---

National Insurance Contributions Bill

My Lords, when we debated the Queen’s Speech last November, I said that we would greet this Bill with little enthusiasm. The intervening five months or so have done nothing to change that. The noble Baroness, Lady Hollis, has used this opportunity to return to the fray on buy-back. The whole House was shocked when the Minister reneged on the commitment that he had given her during proceedings on the Pensions Bill. The noble Baroness, in her doughty way, has refined her attack and sought to deal with the objections that the Government have come up with. In particular, through the use of hurdles, she wishes to constrain the annual cost of implementing any buy-back proposals. I just say to the Minister today that the noble Baroness makes a strong case and, if she decides to pursue it in this Bill, without making any commitments, we will look very carefully at whether we can support her on the refined basis that she has put forward. For all the Minister’s fine words, this is a money-grabbing Bill designed to pour a couple of billion pounds each year into the Treasury. It has a fig leaf of pensions and national insurance reform but money is what it is about. It is ironic that your Lordships’ House is able to consider this Bill in detail because, technically, it is not a money Bill. The noble Lord, Lord Newby, referred to this. I welcome the opportunity to consider this Bill fully and would welcome the ability of your Lordships’ House to consider the technical aspects of Finance Bills in future. But that is for another day. As the noble Lord, Lord Newby, pointed out, it is little more than a fiction that national insurance is not a tax. The money goes into a mythical National Insurance Fund. But, as the noble Baroness, Lady Hollis, pointed out, there is a surplus building up in that fund. On the basis of the last accounts that I could trace, the Government Actuary recommended a balance of around £10 billion at March 2006, but at that date the fund had £34 billion in it—and so £24 billion had already been used to prop up the Government’s spending. Will the Minister say when the 2006-07 accounts will be available, as they seem to be overdue? What does he expect the figure to be on an up-to-date basis—say, at March 2008—and what impact will this Bill have on the surplus? The noble Baroness, Lady Hollis, referred to the increasing surplus that we expect to see from higher rates of higher national insurance payments being made. It is clear that the money which will be raised by this Bill is in substance an increased tax, because it is not needed for National Insurance Fund purposes. Rather, it will fund the UK’s budget deficit, which I remind the House is now outdone in relative size only by those of Pakistan, Hungary and Egypt. The first thing that this Bill does is to increase the upper earnings limit so that employees pay national insurance at the full rate on more of their earnings. This was introduced by the Prime Minister when he was Chancellor as part of the package of income tax changes which have been so mishandled by the Government. Only those on middle incomes are affected by the raising of the upper earnings limit under this Bill, paying £ 1.5 billion a year as their contribution to the package. But we know, as the noble Lord, Lord Newby, pointed out, that another part of the package was the 10p rate abolition, which hit 5.3 million mainly single people on low earnings. We still have no details on how, when and to what extent that wrong will be righted. I am sure that voters, when they go to the polls tomorrow, will remember that the Prime Minister knows how to raise money but has no idea about how to do it with fairness and equity. We agree that, in principle, the national insurance and income tax systems should be harmonised, but this Bill does not do that. There are still significant differences between the two, including the weekly basis of contributions and different bases on which national insurance and income tax are levied. Noble Lords should be aware that this Bill is not about reform; it is about grabbing £1.5 billion a year dressed up as reform. The Government pretend that this Bill harmonises the upper earnings limit and the start point for the higher rate tax, but that is completely untrue. What the Bill does is to give the Government power to raise the upper earnings limit by order to whatever level the Government choose. There is no restriction on the amount at which the upper earnings limit can be set. The noble Lord, Lord Newby, referred to the loss of the constraint of the 6.5 to 7.5 times the primary threshold, contained in current legislation. The only constraint is the rather ludicrous one of there being an affirmative order. I agree with the noble Lord, Lord Newby, that that allows for insufficient scrutiny and we shall return to this area in Committee because we believe that some restrictions on the Government’s use of this power should be enshrined in legislation. I can tell the noble Lord, Lord Newby, that I have given some thought to a series of amendments that might achieve the alignment over the next two years but also put a constraint on the Government thereafter. The second thing that the Bill does is to raise money for the Treasury by stopping the accrual of S2P above an upper accruals point from 2009-10. As I have already made plain to the House before, I have never understood how S2P actually works, but I am hoping next year when I reach pensionable age that I might find out whether I have accrued any. This change raises approximately £450 million a year, mainly through contracted-out rebates. We heard the Minister’s spin on this; it is all about implementing the Pensions Commission recommendations that the S2P should be flat-rated by 2030. The Government’s May 2006 White Paper, Security in Retirement: Towards a New Pension System, was very clear on the Government’s policy. It said at paragraph 3.13 that, "““we will … reform the State Second Pension so that it becomes a simple, flat-rate weekly top-up to the basic State Pension. Accruals will start gradually to become flat rate at the same time as we start to uprate the basic State Pension by earnings. We estimate that the State Second Pension will become completely flat rate around 2030 or shortly afterwards””." The policy was to link flat-rating to earnings linking and the 2030 date for the completion of the flat-rating was a mere estimate. All we know about earnings linking is that it will not start before 2012 but could start any time thereafter within the next Parliament, subject to the Treasury’s view of ““affordability””. We also know that the Government’s finances are not in great shape and so there are considerable doubts about whether the commencement of earnings linking can be afforded in 2012 or even in 2015. We shall be exploring this further with the Minister. For today the key issue is that flat-rating the S2P is being started three years ahead of its earliest planned date and possibly six years ahead of the actual introduction of earnings linking. The Minister has rehearsed the Government’s line that they had to act because the increase in the upper earnings limit in Budget 2007 meant that, if nothing else were done, flat-rating would be delayed from the date of 2030. But the 2030 date was merely an estimate rather than a target and hence there is a degree of hypocrisy in now elevating it to target status. In another place my honourable friend Mr David Gauke probed Treasury Ministers on this decision to bring forward the start of flat-rating. The answers that he received are somewhat incredible. Apparently the Treasury knew when Budget 2007 was put together that the UEL changes would increase the S2P accruals and would hence affect contracted-out rebates in the near term, and that this additional cost was included in the 2007 Red Book. I think the noble Lord, Lord Newby, was looking for revenue in the 2007 Red Book. Actually it was an additional cost that we are told is in the Red Book but I have not found it either. The Treasury also knew, apparently, that it would affect the flat-rating projections but it seems that the Chancellor, the other Treasury Ministers and Treasury officials thought it quite unnecessary to tell anybody about it at the time. Instead they waited until this Bill was considered in another place before coming clean on the issue. At best, this is Government at their least transparent. Having increased the UEL, there were several options for achieving flat-rating. Given the Government’s existing policy statements, a disinterested observer might conclude that the most rational way was to realign from 2012 or from whenever earnings linking was introduced if that were later. Whether to flat-rate by 2030 would have been a separate decision affecting the speed of achieving flat-rating. Any observer who knows this Government would know that the Treasury would just see another stealth tax on offer and select the option which produced the greatest inflow to the Treasury. We have stopped counting the number of stealth taxes the Prime Minister introduced when he was Chancellor because the number grew so large, but this one has to qualify for a special prize for stealthiness. We should also remember that the Government have form on using national insurance rebates. The last quinquennial determination blatantly loaded costs onto employers in order to save the Treasury money. The Government ignored the advice of their own Government Actuary as well as submissions made by employers and the pensions industry. The Government lamely tried to hide behind the words ““cost neutrality”” and ““fiscal circumstances””—that is, the Treasury’s view of what it wanted to afford rather than what occupational pension schemes needed in order to compensate them for assuming contracted-out obligations. In this Bill the Government are at it again, giving plausibility to their raid by describing the rebates in the impact assessment as ““anomalous gains”” for employers. When are the Government going to treat private sector occupational pension schemes, especially defined benefit ones which are most affected by the rebates, with respect? Do they really think that employers, already cheated out of their contracted-out rebate levels, think that these so-called gains are anomalous? The Government are doing everything possible to kill occupational pension provision and we will be discussing that again with the Minister when we reach the Pensions Bill. This is a miserable little Bill. I feel sorry for the Minister, who is an honest man, for having to come to the House to defend it.