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National Insurance Contributions Bill

My hon. Friend makes a good point. We have been rather consensual this afternoon, as we were in Committee, when discussing areas of disagreement between us and the Government, but some of the debate on Second Reading was slightly more feisty, and the accusation was made that the Conservatives, in raising concerns, were on the side of the wealthy. Actually, as my hon. Friend points out, the people who will lose out as a consequence of both the package as a whole and the measures dealing with national insurance contributions are those who earn about £39,000 to £40,000 a year. That is certainly what the Institute for Fiscal Studies concluded. So we are talking about police officers—they are not receiving a full pay increase as it is—senior nurses and teachers, not the very wealthy. It is middle England, to some extent, that will suffer as a consequence of the increase. I want to make it clear that we do not object to aligning national insurance contributions with higher rate income tax. The idea seems sensible, and I made the point earlier that debate on the matter has been led by my hon. Friend the Member for Tatton (Mr. Osborne), the shadow Chancellor. The Forsyth report, which advocated something similar, has been influential, but those proposals were based on the use of fiscally neutral measures. As my hon. Friend the Member for Gravesham (Mr. Holloway) made clear, the measures in the Bill are not fiscally neutral. They are intended to raise more tax revenue, which we know the Government need to do. I shall not stray too far into yesterday's Institute for Fiscal Studies report, which showed that there is an £8 billion black hole in the Government's finances, and that taxes will need to increase to ensure that the Prime Minister's fiscal rules are met; the point is that the measures are primarily a tax increase, and not one that will be paid by the wealthy. Looking more broadly at the Budget 2007 package—I shall not dwell on this point—we see that it is the low earners who make up the majority of those who will lose out. We know that 5 million households will lose as a consequence of the measures. I do not think that we ever got an answer to the question asked at a Committee evidence session about how many of those 5 million households would be in the £39,000 to £40,000 income range. I do not know whether the Financial Secretary has an answer, but it would be interesting to know how many households within that band will lose out. Of course, it is the way in which national insurance contributions are being aligned with higher rate income tax that will cause that loss. The second element of the Bill is the separation of the upper accruals point from the upper earnings limit. We all speak of the consensus on all sides about the Turner package of pensions reform, and there is a fundamental consensus on the thrust of what we need to do. The reason why we have expressed concern about what the Government propose in the Bill is not because of any abandonment of the consensus, as was alleged on Second Reading. We believe that there should be a restoration of the earnings link to pensions, and have advocated that idea for some time. We have also accepted the principle of separating the upper earnings limit from the upper accruals point as part of a package—as part of a set of proposals that would enable us to finance the restoration of the earnings link. However, what we see in the Bill is the breaking up of that package, and we are legislating now on separating the upper accruals point from the upper earnings limit at least four years before the implementation of the restoration of that link. That will not happen until 2012, the date that the Government are working on. The Financial Secretary reiterated in Committee that it remains the intention and expectation of the Government that the link will be restored in 2012. The caveat on which the former Chancellor, now the Prime Minister, insisted was that the Government could not restore the link unless economic conditions allowed. Given the green Budget produced by the Institute for Fiscal Studies, one must seriously question whether those economic conditions will permit that in 2012. If not, it could be another seven years before the link is restored, yet we will already be paying the cost—people will be paying contributions to a contributory system, and their contributions will count for nothing. Those will no longer be contributions, but tax payments. The Pensions Policy Institute raised the issue following the 2007 Budget when national insurance contributions were increased by the increase in the upper earnings limit, and made it clear that as a consequence, unless something was done, the flat-rating would be delayed until 2035. On Second Reading and in Committee we explored in some detail whether the Treasury was fully aware that that would happen. We were told explicitly that the Treasury was aware. In the Red Book showing the financial implications of every policy announced in the Budget, the additional costs of the increase in the upper earnings limit—in other words, the additional rebates that would be paid to funds for those who had opted out of the second state pension—were scored. That being the case, it is surprising that the Treasury, which with the left hand had identified that there was an issue, had not done more with the right hand to address it. It was conceded by the Treasury officials—whom I take this opportunity to thank for their clear evidence and their help to the Committee—that the Red Book made no explicit reference to the problem. We know that the Treasury was aware of it, yet no proposals were made at the time of the 2007 Budget. One cannot help concluding that the 2007 Budget package was somewhat rushed, and that not all the implications were appreciated or, if they were, not all the necessary mitigating steps were taken to address those consequences. That Budget looks increasingly flawed— ... I take your guidance, Madam Deputy Speaker. I move swiftly on to our essential concern about that second element of the Bill. A number of people—not the very wealthy—will be paying more in contributions but not receiving the benefit, because they will reach the upper accruals point. We have asked one question throughout. The Government's explanation is that we need to ensure that we revert to 2030-31 as the point at which flat-rating comes in. What has never been satisfactorily explained is why that 2030-31 date is so important. I appreciate that it was part of the original Turner package, but that was based on the assumption that the national insurance contributions upper earnings limit was not going to be increased as it subsequently was. Why was 2030-31 so sacrosanct that it had to be maintained? My hon. Friend the Member for Ludlow (Mr. Dunne), who is detained on important constituency business today, raised that very question in Committee. The Minister answered that it would have led to higher earnings receiving a greater than intended benefit for the state second pension. That is absolutely right, but those higher earners, as she describes them, were contributing more in national insurance contributions than had been anticipated. Why should they not also receive additional benefits? I hope that that point will be explored further in another place. The Bill will raise additional revenue from national insurance contributions. It will weaken Parliament's ability to scrutinise further tax increases in this area, and it means that—in a manner not anticipated by the Turner report and the consensus that arose from it—people will pay more in national insurance contributions but not receive additional benefits as a consequence. For those reasons we remain concerned that the Bill is flawed, and we will oppose Third Reading.