National Insurance Contributions (Secondary Class 1 Contributions) Bill

Lord Blackwell Excerpts

2nd reading
Monday 6th January 2025 Lords Chamber

[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.

National Insurance Contributions (Secondary Class 1 Contributions) Bill

Lord Blackwell Excerpts

Committee stage
Tuesday 21st January 2025 Grand Committee

[Baroness Noakes (Con)]

My Lords, I agree with the noble Lord, Lord Eatwell, on simplification of the tax system; indeed, I have made many speeches on that subject in the past. I also agree that as a matter of principle it is not good to layer exemptions on to any taxes, but we have to see here that the Government have chosen to use a very blunt instrument to raise taxes, so we are faced with a problem. Do we just accept this blunt instrument bludgeoning whole sectors of our community or do we try to make it a bit better? I think that, on grounds of public policy, it is reasonable to make exceptions in order to ameliorate the effect of a dangerously wide imposition of these additional taxes on employment.

[Lord Blackwell (Con)]

My Lords, as the noble Baroness said, the easiest way to avoid exemptions would be not to raise this tax at all; then we would not have to deal with the sectors that will be hit hard by it. I very much support the amendment in the name of the noble Lord, Lord Scriven, and I hope that it will come to a vote on Report, so that we can all support it. As other noble Lords have said, I particularly want to extend that to other charities, which I think are covered by Amendment 5 in this group.

[Noble Lords]

It is in a later group.

[Lord Blackwell (Con)]

In that case, I will address that amendment when we come to it.

[Baroness Neville-Rolfe (Con)]

My Lords, I thank the noble Lord, Lord Scriven, for tabling these amendments and others who have spoken, particularly my noble friend Lord Randall, who supported the amendments highlighting the damage to smaller businesses. I very much share his view.

This has been an interesting discussion and it has brought out how unjust the proposals in the Budget for national insurance were. The amendment rightly draws attention to the problems created across the health sector, all of which we will discuss again in detail on other groups. “Stark” was the rather good word used by the noble Lord, Lord Scriven. As we heard at Second Reading, there are appalling consequences for those dealing with some of the most tragic services, including hospices and the transport of those with special educational needs. There will also be an immense strain on care homes, GPs, dentists and pharmacies—mostly small operations employing a number of part-time and low-paid staff. That will seriously impact on the health of the NHS.

What is so unfair is that the public sector is being compensated for the extra costs. That is in contrast to those carrying out public good in the private sector, which, incidentally, we know is more productive. For example, I have been amazed by the industry of family-run pharmacies, which helped so much during Covid and are asked to do more and more year by year. They are having to deal with the treble whammy of NICs, the national minimum wage rises—especially for the young—and the prospect of the Deputy Prime Minister Angela Rayner’s proposals for new employment legislation.

As I highlighted at Second Reading, many in the health sector say that they will be forced to reduce services and limit headcount. For example, we heard from the noble Lord, Lord Scriven, about the increased cost of social care faced by the independent care providers—I think he talked about £900 million; I had a figure of £940 million—which simply dwarfs the £600 million support rightly included in the Budget to help the sector. If the Government recognise that this tax is not sustainable for the public sector, why are they unable to apply that same logic to sectors that provide public services? These are not big businesses. They provide a critical service for the people and, if they are unable to do so, that will add to the pressure on the NHS. The noble and learned Lord, Lord Hope, gave a good example of the Cyrenians in Scotland and my noble friend Lord Forsyth rightly mentioned hospices, as I think everybody will do throughout this Committee.

National Insurance Contributions (Secondary Class 1 Contributions) Bill

Lord Blackwell Excerpts

Committee stage
Wednesday 29th January 2025 Grand Committee

[Lord Blackwell (Con)]

My Lords, I would like to put this discussion in the context of the profitability of the small businesses that we are talking about. The noble Lords who proposed these amendments have effectively made the point that many of these small businesses will be the engine of growth—the acorns that will develop and be the big businesses of the future. In successful small businesses, profitability varies tremendously, depending on the sector and capital intensity, but it would not be unusual for a business of this scale to have a net profit margin of around 10%. However, in some sectors, such as retail, hospitality and construction, that margin may be as low as 2% or 3%. When you are talking about adding 1% to the cost of employment, where the employment may be a significant part of the turnover, you can see that the impact on the net profit margin is potentially devastating, particularly since, in many cases, the percentage increase in their national insurance bill will be larger than 1%.

Clearly, we must be particularly concerned about start-ups because they are not yet successfully established trading businesses. They may have to undergo a number of years of losses before they get to that position. They accumulate those losses and they have to pay interest on those losses and, projecting forward, the additional costs may well tip the balance on whether those profitability equations earn an adequate return on capital to make the investment worth while.

Amendment 6 proposes to exempt businesses with a turnover of below £1 million. Obviously, that is a broad category to cover. We do not know exactly how many people are employed in such businesses but, as a rough proxy, the number of people employed in businesses with less than 50 employees is 47% of the entire UK workforce. We are talking about a significant part of the workforce being impacted by these changes, potentially in a significant way.

I heed the message from the noble Lord, Lord Eatwell, that we should not be complicating the tax system, but the only reason why we are discussing these amendments is the proposal to increase national insurance. If the Minister does not want to accept a broad exemption for small businesses, it would be helpful to the Committee if the Government could suggest amendments that would exclude those businesses that we are particularly concerned about—the start-ups and those on narrow profit margins—and see if there is a way in which to ensure that the engines of growth in this sector are not destroyed or damaged.

[Lord Forsyth of Drumlean (Con)]

My Lords, I just want to follow up on that excellent point made by my noble friend. It is a long time since I ran a small business, but I can still remember the feeling of fear as to whether, as one started up, one was going to have enough to meet the payroll at the end of the month. There is pressure on client and other businesses and there are risks, and events can drive you off course. When you have produced your budget for the year and are reliant on certain things happening, out of a blue sky—actually, the Labour Government did not come out of a blue sky; that was obviously going to happen—you suddenly have to find all this extra money. The impact is harder on the smallest businesses of that kind. It is hard to quantify and saps the enthusiasm and drive among entrepreneurs when they are faced by this.

I am very supportive of the Chancellor of the Exchequer’s determination to get growth in this country and the way she is going about it. However, as has been pointed out by several noble Lords—the noble Lord, Lord Blackwell, put it most crisply—small businesses are the ones that will become big businesses; they are the ones that will create the wealth, while the large businesses will shed labour. We keep being told how AI will mean that those businesses will be laying off labour. However, the small businesses are the ones that will be using artificial intelligence, if you believe it will be such a big change. They are the ones that will develop and use AI, but they are also being hammered and will find themselves facing great difficulty.

It is also the case that small businesses find it hardest to get support from the banks, because, increasingly, the large clearing banks are not interested. As we have heard in the Financial Services Regulation Committee, they are increasingly not interested in supporting SMEs. If the Chancellor’s determination is to get growth, hobbling small, embryo businesses is not a smart idea, if you are taking at least a longer-term view of three to five years.

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[Lord Sharkey (LD)]

My Lords, these amendments address very important issues. As noble Lords who attended the Committee last week will be aware, we on these Benches have taken an approach to the Bill aiming to exclude certain sectors from the Government’s rise to employers’ national insurance contributions—sectors that we feel will be particularly impacted by the change.

The amendments in this group follow the same structure as our earlier amendments, exempting employers of young people in various age groups from the proposed rise in employers’ national insurance contributions. We touched at least tangentially on that and on some of the concerns raised about youth employment when we debated amendments last week, tabled by my noble friend Lady Kramer, relating to part-time workers and to the hospitality and tourism sectors. For many young people, part-time work is the entry point into the world of work. A career in hospitality is often the first step on the career ladder for many young people entering the job market.

According to data commissioned by that well-known authority, the British Beer & Pub Association, pubs currently provide jobs for more under-25s than they ever did, with 350,000 people in employment in that sector. The association estimates that, to keep employing that same number of under-25 year-olds, the NICs liability for employers will increase from £82 million to £153 million.

I shall not repeat the points made in our debate last week, but I urge the Minister to address further some of the possible unintended consequences that the measures in this Bill might result in, as employers in these sectors look at ways in which to offset the additional costs that they will have to endure—perhaps instituting hiring freezes or freezing pay rates—and especially and specifically the impact that will have on young people seeking to enter employment for the first time. An impact assessment would have been very helpful, as would the application of the mechanism contained in Amendment 33 from the noble Baroness, Lady Noakes, which we discussed earlier this evening.

In the regrettable absence of an impact assessment, it would be entirely proper to postpone the NIC provisions until the Government make more age threshold granular data available to help to assess the effect of the measure on young people. I heard the Minister’s unequivocal refusal to provide any more impact assessments, and I expect that we will hear it again in Committee and on Report.

[Lord Blackwell (Con)]

My Lords, I want to add to the comments made by my noble friend Lord Altrincham in introducing these amendments. He spoke of a large number of young people who are not in economic activity, full-time education or training. Labour market statistics are notoriously difficult to interpret, as we know, but, if you take the unemployment rate he quoted—around 14%—we know that, in addition, a worryingly large number of people in this age group are also on long-term sickness benefits. All of them could be in productive work, with the right support and encouragement.

A number of Members of this Committee are also members of the House of Lords Economic Affairs Committee, which recently did a review of this area. Some of the evidence that we took made the point that, once a young person moves on to long-term benefits without ever having had meaningful employment experience, it becomes increasingly difficult for them to get work. They become stranded in a benefit life, which is not only wasteful for them but a huge cost to the taxpayer.

In stressing the importance of making it economically attractive for employers to take on young workers such as these, I wonder whether the Government should consider going further than these amendments: not just retain the existing levels of national insurance contributions for employers for this age group but reduce the national insurance contributions of young workers to give an additional incentive to help them, at this early stage in their lives, into a meaningful working career.

[Lord Livermore (Lab)]

My Lords, I am grateful to all noble Lords who have taken part in this debate. I will address the amendments tabled by the noble Lord, Lord Altrincham, and the noble Baroness, Lady Neville-Rolfe, which seek to exempt the salaries of young people from the increase in employer national insurance.

An employer national insurance relief is already available for the earnings of those aged under 21 and for apprentices aged under 25, meaning that employers are not required to pay national insurance contributions up to £50,270 for these groups. Despite the challenging fiscal inheritance that this Government faced, we are maintaining these important reliefs for under-21s and apprentices under 25; they are not changing as a result of this Bill. Creating other thresholds and rates based on the age of staff would add additional complexity to the tax system. These amendments would introduce new pressures that would have to be met by more borrowing, lower spending or alternative revenue-raising measures.

The noble Lord, Lord Altrincham, mentioned NEETs. I completely agree with him, but the situation that this Government inherited is completely unacceptable. That is why, at the Budget, the Government announced £240 million to fund 16 pilot projects across England and Wales in order to improve the support available to the economically inactive, the unemployed and people who want to develop their careers. This will include eight youth guarantee pilots to test new ways of supporting young people into employment or training.

It is also why, in the spring, the Government will bring forward a welfare reform Green Paper. I have read with interest the proposals mentioned by the noble Lord, Lord Blackwell, from the Economic Affairs Committee of your Lordships’ House; I hope that many of them will feature in that Green Paper. For now, given the points that I have set out, I respectfully ask the noble Lord to withdraw his amendment.

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[Lord Blackwell (Con)]

My Lords, I will not repeat the powerful arguments that have been made for this set of amendments, but I would like to put the argument in stark terms. What is exceptional about most charities is that they do not have the ability to raise revenue by selling more and putting up prices. Some do, but many are not commercial enterprises. In effect, since those charities can raise this money only through additional fundraising, the Government are saying to charities, “We want you to go out and solicit more contributions from philanthropists to pay for government services”. If the Government went out to the public and said, “This is what we’re going to do”, I wonder how many people would think that a sensible policy.

[Baroness Kramer (LD)]

My Lords, I will be very brief, because these Benches spoke extensively on charities in an earlier grouping, where the amendment would have overturned the change that the Government are introducing. I particularly want to pick up the amendment from the noble Baroness, Lady Bennett, because, like others, I am very conscious that, of the charities that I have talked to, a fundamental part of their problem is that they cannot turn around and respond quickly enough to a measure that is being introduced so quickly. I am not up on all the rules of the Charity Commission, but I suspect that it would frown greatly on a charity spending when there is no clear funding mechanism coming in to replenish its resources. I think that there is a requirement to have several months’ contingency on the books, so there is a real problem here for many charities in having to turn around very quickly.

One of the amendments deals with increases in the employment allowance. That runs into a problem that the Government could help us with. It is my understanding that an entity that sells 50% of its services to the public sector does not qualify for employment allowance, so there will be many charities that are excluded from any benefit that is offered under that amendment. I wonder if the Minister could help us to get a better grip on that, because I think we have all struggled with understanding the application of those rules.

My last point did not occur to me until I started reading the input from various charities. A number of charities that have been able to survive and are fairly confident about their funding will now find themselves in a position where they need to battle and compete for grants. Some of the very smallest charities are concerned that they may get excluded from the grant offering because charities with a bigger reach are now turning to those particular pots. I am not sure whether the Government considered that as they put together this picture.

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[Lord Londesborough (CB)]

My Lords, I will speak briefly as I put my name down in support of Amendment 62 in the name of the noble Baroness, Lady Neville-Rolfe. I could have—indeed, I should have—done so for Amendments 61, 63 and 64 as well.

I continue to use the word “baffled” about the Government’s apparent resistance to impact assessments, which are so crucial if you are to have joined-up thinking on the Government’s economic growth strategy. As we know, rather worryingly, we lost 47,000 people off the payroll last month. I just raise this point in relation to the Government’s White Paper, Get Britain Working, which has some ambitious and laudable aims. Specifically, the headline bullet is that the aim is to take 2 million people out of welfare and into work. Put another way, the aim is to reduce the economic inactivity rate of our working-age population from the current 25% to 20%. Of course, the question is: where will those 2 million jobs come from? Who will create them? The answer is the private sector; that is the assumption.

When you come back to impact assessments, you have to ask how private sector employment will be impacted by not just the rise in national insurance contributions but the increase in the national minimum wage and the upcoming anticipated restrictions being brought in by the new Employment Rights Bill. All these factors boil down to the importance of assessment. If we have a lack of assessment, we greatly reduce the chances of the Government achieving their aims. So, again, I ask the Government to embrace accountability through Amendments 61, 62, 63 and 64.

[Lord Blackwell (Con)]

My Lords, I will make a brief comment on these amendments. In the Committee’s discussions so far, the noble Lord, Lord Eatwell, has made great play of the fact that the OBR suggested that the overall Budget measures would increase employment. The noble Lord is not in his place but, if he were, I am sure that, as an economist, he would agree that it is important to have the right counterfactual. Of course, what the OBR was not looking at in the Budget was the exact impact of taking the £20-odd billion from the national insurance rise and spending that money. It was looking at spending a lot more money; the Government are raising expenditure by £142 billion over the next five years, in excess of what they are raising in additional taxation.