Considered in Grand Committee
I am pleased to introduce to the Committee the Social Security (Contributions) (Amendment No. 2) Regulations 2009 and to speak to the Social Security (Contributions) (Re-Rating) Order 2009.
As the regulations and the order deal with the various national insurance contribution rates and thresholds, it is sensible that we take them both together. I confirm that the provisions in the regulations and the order are compatible with the European Convention on Human Rights. All the changes were announced at the time of the Pre-Budget Report on 24 November 2008.
I will start with the Social Security (Contributions) (Amendment No. 2) Regulations 2009. After an exchange on one of the other orders earlier this afternoon in which there was a slight mistake leading to delay, I have to confess again that there are two minor typographical errors in the preamble to this instrument. Section 122(1) was inadvertently cited. Section 5(6) should have been cited, and the same is true for the Northern Ireland equivalents. These will of course be corrected when the instruments are made. I crave the indulgence of the Committee for those faults. I am also glad to have noted them at this stage and not to have them pointed out to me by the ever-vigilant noble Lord, Lord Howard.
In the 2007 Budget, the former Chancellor of the Exchequer announced a package of reforms to modernise the tax and benefits system. Part of the package included changes to national insurance contributions to align the upper earnings limit with the level at which higher rate income tax becomes payable from 6 April 2009. The upper earnings limit is being increased from £770 to £844 per week to fulfil this commitment. These regulations also increase the class 1 lower earnings limit from £90 to £95 per week. The lower earnings limit is legislatively linked to the level of the basic state pension and is the level of earnings at which entitlement to contributory benefit begins.
Finally, the regulations increase the class 1 primary and secondary thresholds from £105 to £110 per week, which is broadly in line with prices. Earnings between the primary threshold and the upper earnings limit are liable to main rate employee contributions of 11 per cent. Earnings above the primary threshold are subject to the additional employee rate of 1 per cent. Employers pay contributions at 12.8 per cent on all earnings above the secondary threshold.
The Social Security (Contributions) (Re-Rating) Order 2009 sets the NIC rates and thresholds for the self-employed and for those paying voluntary contributions. For the self-employed, it raises the small earnings exception below which the self-employed may claim exemption from paying class 2 contributions. That will rise in April from £4,825 to £5,075 a year, an increase broadly in line with prices. Many people choose to pay these contributions to protect their benefit entitlement. The rate of class 2 contributions for 2009-10 will rise from £2.30 to £2.40 a week, which again is an increase broadly in line with prices.
Also for the self-employed, the draft order sets the profits limits between which main rate class 4 contributions are paid. The lower limit, at which class 4 contributions become due, will increase broadly in line with inflation from £5,435 to £5,715 a year. The upper profits limit will increase to £43,875 for the 2009-10 tax year. This ensures that the self-employed pay main rate class 4 contributions on much the same range of earnings as employees who are liable to class 1 contributions, and is an essential element in making the national insurance system fair for everyone.
The draft order also deals with the weekly rate of voluntary class 3 contributions, which help those with insufficient contribution records in any given tax year to make up a qualifying year for benefit purposes. The rate of class 3 will increase from £8.10 a week to £12.05 a week from April. This is an above-inflation increase and is a consequence of changes made in the Pensions Act 2008 to allow contributors who met certain conditions to pay class 3 contributions outside the existing time limits to improve their basic state pensions. It was made clear when the amendment was introduced that this measure was to be overall cost neutral and that the weekly class 3 contribution rate would therefore be increased accordingly.
The review of contribution rates is accompanied by a report from the Government Actuary detailing the effects of the draft order and regulations, and the draft order uprating benefits laid by my right honourable friend the Secretary of State for Work and Pensions on the National Insurance Fund. I am pleased to say that there is no expectation that the fund will need a Treasury grant for the 2009-10 tax year.
Northern Ireland has a separate national insurance scheme from Great Britain, but the two schemes are closely co-ordinated and maintain parity of contribution rates. The draft order and regulations therefore cover Great Britain and Northern Ireland. I commend the draft Social Security (Contributions) (Amendment No. 2) Regulations 2009 to the Committee.
Again, I thank the Minister for tabling these statutory instruments. An interesting part of these amendments is the increase in the level of class 3 voluntary NICs as a result of the victory of the noble Baroness, Lady Hollis, during the passage of the Pensions Act 2008. As my noble friend Lord Skelmersdale said then, as welcome as the increased flexibility will no doubt be to those who find it difficult to make up the minimum contributions necessary for a full state pension, contributors will be paying for it. The timing of the increase is also unfortunate. At a time when unemployment is rising, the Government are increasing the cost of employment.
In carrying out his work, the Government Actuary, Mr Trevor Llanwarne, used an earnings growth figure of 3.2 per cent for 2009-10. The Treasury has forecast 2.7 per cent growth for the same year. Both forecasts are thought to be wildly optimistic by most commentators. How would more pessimistic assumptions affect the calculations?
Similarly, unemployment levels have also changed since the Pre-Budget Report. These will affect the use of the fund. Will the Minister comment on whether the surpluses in the fund will be sufficient to cope with these dramatic variables? The surplus is currently used to subsidise the National Health Service and other government spending. Would using the surplus to fill the gaps that I have identified have such a significant impact on government revenues that there could be other consequences, such as a tax increase?
I seem to have drawn the short straw among my colleagues for participating in this annual ritual to approve these two social security orders. In preparation, I had the pleasure of reading the Government Actuary’s report for the first time. It is an impressive document, if largely incomprehensible to an amateur in the field such as me. As we have heard, the good news is that the balance in the National Insurance Fund is in surplus, is well over the recommended one-sixth of annual benefit expenditure, and will therefore need no Treasury grant this year. However, are the assumptions made about unemployment and benefit payments on track, or does the Minister think that they are far too optimistic?
The Government in general seem to be surprised at the speed at which the country has hurtled into deep recession. I see that the Actuary has used the same assumptions of employment and unemployment levels as the Treasury did in the Pre-Budget Report on 24 November last year, and that worries me. After all, the Chancellor predicted growth in the second half of this year, but this has now been revised downwards. It was also predicted that the economy would contract by between 0.75 per cent and 1.25 per cent, but this was also wildly optimistic; I use the same phrase as the noble Lord, Lord Howard of Rising. What are we to make of the assumptions in the report now? Perhaps the Minister would enlighten us.
The actual upratings are, of course, welcome. But no one should think that the benefit system is generous, as many people are now finding out who may have paid contributions for many years and who may now feel cheated that the jobseeker’s allowance is so low. There are several groups about whom we should be greatly concerned. The first is pensioners who do not take up their entitlement not just to pension credit, but also to housing benefit and council tax benefit. This group has grown in the past 10 years, according to the Rowntree report Monitoring Poverty and Social Exclusion. In fact, pensioners are being hit from all directions at the moment, because those with modest savings are finding that their income has plummeted due to very low interest rates. The Government should redouble their efforts to make sure that pensioners who need it at least receive pension credit rather than go hungry and cold, which is almost certainly happening at the moment.
The second group is working-age adults in low-income working families. This group is set to rise, with only low-income jobs available in many areas. The third group concerns the number of children in working families needing tax credits to avoid low income. The Rowntree report states that this increasing need for tax credits is the key to why the Government have missed their child poverty targets.
Another alarming statistic is that the proportion of all low-income households paying full council tax has risen by a third over the past 10 years to 60 per cent; so much for the popular view that the country is full of benefit scroungers. In parenthesis, it is worth noting that the authors of the Rowntree report say that, as far as child poverty is concerned, the much-repeated mantra of work being the best route out of poverty is not necessarily the case. It states:
“Rather, there needs to be an understanding of the problems that work can cause as well as the benefits that it provides”.
Amen to that, I say.
It is perhaps unfair for me to ask the Minister a couple of questions, as he is not the Minister who deals with social security benefits. However, I shall not be deterred. No debate about benefits should fail to ask where the benefit simplification project now stands. There is no doubt that many millions of pounds in benefits are not being claimed because of confusion about entitlements and complex application processes.
Finally, there is worrying evidence that some new benefit claimants, such as lone parents looking for work, are having difficulty in accessing crisis loans from the Social Fund, such is the burden on Jobcentre Plus offices at the moment. Is the Minister confident that enough trained staff are in place at these vital offices who understand the system that they are trying to administer?
I am grateful to both noble Lords who have spoken. As the noble Baroness, Lady Thomas, was kind enough to indicate, I do not normally respond for the Government on these complex and challenging issues. It will become evident to the Committee that I have an obviously limited ability to deal with some of the very detailed issues. I want to deal with the more general issues first, if I may, if only to respond to the broad challenges.
The noble Lord, Lord Howard, predictably identified that the current economic crisis is having a deleterious effect on public finances, on the estimates of growth in the economy and on the consequences for government expenditure. I think that the Committee is well aware of the attendant difficulties, and the noble Lord is right that the assumptions about growth that were made in the Government Actuary’s report were based on all the information and experience at the time, which were linked to the PBR in 2008.
The GAD report recognised that assumptions are not necessarily borne out in practice. Indeed, section 8 of the report allows for divergences from the assumptions that have been made. The noble Lord, Lord Howard, is well aware that divergences will inevitably occur. He does not have too long to wait before the next Budget from my right honourable friend the Chancellor, when the figures for growth will take account of the changed circumstances. It might help the noble Lord to know that, if earnings decrease by 1 per cent over 2008-09, there will be a reduction in receipts of £2.48 billion—an illustrative figure of the difficulties that attend the seriousness of the situation that we all face.
I therefore cannot make assumptions at this point about my right honourable friend’s Budget by telling the noble Lord, Lord Howard, what the effects on health and education will be if the surplus is eroded by the loss of resources that are needed to sustain it at its predicted level. He will have to bide his time. After all, he is a patient man, and he has to wait only a matter of weeks for the Budget, when all will be revealed. He will be able to develop his perspective on what is good for the nation at that time. I have no doubt that a very high percentage of what is good for the nation will be criticism of the Government rather than an effective alternative, but we will wait and see. I will not prejudge the noble Lord on that, and I look forward to the debates that we will have at that time.
I am concerned about the issues which the noble Baroness, Lady Thomas, has introduced to the debate. She may well have been in the House this afternoon when the Government were being berated for the amount of money that was being spent by government quangos on communication. She identifies absolutely clearly that new people are becoming unemployed or dependent on benefits for the first time. They need information, which someone must provide. That is a cost on a communication budget. Inevitably, therefore, I am a little loath to take criticism of government expenditure. I fully appreciate her point about effective communication on entitlement, which is very important. Only the other day, the Government emphasised the extent to which we were directing ourselves to ensuring that families and individuals who are entitled to benefits should have effective communication on those matters. I accept the point that the noble Baroness, Lady Thomas, made in detail about low-income families. She mentioned costs, and she will know that certain costs are decreasing.
I have to take the jibes of the noble Lord, Lord Howard, about the return on investments. That is, of course, an issue for many people on fixed incomes. By the same token, however, inflation is plummeting in certain crucial areas, some of them absolutely critical to the very categories of people that we are addressing. Certain aspects of the cost of living are dropping rather than rising, against our expectations in the Pre-Budget Report before Christmas.
I bear in mind the point of the noble Baroness, Lady Thomas of Winchester, which is borne out by the Government’s response. She will know that we took steps to ensure that cold weather payments for pensioners should increase, against a background of the severity of this winter and recognition of their difficult circumstances. I understand her anxieties on these points. We will have to return to them. They are part of the general issues of necessary expenditure currently confronting the Government, against a very difficult economic situation that we share with the vast majority of countries, particularly those that seek to sustain a requisite level of support for those in need.
I have not dealt with these issues with quite the accuracy that my noble friend Lord McKenzie, the Minister for Work and Pensions, would have. Although he will not forgive me for my weaknesses, I hope that the Committee will.