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.