Budget Statement

Lord McKenzie of Luton Excerpts

Tuesday 14th March 2017 Lords Chamber

[Lord McKenzie of Luton (Lab)]

My Lords, it is a pleasure to follow the noble Lord, Lord Marlesford, and to hear his imaginative proposal. I wish him luck in his discussions with the Chancellor.

We are entering unchartered waters as we, sadly, start the process of leaving the EU, but it is an opportunity first to take brief stock of the health of the economy and the stewardship of this Government. As others have said, the UK’s position can be characterised by sluggish growth, soaring personal debt and stagnating pay. Some 6 million people earn less than the living wage and 4 million children are in poverty, two-thirds of them in households in which at least one parent works. Zero-hours contracts abound, with all the insecurity they can bring. The OBR reports that business investment remains subdued, inflation is on the rise and our public services teeter on the brink. We have a housing crisis.

The Budget does nothing to change this. Certainly, the funding for skills is to be welcomed, although it will hardly address the FE budget cuts that have been endured since 2010. The additional £2 billion for social care, albeit spread over three years, will help, obviously, but there is nothing of substance which will help the crisis in the NHS. Apart from the modest change to the universal credit taper rate, the Chancellor has done nothing to unpick the brutal regime of social security cuts—to ESA and tax credits, especially—that is the legacy of his predecessor and which continues to drive families into poverty. Someone said earlier—I think it was the noble Lord, Lord Higgins, who is not in his place—that there is no alternative but to live with austerity. I say: who has to live with it? It is never us but always somebody else.

A report produced by the Chartered Institute of Taxation, the IFS and the Institute for Government set out 10 steps to making more effective tax policy. It is to be recommended to the Chancellor. To be fair, he started off rather well by adopting its first recommendation and committing to eschew two fiscal events each year. The report suggests that Budgets themselves have become engines for the proliferation of measures, and instances the past five years, when Finance Acts totalled at least 600 pages every year. Another recommendation was to establish clear guiding principles and priorities for tax policy at the start of a Parliament to deter a Government from falling into ad hoc approaches. Of course, this is to be distinguished from the practice of ruling out any changes to key tax rates for effectively the whole of a five-year Parliament and then finding that circumstances cause the commitment to be broken or some slippery wording to be deployed to justify a departure.

Of course, this brings us to the issue of national insurance contributions for the self-employed, in particular the increase in class 4 contributions from next April. There had been prior consultation—I think the noble Baroness, Lady Altmann, referred to this—around national insurance and the self-employed as a consequence of the decision last year to scrap the regressive flat-rate class 2. That was a recommendation of the Office of Tax Simplification. Because the class 2 rate was the route for the self-employed to gain access to some social security benefits—bereavement benefits, contributory ESA and now the single state pension —replacement arrangements are needed and changes have been proposed to class 4 NICs and class 3 voluntary NICs as the new route to those benefits.

The Government responded to the consultation but, so far as I am aware, at no stage was it suggested that the required changes or the earlier improved access to the new state pension would come with a price tag of increased contributions, nor, as is now suggested, possibly wider access to the social security system. This year’s 2% hike in the Budget seems to have been very much an afterthought—a piecemeal approach running contrary to the principles of sound tax policy-making.

That the growth in self-employment is eating into government tax collections, as the noble Lord, Lord Willetts, said, seems beyond doubt. This is in part fuelled by the growth of the gig economy, which is defined in the Oxford Dictionary as,

“A labour market characterized by the prevalence of short-term contracts or freelance work as opposed to permanent jobs”.


This work is typically available through digital sharing platforms.

Prima facie, this sounds like classic self-employment, but things have not proved to be so clear-cut, as my noble friend Lord Beecham said. The role of the platform as a quasi-agency can have ramifications, as Uber has discovered. Indeed, it is suggested that for employment law there are now three categories of individual—employees, the self-employed and workers—but for tax purposes there are only employees and the self-employed. Of course, there is also the director-controlled company, which has seen the reduction in the dividend allowance.

At present, the self-employed are not entitled to the benefits of auto-enrolment, the national living wage, sick pay, maternity, paternity and adoption pay, holiday pay and redundancy and unfair dismissal protection. The employed do, as, for the most part, do workers. So far as national insurance is concerned, erstwhile employers escape the 13.5% employer contribution if they can persuade people to be self-employed. Where to strike the balance in terms of the respective levels of national insurance contribution requires proper analysis, and I hope that the Matthew Taylor report on employment practices will aid that determination.

As for the current Budget provision, it can be argued that, taken together with the abolition of class 2 contributions, the Budget proposal is progressive up to the level of the upper profits limit. This is the view of the Resolution Foundation, as we have heard. It says that the bottom 54% of self-employed earners will pay less or nothing, while those earning over £16,250 will pay more.

However, this does not justify raising £2 billion of revenue from this source, who by definition are lower or median earners, when the Government are continuing with arrangements which cost taxpayers as a whole but benefit the better-off: a £20,000 limit on ISAs and inheritance tax cuts, to name but two. Spreadsheets notwithstanding, this has been a muddled Budget.