National Insurance Contributions Bill

Lord Bilimoria Excerpts

Wednesday 2nd February 2011 Lords Chamber

[Lord Bilimoria]

My Lords, not only is 2011 the centenary of the Parliament Act, it is also the centenary of national insurance being introduced by the great Liberal leader Lloyd George. Is it not ironic that we now have a coalition Government taking us back 100 years? With all the problems we face in this country today—the war in Afghanistan, a gargantuan deficit, and a fall in GDP in the last quarter to name just three—we have a Deputy Prime Minister wanting to push through House of Lords reform and a Government wanting to celebrate the introduction of national insurance 100 years ago by putting it up.

In his acceptance speech as the Republican presidential candidate in 1988, we all remember George Bush Senior's infamous words:

“Read my lips: no new taxes”.

We all know how that turned out. In the lead-up to the 1997 general election, Labour pledged to raise neither the base rate of tax nor the top rate in the lifetime of the Parliament, a pledge repeated by the then Chancellor Gordon Brown before the 2001 and 2005 elections. That pledge, however, omitted the glaring point that almost £8 billion was raised through national insurance hikes in 2003. And that is the point about national insurance—rising rates are generally not met by the public with the same alarm as increases in income tax, for which the noble Lord, Lord Newby, wishes. I quote from a note on national insurance contributions from the Commons Library:

“Many commentators have argued that NICs are poorly understood by the general public, despite the very large amount of money that they raise:

John Whiting is a tax partner at PricewaterhouseCoopers … He has a question that he tries out on people … when they talk to him about the tax system. ‘I ask them what the second biggest tax is, after income tax,’ he says. ‘People flounder. They suggest value-added tax and you shake your head. They suggest corporation tax. Wrong again. Then they start the wilder guesses and suggest petrol duties. They rarely come up with the correct answer, which is national insurance contributions.’

NICs are, in the words of Peter Bickley, technical manager of the Tax Faculty of the Institute of Chartered Accountants in England and Wales”—

of which I am proud to be a fellow—

“‘the Cinderella of taxes’. They are the unseen tax. They are a dream come true for chancellors of the exchequer. They are a tax that ordinary people, by and large, have not noticed”.

It is estimated that in 2009-10, income tax, as the noble Lord, Lord Newby, said, brought in £134 billion to the Exchequer—nearly one-quarter of all government takings. National insurance contributions brought in almost £100 billion—almost as much as VAT and corporation tax combined.

People have the impression that national insurance is a contributory system, going only into social security, benefits, pensions and even the NHS. However, Andrew Dilnot, former director of the Institute for Fiscal Studies, said in 1995 that,

“it would be hard to find much evidence of any persisting actuarial link between contributions paid and benefits received”.

In a study of perceptions of the national insurance system published by the then Department of Social Security, it was found that respondents saw no real distinction between paying national insurance and tax. Whether it be income tax or national insurance, the money is in effect going into the same pot, and the game is up. As Abraham Lincoln famously said, you can fool some of the people all the time, and all of the people some of the time, but you cannot fool all of the people all of the time.

This Government’s and the previous Government’s plans to increase primary and secondary national insurance contributions by one per cent to 12 per cent and 13.8 per cent respectively is made even more astonishing in the context of the rest of our cut-throat tax system. We have a top rate of tax of 50 per cent, which dwarfs America's reasonable top rate of 35 per cent. Research conducted by KPMG and released in October 2010 revealed that only three countries in Europe are above the UK in terms of personal income tax rates—the Netherlands, Sweden and Denmark—and that we lag behind our two big competitors, Germany and France.

How are we to compete in the international market if we do not have internationally competitive tax rates? How do we expect to attract foreign investment to our country, and attract top talent to the City, if it makes more financial sense for talented people to go elsewhere with their businesses? The Chancellor must know this. That is why he reduced corporation tax from 28 to 24 per cent—a move of which I am wholeheartedly in favour. He said:

“Corporation tax rates are compared around the world, and low rates act as adverts for the countries that introduce them. Our current rate of 28p is looking less and less competitive”.—[Official Report, Commons, 22/6/10; col. 174.]

This is the right attitude applied by the Chancellor to a much smaller area of tax. Corporation tax makes up 10 per cent of the Exchequer's tax receipts: much less than national insurance contributions.

On top of this, we have the madcap immigration cap, turning away international talent. With this national insurance hike, we are merely adding to the ever-growing list of problems that the country faces. Savage and unnecessary cuts—for example, the privatisation of forests—are raising relatively small amounts of money while hurting and upsetting so many people so much. We have a defence review during a period of wartime and turmoil and uncertainty in the Middle East; an SDSR that was rushed through in three months and has made us the subject of international mockery, with aircraft carriers without aircraft, nuclear submarines without AWAC cover and army numbers continually being cut; and the brutish and ham-handed threefold increase in tuition fees that will hurt the higher education sector—both universities and students. VAT has been put up to 20 per cent. There is uncertainty in Europe, with the PIGS countries nowhere near out of the woods and the future of the euro nowhere near certain. There is also global uncertainty and the ominous fact that the economy shrank by 5 per cent in the last quarter—weather or no weather, and whether you like it or not. We have an onslaught of more and more EU regulations and red tape; our housing market has been in the doldrums for years; we have had a prolonged period of dangerously high levels of inflation, with the Monetary Policy Committee of the Bank of England and the Governor of the Bank of England writing letter after letter, month after month, to the Chancellor, after breaching the 2 per cent target. On top of this, the Governor of the Bank of England tells us that real wages have fallen over the past six years—something that has not occurred since the 1920s. All this shows us how badly the British consumer is being squeezed. In an economy where 60 per cent of GDP is accounted for by consumer spending, the confidence of the consumer is paramount, as the noble Lord, Lord McKenzie, said.

Another concern lies in the Government’s tax plans in the lower-income and middle-income thresholds. The Minister spoke of this. However, the IFS tells us that 750,000 people are to be moved into the 40 per cent rate of income tax this year, and a further 850,000 people in 2014-15. This is due to the fact that while the Government are raising the threshold at which people are liable to pay tax, rightly by £1,000 to £7,475, they are reducing the threshold for higher-rate tax from £43,000 to £42,000.

We can all agree that the massive deficit that weighs over us needs to be reduced. No one argues with the Government about this. We, like the United States, have rightly used massive quantitative easing and reduced interest rates for a prolonged period. All this needed to be done and needs to be done. This is where the similarities with the United States end. Whereas we are increasing taxes, including national insurance contributions, the United States has been cutting taxes.

I remember that in the 1980s, after Ronald Reagan’s tax reductions, total tax revenues actually climbed by 100 per cent. After last December’s extension and expansion of tax cuts in the United States—a package of £542 billion—the IMF revised its growth predictions for the US economy this year from 2.3 per cent to 3 per cent, and for the global economy from 4.2 per cent to 4.4 per cent. In the face of all this, we in Britain raise our taxes and national insurance rates and stand by as our growth rate falters. We need to do everything we can to help the economy grow. If we made tax cuts in the UK proportionate to those in the United States, the impact would be huge, by enabling businesses, especially SMEs, to surge forward. The noble Lord, Lord Newby, spoke of SMEs. Consumers would start spending and, most importantly, consumers and businesses would have confidence, as the noble Lord, Lord McKenzie, said. The momentum would build, the economy would grow, tax takes would go up and the deficit would go down. This is the magic bullet, not the tax and NIC increases that are stifling business, stifling the consumer and stifling confidence all round.

There are elements of this Bill that I welcome; for example, the increase in the threshold. I also welcome the NIC holiday for new business start-ups to encourage the creation of private sector jobs in regions reliant on public sector employment. This is a fantastic idea. To see the Government support small and medium-sized enterprise in this way is hugely encouraging. Such businesses are the engine of our economy and deserve support. They are vital if we are to get out of these dark times. However, why not take this good idea and run with it? Why exclude Greater London and the south-east? Let us make this a national, as opposed to a regional, holiday. This gesture in the grand scheme is welcome. I hope that what the Minister said is right and that it will save about £1 billion for SMEs in times to come. If we are serious about growth, we need to decrease taxes. What happened to Chancellor George Osborne’s opinion of a national insurance increase which he said in opposition was an unwelcome tax on jobs?

In conclusion, it is appropriate now, more than ever, to quote Churchill’s opinion of taxation. He said that,

“for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle”.

I urge the Government to re-examine their approach to deficit reduction. The economy should be encouraged to grow, not be stifled by taxation. There are huge areas of public expenditure and inefficiency which can be addressed before we put our businesses and consumers at risk. Public expenditure as a percentage of GDP needs to return to the 40 per cent level. Inefficiencies in the health and welfare sectors need to be addressed. We have an overgenerous welfare system which is being abused and taken advantage of. Cuts must be made there. Instead we are cutting where it hurts the most, forcing our economy back into its shell and hurting our competitiveness.

The Government have had their chance to do the right thing. Instead, at the risk of sounding gruesome, I believe that what the Government are doing to the economy and to the British consumer could be equated to medieval torture—the ruination of this country’s economy through death by a thousand cuts and strangulation by taxation.