National Insurance Contributions (Secondary Class 1 Contributions) Bill

Lord Layard Excerpts

2nd reading
Monday 6th January 2025 Lords Chamber

[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.