Welfare Benefits Up-rating Bill
Lord McKenzie of Luton Excerpts(11 years, 3 months ago)
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Lord Low of Dalston
My Lords, somewhat to my surprise, I find my name on this amendment, so perhaps I should say a few words. I do not want to repeat all the arguments that were advanced at Second Reading and I do not have a lot to add to the very eloquent speech that we have just heard from the noble Baroness, Lady Meacher, but there are a couple of points I would like to make.
The first is the economic argument. I said at Second Reading that it did not really make any sense, at a time when the economy was flat-lining, to withdraw additional purchasing power from a section of the community that was most likely to spend it: those on welfare benefits. With every day that goes by and the economic news piles up about the dire condition of the British economy, the stronger this argument gets. The Minister did not respond adequately to that argument at Second Reading. I would be grateful if the Government gave further serious consideration to the force of that argument, which is genuine and considerable.
The Bill will cause real hardship for disabled people, carers and children. Disabled people are said to be protected but, as we showed at Second Reading, the protection accorded disabled people is partial. There is some protection for those in the support group receiving employment and support allowance, and disability living allowance is exempted from the 1% cap, but those receiving employment and support allowance in the work-related activity group and other disabled people receiving other benefits do not receive protection from the 1% cap. It cannot therefore be said that disabled people are fully protected, nor are carers.
Above all, children are not protected. Disabled children in this country are already disproportionately likely to live in poverty. Approximately 40% of all disabled children—about 320,000—live in poverty, compared with a poverty rate of 30% across all children. Nearly a third live in severe poverty—where a family’s income is less than 40% of the national average. Under universal credit, which will begin to come into effect later this year, parents of disabled children can receive a benefit called the disabled child addition. This will replace the current disabled child tax credit, but, under universal credit, the support available for disabled children who do not receive the high rate of DLA care component will be cut by half, from £57 a week under the disabled child tax credit to £28.52. The Bill will mean that the value of this benefit will increase at a significantly slower rate, by just 1% as opposed to in line with the CPI, which is currently running at 2.7%. As a result of the Bill, parents of disabled children receiving the lower disabled child addition of universal credit will lose £25.21 a year, or £75.63 over the three years during which the 1% cap is intended to operate. I would be grateful if the Minister could reflect further on the hardship that will be caused to all these groups and have second thoughts about the universal application of the 1% cap.
Lord McKenzie of Luton
My Lords, I shall speak to Amendment 1 in this group and to the other amendments that we have in it: Amendments 6A, 9 and 10A. I am grateful to my noble friend Lady Hayter for moving the amendment in my absence and apologise to the noble Baroness, Lady Meacher, for missing the very start of what was a powerful presentation.
Amendments 1 and 9 would remove the reference to 1% in Clauses 1 and 2 and hence remove the 1% cap on the uprating of relevant sums and amounts. Amendments 6A and 10A would delete the prohibition on uprating such sums and amounts under the annual uprating of benefits and tax credits. We fully intend these amendments to undermine and negate the purpose of the Bill, which we consider to be unnecessary, misdirected and contributing to the continuing economic failure of this Government, a failure all too evident from last week’s downgrading of our AAA credit rating by Moody’s.
Let me be clear from the outset on Labour’s position: we will make no commitment now on spending or tax for the next Parliament and will set out our spending plans at the time of the next election. However, right now we would uprate in line with inflation—I shall come on in a moment to how the Government can plug the hole in their increasingly fragile finances.
This Bill is unnecessary because if this Government misguidedly wish to plough on with this capping on uprating, they could simply use the annual uprating process. The Bill provides no certainty for taxpayers because there is no certainty on claimant numbers, except perhaps the prospect of them increasing, given the Government’s economic failure. As for the markets, it is frankly untenable to suggest that by locking those amounts, which account for less than 0.1% of government spending, into legislation they will be assured and comforted. It does not seem to have cut any ice with the rating agencies. The certainty of a real terms cut in support cannot be welcomed by claimants, especially when they have no certainty about the level of the real cut.
We all know why the Bill was brought forward. We made our position clear at Second Reading and I do not propose to revisit the issue in Committee. The Bill is misdirected on several counts. It does nothing for jobs. Indeed, by withdrawing real resources from low-income families, which of necessity have the highest marginal consumption rates, it is damaging demand. It ignores the IMF warning that the fiscal stabilisers should be allowed to operate. Its justification is supposed to be that there needs to be some correction for the fact that benefits have been uprated at a faster rate than earnings over the past five years—essentially, that those out of work have done better than those in work. It is perverse, therefore, that two-thirds of those hurt by the Bill are in work, taxing the very strivers whom the Government claim to be supporting. Indeed, specifically included in the cuts is in-work support, such as working tax credit, SSP, SMP and paternity pay, as well as in and out of work benefits such as housing benefit, the very support that enables individuals to sustain employment and manage work and family responsibilities.
It is not only those in work who are having their living standards cut. The Government are failing to honour their pledge to protect the most severely disabled. If they still hold to their obligations under the Child Poverty Act, they are drifting further away by pushing a further 200,000 children into poverty. Worst of all, at a time when the Bill will reduce the living standards of the very poorest, they are rewarding those with the highest incomes, including 8,000 millionaires, with a generous tax cut. The contrast could not be greater: a £2,000 a week tax cut for some, 71p a week if you claim JSA.
By leaving the inflation risk with claimants, the Bill creates greater risk for the poor and uncertainty about their real incomes. The 2012 Autumn Statement cites energy and fuel prices as remaining a potential source of risk over the coming years. It estimates that inflation will be higher in 2013 and 2014 than originally announced due to rises in domestic energy prices and food commodity prices—the very costs that hit the poorest hardest. We see today the reaction of the currency markets to our credit rating downgrade: a weakened sterling, which will put further pressure on prices.
Uncertainty is compounded by there still being no cumulative impact assessment for the raft of benefit and tax credit changes that have been introduced so far by the Government. The IFS, in its 2013 green budget, analysed the effect of the 2013-14 tax and benefit changes. It concludes:
“This broad pattern of tax giveaways and welfare takeaways”—
its own terminology—
“means that the changes, on average, reduce net incomes towards the bottom of the income distribution and increase net incomes in the middle and upper parts of the distribution”.
It states that the below-inflation uprating is the predominant cause of losses in the bottom half of the income distribution and that the reduction of the top rate of tax from 50% to 45% produces the gain for the richest.
That juxtaposition speaks volumes about the priorities of this Government: the rich need more to motivate them; the poor need to feel the lash of cuts to inspire them. This pattern is not new. Looking at the overall position since 2010, apart from the richest decile it is a fact that the poorest have lost the greatest percentage share of their income in the cause of fiscal consolidation. This analysis is consistent with the detailed briefings that we have all received from a range of authoritative sources. They tell us that 68% of those affected by the Bill are actually in work, 30% of all households that will be hit will lose on average £156 a year, two-thirds of those households are families with children, 71% of households affected are at or below average income, and two-thirds of those affected are women.
Lord Bates
I, too, was not intending to speak on this amendment, but I was spurred to by my noble friend Lord Forsyth of Drumlean. I rise to add to some of the points and to reinforce some of the questions that he has about this. I followed this debate quite closely at Second Reading, and I thought that the position then argued by the noble Lord, Lord McKenzie of Luton, was that the Opposition opposed the 2013-14 and 2014-15 limits but had not yet reached a position on 2015-16. Presumably by supporting this amendment, they are now making the position that they do not agree and would therefore reverse the policy as it affects 2015-16, which is £1.9 billion. I may have got that wrong, and I am very happy to sit down if the noble Lord wants to intervene to correct me.
Lord McKenzie of Luton
I shall clarify for the noble Lord that we made our position clear in respect of 2013-14, which is not in the Bill but is dealt with by regulations in the normal way. We made it clear that we will make no tax or spending commitments in respect of the next Parliament, which would include the latter part of 2015-16. As for 2014-15, we think that removing this cap would enable the normal process to take place so that there can be an assessment in the normal course about what is happening to inflation and the state of the economy in that year. I hope that has clarified the position. That has not changed since we debated this at Second Reading.
Lord Bates
The noble Lord is saying that the Official Opposition do not intend to make any pledges, which is interesting because I thought I heard last week that there was a proposal for a mansion tax and that that would be funded by other means. I thought that was a specific spending commitment beyond 2015-16.
My second point picks up on one from the noble Baroness, Lady Meacher, who made a thoughtful contribution. We overwhelmingly agree that the most effective way to alleviate poverty and raise standards is to create jobs. I would have thought that there would be some recognition that the Government’s record on that has been quite reasonable. We would of course like it to be very much better, but contrary to some other countries that are wrestling with the same problems our unemployment rate continues to fall. We now have the highest level of private sector employment in our history and a million new private sector jobs since the last election. That suggests that moves to reform taxation and stimulate the economy are beginning to have some effect, and that they are the best way of tackling this.
We have an Urgent Question coming up on the rating agency decision: the noble Lord, Lord McKenzie, and the noble Baroness, Lady Meacher, referred to this. I was reading through the decision and thinking of making a contribution to the Urgent Question, which I will not now do having secured the Floor in this debate. Moody’s statement,
“explains that the UK’s creditworthiness remains extremely high … because of the country’s significant credit strengths”,
chief among which are,
“a strong track record of fiscal consolidation and a robust institutional structure”.
That is quite interesting. In fact, going beyond that, we are again warned about what could happen to the country’s inflation and the cost of borrowing if the country were to be downgraded again.
Further down, on what could move the rating up or down, Moody’s statement says that,
“downward pressure on the rating could arise if government policies were unable to stabilise and begin to ease the UK’s debt burden during the multi-year fiscal consolidation programme”.
So there is a case for fiscal consolidation. There needs to be a recognition that the Government’s policies of raising tax thresholds and increasing employment are beginning to have some effect.
Notwithstanding that, I come to a point of agreement, which I made at Second Reading: no one on any side of the House is cheering on this measure. It is an economic necessity. It is certainly not something that anyone takes pleasure in.
Lord Newby
I am extremely sorry if I misunderstood the noble Lord.
In conclusion, I repeat that the amendments in this group would mean that the Bill would not deliver on its purpose of enabling the Government to set out clear and certain plans to control welfare spending and help secure the economic recovery. That is why they should be resisted.
Lord McKenzie of Luton
My Lords, perhaps I may wind up on behalf of my noble friend, who moved Amendment 1 on my behalf. I thank the Minister for his range of responses. I emphasise that, yes, we believe the amendment would negate the Bill, but it would not prevent the Government doing what they wanted to, given a chance, over a three-year period. However, we believe that it is wrong to lock in a real-terms cut for three years. Effectively, it is for two years, given that the first year is by way of regulation.
On issues of tax, the Minister, in response to the Second Reading debate, said that a 50% tax rate would not garner the revenue we believed because people would order their affairs. Ordering their affairs, as set out in some detail in the HMRC publication that looked at this issue, would involve switching income from one year to another. It is quite possible that, as we speak and draw to the end of the current tax year and move towards, possibly, a 45% tax year, a great deal of income will shift from this year into next year. Will the Minister say whether he thinks this is okay and acquiesces with it, or whether it is a matter that the Government should address in some form? If you simply sit back, clever and well resourced people will reduce their tax liabilities as fully as they can. However, it does not inevitably have to be that way, particularly when the people who will pick up the burden of that avoidance are at the very low end of the income scale.
Lord Bates
I take the argument that the noble Lord is making about 50p down to 45p. I am puzzled therefore as to why, during the entire period of the previous Government, who were in power from May 1997 until April 2010, the top rate was 50p. It reduced to 45p only on 6 April 2010. If it was an overriding cause of concern and a belief of the Government of that time, in which he served as a distinguished Minister, surely they would have kept the rate at that level and not proposed reducing it.
Lord McKenzie of Luton
We are addressing the policies of this Government. We can spend all our time debating what previous Governments have done but we are addressing this Government’s determination to raise the revenue that they can from a 50% rate, rather than give what is a huge tax cut to a minority of people in our country at a time when people at the other end of the income scale are being asked to bear a real additional burden. That is what we are complaining about and we believe that the Government can and should do something about it.
There have been a range of powerful contributions to this debate. I agree entirely with my noble friends Lord Bach and Lady Hollis about this collection of things that are going on, particularly at the moment. New benefits, new structures and new payment details are being introduced in circumstances in which it is difficult for people to access good advice, to get justice when they wish to challenge, or even to understand the system with which they are faced.
The noble Lord, Lord Bates, referred to fiscal consolidation. Yes, we all agree about fiscal consolidation: the issue is how you go about it. We all agree about the importance of work and getting people into work, but it is how you go about it. The problem is that the Government have not produced the goods. Every time George Osborne presents a Budget or an Autumn Statement, the OBR revises growth downwards. Indeed, the latest GDP figures show that there has been no growth this year. The issue is not about whether we believe growth is the right way forward; it is about how you get it—and this Government have not delivered on that.
As to their impact on benefit spending, the Government’s failure to get Britain back to work is sending the social security bill up by something like £13.6 billion more than expected. Long-term unemployment is up by 55.7% this year. That is a manifestation of government failure in getting people into work and on growth in the economy. Borrowing has risen by 10% so far this year and it looks as though the Chancellor will miss his target to get the national debt falling by 2015.
On our record on benefits, I would say to the noble Lord, Lord Forsyth, that real-terms expenditure on out-of-work benefits fell by £7.45 billion under the previous Labour Government between 1996-97 and 2009-10, while real spending on out-of-work benefits in 2006, at something like £38 billion, was at its lowest point in 15 years. You do not have to take my word for Labour’s record on benefits. An analysis was made of the Labour Government’s record on welfare reform and it was found that they had made “strong progress” in their welfare-to-work agenda. Policies such as Welfare to Work, the New Deal and Jobcentre Plus were all a success. It was the noble Lord, Lord Freud, who came to that judgment.
Lord Forsyth of Drumlean
I am most grateful to the noble Lord. I am a bit puzzled because he said in answer to my noble friend Lord Bates that we were discussing the policies of this Government, not the last one. He is a little selective. However, given what he has described—an economy which is not growing at all—how on earth does he expect to fund the increase in benefits that he says he is in favour of? That is the crux of the matter. It is not about where we would like to be or how the world might be different, the fact is that the economy is not growing. If the economy is not growing, how is it possible to expand the welfare budget?
Lord McKenzie of Luton
I was talking about the last Labour Government in response to points that the noble Lord himself made earlier on. On growth, I would outline that there is one particular proposal that we in the Labour Party have been working on—the long-term jobs guarantee, and we have explained how it could be funded by, yes, restricting tax relief for the wealthiest in terms of pension contributions. It would get people into work, get them spending, and take them off benefits and welfare support. That is the way to do it. Perhaps I can turn this back to the noble Lord. The approach the Government have undertaken has simply failed to deliver growth; it is not happening. Everyone knows that and it does not need me to expound on it. The Government have failed to deliver.
It is because of that that we are challenging this burden of a real-terms cut. The noble Lord said that it is not a cut, but of course it is a cut in real terms because it is a cut in people’s living standards. It is also a cut that we do not know the magnitude of over the life of this Bill, which is why we object to it so strongly. We do not know what the rate of inflation is going to be in two years’ time. We can speculate on the impact of the downgrading of our credit rating, but getting growth in the economy and thus providing more employment is certainly more likely to impact in a positive way. That is what we would argue for and plan for. It is making the people at the bottom end of the income scale pay for the failure of this Government that we object to. This Bill is the wrong way to deal with benefits uprating. There is a tried and tested way that has operated for many years which is open to the Government rather than locking it down and forcing people into a real-terms cut in their living standards.
I suspect that we will have another round of this argument on Report because it is the fundamental part of our objection to the Bill, but in the mean time, I beg leave to withdraw the amendment.
Child Benefit
Lord McKenzie of Luton Excerpts(11 years, 7 months ago)
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Lord McKenzie of Luton
To ask Her Majesty’s Government whether they have plans further to restrict child benefit.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, the Government are exploring further options for making the welfare system fairer and more affordable. Details will be announced in due course.
Lord McKenzie of Luton
My Lords, I thank the Minister for that reply, but I am not particularly comforted by it. We are, of course, among the shambles that is engulfing the introduction of the current change to child benefit policy for higher rate taxpayers—evidence, if we needed it, that policy should not be made on the hoof. Hundreds of thousands of people have been brought into the self-assessment process at a time when HMRC staff numbers are being savagely reduced. But my question for the Minister on the matter of evidence-based policy-making is to ask how he justifies the proposals aired by the right honourable Iain Duncan Smith, a fellow Minister, that child support for those unemployed should be restricted to just two children because, he asserts:
“Large numbers of families on welfare are having more children because they believe taxpayers will support them”.
Will the Minister give us the evidence for that assertion? Should such a policy ever be introduced, what impact does he think that there would be on child poverty in this country, which is already on the rise under this Government?
Lord Sassoon
My Lords, first, I am sorry that the noble Lord, Lord McKenzie of Luton, was not comforted in his terms by my answer. Does he disagree with the idea that the system should be fairer and more affordable? We know that the previous Government’s system was unaffordable, and we are putting that right. As to his question about some of the ideas that are being floated at the moment, it is simply not fair that it is possible for someone to be better off on benefits than they would be in work. How can we justify a system in which people in work have to make decisions about having a child or having another child based on what they can afford, whereas those out of work know that their benefits will just increase?
Economy: Government Policies
Lord McKenzie of Luton Excerpts(13 years, 2 months ago)
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Lord McKenzie of Luton
My Lords, it is a particular pleasure to follow the noble Lord, Lord Tugendhat, particularly given the contribution that he has just delivered. I should like to offer my congratulations to the noble Baroness, Lady Stedman-Scott, and a fellow Lutonian, the noble Lord, Lord Hussain, on their excellent maiden speeches.
A short while back, when our rail infrastructure stalled and ground to a halt, it was because we had the wrong type of snow. Now it seems that our economy is stalling, not only because the snow is back but because we have had the wrong type of inflation—increasing spending on benefits but not having a commensurate increase in tax revenues. It is particularly timely that we are having this debate today and we should congratulate the noble Lord, Lord Lawson of Blaby, on giving us this opportunity. I remember well his 1988 Budget and the Finance Bill that followed. I was tucked away in a garret in Norman Shaw North scribbling amendments for the Labour Front Bench, all of which, sadly, were defeated.
However, in comparison to the autumn forecast, growth is down in 2010, and in 2011 and 2012. Unemployment is up in every year and spending on social security benefits is up by some £12 billion over the Parliament. The OBR expects the economy to be 0.7 per cent smaller in 2015 than it did in November, just a few months ago. Borrowing is up by £43 billion over the forecast period—£11 billion a year extra in 2015-16. The noble Lord, Lord Newby, talked about this being a slight rise in borrowing, which I find interesting terminology.
So what is happening? Last year, when we left office, the economy was growing strongly again. Inflation was lower and unemployment was falling. Everyone knows that the deficit has to be addressed but we continue to hold to the view that the Government’s approach is cutting too deep and too fast. In doing so, they are fuelling unemployment, thus making it more difficult for growth to take hold.
There can be a plan B. We could quite credibly halve the deficit steadily over four years, and not try to cut it further and faster than any other major economy in the world. That is not being faint-hearted. There would have to be tough choices to get the deficit down, including spending cuts and tax rises. But the most important thing in getting the deficit down is what happens to jobs and growth in the economy, which is why last year, as the economy started growing again and unemployment was falling, the deficit came in £20 billion lower than was expected. All that changed as the economy stopped growing at the end of last year, and unemployment is now rising again. As the Financial Times today reports, all the Chancellor’s tinkering yesterday, and all the lollipops with enterprise boosting, red tape cutting and planning regulations, has had no effect on the OBR’s assessment of long-term growth assumptions.
While yesterday may have made little change, we should remember what has gone before and the pain that is still to come. By 2015-16, the CPI switch will mean change for those claiming benefits, tax credits and public service pensions. There will be a hit of £10.5 billion annually. We know that the VAT cost is £13.5 billion annually. There are changes in restrictions to the employment and support allowance that will hit to the tune of £1.1 billion, cuts in child benefit of £2.5 billion and there are more.
Yesterday’s efforts by the Chancellor can reasonably be described as fiscally neutral and some of them nifty. He held true to the Lib Dem aspiration of increases in the income tax personal allowance but by the end of the forecast period equivalent amounts will be clawed back by changing the default indexation assumptions from RPI to CPI. This will apply to national insurance thresholds—until those far-off days should national insurance ever be merged with income tax. I think that we would be wise to listen to the comments of the noble Lord, Lord Lawson, on that matter. But it means that capital gains tax annual exempt amounts and ISA limits will be less favourable and generous in the future. The reduction in the national insurance contracting out rate is a further hit on business and on individuals.
We also heard from the Chancellor that his vision for growth encompasses the ambition that we should have the most competitive tax system in the G20 and that the system should be simple to understand and easy to comply with. In order to have the most competitive system in the G20 depends on how things are measured. Inward investors will not just look at headline rates; they will look at effective tax rates. Yesterday’s announcement of a further 1 per cent cut in the rate of corporation tax is no doubt welcome but the more substantial cuts announced in the June Budget last year were largely paid for by restrictions on capital allowances and investment allowances. We heard yesterday the simplistic line that our tax code is now the longest in the world. Frankly, that does not help. Tax law and regulations are structured differently in different countries. Try putting the US code with all its regulations and guidance end to end.
As for simplification, of course it makes sense to sweep away redundant provisions but I wonder how many additional pages of legislation will flow from yesterday’s announcements. We have heard about changes to the controlled foreign companies’ regime, the taxation of foreign branches, stamp duty land tax bulk purchasing and the taxation of non-doms, to mention just a few. There are a raft of anti-avoidance provisions, which we support, but these will not be dealt with by simplifying the tax system. Unless and until we have a general anti-avoidance provision, they will require specifically targeted changes to the law. That will then set new boundaries for the avoidance industry to assail.
The Government’s approach to regulation seems to be that it is inevitably undesirable and should be quashed at every turn. No one would argue for unnecessary regulation but just occasionally it would be good to hear the Government speak up for regulation which has been transformational. The Health and Safety at Work etc. Act was built on political consensus. It has helped to save many lives over the years and has been beneficial for business and society in saving costs and the misery of people who might have been injured or made ill by their work. We weaken all that at our peril. Dame Carol Black, in her review of the health of Britain’s working age population, estimated the annual economic cost of sickness absence and worklessness associated with working-age ill health to be more than £100 billion per year.
To conclude, there was nothing in the Budget yesterday which gives comfort on growth. Let us hope that this debate will provide ammunition to the Chancellor to enable him to rethink.
National Insurance Contributions Bill
Lord McKenzie of Luton Excerpts(13 years, 2 months ago)
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The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, Amendment 1 returns to the allocation of national insurance contributions receipts between the National Insurance Fund and funding of the NHS, which was covered both at Second Reading and in Committee. This amendment, as the noble Lord, Lord McKenzie of Luton, has explained, is aimed at ensuring that the NHS allocation of the additional rate is subject to an adjustment to ensure that the funding of the NHS from national insurance contributions will grow in real terms year on year. The amendment would require comparisons to be made from one year to the next of the NHS allocation and adjustments to ensure that the allocation grows in real terms each year.
As I explained in Committee, the amount that is to be spent on the NHS, whatever the noble Lord says, was confirmed in the spending review in October last year and is unaffected by whether the funds come from national insurance contributions or elsewhere. The noble Lord says that he wants to ensure, through the amendment, that the health service is not short-changed. I can absolutely assure noble Lords that nothing in this Bill goes anywhere near short-changing the National Health Service. The amendment would ensure that the national insurance allocation to the NHS increases year on year, which is a bookkeeping matter, but nothing more.
It may help noble Lords if I put this matter into a bit of context, because I was beginning to lose some of the train of the noble Lord’s argument and I fear that others may have done so as well. Perhaps it would be helpful to the House to go back and explain the numbers very broadly.
I shall take the last full year for which the numbers are certain. In 2009-10, the total sum raised by national insurance contributions was £94 billion. Of that, just over £20 billion was allocated to the NHS and the balance, around £74 billion, was allocated to the National Insurance Fund. Total NHS expenditure in 2009-10 in England alone was exactly £100 billion, so it is important to understand that, whatever allocation of funds out of NICs proceeds to the National Health Service, it makes up only around 20 per cent of NHS expenditure.
I have also been looking at the numbers over the past few years. If we go back to 2004-05, for example, in that year the contribution made by NICs to NHS expenditure on the basis that I have described was 24.3 per cent, but by 2009-10 that contribution had fallen to 20.3 per cent. So I find it quite hard to accept noble Lords opposite casting all sorts of aspersions at the present Government about how they will safeguard expenditure on the NHS when their own record shows that over the last few years they contributed a significantly falling percentage of NICs to NHS expenditure. Nobody challenged them with the thought that they would renege on their commitment to NHS expenditure, so I do not expect noble Lords seriously to challenge the fact that this Government will stick to their commitment to increase National Health Service expenditure in real terms. The point is that NICs will only ever make a small but significant—20 per cent or thereabouts at the moment—contribution to NHS expenditure. The balance—the greater sum out of NICs—will go where it has to go, which is into the National Insurance Fund.
I do not want to belabour the point but, in big-picture terms, the amendment would make absolutely no difference. It would not affect the money that goes into the National Health Service. The negative effect of the amendment would be to create a degree of uncertainty in establishing the NHS allocation, as we would know the receipts from national insurance for sure only after the end of the tax year, because they are dependent on wage levels, economic conditions and the thresholds as they apply in a particular year. We would then have to compare those with the previous year’s allocation and make an adjustment if necessary to ensure a real-terms increase. That would add administrative complexity and create accounting and funding uncertainty, not least for the Government Actuary, who is required to report on the state of the National Insurance Fund each year. It would have, as I have explained at some length, no impact on the overall spending on the NHS, which is a rightful concern of noble Lords.
Government policy is to maintain the level of national insurance contributions allocated to the NHS and to allocate additional revenues from rate rises to the National Insurance Fund. That is what the Bill will achieve. That helps to ensure that plans for payment of pensions and other contributory benefits are sustainable in the long term. In that way, we can protect pensioners with the new triple lock, which guarantees each and every year a rise in the basic state pension in line with earnings, prices or a 2.5 per cent increase, whichever is the greatest.
I repeat that this amendment will not affect overall spending on the NHS because that figure has been set in the October spending review. Given that the figure has been fixed, the amendment would serve only to create a degree of additional bureaucracy and complexity. I have gone to some length to reassure, I hope, the noble Lord, Lord McKenzie of Luton, that the health service will in no way be short-changed because of the Bill. Therefore, I ask the noble Lord to withdraw the amendment.
Lord McKenzie of Luton
My Lords, I thank the Minister for his response. He said that he did not believe that we could reasonably challenge the assertion that the coalition Government would increase funding for the NHS in real terms, but that is precisely what we are doing. If the noble Lord looks at the Red Book and the projections, the aggregate figure is a 0.4 per cent increase, but when you back out the fact that included in that is £1 billion reallocated for social care, because local authority budgets have been squeezed, you will see the opposite effect—a real-terms cut. That was part of the backdrop to the amendment.
The noble Lord said that the Government’s proposition was to “maintain” the allocation, but that is precisely what they are not doing this year. I raise what Mr Gauke said in the other place. He said on the record that, because earnings were increasing and were projected to increase next year, on the basis of the Government Actuary’s report, he would expect the NHS allocation to increase.
At the end of the day, the Government are clearly under pressure on spending, as any Government would be at the current time. If they are looking for resources outside of the National Insurance Fund to make good any shortfall in meeting their commitments, that will be more difficult if they cannot get a reasonable allocation from the National Insurance Fund—a reasonable allocation being an increase in real terms when earnings are increasing as well. That was exactly the premise of Mr Gauke in another place.
The Minister made much of what this would mean in terms of administration, but I reject that rather bureaucratic proposition of how you could deal with this, because I think that it could be dealt with quite easily on the basis of estimates, with adjustments at the end of the year. There is no great mystery about that. Having said that, our real concern is the fundamental issue of whether proper funding is going to the NHS and whether in real terms the Government are meeting their commitment. We do not believe that they are. This is just one facet of that. However, I think that we have probably got as far as we can on this. I beg leave to withdraw the amendment.
“( ) This section applies to all regions and countries of the United Kingdom.”
Lord McKenzie of Luton
My Lords, in moving Amendment 2, I shall speak to the other amendments in the group, which seek to remove the excluded regions from the Bill so that the national insurance contributions holiday will apply without geographical restriction. It will bring London, the eastern region and the south-east within the benefits of the provisions.
There are two fundamental reasons why we continue to advance this proposition. The first is fairness and the second is to do with simplicity. To deal with the latter first, it was clear from probing that having excluded regions is a complicating factor in the construction of the legislation and the operation of the scheme, and would discourage a clear understanding and therefore take-up of the scheme. We identified complexities for some types of businesses as to where the new business was principally carried on and, I think, established that some of the 10 employees by whom the national insurance holiday could be enjoyed could anyway be working in the excluded regions. I think that we left unresolved the issue of how, if at all, the holiday would work whereby new business might contribute to the shared services of a group.
I am sure that the Minister accepts that having the excluded regions as part of the scheme creates additional bureaucracy and administrative cost, but the real issue is fairness. Excluding three regions from the holiday scheme means that significant parts of the UK that are every bit as deprived as other parts and have equal if not higher unemployment and a heavy reliance on public sector employment are denied this incentive. If the national insurance contribution holiday is a meaningful incentive, while we do not think that it is perhaps the most effective means of stimulating growth, we can see that it will help and believe that it should be fairly available. Help, of course, is needed especially at the current time, with the unemployment figures looking continually grim. The unemployment rate for the three months to December 2010 was up to 7.9 per cent, and the total number of unemployed people increased by 44,000. For 16 to 24 year-olds, unemployment increased by 66,000 to reach 965,000—the highest figure since comparable records began in 1992.
The Minister has to date been a little coy about providing up-to-date figures for the take-up of the scheme, which has now been running with effect from June last year. Figures given in another place suggest take-up by January this year of some 1,500 businesses, which is obviously disappointingly short of what might have been expected, as the overall projection is that 400,000 businesses will participate over the three years and two months that the scheme will operate. If the Government are not to fall woefully short of their target and to miss an opportunity to deploy to the full the resources allocated to stimulate the growth of jobs, the scheme requires better take-up or an expanded application. We offer by way of a later amendment the requirement for an annual report to take more formal stock of progress. That could lead to changes in the scheme if the report showed that including the currently excluded regions was leading to overspending. Modifications could then be made.
Lord Sassoon
I am very grateful to my noble friend Lord Newby; he has done my job admirably on these amendments. However, I start by returning to fairness. The reason for the Government introducing the holiday is their belief that it is fair that people and regions that have become overdependent on public sector jobs are given additional help as the economy has to rebalance. I therefore agree completely with my noble friend. It is clear that the noble Lord, Lord McKenzie, means to misconstrue the purpose of the Bill.
We in the Government are doing other things to lift the burden of national insurance contributions on businesses right across the country, notably by raising the threshold by £21 per week above indexation from 6 April 2011 and by reducing corporation tax rates. Those very considerable measures are benefiting businesses right across the country, reversing the damaging effect of the Labour Government’s jobs tax. This particular measure is not about fairness across the country in that sense but about fairness to those regions that, under the previous Government, became overdependent on government employment. This is a way of targeting resources to enable new businesses to grow in those regions.
My noble friend Lord Newby went on to ask the noble Lord, Lord McKenzie, about the additional cost of the scheme. The Government estimate that if the scheme were to go national it would increase the projected costs of the scheme by about 70 per cent, so my noble friend is completely right that this could be a significant additional expenditure. He has made the point that I was not going to make, although he is quite right; it is yet another example of Labour’s unfunded spending promises.
As for other issues on the excluded regions, the reason why Greater London, the eastern and the south-eastern regions are excluded is principally because the proportion of the population in public sector employment in those regions is lower than in any other parts of the UK. Also, in addition to my noble friend’s point, noble Lords might wish to be reminded that during the public evidence session on the Bill, representatives from the Federation of Small Businesses and the British Chambers of Commerce made it clear that the south-east is more resilient than the rest of the UK and that the formation of now businesses would not be harmed significantly if the holiday was not available in these regions. The Government agree with that assessment.
There is then the question of having pockets of deprivation with high claimant count in particular parts of the excluded region. The Government of course acknowledge that areas smaller than regions have particular concentrations of needs. That is reflected in our looking for more efficient mechanisms than this one for addressing those more local needs. For example, my right honourable friend the Chancellor of the Exchequer announced earlier this month that the Budget will introduce new enterprise zones across parts of Britain. Those zones have great potential but need that extra push from the Government and local communities working together. Such enterprise zones would be expected to be far, far smaller than regions. There are other, fairer and more appropriate ways of dealing with the issues which the noble Lord, Lord McKenzie, raises perfectly reasonably. They just do not happen to have anything to do with this holiday, which is about dealing with an unbalanced economy as far as dependence on public sector jobs is concerned.
In conclusion, the holiday is targeted specifically at regions and countries with the highest proportion of public sector dependence. It is there to encourage new businesses to start up and to take on employees in those areas. I will not be drawn into updating now on the take-up—there will be other occasions for that—but one would expect it to increase over time. We will no doubt discuss a little later today the form of reporting that is appropriate. Expanding the holiday to the whole country would undermine the very purpose and rationale of the policy. I ask the noble Lord to withdraw his amendment.
Lord McKenzie of Luton
My Lords, I thank the Minister for his reply and the noble Lord, Lord Newby, for his contribution. We do not misconstrue the purposes of the Bill; we support projects that help to rebalance the economy, and we see that focusing in part on where there is high public sector employment in an area is one way of doing it. It is not the only way, but we have acknowledged that the Bill can make a contribution in that respect.
The noble Lord speaks as though there is almost a huge divide between the excluded regions and those that are included. From the ONS public sector employment statistics bulletin for quarter 1 of 2010, let me run through the list of percentage by region of identifiable public sector employment. The point that I reiterate is that the spread between the regions is relatively narrow, and that London misses out on this basis. The north-east is said to have 25.1 per cent, the north-west 22.3 per cent, Yorkshire and Humber 22.6 per cent, the east Midlands 18.5 per cent, the West Midlands 21 per cent, the east 16.6 per cent, London 21.1 per cent, the south-east 16.8 per cent and the south-west 21.3 per cent. To chop off three of those areas, as though they are a completely distinct part of the economy with in no way the same reliance on public sector employment, seems incredibly flawed as an argument. It is not just a question of looking at little pockets within regions, as the overall regional statistics show a close match across the regions.
The noble Lord, Lord Newby, said that we were talking about £1 billion for regional development—fine; no one is looking to take £1 billion away from the project. However, he again referred to “more affluent” regions. I am sure that parts of all regions are affluent, and parts of all regions are deprived and with high unemployment. One accepts that there are special challenges in some of the northern regions, and one would not want to detract the support available to those. Luton is in the east of England. It still has high levels of deprivation, but the spread across the region shows that parts to the east are distinct, with much lower wage economies, higher employment infrastructure deficits and real challenges. They are every bit as deserving of the benefit of schemes such as this as anyone else.
The noble Lord rightly challenged me on the costs. I refer to figures given by the Minister, but the purpose of the probing earlier—I note that the Minister remains coy on the point—was to question whether the allocation made will in any way be spent. I think that the proposition that underwrites the estimate is that this will support something like 800,000 jobs, and those jobs will have to be created outside the excluded regions by start-up businesses over a period that has about two and a half years to run. That is a tall order. If it can be achieved, great, but there is headway in the allocation to extend the scope of the scheme, and we support that.
I have tried to deal with the points raised. We think that the provision is unfair. All regions should have the opportunity to benefit from this. We shall get to an amendment tabled by one of my noble friends shortly, following which there would be scope, through monitoring, to dampen down the scheme if it proved to be overheating. However, there is no sign of that. It is a pity that the Minister was not even able to give us an update; we are almost at the end of the year. Some £50 million is meant to have been spent, which would mean that at the very least 25,000 businesses would have signed up. I suspect that we are nowhere near that on the basis of the figures of 1,500 that were discussed a couple of months ago in the other place. Having said all that, we have had a brief but, I hope, full encounter on the subject, and I wish to test the opinion of the House.
National Insurance Contributions Bill
Lord McKenzie of Luton Excerpts(13 years, 2 months ago)
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Lord McKenzie of Luton
My Lords, I shall speak also to Amendment 2. Amendment 1 seeks to probe why 50 per cent, rather than, say, 75 per cent, of the product of the additional primary rate and additional class 4 percentage rate form part of the health service allocation. Amendment 2 poses the same question for a 100 per cent—the existing percentage—allocation.
The main features of the contribution system are helpfully set out in appendix 2 of the Government Actuary’s Department report on the Social Security Benefits Uprating Order 2011. For the NHS allocation it sets out, as partly provided for in the Bill, the rates of 2.05 per cent of earnings between the primary threshold and the upper earnings limit and 1 per cent of earnings above the UEL. From April 2011, the UEL, as we have just heard from the Minister, has reduced and the primary threshold has increased. That would appear to mean that for any given level of earnings, the 2.05 per cent of the allocation will be lower because the band is narrower, and the 1 per cent will be greater because the starting point is lower. However, overall, with constant earnings, this part of the NHS allocation would appear to be reduced. Similarly, the constant 1.9 per cent NHS allocation from employer contributions would appear to be less because it starts from a higher secondary threshold. The same issue arises in respect of class 4 contributions.
Given that GAD assumes the number of jobs to be the same next year as this year, with earnings increasing by just 2.1 per cent, what estimates have been made of the overall NHS allocation? Will the Minister let us know the estimated figure for the current year and how this would change if the percentage of the additional rates applied was variously 75 per cent and 100 per cent? These issues are important in seeking to understand the projected outcome on the National Insurance Fund in the context of the funding that has been allocated to the NHS. On this matter, in responding to the Second Reading debate, the Minister said:
“I hope it is completely clear to noble Lords that nothing in the Bill affects in any way the commitment to increase NHS spending in real terms in each year of this Parliament. We can afford to do this without additional funding from national insurance contributions”.—[Official Report, 2/2/11; col. 1429.]
Anyone who followed the debate in another place, which I will not replicate today because there will be other opportunities, will understand why the Government are effectively failing in this pledge; I refer to the switch in funding to cover social care budget shortfalls, the consequences of the VAT increase on the NHS given the inflation in the costs of treatment, and the costs of the reorganisation.
Perhaps the Minister will tell us, if the Government are to struggle to reach their NHS spending commitment, where the money will come from if the moneys allocated from the National Insurance Fund are not to be used. Will he also let us know how the additional moneys retained in the National Insurance Fund and not allocated to the NHS have contributed to its balance, which is projected now to be £53 billion by 2015-16? Clearly, if the NHS allocations were greater, the balance of the fund would be less and the investment income less—but what would the other ramifications be? We probe with these amendments. I beg to move.
Lord Sassoon
My Lords, I hope that I did not give too much encouragement with my remarks on Clause 1 to indicate that I would be in too accommodating a mode this afternoon. As regards the two amendments, I find this split of the proceeds between different allocated funds rather confusing and arcane. The relevant questions are the big picture ones asked by the noble Lord, Lord McKenzie of Luton, about the impact, if any, on NHS funding.
The point is that although for government accounting purposes—which are important—the moneys need to be allocated, the allocation does not and will not have any impact on NHS funding. It is absolutely not part of government policy to cut NHS funding automatically if, for example, global conditions lead to a reduction in national insurance contribution receipts. The Government would simply make up any shortfall from lower than expected national insurance contributions from other sources.
Even though the noble Lord questions it, the overriding commitment is the one that has been given on National Health Service spending. The amendments do not have any bearing on how much the NHS will have to spend because if the money does not come out of one fund it will come out of other sources of general government expenditure. We are maintaining the level of national insurance contributions allocated to the NHS and taking the additional revenues from rate rises to the National Insurance Fund. That is what is happening here although, as I have said, it will not have any impact on the NHS but merely maintain the previous level of funding. However, putting the additional revenue into the National Insurance Fund will help to ensure that plans for the payment of pensions and other contributory benefits will be sustainable in the long term. Through that funding we can protect pensioners by the new triple lock that guarantees a rise in the basic state pension every year in line with earnings, prices or by 2.5 per cent, whichever is the greater. In ordinary circumstances we would expect contributions to rise broadly in line with earnings, and therefore to rise in real terms.
Under the Government’s proposals, we expect allocations to the NHS to rise in real terms in a typical year. I do not have the breakdown of the split under different percentages. I could get my calculator and work it out but the main point, as I have tried to explain, is that the split itself is not relevant. We are maintaining the allocation and ensuring that the National Insurance Fund continues to grow, and National Health Service expenditure is protected by the commitments that the Government have given in their broader expenditure plans. I hope that I have adequately explained what is going on and that noble Lords will withdraw the amendment.
Lord McKenzie of Luton
My Lords, I thank the Minister for his reply. Of course we will withdraw the amendment; as he knows, that is the practice in the Moses Room. I understand the broad thrust of his point about funding for the NHS, but we shall have to agree to differ on the Government’s performance in that regard. We shall have the opportunity to debate that fully on other occasions.
The Minister said that in the event of a shortfall in contributions, the Government would make up the difference. One point that I was probing concerned the respective levels of the NHS allocation for the current year and for the year we are about to enter. I accept that the Government are preserving the 1 per cent and 2.5 per cent rates. However, the bands on which they are operating are changing; the bands for next year will mean that the UEL is reducing and the primary threshold is increasing. All other things being equal, if there were constant earnings between the two years, you would expect a lower contribution to the NHS allocation than was the case before the changes were introduced. With great respect, I do not think that the Minister has fully responded to that point—but it looks as if he may be about to do so.
Lord Sassoon
I apologise for not responding earlier, but I see that the noble Lord has the Government Actuary’s report, from which the Committee can see that the NHS allocation for 2010-11 will be about £20.5 billion, and pretty much the same for 2011-12. The figures in appendix 6, towards the bottom of page 25 of the GAD report, show that the expectation is £20,608,000,000 for 2010-11 and £20,437,000,000 for 2011-12. That is after the bands change; the amount is very close.
Lord McKenzie of Luton
I had not reached that appendix, so I thank the Minister for those figures. I accept that they are very close. Nevertheless, there is a reduction year on year. Had more than 50 per cent been allocated, the outcome would have been different. It is not just a matter of comparing one year with the next. Dealing with the rates is one thing, but if the bands are changed there will be consequential effects in subsequent years as well.
I will press another point that I raised concerning the impact on the balance of the National Insurance Fund. The actuary’s report shows an increase to some £53 billion over the years to 2014-15. The effect of not allocating more to the NHS is to build up that balance, which will also have implications for the investment in the fund. If more were allocated to the NHS, what would be the effect, other than reducing that balance and changing the investment income?
Lord Sassoon
My Lords, clearly, if there was more in the fund, a greater part of NHS expenditure could come via that route, but I am not clear that there would be any significant consequence in terms of the outcomes we are talking about. NHS expenditure will be determined by the allocation that has been given in the spending review. The noble Lord may quibble about the nature of the numbers and what is covered by them, but they are set out with great clarity in the review. For this purpose we are talking about some relatively simple arithmetic in terms of what would happen if there were to be any shortfall. If there is a surplus, funds that do not go to the NHS go to the National Insurance Fund; that is what has led to the considerable current balance. We are talking about a process where a fund has accumulated over the long term and we need that surplus, although it is predicted to fall, in order to fund future pensions.
In summary, one way of looking at it is that in the short term a high balance will help to tackle a deficit. Indeed, as the noble Lord heard from his officials in the past, and as has been explained to me, that balance is invested with the Commissioners for the Reduction of the National Debt.
Lord McKenzie of Luton
I am grateful to the Minister and beg leave to withdraw the amendment.
Lord McKenzie of Luton
My Lords, I beg to move Amendment 3 and to speak to Amendments 8 and 9. The purpose of this group of amendments is to probe a little the boundaries of the national insurance contributions holiday. As I think we made clear at Second Reading, we see merit in the scheme as an incentive to encourage employment by new businesses but wonder whether the parameters of the scheme are driving a bureaucracy that will considerably lessen its impact.
We acknowledge that the wider the scheme is drawn, the further the resources have to go but the level of take-up referred to when this was debated in the other place suggests that the Government are falling far short of their anticipated take-up. Without praying in aid the report that is due to come more officially in due course, perhaps the Minister might give us some update on the take-up to date. The scheme has effectively been under way for something like nine months. Is the expectation that this incentive will still reach 400,000 businesses over the relevant period? By limiting the holiday to new businesses, the complexity of the legislation inevitably increases as it has to address the avoidance possibilities of people recasting an existing business as a new enterprise. We will come later to the validity of the excluded regions but we accept that if they are to be part of the scheme, the boundaries of the non-excluded regions must be secure.
The purpose of Amendment 3 is straightforward: to secure that,
“the principal place at which the new business is carried on … is not in any of the excluded regions”,
not only when it is started but “throughout the period when” the benefit of the holiday is being enjoyed. There is an argument that the requirement should be satisfied throughout the relevant period, but if that were imposed you would not be able to grant the holiday and the benefit of the cash flow until the end of that period.
Amendment 8 seeks to probe why six months has been chosen as the cut-off point in determining whether a business has effectively been recycled. The Minister might explain why that is considered a more appropriate period than, say, the 12 months that the amendment suggests. Perhaps he would also take the opportunity to expand on some of the terms in Clause 5. A business is not a new business for that clause’s purposes if a person has, within the defined period, carried on a,
“business consisting of the activities of which the business consists”.
That might be abundantly clear in many circumstances but not, we suggest, in others. Will a retail business—say, a grocery store—conducted in one part of a non-excluded area consist of the same activities previously carried on by that person if the business were a retail business in a different location selling the same type of products? What if the product range were different—children’s clothing, say—but trading were from the same location and, possibly, under the same name?
The purpose of Amendment 9 is to test whether there is any leakage of the benefit of the holiday where P genuinely starts a new business which is run alongside an existing business of P. In part, that depends on whether it is a single business or there are two or more separate businesses. Organising an expansion as a branch of an existing operation would presumably not be a new business; organising via a separate company or partnership could be. What, in the arrangements in the Bill, would prevent employees being employed by the new business with some recharge to the other businesses? Does Clause 6(1)(a) require employment wholly for the purpose of the new business?
I would not expect the Minister necessarily to respond in detail to all of these points this afternoon. They are raised to highlight the fact that focusing on new businesses and having excluded regions complicates matters—sometimes, I suggest, considerably. It certainly complicates the legislation, notwithstanding the general anti-avoidance provisions of Clause 10, which we thoroughly support. It will inevitably be the case that when boundaries to a scheme are set down, there are those who will seek to circumvent them. I am not sure whether the Government have been wise in offering so many of these opportunities.
Baroness Kramer
My Lords, I apologise if my newness to the institution shows in my bobbing up at the wrong time. I wish to make a couple of small comments on the amendments in this group, although my comments are less about the detail and more, in a sense, about questioning the underlying principle.
For all of us, the notion that new business can be stimulated to be a fountain of growth and of new jobs is obviously highly desirable, so an effective take-up of the programme would, I suspect, be met with pleasure on every side of the House. However, given the potential for a review period as we move through the Bill, might it not be good to keep in the back of one’s mind that even new jobs that come from existing businesses can be valuable, even if the take-up does not reach the targets of the initial programme? It strikes me that that would not be a failure, given that economies are volatile and take-up can take time but that jobs are beneficial even if they originate from business that is already under way. It might be important to ensure that this whole category of issues is critical in any review that might come one year after the initiation of the programme so that the Government can consider whether they would be wise to expand the categories in order to achieve the underlying intention of the Bill.
Lord McKenzie of Luton
Again, I am grateful to the Minister for his response. I would like to reflect a little on what he said on Amendment 3 and the application of Clause 7(3) but we see the import of that response. Of course, I shall not press any of these amendments this afternoon. I agree with the noble Baroness, Lady Kramer, about the take-up of the scheme as conceived; if it does not use the resources and if there is a view to possibly recasting it, the value of new jobs for existing businesses is certainly something that the Government might consider including. I entirely accept, as we all would, that you have to strike a balance on the cost of these things and on where you draw the line. I would hang on to my point and spend a little time trying to bust the anti-avoidance provisions. By and large, I think they are pretty secure. The more targeted it is, the greater the risk of avoidance arrangements and people trying to take the benefit of something which is not intended. Obviously, the broader the scheme, the less likely that is to happen. In the interim, I beg leave to withdraw the amendment.
Lord McKenzie of Luton
My Lords, I shall speak also to the other amendments in this group. As we discussed at Second Reading, and as was pursued in another place, we have concerns that the national insurance holiday is targeted by crude geographical area and not by any more objective assessment of need. These amendments variously look to remove Greater London, London, the south-east and the eastern region as excluded regions. As we have just discussed and as we shall discuss further under the next grouping, there are practical ramifications and administrative costs in excluding certain parts of the UK from the benefit of the holiday.
The Government’s chosen method of targeting is to look at those areas with the greatest reliance on public sector employment and to do that at regional level. Given that the RDAs are being abolished—that is about to be debated in another place—and that different economic groupings are being established through LEPs, can the Minister say on what basis the analysis has been undertaken at a regional level? We certainly acknowledge that the scale and speed of cuts in public spending will have devastating effects on unemployment, both public and private. If the basis of targeting is reliance on public sector employment, perhaps the Minister can say a little more about how this measure is determined.
For example, does the Minister accept that direct employment in the public sector is only part of the story? Parts of the private sector are as heavily reliant on public expenditure as perhaps those in the public sector that provide direct employment. That can be for a combination of reasons, including previous outsourcing of functions of central or local government and the reliance on public sector construction contracts. For instance, the Building Schools for the Future programme would have provided significant employment opportunities. For example, we know that the Government have been recruiting via agency companies in order to keep head counts down. Perhaps the Minister can say whether those arrangements are included as part of the public sector.
Another issue to consider is the extent to which spending cuts are borne fairly and proportionately across areas. In devising this policy, what analysis was undertaken of how spending cuts are being borne across the country? Have the Government sought to differentiate between front-line and other staff? We certainly accept that levels of public sector employment are one measure of vulnerability to spending cuts, but by taking a regional perspective the Government are averaging out high reliance on the public sector in some parts of the excluded regions. Debate in another place highlighted a number of constituencies in the excluded regions which were in the top 10 for public sector employment. These include Oxford East in the south-east, Lewisham East in London and Luton North in the eastern region. It was highlighted that Newham has a public sector employment rate of 33.6 per cent but is excluded from the holiday, whereas Macclesfield, with a rate of 11.8 per cent, is included. The Government’s approach does not recognise differences within regions and could be giving rise to significant deadweight costs. However, at a regional level, London has a higher employment rate than three regions which are not excluded. It is difficult to see the sense in that.
The east of England is the region that I know best. Currently, the east of England business start-up rate is below that of London, the south-east and some international comparator regions. The region requires a skills base that better meets the needs of regional businesses. It is also underperforming in terms of levels of GVA compared with London and the south-east and has a marked east-west split in economic performance. Workplace earnings vary acutely, with workers employed in Suffolk, Norfolk and Southend-on-Sea being the lowest paid in the region. Despite the region’s overall high employment rate, areas of high and persistent unemployment remain. This has a major impact on levels of deprivation and health inequalities. While some districts in the region are among the most prosperous in the country, 11 districts are rated among the most deprived in England.
The February labour market statistics are very worrying, particularly the 66,000 increase in the unemployment rate among 16 to 24 year-olds. It appears that the benefit of the holiday is simply not available to some of the worst affected areas. Two of the top 15 constituencies in the UK with the highest unemployment rates are denied—both Luton constituencies, ranked 168th and 269th, are excluded. A detailed analysis of deprivation data suggests the same picture. Some areas of greater affluence are included in the scheme ahead of others with greater levels of deprivation.
We accept that public sector employment is in some measure a proxy for vulnerability to spending cuts and that an incentive for private sector businesses can help. It is also accepted that if there are to be geographical exclusions and inclusions, the broader these are the less likelihood there is of displacement activity. However, the scale of the exclusions fundamentally calls into question the fairness of the policy as cast. I beg to move.
Baroness Kramer
My Lords, I rise to speak because I grew up and have spent much of my political life in Greater London. Like most Londoners, I would defend to the last any opportunity or benefit that might come to London. However, I recognise that if areas such as Greater London, the south-east and the eastern region—I know the latter region less well—were included in this scheme, they would suck up the overwhelming majority of funds that the Government could make available. At a time of great prosperity that might not matter, but at present those of us who live in the better-off regions have to be conscious of how seriously difficult life can be in other parts of the country, particularly those which are losing a significant number of public sector jobs and are dependent on those jobs.
Lord Sassoon
My Lords, I am very grateful to my noble friend Lady Kramer for answering the main thrust of the questions put by the noble Lord, Lord McKenzie. This measure does need to be targeted. It cannot be targeted in a way that picks out pockets of deprivation—of which there are a significant number in London and elsewhere. However, the basis on which we came up with the holiday includes a relative regional effect. Of course, if we were to sweep away all the geographic exclusions, the thrust of the holiday, which will be to have a relative regional effect, would disappear. On the other hand, as my noble friend says, unlike other measures, this would not be an appropriate measure to target in a subregional way—that would not be feasible.
We have gone with a broad regional analysis. The simplest way to explain the basis for doing this is through the numbers for public sector employment as a percentage of total employment by region. The latest available data when the policy was formulated showed that against a national UK average of 25.1 per cent public sector employment, the three lowest regions were the south-east with 22 per cent, London with 22.5 per cent and the eastern region with 23.1 per cent. That was the principal basis on which the exclusions were made.
My noble friend made the critical point that I was going to make about cost and targeting the money. If the three excluded regions were included, that would increase the total cost of the holiday by some two-thirds. To put it another way, out of the total holiday cost, two-fifths of the benefit of the holiday would go to those regions that are least dependent on government employment, and only three-fifths would go to those regions that are more dependent—in some cases considerably more—on government public sector employment. At the heart of this measure is the belief that the funds available should go to the regions that most need them on this metric.
Indeed, the evidence in the public evidence session on the Bill supported that. For example, representatives from the Federation of Small Businesses and the British Chambers of Commerce made it clear that the south-east is more resilient than the rest of the UK and new business formation would not be significantly harmed because the holiday was not available in these regions. It is worth reminding the Committee that all new and existing businesses in the south-east will benefit from the increase in the employer national insurance contribution threshold and in the reduction in corporation tax rates. Therefore, considerable benefits go to the region through our wider package of measures.
There were questions about the different definitions of regions and so on. The LEPs do not have geographic boundaries that equate to the regions and, in theory, could cross the regional boundaries that we are using. In effect, they are groupings by local authority boundary. Yes, there are other ways of doing it. We have taken the regions as defined for the purpose of public sector employment, which we think is the most cost effective way of targeting the benefit.
Lord McKenzie of Luton
I thank the Minister for that response and the noble Baroness, Lady Kramer, for her contribution. I do not think that we will totally see eye to eye on this issue. The noble Baroness referred to better-off regions, but that does not address the point that regions are not homogeneous. For example, there are huge disparities across the eastern region, but because of areas of particular prosperity in aggregate the area is counted out. As a result, those areas where there is deprivation and high unemployment lose out. I agree that it is to be hoped that there are other arrangements which would enable jobs to be created via one mechanism or another, but I believe that the regional focus is producing unfairness in the scheme.
The Minister said that the measure could not operate at a sub-regional level. I am not quite sure why not. Exactly the same rules will apply. There simply will be a different set of boundaries and descriptions. He referred to the fact that all businesses are benefiting from the national insurance changes to the threshold and corporation tax deductions. I guess that they are all equally suffering or all suffering from the impact on consumer demand of the VAT increase. But that is probably a debate for another day. I do not think that we will make progress on this issue. Accordingly, I beg leave to withdraw the amendment.
Lord McKenzie of Luton
My Lords, Amendment 10 focuses on the inclusion within the term “business” of “property business” and “investment business”. Section 263(6) of the Income Tax (Trading and Other Income) Act 2005 includes a UK property business and an overseas property business within the definition of “property business”. This would seem to open up the possibility that the principal place at which a new business is carried on is overseas with subsidiary business activities in the UK. Obviously, those overseas operations would not be within an excluded area.
Furthermore, even if those subsidiary activities were in the excluded regions, the national insurance holiday would still seem to apply. I ask myself whether this was what was intended. I looked again briefly at Clause 7(3), which the Minister prayed in aid in response to an earlier amendment. If you have a business where the principal place of that business is outside the excluded region, but nevertheless there are employees operating in excluded regions, what in the Bill would stop a holiday applying to them? Having just argued that I do not want any excluded regions, I might seem to be arguing against myself. However, in terms of the integrity of what is proposed here, it may be that I am missing something. Perhaps the Minister would respond to that. Even if the subsidiary activities were in the excluded region, the national insurance holiday would, I suggest, still seem to apply. There seems to be nothing which precludes a new business being carried on in any of the excluded regions or indeed for the national insurance holiday to be available to employees based in the excluded regions so long as the principal place at which the new business is carried on when it started is not in any of the excluded regions. Is that how the Minister reads the legislation?
The principal place at which the business is carried on will often be very clear, as the HMRC’s very helpful note suggests. However, for an investment business or a property business, it might be much less certain. The core of such businesses might be based on the judgment of a few individuals; it would not necessarily be where the portfolios, especially investment portfolios, are located or indeed where the back-office functions are located or where the contracts for the investments or property portfolios are executed. Where the business is primarily carried on could be quite nomadic or easy to place in a favourable location, perhaps where the guiding minds of the business meet periodically to receive investment reports and make decisions about changes to the portfolio. Does the Minister have a view on this? The noble Lord may feel able to say that it has to be determined on a case-by-case basis and I accept that that may be so. Would he accept that this probing amendment highlights a layer of potential complexity which is introduced into the scheme again by having excluded regions? I beg to move.
Lord Sassoon
My Lords, in relation to what we are trying to achieve through the holiday scheme, it is important to create employment. The question of the nature of the activity which is being engaged in is one where again we want to be as permissive as we can be, consistent with the nature of the scheme. Although the noble Lord raised a number of other points going back to the question of boundaries between excluded and non-excluded regions, what we are principally talking about in the amendment is the type of trade or business which the activity is engaged in.
In that context, as well as making the general point that what we are focusing on is maximising employment growth from a broad range of sectors, it might be worth saying a word or two about what property business includes. It covers activities including property rental, land rental and furnished holiday lettings; for example, I believe that the holiday could be particularly valuable in relation to furnished holiday lettings which, of course, would typically operate in rural areas and often provide employment where there are not other significant job opportunities. I would certainly like to think that the noble Lord, in proposing this amendment, was not intending to remove businesses from relief if that could, for example, prevent people or discourage people from providing holiday lettings, furnished cottages, apartments and so on.
Similarly, on investment business, the Government’s view is that making investments and deriving profits from them is no less inherently a business than buying and selling any other tradable item. As the noble Lord says, there will be case-by-case determination by HMRC if there are questions about the validity of the trade or of boundaries.
Lord McKenzie of Luton
I thank the Minister for his response. We propose to withdraw the amendment. The purpose of framing the amendment and focusing on property and investment business is to highlight again the particular conundrums that arise in respect of businesses of that nature, which often—particularly for smaller businesses—would be controlled by one person or two people. Where that business is principally located would often be where that individual or individuals are, and the substantive back-office-type operations could be completely separate and different. It just highlights the sort of problems that come from having these definitions and having to guard the boundaries of them.
The Minister has confirmed one point that surprised me when I happened upon it. He has confirmed that so long as the principal place at which the new business is carried on is not in any of the excluded regions, other parts of the business could be carried on anywhere including in the excluded regions, and if the employees in the excluded regions happened to be part of the first 10 they would be eligible, or count towards, the national insurance holiday. I see nodding from the Box—perhaps I have been going on too long and they are nodding off—but, if that is right, it looks a bit daft in terms of the definitions we have been probing this afternoon.
I beg leave to withdraw the amendment.
“( ) A new business shall be able to treat two or more part-time employees, up to the value, in terms of hours worked, of a full-time employee, as a single person for the purposes of the relief available.”
Lord McKenzie of Luton
My Lords, to a certain extent the Minister has already pre-empted this and given us a response which will be, I think, that in a sense there is room for part-time workers within the headroom that the count of 10 will provide. Nevertheless, I will seek to pursue the argument.
The technical note issued by HMRC in August adds some clarification on the maximum number of qualifying employees. In particular it makes clear that employees earning below the secondary threshold—that is the start of national insurance obligations—still count towards the 10, even if they are part-time or casual employees. Even if there is no employer national insurance due and no benefit from the holiday, they still count against the number 10.
The purpose of this amendment, which I accept would need some tidying up to be acceptable, is to enable part-time employees to be aggregated when determining the first 10 employees of a new business. It may well be that individual part-time employees do not earn above the secondary threshold so that, irrespective of their employment, a holiday would not produce a benefit for the new business, but it may allow the eleventh or twelfth employee to be counted in and the employer to enjoy the benefit of the holiday. Clearly there would need to be rules about what counts as part-time, and who gets added to whom, as it were, to determine a full-time equivalent, and what happens if a part-timer leaves, but these should be capable of being drawn up fairly simply.
Part-time working has been an increasing phenomenon of the UK labour market in recent years, although it dipped slightly in the last quarter to December 2010. Over the last year, it has increased by some 8 per cent for men and over 1 per cent for women. Nearly three-quarters of those employed part-time are women. Job sharing, especially for women, is an increasing way of balancing caring responsibilities with work, and a removal of the default retirement age, which we thoroughly support, will lead possibly to older people working longer but on a part-time basis.
Taking on part-time workers in the early stages of a new business could help lower risk to the business and increase its survival rate. There is clearly a tension between this and having full-time employees who could generate a benefit from the national insurance holiday. Being able to aggregate part-time employees on this basis would go some way to ameliorating the tension between those two positions. I beg to move.
Baroness Kramer
My Lords, I want to speak particularly to this amendment because it is, in a sense, a real request. Part-time working and job sharing are really important. The Government have done a great deal to promote, indirectly, part-time work through, in effect, a pupil premium that now goes down to the age of two. This for many women means that there is a form of very attractive childcare available from the age of two, even for disadvantaged families, making part-time working far more feasible than it might have been in the past. The culture, however, needs to change, and it seems to me that this Bill, because it resists using the language of part-time work and job sharing, falls into that ongoing trap of not challenging the culture and pushing that change forward. Part-time work is often seen as a temporary accommodation, and as the lowest skilled work—that is not always true, but it is the general image—rather than as something that can be embedded permanently into the way that a company functions.
Lord Sassoon
My Lords, I echo my noble friend Lady Kramer’s view of the importance of job sharing. I, too, could introduce a small reminiscence. I have had job-sharing personal executive assistants working for me, and I know that the arrangement can work extremely well. It gives people who, for example, have children, more opportunities to work. I have seen this in action and I and the Government encourage it.
The difficulty in this Bill is that they will be working in the technical framework of tax and national insurance legislation. One feature of the NICs and tax framework is that there is no distinction in the HMRC construct between full-time and part-time work. Therefore, we decided that the way to accommodate this was through the relatively high limit on the total number of employees. Putting together a construct for this piece of national insurance legislation that distinguished between full-time and part-time staff would be enormously challenging. This was recognised in the public evidence session by the Federation of Small Businesses, which concluded that it would add complexity for the employers who were affected.
There is nothing here that discourages part-time employees, and the 10 employee limit should fully accommodate the likely demand, except in the very marginal case of the few thousand firms—perhaps 2 per cent—that would be restricted by the limit. Again, I ask noble Lords to withdraw the amendment.
Lord McKenzie of Luton
My Lords, I will certainly withdraw the amendment in due course. I am grateful to both noble Lords who have spoken. The noble Baroness, Lady Kramer, spoke with authority and passion about the importance of part-time work and of job sharing. She made a hugely important point about cultural change and recognising that part-time work is not simply temporary work in low-level, low-paid jobs. As she explained, very senior job shares will increasingly form part of the system.
I accept what the noble Lord, Lord Sassoon, said about the difficulty of constructing this within the Bill, and I take the point about NICs and the tax system not making a difference between part-time and full-time employees. We will have some debates tomorrow on the Pensions Bill, and on the attempt to get some aggregation of people in part-time jobs for national insurance purposes so that they get credited at least for pension purposes—but that is a debate for another day.
I recognise that the level of 10 employees gives some headroom to deal with this, although I am disappointed that the Minister could not explicitly cater for part-time workers if for no other reason—it is not really the one that I had thought about—than to push the issue of the cultural change that is needed so that we properly value and encourage, where appropriate, part-time working and job sharing. I beg leave to withdraw the amendment.
National Insurance Contributions Bill
Lord McKenzie of Luton Excerpts(13 years, 3 months ago)
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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.
Savings Accounts and Health in Pregnancy Grant Bill
Lord McKenzie of Luton Excerpts(13 years, 5 months ago)
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Lord McKenzie of Luton
My Lords, this has been a very powerful debate, with some excellent, if not brilliant, contributions, but I express again disappointment that the designation of this Bill as a money Bill precludes us a proper Committee stage. Indeed this issue has clearly exercised a number of speakers this afternoon. To the noble Baroness, Lady Howe, who was obviously unable to support us on the Motion last week, I say that that was not a challenge to the certification by the Speaker; it was simply to get a Committee stage within the existing rules. The noble Baroness, Lady Noakes, is right; we do not and cannot challenge the certification by the Speaker, although if I had the benefit of the incisive research, as ever, of my noble friend Lady Hollis, I might have been a little bolder.
My noble friend Lord Griffiths raised an interesting point about whether this certification was pressed on the Speaker by the Government; it was a new point to me, but something which we ought to understand. Certification comes at the end of the House of Commons process, but that is not to say that somebody might be preparing the arguments for, and be privy to, the prospect of that certification in due course. I think that that is a specific issue that we need to understand in relation to this Bill. If nothing else comes from the debate we have had around this issue, I hope that it will bring a process of some greater clarity to when a money Bill is a money Bill and some greater clarity on the process and timing of that. Notwithstanding that, my noble friend Lady Hughes urged the Minister not to stand behind that certification and to bring forward legislation which clearly has strong support right around the House.
As we heard from the Minister, the Bill implements the second stage of cancelling government contributions to child trust funds, withdraws funding for the health in pregnancy grant and repeals the prospect of rolling out saving gateway accounts, which have been the subject of successful pilots. Each of these measures has resource implications, of course, but they have profound policy implications as well. But given the Government’s focus on deficit reduction, any consideration of the Bill is inextricably linked to consideration of their approach to tackling the deficit, an approach we consider to be flawed.
We have heard the usual party line from the Minister about the deficit, but no objective analysis of our economic position. Over the past two years, the UK has faced the biggest economic challenge for generations as the global financial crisis hit our banks here and our export markets around the world. At the start of the crisis, the UK had the second lowest debt in the G7, below that which we inherited from the Conservative Government in 1997. Borrowing rose not because of our spending before 2007, but because tax receipts fell and spending was allowed to rise to provide extra support for the economy when it was at its weakest. The fiscal stimulus co-ordinated with the rest of the world, with only the Conservatives in the UK a lone voice in opposing it.
The consequences of that—an increasing deficit and an increase in public sector debt—would have to be dealt with by any Government and tough choices would be necessary, but we consider that the coalition Government have made the wrong choices. We reject the Osborne prescription which says the faster, the harder and the earlier you cut, the better for our economy. Indeed, is that not the advice that Ireland was given? We argue for an approach that would bring the deficit down, but in a balanced way that gives the private sector a more realistic chance of taking up the slack. Indeed, last week’s OBR forecast shows lower growth than expected over the next two years, a relatively slow recovery from recession by historical standards, and that the scale of the fiscal consolidation, yet to have its full effect on the economy, has weakened the prospects for growth.
So there is an alternative approach, and there are different choices about how the fiscal consolidation should be borne. But by locking into an imprudent consolidation plan, the Government have restricted policy choices and made a joke of the Chancellor’s declaration that he will not balance the budget off the backs of the poor. That is precisely what is happening in this Bill. There are consequences that arise from the deficit reduction plan, as my noble friend Lady Hughes pointed out.
The noble Lord, Lord Northbourne, rightly challenged us not to accept that poor outcomes for some children do not matter. Of course, it is the pattern of what has gone before. We know that the combined effects of the June emergency Budget and the comprehensive spending review are deeply regressive, and what is fair about measures that have cut almost £7 billion from direct support for children and where women are hit twice as hard as men by changes to tax credits and benefits? My noble friend Lady Armstrong pressed on this, although I think it is right to say that the Conservatives were not originally in support of our action on Northern Rock.
My noble friend Lady Thornton made it clear that there can be little doubt that child trust funds have been a success in terms of encouraging people to save. Evidence submitted in another place showed that there was a 72 per cent take-up of the scheme by parents, with obviously all children being enrolled after 12 months. Some 31 per cent of accounts were being topped up, rather than the 24 per cent suggested. This was across the board, although regularity and amounts varied. Evidence provided in another place variously described child trust funds as the,
“single most successful savings policy to date”,
or a,
“very successful nudge for people with regard to the inertia over savings”.
It is like auto-enrolment for pensions, as my noble friend Lady Drake argued. Depending on the rates of return, it was suggested that accounts could accumulate to as much as £9,000 or £10,000 by the age of 18.
There are obvious benefits of the child trust fund in helping to develop and reinforce a savings culture, encouraging asset accumulation, seeing the benefits of young people having a tangible stake in society, having to make choices, hopefully responsible choices, about resources, and becoming more financially literate. These are opportunities that many young people from better off families have at the moment. Child trust funds opened up these prospects for children from poorer families, and they are now to be denied.
There are a number of options the Government could pursue to retain the prospect of some of the benefits of the child trust funds—certainly the prospect of concentrating the saving instrument on the poorest one-third of families, those on DLA and looked-after children, which was a commitment of the noble Lord’s party at the last election. What has happened to this pledge and what would it cost now to fulfil it? They could reduce the government contribution for a period or defer the abolition for a period, but they have chosen to stop these arrangements entirely. That is to be regretted.
We acknowledge, though, that the national financial advice service, with its limitations, as my noble friend pointed out, and the annual financial health check will help build financial literacy and is to be welcomed. We are told that this service is to be rolled-out next spring. Given its proximity, perhaps the Minister will tell us a little more about its scope and reach and the nature of the levy on the financial services sector, which is to provide the financing.
It has been announced—we heard it again today from the Minister—that the Government are to introduce a junior ISA, but that some of the detail is still unknown, as, indeed, is its final timing. Clearly such a savings product would not benefit from a government initial or interim contribution but would obtain the benefit of a tax-free build up and would be, presumably, tax free on exit. The benefit of the tax-free build up would, presumably, effectively accrue to contributors, whose income would be sheltered. In comparison to the child trust fund, this would be less advantageous to those families on the lowest income, who are not wholly within the charge for tax, and who would miss out on the extra government contribution—the poor missing out again, with higher rate taxpayers benefiting most. So much for Conservative and Lib Dem values.
Evidence given to the Public Bill Committee in another place suggested that providers of child trust funds would need time to get their systems, including distribution systems, in place for the new product—unless, that is, the junior ISA is the CTF without the government contribution. Given this seemingly inevitable gap between the proposed demise of the child trust funds and the introduction of junior ISAs, could there not be some process to bridge the gap by extending the child trust funds or backdating junior ISA arrangements? What attention are the Government giving to the practical implications of introducing a new product? What reassurance can be given to those who, according to Save Child Savings, have invested millions of pounds in the systems, infrastructure and marketing required to ensure consumers have access to a vibrant competitor provider community? What assessment has been undertaken concerning the likely take up of junior ISAs—the cost does not appear in the Red Book, so far as I can tell—and the distributional affect of the benefits?
Nearly every noble Lord who has spoken has focused on the issue of looked-after children, including my noble friends Lady Thornton, Lady Armstrong, Lady Blood and Lord Griffiths of Burry Port; the noble Baronesses, Lady Howe, Lady Noakes and Lady Ritchie; and the noble Earl, Lord Listowel, who has always strongly supported the cause of looked-after children. It has been rightly the subject of debate both today and in another place, but we should acknowledge that, despite progress, we do not have a strong record on providing good outcomes for looked-after children, who enter adult life poorly provided for.
As Barnardo’s and Action for Children state, the transition from care to independence is a critical period for young people and having adequate financial support is a key factor if they are to succeed as they enter adulthood. Child trust funds would have been one way of helping to rectify the problem. The proposed replacement by a junior ISA, which is presumably predicated on parental contributions, does not help without special arrangements.
The budgets of local authorities, who are the corporate parents of looked-after children, have been particularly savaged by the CSR, as my noble friend Lady Armstrong explained. We are aware of the discussions that have taken place with Mark Hoban, Paul Goggins MP, Barnardo’s and Action for Children, and warm words have, indeed, been spoken. What specific proposal is coming forward from the Government? We cannot pass an amendment today, but we hope in the circumstances that the Government can give us the clearest commitment, on the record, to bring forward legislation on this matter.
The Bill before us repeals the primary legislation for the savings gateway, which was to be a tax-free cash saving account available to people in receipt of qualifying social security or tax credit awards. The purpose of this was clear: to promote a saving habit among those of working age on low incomes by way of a government contribution for each pound saved. It was acknowledged by the Minister that the evidence from the pilot studies showed that matching was a popular and easily understood incentive to save. Given that the first accounts were due to be opened in July this year and that the government contribution were to come after two years, no cost would have arisen until 2012-13. It cannot be argued that this was not a targeted programme. Its scrapping will only disadvantage the poor. Why repeal the primary legislation? If the Government insist that the gateway is unaffordable but they recognise its merit, why not defer for a period? The noble Baroness, Lady Noakes, hinted at support for some arrangement to incentivise saving for low-income families.
There is another dimension to this. How does the Minister respond to the submission from the Runnymede Trust that the withdrawal of the savings gateway would disadvantage BME communities in particular, who tend to have lower levels of savings? What detailed assessment of the equality implications of the proposals has been undertaken? I noted that the noble Lord, Lord Northbourne, expressed incredulity at the Government’s claim that the Bill has little impact on equality.
My noble friend Lady Thornton spoke of the health in pregnancy grant with knowledge and passion, as did others. The evidence presented to the Public Bill Committee in another place set out the benefits of the grant and its potential to improve a mother’s diet during pregnancy, as well as providing the wherewithal to help with necessary purchases of equipment. Indeed, the evidence described how the onset of motherhood is a defining moment in a parent’s life but how it can also be a step towards poverty. It is a time when the support of services and financial means should be sustained and not withdrawn.
There may be issues about the timing of the grant, and whether earlier payments would be more appropriate, but withdrawal of this support at the same time as families are facing an array of other cuts is unacceptable and flies in the face of the Government’s expressed objectives of reducing inequalities and improving social mobility and outcomes for children. The Minister spoke about the benefit of a voucher system. I wonder quite how that sits with issues of individual responsibility.
As was pointed out, it is not just universal but means-tested benefits which are being attacked. The Sure Start maternity grant for other than the first child is to go. Yesterday’s announcement that Social Fund budgeting loans will be available to help families to buy maternity items will be of little comfort. What additional resources are being made available to the Social Fund for this?
Our opposition to the Bill is on two levels. It is set in the concrete of a deficit reduction approach which drives conflicts with stated government policy around fairness, social mobility and better outcomes for children. Even within the practical confines of these constraints, it fails to take opportunities to retain and build on that which the Government have acknowledged to be worth while. All in all, it is another measure which will hit the poor the most.
Lord Sassoon
I will relay the message back and discuss it with the Financial Secretary. There were also questions on the capacity of local authorities. My noble friend Lady Ritchie of Brompton gave the most considered view from a local authority perspective, as she should. She talked about local authorities being under pressure. Certainly, I did not hear her say that it would be impossible for local authorities to find funding in these areas, but of course they have to make difficult choices—ones which, going forward, will not be constrained by so much ring-fencing in their budgets, as has been recognised.
Lord McKenzie of Luton
If it is the Government’s proposition that local authorities should pick up the obligation to support junior ISAs for looked-after children, given that the Government have signed up to the principle that they would keep local authorities whole for new burdens, will the Minister give a commitment that if that is the way that it goes, the Government will provide that extra funding?
Lord Sassoon
My Lords, I cannot promise today that all looked-after children will have a junior ISA opened for them and I certainly cannot provide any assurance about government funding. I have said that my honourable friend is looking into all this and, if and when there are proposals, the Government will indeed come forward with them.
I turn to some other important points on child trust funds and their effects on savings. A number of points were made by the noble Baroness, Lady Drake, and the noble Lord, Lord McKenzie of Luton. Have child trust funds had a positive effect on savings? There is currently no robust evidence about whether the child trust fund has increased savings for children. While some parents are using child trust funds, not all are. I have it that 22 per cent of child trust funds received contributions in 2009-10, marginally down on the 24 per cent in the previous year. In any case, we do not yet know whether any of that saving is additional or would have happened anyway. For lower-income families, only 12 per cent of CTF accounts received contributions. I take my noble friend Lord Newby’s points to heart about the untargeted and, certainly, the unproven nature of the effect of child trust funds.
Several noble Lords, including the noble Baroness, Lady Thornton, and the noble Lord, Lord McKenzie, raised the question of the gap before the introduction of junior ISAs. I must go back to the need for us to move quickly to tackle the budget deficit. I realise that this will leave a gap before the junior ISAs are available. However, we are working hard with the industry and other stakeholders to make sure that the gap is as short as possible. We intend to publish draft secondary legislation, setting out full details of the new accounts, in the spring and for them to be up and running in the second half of 2011. We will ensure that eligibility for the new account is backdated to ensure that no child born after the end of the CTF will miss out on the chance of having one of these accounts.
Concerns were raised by the noble Baroness, Lady Hollis of Heigham, and others about the suitability of junior ISAs for children from families on lower incomes, and whether they would benefit only the rich. I certainly do not believe that this will be the case. These accounts are not just about offering people a tax-free option for children’s savings; they will also offer a clear and simple way of saving for children and of ensuring that the money is locked up until the child reaches adulthood. This will prove attractive to many families on lower incomes. Of course, saving issues are difficult for us all, particularly those on lower incomes, but I remind the noble Baroness and the noble Baroness, Lady Drake, that already more than 12 million people with incomes below £20,000 have an ISA. It is penetrating lower-income groups.
I am grateful to the noble Lord, Lord McKenzie of Luton, for drawing attention to the annual financial health check. That was also welcomed by the noble Baroness, Lady Drake. There are questions about advice turning into action but we should start somewhere. I am grateful to noble Lords for drawing attention to that important initiative.
On the question of the Bill’s equality impacts, an initial assessment of these was published on 15 September, when the Bill was introduced. Although we do not say that there are no impacts, the impact assessment shows that those that have been identified are proportionate, given the need to reduce the UK’s budget deficit.
I should say a little about the health in pregnancy grant, which the noble Lord, Lord Northbourne, raised first. I assure him that we have another scheme, the Healthy Start scheme, which targets and supports pregnant women on lower incomes, providing vouchers for fruit, vegetables and milk from the 10th week of pregnancy. This very much goes to the heart of the point that my noble friend Lady Browning made from an expert perspective. It did not look as though the health in pregnancy grant was achieving its original target of reducing the incidence of low birth weights. The Healthy Start scheme is much better targeted towards that.
Lord Sassoon
My Lords, it comes back to where we need the scarce resources available to be targeted. In answer to the questions that were raised about the underlying purpose of the pregnancy grant—namely, to deal with the problem of underweight children and nutrition—the Healthy Start scheme is far better targeted to that end.
I am conscious of the time. In my final minute I come back to the wider point of the Bill. Without the changes that we are making, we would have had to spend more than £3 billion in the four years of the spending review period on the child trust fund, the saving gateway and the health in pregnancy grant. That would simply have been unaffordable. The Opposition have not come up with any ideas of how we could have made alternative cuts.
Lord McKenzie of Luton
My Lords, if the noble Lord is tempting me, I have a whole string of things that I could raise, but does he think that we might do without the £2 billion to £3 billion that we are spending on an unnecessary, unproven and top-down reorganisation of the NHS?
Lord Sassoon
My Lords, out of this Bill we are saving £3 billion of spending which we believe could be better targeted. We therefore believe that that is actually concentrating our scarce resources on disadvantaged children and child poverty—that is where the resources should go—as well as enhancing growth in our economy through spending on infrastructure, low-carbon investments and science.
I realise that the measures in the Bill are disappointing to some noble Lords. I believe that they are necessary. Notwithstanding the fact that this is a money Bill, we have had a good debate. Some follow-up points in one important area have been made from all sides of the House. I believe that the Bill is necessary and I ask the House to give it a Second Reading.
Bill read a second time. Committee negatived. Standing Order 46 having been dispensed with, the Bill was read a third time and passed.
Equitable Life (Payments) Bill
Lord McKenzie of Luton Excerpts(13 years, 6 months ago)
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Lord McKenzie of Luton
My Lords, this short debate has inevitably ranged wider than the provisions of the Bill. As we have heard, the Bill is an enabling measure which authorises payments to be made where persons have been adversely affected by maladministration in the regulation of the Equitable Life Assurance Society before 2001. It also enables provision to be made for disregarding such payments for tax, tax credit and certain other payments. The Bill does not spell out the detail of any compensation scheme or how the provisions of Clause 1(3) are to be implemented. As far as one can tell, no parliamentary approval for the scheme is necessary, although I believe Ministers in another place have committed to finding a way for Parliament to hold the Government to account when the independent commission produces its final proposals. Can the Minister say whether such a way has now been determined and whether it will apply to your Lordships’ House as well as to the other place?
As my noble and learned friend Lord Davidson of Glen Clova made clear, we do not oppose the Bill and consider that we should play our part in bringing resolution to this protracted issue. However, because it is a money Bill, we are constrained from making detailed amendment.
There are many strands to the Equitable Life saga. It is the UK’s oldest insurer but was brought down by what might have seemed the innocuous development some 60 years ago of guaranteed annuity rates on with-profit pension plans. As the noble Lord, Lord Kirkwood, remarked, who today would contemplate such a prospect? However, these were different times. Lower returns on gilts and increasing longevity emphasised that the Equitable Life business model was not sustainable. Its attempts to cover the costs by paying lower final bonuses to with-profit policyholders fell foul of the courts and eventually it was forced to stop writing new business in December 2000.
The impact that this had on its investment policy and returns and the consequent range of decisions inflicted on policyholders fuelled the campaigns for compensation led by the Equitable Members Action Group and the Equitable Life Trapped Annuitants. Matters were not made easier by these issues straddling two regulatory regimes and Governments of the Conservative, Labour and now coalition variety. A lot of water has flowed under the bridge since the failings of Equitable Life became apparent. The matter has spawned a range of inquiries and reviews, including by the FSA, the Treasury Select Committee, the actuarial profession, the Treasury, the ombudsman twice and the Public Administration Committee. As well as reviewing the predicament caused by Equitable Life, these variously ranged over the regulatory regimes, the Government Actuary’s Department, the actuarial profession, the governance of mutual life offices and the accounting for with-profits business by life insurers.
We can therefore support the Government in seeking to bring this matter to a close, notwithstanding that their approach is different from that which we adopted. We have heard from the Minister that it is to be done on the basis of accepting all the ombudsman’s findings and the setting-up of an independent commission to design a fair and transparent payment system.
We know that the CSR has provided an envelope for overall compensation of £1.5 billion. This has been argued to be consistent with the ombudsman’s findings, which acknowledged that a compensation scheme should consider the impact on the public purse. This is a principle with which we agree but, as my noble and learned friend inquired, can the Minister say a little more about how the judgment was made and how this particular figure was arrived at?
The Government have determined that all policyholders of with-profit annuities from the end of 1992 will have their losses covered in full. As we have heard, this figure is calculated to be £620 million. This implies that the balance of £880 million—but only £775 million within the CSR period—is allocated to cover other losses. As the starting point is the recognition of relative loss of £4.3 billion, this means that there is £880 million to cover the recognised loss of £3.7 billion—some 24 per cent. According to the document issued by the Independent Commission on Equitable Life Payments on 3 November, this amount is to cover almost 500,000 holders of individual policies and 600,000 group pension policies. Can the Minister confirm these figures?
Will he also say whether the calculation of relative loss is on a pre- or post-tax basis, a point probed by my noble friend Lady Drake, and what this means for any orders which might be made under Clause 1(3)? It was made clear in another place that payments under the compensation scheme would be free of tax. If relative loss is calculated on a gross-of-tax basis and the post-1992 with-profit annuitants are kept whole on this basis, will not the tax exemption go further than full reimbursement?
Incidentally, it is noted that Clause 1(3)(b) enables compensation payments to be disregarded for tax credit purposes—another point on which my noble friend touched. What is the intended position for pension credit, which is not specifically mentioned in the legislation, and how is this provided for within the Bill?
The Minister will be in no doubt that there are those—in EMAG in particular—who are far from happy with what is proposed. Their anger has been fuelled by raised expectations created by the pledge made by many MPs, overwhelmingly Tories and Lib Dems, in the run-up to the last election—in particular the commitment to support and vote for proper compensation for victims of the Equitable Life scandal and a scheme, independent of government, which was,
“swift, simple, transparent and fair”.
This pledge was effectively replicated in the coalition agreement. Does the Minister argue that what is proposed meets the terms of this pledge, or were those who now support what is on offer ill informed or ill advised? How does the Minister respond to the challenge from the Equitable Members Action Group that the £4.3-billion figure reflects a calculation based on accepting just some of the findings of the ombudsman, which are those that the previous Government accepted, and not the full findings which the coalition Government have adopted?
The Minister will be aware that a particular bone of contention, as we have just heard from the noble Lord, Lord Willoughby de Broke, is the start date for compensation. This is set at policies taken out from September 1992, notwithstanding that the ombudsman concluded that nobody would have sensibly invested in Equitable Life after 1 July 1991. Others have argued on moral grounds that a compensation scheme should even predate 1991. In the other place, the Government have seemingly relied upon a variety of arguments to justify the September 1992 date, including the arguments that: maladministration before that date would have led to overbonusing, a term I am not sure has entered the lexicon of the banking community; that records prior to this time are not readily available; and that policyholders would not have been aware of regulatory failure, had proper regulatory returns been made, before the autumn of 1992. It would be helpful if the Minister could be clear precisely on which of these grounds, or indeed any other, is the basis for the chosen start date. Should the ombudsman at any point in future review the compensation scheme and determine on one basis or another that it is not consistent with her findings and recommendations, will the Government seek to adjust the funding envelope?
The challenge of calculating and devising a compensation scheme is daunting, which is why we in government appointed Sir John Chadwick. His approach was based on different terms of reference, but the concept of looking at classes of policyholders rather than seeking to unpick the investment decisions of millions of separate transactions is sensibly being adopted by the commission. The concept of relative losses has been accepted, as has the methodology. But perhaps the Minister might just comment on the assertions from EMAG that the calculation is in error in that non-contractual exit costs have been deducted from the comparator, thus reducing the difference, on the basis that it would not have been necessary to quit a comparator entity.
In Committee in another place, the Minister indicated that a lot of effort was going into producing a,
“means by which policyholders can raise concerns about the incorrect application of scheme rules to individual cases”.—[Official Report, Commons, 10/11/10; col. 331.]
That implies an opportunity to challenge the calculation, but not the rules of the scheme itself. My noble and learned friend inquired about this, but does the Minister have any further news on how this might operate?
The noble Lord's ministerial colleague has received representations from the Guernsey Financial Services Commission about Equitable Life policies written by its Guernsey branch. This seeks assurances of equality of treatment with UK resident policyholders and policyholders resident in other jurisdictions. What is the Government's response to this and to what extent did the financing envelope reflect this potential obligation?
This has been a brief discussion. As we have already said, we will support the Bill. This has been a long and arduous journey for those who have lost out from regulatory failure, and I fear for some that the journey is not yet at an end. But the Government are entitled to be given credit for the determined manner in which they have taken this forward. We need to ensure that we have robust regulatory systems so that people have confidence to save. As my noble friend Lady Drake has noted, this is even more important with the onset of auto-enrolment. I look forward to hearing the Minister’s reply.
Lord Sassoon
My Lords, I am conscious of the time that we have got to. I can only repeat that, while I accept what the noble Lord reads out as factually correct, he omits to point out what I have said: it is nevertheless the fact that those pre-1992 annuitants could not have been affected by maladministration, which is the purpose of this compensation scheme. Although I entirely accept the analysis of what has happened to their income levels in recent years, the judgment is that, on balance, they were paid more in the early years than they should have been, and that exceeds the reduction in more recent years. It is a regrettable situation but not one that it would be proper to bring into the compensation scheme.
Lord McKenzie of Luton
My Lords, the Minister has been very full in his replies. Could he comment on one specific point? I think that he has confirmed that the comparator is on a gross-of-tax basis. Therefore, if WPAs who have been kept whole in addition get a tax exemption, does that not provide for that group more than its actual loss on that basis?
Lord Sassoon
I am conscious that I have not answered the question. Given the time, I will write with a clear analysis of the tax position and what it results in. I have not lost sight of the question and I will sweep up anything else that I have missed.
I reconfirm that the Government take the maladministration of Equitable Life very seriously. We have shown that resolving this issue is a real priority of the Government and have taken the necessary action to reach a fair and swift resolution. I fully sympathise with the plight of policyholders who have waited more than a decade for justice. It is time we brought their suffering to an end. I believe that ours is the appropriate course of action and that the Bill before the House today will help us achieve that.
Taxation: Deficit Reduction
Lord McKenzie of Luton Excerpts(13 years, 7 months ago)
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Lord Sassoon
I am grateful to my noble friend for drawing attention to the fact that the Government have made a very significant breakthrough in combining the need to get proper tax receipts for bank accounts held in Switzerland with the Swiss Government's understandable concern about banking secrecy. We will have to wait and see what the final details are, but it is a major breakthrough.
Lord McKenzie of Luton
My Lords, will the Minister update us on the issue of anti-avoidance provisions, and in particular general anti-avoidance provisions? The June Budget book says that the Government will engage informally with interested parties. Does not engaging informally display a certain lack of seriousness? Will the noble Lord share with us who these interested parties might be? Are they the big law firms, the big accountancy firms, the non-dom community or the international banks?
Lord Sassoon
We are consulting widely in the way that is described and we will come forward with proposals in due course. In the mean time, we have allocated an additional £900 million of expenditure to HMRC over the spending review period, which is expected to result in annual revenue increments of £7 billion by the end of that review period. We are taking action very quickly in this area—much more so than did the previous Government.