Inflation

Lord Macpherson of Earl's Court Excerpts

Monday 1st July 2019 Lords Chamber

[Lord Macpherson of Earl’s Court (CB)]

My Lords, I declare an interest: in two weeks’ time, I begin to receive a Civil Service pension that will be uprated by the consumer prices index.

I congratulate the noble Lord, Lord Forsyth, and his committee on a rigorous and high-quality report, and on securing this timely debate. Public confidence in statistics is essential in a liberal democracy. I recall the words of Sir Michael Scholar, the first chairman of the independent UK Statistics Authority, who, incidentally, was appointed by the noble Lord, Lord Darling. He said:

“For me, good statistics is like sound money or clean water, it is an absolute necessity and if you do not have it things go seriously wrong”.


When it comes to economic statistics, measuring the rate of inflation is perhaps the most important statistic of all. Maintaining the value of a benefit, tax or charge has been hardwired into our social system since the Rooker-Wise-Lawson amendment of 1977.

I fully recognise that estimating the overall price level at any time is not easy, and I have considerable sympathy with the statisticians at the Office for National Statistics who must wrestle with this problem. Nobody has the same spending pattern. Expenditure tends to vary with age and income. Consumer habits and technological innovation mean that spending patterns are continually evolving. There is also a regional dimension, in that a lettuce will inevitably cost more on Uist than in Kent.

I was Permanent Secretary to the Treasury when the UK Statistics Authority, on the advice of the National Statistician, withdrew the retail prices index’s status as a national statistic in January 2013. At that time, it seemed that the RPI’s days were numbered. I knew that there would be a transition before the ONS and the Government alighted on a new arrangement, but six and a half years on I am surprised at how little progress has been made. I can understand the Treasury dragging its feet. At a time of fiscal consolidation, index shopping was helpful if, as the noble Lord, Lord Forsyth, pointed out, opportunistic, but there comes a point where such an approach damages the wider credibility of government policy, and we are now past that point.

I thought the UKSA handled the issue in textbook fashion in 2013, but since then it has been less sure-footed. It is no longer credible for the UK Statistics Authority to hide behind the Government. It needs to be clear about what is the best measure of inflation, and it needs to move the retail prices index into line with that measure.

Personally, I think the committee has been rather too kind to the RPI as currently constituted. It is not just the clothing formula which is the problem; it is the use of the Carli formula more generally. No other country uses it. Canada dropped it for sound reasons in 1978. Everybody else, with the exception of Slovenia, uses the Jevons formula. As Paul Johnson said in his 2015 review,

“Carli should not be used in any index aiming to achieve a good estimate of changes in consumer prices”,


and further it,

“is not suitable for use”.

Dr Ben Broadbent in his evidence to the committee reinforced the case against Carli saying that its failings,

“have been evident for a century”

I know this country welcomes exceptionalism, but we really ought to adopt international best practice. I would therefore advise against keeping the Carli index on life support. It is better to put it out of its misery once and for all.

Dropping Carli will have big implications for people who use the RPI. Having criticised the UK Statistics Authority for slowness, I should give it credit for its approach to consultation hitherto, and I hope it will consult further as and when—I hope it is soon—it reaches a definitive view on the way forward. I recognise that the UKSA is independent of government, but I would be grateful if the Minister could confirm that consultation lies at the heart of the UKSA’s and the Government’s strategy when it comes to change.

A reformed index would mean a transfer of resources to rail travellers and graduates with outstanding loans. The Government, understandably, have not recognised these groups as priorities hitherto, given competing calls on taxpayers’ money, but it is always open to the Government to change the relevant uprating formulae, just as they introduced the triple lock to underpin the state pension.

This brings me to the vexed issue of index-linked gilts. My recollection is that this was the swing factor when the Carli problem first emerged in 2013. I can see why the Treasury and the Debt Management Office do not want to disrupt the gilt market—it is to their credit that it is one of the most efficient markets in the world—but here the committee’s report is persuasive. First, whether or not the ONS changes the basis of the RPI, the market is sufficiently big—and it is likely to get bigger with current spending proposals—to be able to bear CPI-based issues existing alongside gilts indexed to the RPI. As the committee’s report makes clear, there are only three index-linked gilts left with a requirement that the Treasury buys them in at par if there is an index change. All will have expired by 2030, and even if the Government had to buy them in, I do not believe that would prove too disruptive, not least because at current prices few, if any, holders would want to exercise the option.

I urge the UK Statistics Authority and the Treasury to act. Maintaining the status quo is increasingly untenable.

National Insurance Contributions (Termination Awards and Sporting Testimonials) Bill

Lord Macpherson of Earl's Court Excerpts

2nd reading (Hansard): House of Lords
Wednesday 26th June 2019 Lords Chamber

[Lord Macpherson of Earl’s Court (CB)]

My Lords, I will speak briefly in support of the Bill. It would be poor form not to, since the Bill has its origins in George Osborne’s last Budget, when I was his Permanent Secretary.

In many ways, it is a textbook piece of tax legislation. It originated from a proposal from the Office of Tax Simplification and reflects extensive consultation. I recognise that increasing tax on redundancy payments will not satisfy all, but if they are subject to income tax, it follows logically that they should be subject to national insurance. Who knows? A higher tax charge might deter unnecessary redundancies.

Nearly every Government I worked for at the Treasury looked at bringing income tax and national insurance closer together. I remember a review in the mid-1990s, encouraged by the noble Lord, Lord Heseltine, which I suspect was led by the noble Lord, Lord Young, as Financial Secretary to the Treasury. However radical their initial intentions though, Governments tend to shy away from wholesale reform, understandably scared off by the number of winners and, more importantly, losers. The difference in assessment periods and tax base of national insurance and income tax is problematic. National insurance is assessed weekly; income tax is assessed annually. National insurance is payable only on earnings; income tax is payable on savings and rental income too. Income tax includes a number of reliefs, not least on pension contributions; national insurance does not. National insurance provides pension entitlement; income tax does not. National insurance is not payable by employees over the pension age; sadly, income tax is payable until you die. The income tax system is progressive, marginal rates increasing with income; national insurance is not. Indeed, once earnings go above the upper earnings limit, the employee’s marginal rate falls from 12% to 2%.

Therefore, although there would be substantial administrative gains if income tax and national insurance were brought together, and the tax system would become altogether simpler and more intelligible for citizens, Governments generally conclude that full alignment is altogether too difficult. Indeed, I wonder how much Governments really want it. National insurance rates have almost doubled during my working life, while successive Governments have taken credit for reducing the basic rate of income tax from 33% to 20%.

All that said, it is still possible to create greater alignment. The Bill represents a small step in that direction. I would be grateful if the Minister would confirm that the Government remain committed to finding further ways of bringing income tax and national insurance closer together. It is right in principle that sporting testimonials and large redundancy payments are subject to income tax. If that is the case, they should also be subject to national insurance.

It is a pity that only employers’ national insurance contributions—class 1A—are being applied. There is a strong case for applying employee national insurance contributions as well. No doubt the Government will argue that there are precedents for exempting certain types of employment income from class 1. For example, benefits in kind, such as a company cars, are subject to class 1A but not class 1. I encourage the Government to look at this again at some point in the future. The national insurance system should not discriminate between different forms of remuneration. Potentially, it would bring in some useful additional revenue, which, to judge by the spending commitments of the candidates to be the next leader of the Conservative Party, will be needed.

In seeking greater alignment between national insurance and income tax, I encourage the Government to keep two areas in their sights. The first is self-employed earnings, where the Office of Tax Simplification recommended abolishing class 2 and raising class 4. Sensibly, the Chancellor came forward with a proposal on this in 2017, but he was forced by a strange coalition of Brexiteers and the official opposition to withdraw it. At some point, maybe many years hence, a Government will be elected with a rather more compliant majority than exists today. At that point, I hope Treasury Ministers will have another go at simplifying the system and creating greater alignment between employee and self-employed national insurance.

Secondly, by bringing the starting point for income tax and national insurance closer together, Gordon Brown achieved broad alignment in the early 2000s. For the rest of that decade, the annualised lower earnings threshold was maintained in line with the income tax personal allowance. The coalition Government chose to prioritise increases in the income tax allowance. The national insurance threshold has been left behind. At some point, I hope the Government will seek to close the gap. I am encouraged that both candidates in the Conservative Party leadership election have advocated a rise, although they have not yet said how they propose to fund it. I know closing the gap fully would be very expensive, but if in future the Government have the resources to cut taxes, I hope they will make this a priority. Meanwhile, I strongly support the Bill and wish it safe passage.