029 of 900,000, which itself is de minimis in a workforce of 33 million to 34 million—and that is based on higher economic growth numbers from a few weeks back. The eroding tax receipts and declining employment numbers expected by the OBR need a careful government response. Perhaps the Minister could confirm that there will be no need to raise tax further this year.

There is dissonance between the Prime Minister’s commitment to growth and the Chancellor’s guidance to the contrary and approach to tax. The NIC increase is part of a set of policies, including the lower threshold, the minimum wage and auto-enrolment, which put burdens on the labour market that make employers reluctant to take on staff. It is this mixture that was noticed immediately during the Chancellor’s October Statement, and which may have contributed to the apparent economic slowdown over recent weeks. The tax increase has become the break point between the Government’s guidance and their actual tax-raising approach. We might need the help of the eminent Belgian detective Hercule Poirot and his “little grey cells”, as well as the Minister, to help us understand and unravel an economic strategy that talks about growth and reducing barriers but sets tax policy with known job-reduction impacts and likely economic contraction.

Perhaps the Minister could help us understand the economic approach. Are the Government sensitive to the move of jobs in life sciences away from the UK? The tax system provides tax breaks for capital equipment that would likely support automation, as referenced earlier this evening. Are we expecting a reduction in employment, with fewer jobs for young people and more automation? That may bifurcate the employment market and increase even further the tax dependency and tax concentration we have on mobile and highly paid people.

The Minister has been very respectful to our debate but, as we enter 2025, the real debate around this topic has become much broader, with the Bank of England, the CBI and the Institute for Fiscal Studies all weighing in. The OBR is one thing, but the Bank is another—surely no better a forecaster than the Government, but aligned in its concerns with Peers today.

For now, the Government, through this tax rise in particular, have created a stagnant economy in which businesses do not grow, young people struggle to find work and professional jobs move to other countries, creating enormous fiscal risk for the future. As such, we on these Benches cannot support the Bill.

Before I conclude, I should address the amendment in the name of the noble Baroness, Lady Kramer. It does not go far enough. As the House has heard today, there is an almost endless list of businesses and charities that will be hit hard by this policy. Given the appalling impact that the increase in NIC contributions is going to have, we will be tabling a Motion to ensure that the Bill is debated on the Floor of the whole House, giving it the proper scrutiny it deserves. Only by scrutinising the Bill to the fullest possible extent can we hope to improve it, to the benefit of businesses and charities across the country. The Liberal Democrats will have taken the first step in voting for this amendment today, but if they really care about the damage the Bill will do, they might consider voting with us on Wednesday.

20:44

[Lord Livermore (Lab)]

My Lords, it is a pleasure to respond to this Second Reading of the national insurance contributions Bill, and in doing so to respond to the points raised by the amendment in the name of the noble Baroness, Lady Kramer. I am grateful to all noble Lords for their contributions during today’s debate. The Budget in October involved taking some very difficult decisions: to clear up the mess that we inherited, to repair the public finances, to protect working people and to rebuild our public services. Faced with the reality of broken public finances and broken public services, not acting was not an option, which is why this Bill is necessary, as my noble friends Lord Chandos and Lord Layard observed.

Some noble Lords, including the noble Baronesses, Lady Neville-Rolfe and Lady Noakes, the noble Lords, Lord Forsyth of Drumlean, Lord Ahmad of Wimbledon and Lord Mackinlay of Richborough, and the noble Viscount, Lord Trenchard, focused on the Government’s fiscal inheritance and sought to deny the £22 billion black hole that the previous Government left behind. I am, of course, very grateful to all noble Lords who mentioned the £22 billion black hole and thank them for doing so.

The Treasury has provided to the OBR a line-by-line breakdown of the previous Government’s unfunded commitments—260 separate pressures. Noble Lords need not just listen to the OBR and the Treasury. They need look only at the out-turn data: central government current expenditure, published by the ONS, shows that for the six months since March the out-turn is £11.8 billion higher than forecast. That is £11.8 billion over six months—well on course for £22 billion over the year. The noble Lord, Lord Moynihan of Chelsea, asked why the money is not there. I politely suggest to him that it is because of the policies he supported under the previous Government.

Faced with this reality, as the Chancellor was, any responsible Chancellor would have to act. Ignoring this black hole, as my noble friend Lord Eatwell said, would have taken us down a path of irresponsibility—the path chosen by Liz Truss in her mini-Budget, for which working people are still paying the price.

Some noble Lords, including the noble Baronesses, Lady Neville-Rolfe, Lady Noakes, Lady Bray of Coln and Lady Porter of Fulwood, the noble Lords, Lord Jackson of Peterborough and Lord Mackinlay of Richborough, and the noble Viscount, Lord Trenchard, sought to argue that the Bill breaches the Government’s manifesto commitments. That is clearly not the case. Despite the pressures on the public finances, the Government made a clear choice at the Budget to keep our promises to working people by not increasing their income tax, national insurance or VAT, and we went further by freezing fuel duty. Compare this with the decision made by the previous Government to freeze income tax thresholds—a decision which cost working people over £30 billion. Instead, our Budget ensures that, from 2028-29, personal tax thresholds will be uprated in line with inflation once again.

Some noble Lords, including the noble Baronesses, Lady Neville-Rolfe and Lady Moyo, the noble Lords, Lord Londesborough, Lord Forsyth of Drumlean, Lord Ahmad of Wimbledon and Lord Ashcombe, my noble friend Lord Eatwell and the noble Viscount, Lord Trenchard, focused on the impact of these measures on employers. We heard a lot during today’s debate from the noble Lords opposite about how much they know about business. One does wonder, then, why the economy was such a catastrophe over the past 14 years.

I accept, though, that the Bill will require some employers to contribute more. These are difficult decisions and not ones we wanted to take. I understand and respect the legitimate concerns that have been raised, including by some businesses. But, taken together, the measures in the Bill mean that more than half of businesses with national insurance liabilities will either see no change or see their liabilities decrease. As my noble friend Lady O’Grady of Upper Holloway said, 865,000 employers will now pay no national insurance at all, and over 1 million employers will pay the same or less than they did before. In answer to the noble Viscount, Lord Trenchard, around 250,000 employers will see their liabilities decrease. Around 940,000 will see an increase and 820,000 will see no change.

The noble Lord, Lord Macpherson of Earl’s Court, asked about reducing distortions. Recent changes, such as reforms of the off-payroll working rules, have reduced distortions and we will keep this issue under review.

To all those noble Lords who asked, we have no plans to combine income tax and national insurance. Relative to other countries, our tax burden on employers hiring average earners remains low. The UK will remain below the OECD average and the third lowest in the G7, below France, Italy, Germany and Japan.

The noble Lord, Lord Jackson of Peterborough, asked about the impact of these changes on the public sector. We have set aside funding to protect the spending power of the public sector, including the NHS, from the direct impact of the changes, totalling £4.7 billion next year, rising to £5.1 billion in 2029-30. We are now working with departments to ensure that this funding is allocated appropriately, and specific allocations will be set out in due course.

In answer to the noble Lord, Lord Bruce of Bennachie, the Barnett formula will apply in the usual way. My right honourable friend the Chief Secretary to the Treasury is in regular contact with the Scottish Government on funding, including on the application of the Barnett formula.

Some noble Lords, including the noble Baronesses, Lady Kramer and Lady Neville-Rolfe, and the noble Lords, Lord Scriven and Lord Sharkey, spoke about the impact of the Bill on GPs, dentists and pharmacists. As the noble Lords will know, every year, the Government consult with each sector about both what services they provide and the money that providers are entitled to in return under their contracts. As in previous years, this issue will be dealt with as part of that process. The Department of Health and Social Care will shortly confirm funding for GPs, dentistry and pharmacy.

The noble Baroness, Lady Kramer, and the noble Lords, Lord Forsyth of Drumlean, Lord Scriven, Lord Udny-Lister and Lord Sharkey, asked about adult social care providers. The Government are providing a real-terms increase in core local government spending power of 3.5% in 2025-26. To support social care authorities to deliver key services, we also announced a further £200 million for adult and children’s social care at the provisional local government finance settlement last month. This will be allocated via the social care grant, bringing the total increase of this grant in 2025-26 to £880 million, meaning that up to £3.7 billion of additional funding will be provided to social care authorities in 2025-26.

Several noble Lords—including the noble Baronesses, Lady Porter of Fulwood, Lady Bray of Coln, Lady Sater and Lady Neville-Rolfe, the right reverend Prelate the Bishop of Southwark and the noble Lord, Lord Blackwell—focused on the impact on charities, including hospices. We are supporting the hospice sector with a £100 million boost for adult and children’s hospices, to ensure that they have the best physical environment for care, and £26 million revenue to support children and young people’s hospices. More widely, the Government provide support for charities, including hospices, via the tax regime, which is among the most generous of anywhere in the world. Tax reliefs for charities and their donors were worth just over £6 billion for the tax year to April 2024.

The right reverend Prelate the Bishop of Southwark asked about listed places of worship. The outcome of this programme is currently being assessed by the DCMS, as it finalises its financial allocation for 2025-26. The right reverend Prelate also asked about SEN transport. In the Budget, the Government announced £2 billion of new grant funding for local government in 2025-26. This includes £515 million to support councils with the increase in employer national insurance contributions, which covers special educational needs home-to-school transport schemes.

The noble Baronesses, Lady Kramer and Lady Neville-Rolfe, asked about childcare and the impact on the rollout of the expanded entitlement. Early years providers play a crucial role in driving economic growth, which is why we have committed to open 3,000 new school-based nurseries in this Parliament. At the Budget, the Chancellor announced that total funding will rise to over £8 billion in 2025-26 to support providers. On top of this, last month, the Department for Education confirmed an additional £75 million to help the sector expand next year, and a further £25 million to support childcare for disadvantaged children through the early years pupil premium.

The noble Baroness, Lady Sater, asked when the impact assessment will be published. The tax information and impact note was published on 13 November, alongside the legislation when it was introduced. The latest forecasts for tax revenues were published alongside the Office for Budget Responsibility’s October Economic and Fiscal Outlook.

Many noble Lords—including the noble Baroness, Lady Neville-Rolfe, the noble Lords, Lord Macpherson of Earl’s Court, Lord Forsyth of Drumlean, Lord Londesborough, Lord Ahmad of Wimbledon and Lord Mackinlay of Richborough, and the right reverend Prelate the Bishop of Southwark—focused on the wider macroeconomic impact of the Bill. As I said in my opening speech, not to act was not an option. The choices we have made were the only route to putting the public finances back on a stable path while protecting working people and rebuilding public services. The economic data we have seen in recent months is disappointing. In particular, the recent growth figures show the sheer scale of the challenge we face, and the noble Lord, Lord Horam, set out the dire inheritance that we faced on growth.

The fact is that there would have been far greater cost to continuing with the irresponsibility and instability that has been a near-constant feature of the past 14 years—from the chaos of Brexit and the disastrous deal that followed, which reduced GDP by 4%, through to the Liz Truss mini-Budget that crashed the economy and devastated family finances. Let us remember that the Office for Budget Responsibility has also been clear that, with particular reference to our capital investments, the Budget will increase the size of the economy in the long term.

The noble Lord, Lord Blackwell, rightly identified the problem of inactivity, which is higher than it was before the pandemic. He rightly identified the issues in the benefits system that contribute to that. The Government will bring forward proposals in this area in the coming months. The noble Lord also asked about public sector productivity. Unlike the previous Government, we have introduced a 2% productivity target for all government departments and have said that above-inflation pay awards will be affordable only if they can be funded from improved productivity.

The noble Baronesses, Lady Neville-Rolfe and Lady Moyo, spoke about the impact on inflation. The independent Office for Budget Responsibility says that it expects inflation to remain close to the 2% target throughout the forecast period. This is of course very different from the previous Parliament, when inflation peaked at 11.1% and was above target for 33 consecutive months, and when mortgages rose by an average of £300 a month following the Liz Truss mini-Budget.

The noble Baronesses, Lady Neville-Rolfe and Lady Noakes, and the noble Lords, Lord Howard of Rising, Lord Elliott of Mickle Fell and Lord Altrincham, spoke about employment. The Office for Budget Responsibility’s October forecast, which takes into account all tax measures announced in the Budget, forecasts that the unemployment rate will now fall to 4.1% next year and remain low until 2029. It also expects the number of people in employment to rise by 1.2 million over the course of this Parliament. As I have said to the noble Lord, Lord Elliott of Mickle Fell, on previous occasions, we remain committed to the 80% employment ambition.

The noble Baroness, Lady Neville-Rolfe, asked about the impact of this Bill on living standards. As noble Lords will be aware, the previous Parliament was the worst for living standards ever recorded. The Office for Budget Responsibility’s forecast shows that real household disposable income will increase in real terms every year over the course of this Parliament.

The noble Lord, Lord Forsyth of Drumlean, and the noble Baroness, Lady Noakes, asked about the impact of the Bill on wages. The independent Office for Budget Responsibility expects real wages to increase by 3% over the next five years.

This Bill also serves another key purpose: to fix our broken NHS and put an end to over a decade of underinvestment, neglect and inequality, as my noble friend Lady O’Grady of Upper Holloway said. That is because this Government inherited not only broken public finances but an NHS experiencing the worst crisis in its history. It is for this reason that the Budget included extra investment of £25.7 billion for the NHS over this year and next—investment that is possible only because of the measures in this Bill.

This Government had to take some very difficult decisions, reflected in the Bill we have debated today; not decisions we wanted to take, but necessary decisions to clear up the mess we inherited. Some noble Lords have today argued otherwise. The noble Baroness, Lady Neville-Rolfe, set out her position eloquently, but I did not hear a single alternative proposal. What is her alternative—that we should have ignored the black hole in the public finances? That is the path of irresponsibility and a repeat of the path chosen by the Liz Truss mini-Budget. That is not the path chosen by this Government. Yes, it was a significant Budget, on a scale commensurate with the challenging inheritance that we faced.

I recognise that the measures in this Bill involve asking some businesses to contribute more. However, as a result, and made possible only by the measures contained in this Bill, we have now wiped the slate clean, creating a platform of stability in the public finances. In doing so, and in contrast to the previous Government’s choice to freeze income tax thresholds, we have protected working people, keeping our manifesto commitments not to raise their income tax, their national insurance, or VAT. Again, as my noble friend Lord Eatwell pointed out, the noble Baroness, Lady Neville-Rolfe, said that this was the wrong tax to raise, but gave no detail about what other taxes she would raise. Would she have raised taxes on working people instead? The noble Lord, Lord Forsyth, at least suggested taxing some pensioners more, but from the Official Opposition there simply is no plan.

We have made historic new investment in our NHS and begun to put an end to years of underfunding and neglect. The choices that we have made to repair the public finances, protect working people and invest in Britain’s future are the only responsible choices in the circumstances that we faced. None of these things would be possible without this Bill. This Government were elected on a mandate to fix the foundations of our economy, and that is exactly what we will do. The Bill delivers on that mandate and provides a foundation of stability upon which we will now build long-term sustainable growth so we can rebuild our public services and make working people better off.

20:59

[Baroness Kramer (LD)]

My Lords, this has been a very impressive Second Reading on a very important Bill. I hope that in Committee we can have a really constructive discourse in which we can hopefully find some common ground and make some progress. However, as I look at the Bill as it stands today, I am afraid that I continue to regret. Under those circumstances, I beg to test the opinion of the House.

21:00

Division 1

Ayes: 46

Noes: 61

21:10

Bill read a second time.

House adjourned at 9.11 pm.