National Insurance Contributions Bill

Lord McKenzie of Luton Excerpts

Wednesday 2nd February 2011 Lords Chamber

[Lord McKenzie of Luton]

My Lords, I thank the Minister for his explanation of the Bill, which, he will have gathered from proceedings in another place, we will not seek to oppose. Notwithstanding that, there are a number of issues that we intend to press.

First, there is the economic context of the Bill. We have heard about the Government’s proposals relating to the deficit. Objective observers would acknowledge that when the coalition Government took office, the country had spent almost three complete quarters out of recession and borrowing was falling. Our approach to the deficit was, and would be, to ensure that there was sufficient private sector momentum before the public sector cuts began, cutting back more carefully with genuine protection for the poor and vulnerable. For us, jobs and growth need to come first, which is why we oppose the VAT increase and opted for increases in national insurance contributions—but not until April 2011. That is why we now support the increase in national insurance rates included in the Bill. We proposed it when in Government, as we have heard, as part of the tough choices that had to be made to tackle the deficit, but we were clear that those with earnings under £20,000 would be protected by a rise in the primary threshold. Given the vehemence of the attack on our proposals during the general election, it is somewhat surprising that we see the Government retaining these proposed increases and retaining them without fully increasing the secondary threshold for employers, which it was purported would negate the effect of the increases for employers. Can the Minister confirm that the amounts to be raised from employers from the increases proposed in the Bill will be greater by some £1.4 billion than the savings employers will obtain from increases in the secondary threshold? I suggest that praying in aid the cost of the increase in the income tax personal allowance does not help, because that is focused on individuals’ circumstances and because it is dwarfed by the cuts to benefits and tax credits that the IFS said will lead to dramatic increases in poverty—some £18 billion, focused on the poorest.

So much for the allegations that increasing national insurance rates will kill off the recovery. It is the arrival of the VAT hike, the onset of deep cuts in public expenditure, the certainty of job losses in the public and private sectors and the plummeting of consumer confidence that are endangering growth. As the CIPD stated, the VAT rise could be considered more of a tax on jobs than the rise in employers’ national insurance, but this Government have now given us both. We should be greatly concerned that Britain’s recovery has now ground to a halt.

The increases in national insurance rates in the Bill are consistent with what we proposed—a 1 per cent increase on employer and employee contributions, applicable to class 1 and class 4 contributions. The Bill also provides for a 1 per cent increase in the additional rate paid by employees and the self-employed above the upper earnings limit. The proceeds of this additional rate, introduced in 2003, have hitherto been used entirely to contribute to NHS funding. I shall say more on that later.

Before moving on, though, one might just record that it is unusual to have debates on issues of national insurance without at some stage a discussion about the contribution principle, the merging of national insurance with income tax and the size, scope and nature of the surplus in the National Insurance Fund. I will resist it for this afternoon, except to inquire how the Government see the relationship of national insurance to income tax thresholds going forward.

Back in 2007 it was proposed that simplification of the tax and national insurance system could be achieved by alignment of the income tax personal allowance threshold with the employee and employer national insurance thresholds, and the higher-rate tax threshold with the national insurance upper earnings limit. For a variety of reasons this has fallen by the wayside, but where does this aspiration stand now? Anywhere?

A critical relationship is that between the lower earnings limit and the personal allowance threshold. If there is the prospect of the personal allowance heading for £10,000 and the LEL being dragged upwards, this has significant consequences for the contributory principle and other issues for those on low pay and with part-time jobs, the majority of whom will be women. Perhaps the Minister will let us have his views.

As we have heard, the second part of the Bill covers the introduction of the employers’ national insurance holiday for certain new businesses up to a limit of £5,000 per employee for up to 10 new employees. While we see merit in this proposal, it hardly amounts to a plan for growth. We have some concerns, particularly around the targeting of this initiative. A key cause for complaint in the other place, which we echo, is the crude exclusion of businesses that are principally carried on in Greater London, the south-east region or the eastern region. Excluding these areas from its application creates unfairness and unnecessary bureaucracy. It will be complicated enough to ensure that the holiday is focused on genuine start-ups and new employees, without the further complication of having to ensure that the principal place at which the business is carried on is not in any of the excluded regions.

It seems somewhat inconsistent to define excluded areas by reference to regions when the Government are themselves in the process of scrapping regional development agencies and calling forth local enterprise partnerships, some of which will cut across regional boundaries. Take the case of Luton in particular. It will be part of the South East Midlands LEP, which includes parts of three regional areas, two of which are excluded from benefiting from the start-up incentive while one is not. Where is the sense in that? If the enterprise partnerships are supposed better to reflect economic communities, how will one handle having part of its area potentially benefiting from the holiday and part not?

The Minister will no doubt have read the contributions of honourable Members in another place, identifying areas in their constituencies that have higher levels of deprivation and unemployment or higher levels of reliance on public sector jobs, but which are excluded under these definitions in comparison to some which are included. My honourable friend David Hanson in another place identified more than a dozen constituencies that are in the top 60 constituencies for public sector employment but are not covered by the scheme. Examples were provided of areas that included pockets of deprivation that could benefit from the scheme, but their disadvantage is subsumed into wider regional boundaries. Of the top 12 most deprived local authorities, seven are excluded.

Noble Lords will doubtless also have received representations from Thames Gateway, a hugely important regeneration project which is also to be denied the advantage of this scheme. This makes clear that within the Gateway partnership area there are areas of extreme deprivation and high reliance on public sector involvement. The basis for excluding certain regions rests on identifying regions that are particularly reliant on public sector employment, although we have heard no evidence that this automatically equates to a weak private sector. Using this as a criterion also seems to overlook the growing blurring of the boundaries between the public and private sectors. The fact that a local authority may have outsourced certain activities to the private sector may not make that provider any less vulnerable to cuts. Outsourcing aside, much of what the public sector is responsible for is provided by the private sector, especially on capital projects, and where Building Schools for the Future plans have been savaged, for example, might identify areas of public sector dependence which have become vulnerable.

Any scheme of this nature which is time limited, confined to start-ups, restricted geographically and applicable to only some employees will inevitably need robust rules. On the face of it, the Bill includes clearly defined boundaries as well as a general anti-avoidance provision. We will want to test these in Committee. However, the more complex the scheme, the greater the cost of implementation and the less the likelihood of businesses availing themselves of the benefit. Removing the excluded regions would be one way of simplifying the contributions holiday. The Government estimate that there will be take-up by some 400,000 employers for 800,000 employees, with a potential benefit of £940 million, as we heard from the Minister. It is anticipated that an extra 240 full-time employees would be required to operate the scheme. Of course, the clock is already ticking as the scheme is retrospective to June 2010 and has just two and a half years to run. Will the Minister please update us on the take-up of the scheme to date and what monitoring and reporting arrangements are planned? Early reconsideration of the scope would be in point should the aspiration for take-up not be realised.

Our concern is about the targeting of this initiative. In its defence the Minister will no doubt argue that there is only so much money for the scheme and to extend it would be costly. That does not necessarily follow. It could be spread in a different way. The Minister might also consider how much of the expenditure is dead weight when it is available for areas where unemployment is low and business survival rates are strong.

We have a further concern about the Bill which is prompted by Clause 3. This reduces the amount of the additional primary and self-employed contributions which go to the NHS. These contribution rates are increased by 1 per cent and apply from a lower starting point with the UEL reduced to £817 per week. Hitherto, the whole of the amount raised has been hypothecated to the NHS, but the Bill reduces this to just 50 per cent. This is a proposition which the Government may regret. The coalition agreement pledged to,

“guarantee that health spending increases in real terms in each year of the Parliament”.

Noble Lords will be aware that on any objective analysis when taking account of the diversion of £1 billion of funding for social care, the NHS is facing a real terms cut over the spending review period, and this at a time when it is faced with government imposed increases in VAT and the impact of inflation on the costs of treatment as well as the costs of the planned reorganisation. Is not the reality that this is in danger of becoming another dishonoured coalition pledge? By this reduction in the rate of hypothecation the Government have not made it easier for themselves.

As I have said, we will not oppose this Bill. We support the national insurance increases. However, the national insurance holiday is poorly targeted and should be improved and changes to the rules on NHS hypothecation are a missed opportunity. We will take these matters further in Committee.