National Insurance Contributions Bill

Lord Bilimoria Excerpts

2nd reading
Wednesday 1st December 2021 Lords Chamber

[Lord Bilimoria (CB)]

My Lords, on 7 September, as president of the CBI, I spoke of the Government’s plan for social care reform and funding and said:

“There is genuine consensus in the country that social care reforms and greater investment are long overdue.


Businesses accept difficult choices need to be made, but are already set to be hit by a substantial rise in corporation tax in 2023.


After all that business has gone through during the pandemic and the fantastic Government support that followed, now is not the time for tax increases. It’s time to stimulate investment and growth in the economy.


National Insurance increase will directly hurt a business’s ability to hire staff, at a time when businesses have faced a torrid 18 months and are now fighting crippling labour shortages.


Government must be wary of heaping further pressure on businesses who will be central to the recovery, particularly by making it more expensive to recruit.”


I said at that time that this autumn and winter

“will be a critical period if we are to drive a sustainable recovery. The Government must use all the levers it has in its power to encourage more businesses to invest in the months to come and do everything it can to encourage growth.”

That is exactly what the Minister said when he said that parts of this Bill support regional growth.

The National Insurance Contributions Bill introduces new measures regarding national insurance contributions. National insurance is a tax on earnings—some people call it a tax on jobs. It raises huge amounts for the Exchequer. National insurance contributions were forecast to raise almost £150 billion in 2021-22, so they are one of the main ways in which tax is raised.

As I mentioned earlier, on 7 September the Government announced plans to increase the funding of health and social care through a new tax: the health and social care levy, which will be applied from April 2022 via 1.25 percentage point increases on national insurance for employees and employers. The Bill is of course separate from these rises.

Of course, the Bill introduces relief for employers based within free port tax sites. As the noble Lord, Lord Davies, just mentioned, it also introduces national insurance contribution relief for employers of ex-servicepeople. Anything that the Government can do to help them is brilliant, and I applaud them for making an effort.

There are eight new free ports that would be hubs for trade and help to regenerate communities. Of course, we know that, for the eight in England, the successful bidders have been East Midlands Airport, Felixstowe and Harwich, Humber, Liverpool City Region, Plymouth and south Devon, Solent, Teesside and Thames. I have personally met with the young mayor of Teesside, Ben Houchen, who is championing his area, and I heard first-hand about his exciting plans for increasing investment in Teesside, including with the free port.

Clause 1 will allow an employer to qualify for a zero rate of secondary class 1 national insurance on the earnings of an employee at a UK free port site. This would be zero up to the UST, which has been set at £25,000. This was challenged in the debate in the other place, and I ask the Minister: why is it £25,000? In areas where there are other relief schemes, it is set at over £50,000. The more generous it is, the more it will attract investment—if that is the objective, should we not do that? For ex-service personnel, the NIC relief is only for 12 months, while for the free port scheme it is three years. Why cannot the relief period for ex-servicepeople be longer?

The principle of free ports is to encourage investment, including by reducing taxes, to generate growth and jobs and, therefore, eventually raise more revenue. The Bill could have gone so much further in incentivising investments and reducing taxes. There is much research from around the world that shows that lowering taxes actually increases growth. I cite Mertens and Olea: a one percentage point decrease in tax increases real GDP by 0.78% by the third year after the tax change. In America in 2019, Zidar found that a tax decrease of 1% of state GDP for the bottom 90% of earners increases state GDP by 6.6%. I could go on. In 2018, Ljungqvist and Smolyansky looked at 250 state corporate tax changes from 1970 to 2010 to assess their impact on employment and income. They found that a cut of one percentage point in statutory corporate tax leads to increases of 0.2% in employment and 0.3% in wages. They find tax increases almost uniformly harmful, while tax cuts seem to have their strongest positive impact during recessionary environments.

Of course, the most famous of them all is Arthur Laffer, the American economist. The Laffer curve suggests that when the tax level is too high, lower taxes will boost government revenue and create higher economic growth. This theory formed the basis of the growth that took place in the 1980s with so-called Reaganomics, which saw low levels of inflation, a steep rise in private investment and rising incomes. In fact, between 1982 and 1990, the foundations of the Laffer curve enabled the second longest peacetime economic expansion in the history of the United States. Of course, Arthur Laffer advised President Reagan and Margaret Thatcher.

In this country spending is at its highest level since the 1970s and the tax burden is the highest in 70 years. Inflation has already hit 4.2%, and the Resolution Foundation estimates that real wages in 2024 will be just 2.4% higher than in 2008, compared with a 36% rise in the 16 years before the financial crisis. In 2016, the IMF said that austerity policies do more harm than good.

In September, the CBI’s director-general, Tony Danker, gave a speech on business investment. He said we should be doing everything we can to flip business taxes on their head and reward firms which invest; that is essential to high growth and a sustainable recovery. He said that one of the key levers the Government can use to get businesses investing more is smarter taxation. They should reward the firms which invest and stop punishing, for example, greening UK building stock through business rate increases. Does the Minister agree that the business rates system is not competitive and needs huge reform? Does he agree that business investment in the UK has been seriously underpowered since the 1990s? It has deteriorated from 14.7% of GDP in 1989 to a low of 10% at the end of 2019. Of course, we have had the pandemic, and we are still set to be 5% below our pre-Covid levels by the end of 2022. So, we need to do everything we can to increase investment.

However, between 2021 and 2025, the UK Government are projected to invest an average of 3.4% of GDP, compared to 3.9% in America, 4.1% in Canada, 5.9% in Japan and 9% in China. In 2019, net zero and green spending represented 3.8% and 1.8% of the US and EU economies, compared to just 0.55% for the UK’s climate funding. So, we have a huge opportunity here. The Government’s innovation strategy says all the right things to capitalise on the UK’s potential to be a global innovation hub and leader, but the ambition needs to be backed right now.

Our business rates are four times higher than Germany’s, three times higher than the OECD average and higher than those of any other G7 country. Surely, we need to do things such as reform business rates to increase investment. We invest 1.7% of our GDP in research and development and innovation. In 2019, the figure in Germany was 3.2% and 3.1% in the US. Just imagine the impact on our productivity if we invested just one percentage point more.

To conclude, one of the objectives of the Bill is very important, but I do not think it is going anywhere near far enough to genuinely increase investment. The Government say they want a high wage, high growth, high investment, high productivity, high skill economy. I agree with that 100%, but right now we are facing a high tax economy, including the planned corporation tax and national insurance increases, the business rates I have just spoken about and the highest tax burden in 70 years. We need to stop hiking taxes and focus on boosting investment, because that will create the jobs that will pay the taxes that will pay for the debt.