National Insurance Contributions (Secondary Class 1 Contributions) Bill

Debate between Lord Forsyth of Drumlean and Lord Eatwell

Committee stage
Tuesday 21st January 2025 Grand Committee

[Lord Forsyth of Drumlean (Con)]

I would agree, but it would not provide for the costs of private patients, who are already paying over and above the odds because of the local authorities. I am not criticising the local authorities—in fairness to them, they simply do not have the money. More than three-quarters of councils’ budgets are going on social care, and the costs are going up. This is extending the cost, and therefore it will mean a greater burden on those people paying out of their own pockets.

[Lord Eatwell (Lab)]

When the noble Lord, Lord Forsyth, raised the issue of our meeting in Grand Committee—when the proposal was being discussed—and argued that votes could not be taken, I intervened and said that he was incorrect because I had won a vote in a Grand Committee many years ago. After a little research, I discovered that the noble Lord, Lord Forsyth, was right and I was wrong. The reason is that the Committee in which I won a vote was a Special Public Bill Committee. For those of your Lordships who have not encountered such a thing, a Special Public Bill Committee is exactly the same as a Grand Committee, except you have votes. It is designed to deal with Law Commission Bills. I apologise to the Committee for that error, and especially to the noble Lord, Lord Forsyth.

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[Lord Forsyth of Drumlean (Con)]

The noble Lord was kind enough to write to me and apologise, and we always very much respect the courteous way in which he handles debates in our House.

[Lord Eatwell (Lab)]

That is very kind.

I turn to the amendment. One of the major failings of the UK tax system is its complexity. That complexity is a major source of tax avoidance—that is, the use of legal loopholes, often in ways totally unintended by the policymaker—to avoid tax. The real problem is the large number of exemptions—exemptions which riddle our taxation system and make it so susceptible to tax avoidance.

Increasing exemptions to a particular tax is the wrong way to deal with the perhaps real problems described by the noble Lords, Lord Scriven and Lord Forsyth. The right way is for the Government to target direct subsidy to those services that they wish to have funded. These proposals increase the number of exemptions in the tax system. I can assure the proposers that they will be gamed and will result in tax avoidance, which is totally outwith the intention of the proposers of the amendments. Several other amendments would also add exemptions to the tax system. We should not do it. It makes our tax system worse and more complex and it increases avoidance. The approach embodied in the amendments is a very bad idea.

[Lord Forsyth of Drumlean (Con)]

Before the noble Lord sits down, does not the Bill itself extend extensions, by changing the secondary threshold for class 1 contributions?

[Lord Eatwell (Lab)]

I agree, but adding more exemptions is adding to the pile. What we desperately need is a reform of our tax system that removes exemptions and forces Governments to make policy by deciding which goods and services they are going to subsidise.

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[Lord Eatwell (Lab)]

My Lords, I wonder whether noble Lords who have been referring to national insurance growth as a jobs tax have actually read the OBR assessment of the impact of the Budget on employment. If they have not, I will quote it here. It states:

“The … boost to output from this Budget reduces the unemployment rate by 0.3 percentage points, equivalent to around 90,000 people, on average in 2025 and 2026. Compared to our March forecast, the unemployment rate is lower across most of the forecast, but is in line with its unchanged estimated structural rate by the forecast horizon”.


Why is it that the OBR, having considered carefully the impact of the increase in national insurance, has told us that the level of unemployment is going to fall, in its estimation?

The reason was spelled out beautifully by the noble Lord, Lord Layard, at Second Reading. Perhaps nobody listened carefully to a distinguished professor of economics setting out why the characterisation of the national insurance rise as a jobs tax is seriously misleading in economic terms.

I hope the Committee will forgive me if I repeat the argument of the noble Lord, Lord Layard. The cost to an employer of the increase in national insurance determines the choices that the employer will make with respect to the input of labour in the output that he or she can sell. The increase in national insurance will indeed tend to encourage employers to lower the labour input per unit of output: that is, it will increase productivity. The level of employment then depends on the amount of output.

The amount of output—the overall level of employment—is determined, as the OBR points out clearly in the piece I quoted, is determined by the overall fiscal balance, and this Budget injects £26 billion of extra spending into the economy. Therefore, the economies in employment made by individual employers are significantly offset by the overall level of demand in the economy, because it is that overall level that determines employment, not the individual decisions.

That is what Keynes taught us in 1936, which is why this characterisation of the national insurance charge as a jobs tax that will cause unemployment actually misses out the vital issue of what the revenues from the tax are used for. If they are used, as they are in this Budget, to increase expenditure, as my noble friend Lord Livermore pointed out in his scene-setting discussion, then employment may rise or fall depending on the fiscal balance—and the fiscal balance of this Budget, as the OBR points out, will reduce unemployment.

[Lord Forsyth of Drumlean (Con)]

That is a very ingenious argument, and I hesitate to argue with such a distinguished economist, but just think of what the noble Lord said. He said that the increase in the labour cost as a result of this tax being imposed will force employers to improve productivity, and the way you improve productivity is by sacking the worker and replacing them with a machine, or AI or some other system. It is a bit of sophistry to suggest that it is not a jobs tax because it will only mean that some people will lose their jobs and that the improved productivity may have an effect. As for basing his argument on the predictions of the OBR, I think unemployment went up today.

[Lord Eatwell (Lab)]

It did not. The level of employment went down, but unemployment is not measured by that.

[Lord Forsyth of Drumlean (Con)]

Indeed, but let us not get into that argument. What is the biggest problem facing the country? It is that more than 9 million people who are of working age and capable of working are not working. An argument that suggests that by making it more expensive to take people on, and then add to that—I am not making a Second Reading speech —employment protection, that this will not result in job losses and therefore is not a tax on employment is, even by the standards of great economists, stretching the argument too far. The consequence of this will be, as the noble Lord acknowledged, that some people will surely lose their jobs because employing them will become too expensive.

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[Lord Forsyth of Drumlean (Con)]

My Lords, it is a great pleasure to follow the noble Viscount, Lord Chandos, who is very wise and diligent. For many years, we were together on the Economic Affairs Committee. I agree with him about the simplification of the tax system. Indeed, the Office of Tax Simplification was a recommendation from the tax commission that I chaired back in 2006 to George Osborne and David Cameron. It was implemented and, somehow, the Treasury managed to bog it down in a way that prevented it doing an effective job.

I agree entirely with the noble Lord, Lord Eatwell, that we need a simpler, fairer tax system. The simplest way of dealing with that would be not to have this increase at all because then there would not be the need to have these exemptions. This is a problem that has been created by the Chancellor and the Government. I must say, in speaking to these amendments, that Amendments 4, 5 and 8—

[Lord Eatwell (Lab)]

Okay, let us say that we do not have this measure at all. Is the noble Lord going to cover the expenditure by borrowing or is he not going to spend on the health service, care services and the areas set out by the Minister in his scene-setting remarks?

National Insurance Contributions (Secondary Class 1 Contributions) Bill

Debate between Lord Forsyth of Drumlean and Lord Eatwell

Wednesday 8th January 2025 Lords Chamber

[Lord Forsyth of Drumlean (Con)]

My Lords, forgive me for pointing out that on the Liberal Democrat Benches, the turnout in support of their regret amendment on Monday was less than half their complement. They moved a moved a regret amendment; they made fine speeches about how damaging this Bill will be to charities, hospices and other organisations; and then they also, at the end of the debate, made it clear that they would not give the whole House an opportunity to consider this on the Floor of the House. I do not know what is going on between the Liberal Benches and the Labour Party, but what is clearly going on is some kind of deal—a deal that is against the interests of the people of this country, including many charities, hospices and other organisations.

It is completely wrong to argue that in the Grand Committee this Bill can be subject to similar scrutiny. If it is on the Floor of the House, we can vote on some of the measures that we agreed with the Liberal Democrats need to be considered. We can have proper scrutiny. This is simply an attempt by the Government to hide their embarrassment at the atrocious consequences of this unprecedented national insurance Bill.

[Lord Eatwell (Lab)]

The noble Lord, Lord Forsyth, suggested just now that it would not be possible to vote in Grand Committee. He is in error. I know that because I led for the Opposition on an insurance Bill about 12 years ago and there was a vote in the Committee, which the Opposition won. So it is entirely possible for the same process, the same level of scrutiny and the same seriousness to take place in Grand Committee as on the Floor of the House.