National Insurance Contributions (Secondary Class 1 Contributions) Bill

Lord Moynihan of Chelsea Excerpts

2nd reading
Monday 6th January 2025 Lords Chamber

[Lord Moynihan of Chelsea (Con)]

My Lords, it is a great pleasure to follow my noble friend Lady Monckton of Dallington Forest. The pleasure is allayed slightly by the fact that I cannot hope to rise to the excellence of her speech, which I hope the Minister observed very carefully—but perhaps he was too busy.

Like my noble friends Lord Howard of Rising and Lord Mackinlay of Richborough, I declare an interest as an employer. With the proposal to further raise employers’ NICs, the Government seem to want to pursue, in a manner that is hard to understand or explain, yet another way to damage the economy. I offer the Government a few morsels of attempted sanity. Taxing business at higher rates—making it more difficult to start up, maintain or expand a business—was, I am very much afraid to say, tried by the recent Conservative Government over the last few years and it did not work. In the period 2023-24, the economy ground to a halt. Now this new Government are trying the same approach. How can we possibly expect the outcome to be any different this time?

Over the past 18 months or so, while doing research for a book I have been writing, I have studied the available literature on the impact of taxes on economic growth. The clear consensus is that the taxes that hit the economy the worst are taxes on business and the business taxes that have the most negative impact on employment are—surprise, surprise—employment taxes. The clue is in the name employers’ NICs: “employers”; you know, the ones who employ people. Many employers would be happy if they could employ others merely out of the goodness of their heart, but that is not how the world works for the private sector. To keep a private sector enterprise going, a profit must be made. For that, taxes cannot be too high or else the cost of employing an employee becomes prohibitive, the business loses money and then it has to close down. So the first law of tax is: do not tax a business so high that the employers cannot afford to employ the employees. Yet that is exactly what the increase in employers’ NICs does.

Why on earth have our new Government decided to raise employment taxes to a new high? I discern three possible reasons. The first is to achieve economic growth. That is what the Government say their number one objective is, so in theory they must have thought that increasing these tax rates would increase economic growth. The second possibility is a less noble one: to find the money to pay off their allies. After all, politics involves trade-offs, so perhaps that is why they need to do this. The final possibility is that it is just not them in charge. Rather, they are in the grip of the fabled Treasury orthodoxy, taking their orders from officials at the dreaded OBR and the Treasury.

Let us look at these three possibilities. The first is that they are doing it to achieve economic growth. That has certainly been the Prime Minister’s and the Chancellor’s chant—“growth, growth, growth”—both during the election and ever since. The trouble is that this Government have never laid out their theory of what actually creates growth. Beyond discreditable tropes about green jobs, the numbers of which will have little impact on the long-term economy, the Government have been unable to figure out what they have to do to achieve growth.

However, the answer is standing clearly in front of them. The repeated conclusion of every study on growth is: to grow an economy, you need government expenditure in the low 30 per cents, or less, of GDP, with tax revenues at around the same level; and you need light regulation that allows businesses—indeed, all enterprises—to get on with the job of providing the goods and services that the market wants, at a decent price and good quality, without having to spend all their time jumping through regulatory hoops. That is it. Economies with public sector expenditure levels in the mid 40 per cents of GDP, such as ours, taxes at the same high rate and ever-increasing regulation just do not grow fast, if at all. If this new Government really wanted to grow fast, they would be full of plans to shrink expenditure, to tax less and to regulate less. On all three dimensions, they are doing the opposite.

What is the conclusion? Either the claim that the Government are all for growth is just a chant or a slogan and not really meant, or they are so inept that, despite truly wanting the economy to grow—you have to believe that they do—they have no clue that increasing employers’ NIC will have exactly the opposite effect. I wrote an article for a Sunday newspaper yesterday, citing the instance of a friend running a 35-person high street business who, just to stay afloat after these tax hikes, has to fire two of his employees. He had planned to raise his headcount by two before this. The comments section below my article had entries from business owners claiming that they are in similar circumstances—having to fire people—or, worse, saying that the higher taxes mean, as my noble friend Lady Monckton described, that they have to close down their entire business.

As an interposition, I spoke to this friend this morning. He told me that he has been having difficulty figuring out how to fire two people. Obviously, it would not be great on either of them but, luckily, one of them resigned today. I said, “Where’s that employee going?” In an absolutely uncanny echo of what my noble friend Lord Horam said, my friend said, “Well, she’s gone to work for a local council”. She is being paid more. She can work from home for three days a week. On top of being paid more, she is getting that wonderful golden defined benefit pension. What else? Oh yes, she gets a year’s paid maternity leave.

Where is the money coming from that allows local councils and the Government, and the public sector in general, to pay for all of this? The money is not there. My noble friend talked about the fact that we are now below the middle of the advanced economies in GDP per capita. A while back, we were vying with America for the best GDP per capita in the world.

The noble Viscount, Lord Chandos, probably would have described the situation of this new public sector employee as fair, because, after all, that is what she would need for a great life. However, the money is not there for what the Benches opposite always like to describe as “fair”. The noble Lords on the Benches to my left have an inexhaustible list of societal needs that must be paid for. The noble Lord, Lord Eatwell, rightly decried the decline in our Armed Forces expenditure. But the money is not there.

Why is it not there? It is precisely because of the high-tax, high-spend, high-regulation policies that Governments—on both sides of this House, I am afraid—have pursued over the last 25 years. During that 25 years we have not grown, precisely because of spending money on what was fair and what was needed, rather than spending money that we actually had. As a result, our economy has not grown. Had we grown more—say, at the same rate as the United States did during that time—our economy would now be 40% larger than it is right now. The money would be there. There is your needed money—the money that comes from economic growth. There is the economic growth which this Government’s tax increases will instead throttle.

It is not just my friend and his small business. As has been described today, millions of organisations are affected by this tax raise, not just SMEs but charities, NHS general practices, the arts and so on. Employment losses will, over time, be in the hundreds of thousands. I offer the Government a gentle hint: economic growth comes—despite a valiant attempt by the noble Lord, Lord Eatwell, to assert otherwise—from increases in employment, not decreases.

The second hypothesis as to why the Government see it as necessary to impose this NIC hike is that, having paid off their allies so lavishly in the first few weeks after the election, they now need to find the money to pay for this; a 15% pay rise for train drivers and a 22% pay rise for junior doctors, and still those friends of theirs threaten to go right back on strike. With friends like these, I need say no more.

It is certainly true that these expensive commitments—along with so much money about to be poured down the drain on placating the green crowd and to satisfy other allies who think that the answer to the world’s problems is more and more regulation, so that a new regulator or quango is being brought into existence for every week so far that Labour has been in power—mean that an awful lot of money is being spent. With the Civil Service expanding in its thousands by the week, there are no savings in sight to help the Government pay for all these extra commitments.

We come to the third and final hypothesis: that the Government have been told what to do. Without any serious experience in this area, they therefore have no option but to succumb to their officials, but that in turn is driven by the OBR, which knows not much more about business and the economy than do the Government. It is the blind leading the blind.

The Government have created this problem. They increased expenditure in their Budget by £70 billion. Even with an increase to employers’ NICs, only half of that increase would be covered by additional taxes, and even that amount is true only if you believe the estimation of how much extra tax will be collected. It is, in fact, even worse than this. There is a large extra amount of expenditure that the Government and the OBR have persuaded themselves can be categorised in the national accounts as some form of investment, so that it is not included in the published deficit numbers. But every penny of that so-called investment money will have to be found through additional borrowing, which, added together, brings the additional level of borrowing needed to pay for all this to an extra £50 billion or so—and that is assuming that the economy grows at forecast, which an NIC hike makes quite unlikely.

The OBR asserts that, on net, some £15 billion will be raised from this NIC hike. It acknowledges, albeit to far too small a degree, that employment will decline as a result of this tax increase. That should make Labour hang its head. If the Government were to abandon the NIC raise, the OBR says that that would create a further £15 billion hole. The Government are doing what they have been told to do, and thus they proceed with this NIC raise.

The Growth Commission has contradicted the OBR’s calculation and calculates that the long-term impact of this tax increase will be negative £18 billion—and that is even before you get into the social and economic disruption of large numbers of people being laid off. To answer the noble Lord, Lord Macpherson, who is not in his place, and the noble Lord, Lord Eatwell, you pay for this by not doing it. Surely, in his extensive and distinguished public life, the noble Lord, Lord Macpherson, must have understood that ever-increasing tax and spend just does not work.

What is the conclusion? We have a new Government. They came, they saw, they paid off their allies. Without clear detail they claimed a pre-existent £22 billion black hole, but this claim served only to make their options more constrained. They have accepted what they have been told to do by their officials, but imposing this tax is going to make the economy’s position, and theirs, much worse. They still do not appear to have a clue as to what they need to do to get economic growth going in this country.

[Baroness in Waiting/Government Whip (Baroness Anderson of Stoke-on-Trent) (Lab)]

My Lords—

[Lord Moynihan of Chelsea (Con)]

I am almost finished.

I earnestly entreat the Government to set out on a search for an economic growth plan—

[Baroness Anderson of Stoke-on-Trent (Lab)]

My Lords, I am so sorry, but the noble Lord has now spoken for over 15 minutes. I suggest that he bring his remarks to a close.

--- Later in debate ---

[Lord Moynihan of Chelsea (Con)]

I just informed the noble Baroness that I was about to finish, and I would have finished by now had she not interrupted a second time. I remind her that it is an indicative time, and one interruption—

[Baroness Anderson of Stoke-on-Trent (Lab)]

My Lords, I am so sorry, but the Companion states that Back-Bench contributions are limited to 15 minutes.

[Lord Moynihan of Chelsea (Con)]

I thank the noble Baroness. It is an indicative time. I will finish.

[Noble Lords]

Order.

[Lord Moynihan of Chelsea (Con)]

I will finish. I entreat the Government to set out on a search for an economic growth plan that relies on the facts about growth, not on the unsupported feelings that currently seem to drive their decision-making. I thank noble Lords for their attention.