National Insurance Contributions (Secondary Class 1 Contributions) Bill

Lord Frost Excerpts

2nd reading
Monday 6th January 2025 Lords Chamber

[Lord Frost (Con)]

My Lords, we have heard a lot from the Minister and just now from the noble Lord, Lord Eatwell, about the alleged terrible situation in which the previous Government left the current Government. I have been known to criticise the previous Government myself, and there is a degree of truth in the criticism that we were too ready to resort to spending and to tax and national insurance increases. Indeed, I spoke in Cabinet against the previous effort to increase national insurance; it was one of the reasons why I left that Cabinet a few months later. However, in mitigation of the previous Government and some of their predecessors, that was not unique; it followed the trend established over the past 20 or 30 years to increase the size of the state, push up taxation and spending, and increase the pressure on the private sector.

It is that reality of the past 30 years that makes what we have heard from the Minister and the Government more broadly—the suggestion that they are fixing the foundations and marking a moment of change—so ludicrous and ridiculous. The Government like to claim that they are marking a different path, when the truth is that they are just doubling down on the path that has been set for the past 30 years. There is no change in this at all other than in size and in the energy driving us to a larger state, with higher taxes and higher spending.

The noble Lord, Lord Eatwell, talked about understanding arithmetic, but the arithmetic that I find hard to understand is why it is thought to be a change of direction when the plan in this Budget is to push up public borrowing £20 billion or £30 billion higher than it would have been under the previous Government’s plan, even though taxation is going up by another £30 billion or £40 billion every year. Despite all that, the deficit is still 1% of GDP higher than it would have been at the end of this fiscal period under the previous Government. How is that fixing the foundations? It is doubling down on the trend and making the situation worse. We know that the consequences will be lower growth, less dynamism and lower wealth for the country as a whole.

The specific tax change that we are looking at in this Second Reading debate is a major part of that problem. It is a well understood principle in economics that if you tax a thing you get less of that thing, and if you tax jobs you will get fewer jobs. Even now, Britain has one of the lowest tax wedges in the OECD—the gap between what employers have to pay employees and what they actually receive. European economies with typically higher tax wedges have many more problems with youth unemployment and long-term unemployment. Countries with very high tax wedges, such as Germany, Spain and Italy, have long-term unemployment more than one-third higher than ours. Spain’s is two-thirds higher, Belgium’s is nearly twice as high and Italy’s is highly still. With these measures—and the new employment regulation that is coming our way soon, no doubt—we are heading the same way too. Hiring is falling already, at 23% lower than a year ago. The OBR forecasts a lower participation rate—the “drag” from employer national insurance contributions, as it puts it, which boosts the decline in the participation rate by 50%.

The Government know perfectly well that this effect exists, even if they do not want to acknowledge it more than they have to. We can tell that they know that it exists because they are having to compensate the public sector to mitigate the problem. In so doing, they are reinforcing a divide that already exists between the public and private sectors. My noble friend Lord Forsyth alluded to this just now. Wages are already higher in the public sector and pensions are much more generous. Now the Government are beginning to establish the principle that the public sector should be protected from the consequences of the Government’s own decisions—just like the French nobility before the revolution, who did not pay the taxes imposed on everybody else. It did not end well for them and it will not end well for the Government, or for this country, if they create a privileged class that does not contribute to economic growth but just feeds off it.

As a result of this, we are seeing much more complexity, yet we need simplicity, not complexity, in the way our fiscal and tax systems work. The principle that is being established means that if you are fortunate enough to be on the payroll of the public sector you are shielded from some of these changes, but if you are unlucky enough merely to supply the public sector—for example, as has been said, a car firm taking special needs patients to hospital—or if you merely carry out public sector functions, such as hospices, then you will be on your own. As a result, we are going to see—indeed, we are already seeing—ever-increasing and, in many cases, entirely reasonable demands for exemptions or changes to the rules from those who happen to fall beyond this boundary. There will be new reasons to lobby, new reasons to generate complexity and new reasons to push up costs over time.

The last thing we need is more taxation. I urge noble Lords to look at the OBR’s fascinating historical public finances databank—I find it fascinating, anyway. It shows that, after the Autumn Budget, we now have public sector spending at around its highest level ever, outside the world wars and the pandemic, and taxation is at the highest level it has ever been in this country, even during wartime.

It is true that we are seeing huge strains on the public sector—courts, schools, roads, transport and so on. That is obvious, but we are seeing those not because taxes are too low but because growth is too low. We are exhausting the capacity of the economy to pay for the public goods that we all want to see. There is only one way to resolve that problem, which is to get the boot off the private sector and allow it to generate wealth. The Minister spoke of stability. We all want stability, but there are different kinds of stability and, if we are not careful, we are going to get the stability of the morgue in the British economy. We need activity, dynamism, change, energy and growth. Reversing the trends that we are on against all those things is of huge importance. That, by the way, is why it is so important that Committee on this Bill should be on the Floor of the House.

There is no manifesto commitment to this measure and it is right that we do everything possible to reduce its impact. The non-crisis British state is the biggest it has ever been, and any responsible Government will be trying to reduce it—for example, to what some, at least, regard as the halcyon days of the first Blair term, when the state was a whole 10 percentage points of GDP smaller and, not coincidentally, trend growth was a whole 1% of GDP higher. The current route of spending more and producing less will drive people out of work, crush growth and lead this country to penury, and these NIC measures will take us one further step down that road. The Government need to think again.