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Social Security (Contributions) (Rates, Limits and Thresholds Amendments and National Insurance Funds Payments) Regulations 2019

Volume 795: debated on Monday 11 February 2019

Motion to Approve

Moved by

My Lords, I shall speak also to the Tax Credits and Guardian’s Allowance Up-rating Regulations 2019, and I will explain the changes that the two sets of draft regulations would bring.

These social security regulations make changes to the rates, limits and thresholds for national insurance contributions and make provision for a Treasury grant to be paid into the National Insurance Fund if required. These changes will take effect from 6 April 2019.

First, I will outline the changes to employee and employer national insurance contributions, referred to commonly as class 1 NICs. On class 1 primary NICs for employees, the lower earnings limit will rise in line with inflation from £116 to £118 a week, and the primary threshold will rise with inflation from £162 to £166 a week. The upper earnings limit is aligned with the UK’s income tax higher rate threshold, which will rise from £892 to £962 a week in 2019-20. On class 1 secondary NICs for employers, the secondary threshold will rise with inflation from £162 to £166 a week. The level at which employers of people under 21 and of apprentices under 25 start to pay employer NICs will rise from £892 to £962 a week.

I now move on to the self-employed, who pay class 2 and class 4 NICs. The rate of class 2 NICs will rise in line with inflation from £2.95 to £3 a week. The small profits threshold will rise from £6,205 to £6,365 a year. On class 4 NICs, the lower profits limits will rise with inflation from £8,424 to £8,632 a year. The upper profits limit, which is also aligned with the higher rate threshold, will rise from £46,350 to £50,000 a year.

Finally, class 3 contributions allow people to voluntarily top up their national insurance record. The rate for class 3 will increase in line with inflation from £14.65 to £15 a week.

The regulations also make provision for a Treasury grant of up to 5% of forecasted annual benefit expenditure to be paid into the National Insurance Fund, if needed, during 2019-20. A similar provision will be made in respect of the Northern Ireland National Insurance Fund. I trust that this is a useful overview of the changes we are making to bring rates of support and contributions to the Exchequer in line with inflation.

I now turn to the Tax Credits and Guardian’s Allowance Up-rating Regulations. As noble Lords may know, the Government are committed to a welfare system that is fair to the taxpayer while maintaining our protection for the most vulnerable in society. To put the regulations in context, the Welfare Reform and Work Act legislated to freeze the majority of working-age benefits, including child tax credit and working tax credit, for four years—that is, up to 2020. This helped to put our welfare system on a sustainable long-term path. Specifically exempt from the freeze were the disability elements of the child tax credit and working tax credit. The guardian’s allowance was also not affected.

As per previous years, we are now legislating to ensure that the guardian’s allowance and the disability elements of child tax credit and working tax credit increase in line with the consumer prices index, which had inflation at 2.4% in the year to September 2018. Therefore, alongside our commitment to fiscal discipline through such measures in the Act, the Government are equally committed to protecting those who are most in need of it.

In practice, the regulations mean that we maintain the level of support for families with disabled children in receipt of child tax credit and disabled workers in receipt of working tax credit. They also sustain the level of support for children whose parents are absent or deceased. Increases to these rates are part of the Government’s wider commitment to supporting the most vulnerable people in our society.

This proposed legislation makes changes to the rates, limits and thresholds for national insurance contributions, makes provision for a Treasury grant, and ensures that guardian’s allowance and the disability elements of working tax credit and child tax credit keep their value in relation to prices. I hope noble Lords will join me in supporting these regulations, which I commend to the House.

I thank the Minister for his introduction to the orders. The freezing of working age benefits means that tax credits increase benefits only for workers and children who are disabled. This excludes a whole range of benefits which are crucial to many of the poorest people and families. The Resolution Foundation states that the four-year freeze on working age benefits has been,

“one of the most vivid examples of austerity in recent years as it represents a … real-terms cash loss for millions of low-income families”.

Among the poorest families, the average single parent will be £710 worse off, which amounts to between 3% and 7% of their income. The freeze looks set to cost working-age families £4.4 billion in 2019-20.

I noticed from the Explanatory Memorandum that no consultation was thought to be needed. Last year when these orders went through, the Minister was asked about an impact assessment on child poverty but he said that there was no need as this was done when the freeze was announced. However, we are now entering the fourth year of the benefits freeze. Is it not time an impact assessment was made in relation to the most vulnerable and poorest groups? This is particularly important, first, because the circumstances of these groups need to be taken into account when the migration to universal credit takes place and, secondly, in the light of the evidence of so many reports—for example, by the Resolution Foundation, the Joseph Rowntree Charitable Trust, the Trussell Trust and many others—which draw attention to the poverty and suffering being caused to people and working families at the lower end of incomes.

Does the Minister consider that disabled workers who benefit under the second statutory instrument will be at risk when the Government migrate them to universal credit? Will the Government look at the risk of that process to this vulnerable group? Will they use the forthcoming test-and-learn pilot of managed migration to trial a system where benefit claimants are moved automatically to universal credit so that their income is protected?

My Lords, I too thank the Minister for that introduction. As we have heard, the purpose of the first set of regulations is to make changes to the rates, limits and thresholds for national insurance contributions and provide for a Treasury grant to be paid if necessary. Given the impact of inflation on household incomes, coupled with the poor wage growth over the last decade, we are of course supportive of measures that will ensure that NICs thresholds increase in line with inflation.

But I want to spend a bit longer on the second of these measures, whose purpose, as we have heard, is to uprate the guardian’s allowance and the few elements of tax credits fortunate enough to have escaped the brutal benefit freeze which has been applied across the board—that is, the disability elements for families with disabled children who get child tax credit and disabled workers in receipt of working tax credit. These are to be uprated by CPI, the 12-month measure which was 2.4% to last September. Obviously, that increase is welcome but, as we have heard, it does not cover all the major elements of child tax credit or working tax credit. It does not cover the single parent, couple or 30-hour elements of working tax credit or the child or family element of child tax credit, which is the bulk of the money—all these are frozen. Many of the people who get the tax credits that are being uprated are also in receipt of other benefits such as child benefit, JSA, ESA or housing support, which are frozen as well. This is really quite damaging.

We should not allow an occasion like this to pass without establishing for the record that this is not the way that Parliament traditionally goes about doing this business. The reason that social security benefits and tax credits are indexed to inflation is so that they keep their value. Before 2011, they were linked to the RPI or Rossi, a variant on RPI. When the Government decided to shift that and link them to CPI, it saved the Treasury a lot of money; of course, it cost the same amount to those who were on the benefits. That shift was strongly contested, but at least it retained the aim of ensuring that the value of the benefits stayed at the level determined by Parliament. When the Government made the switch, they claimed it was because CPI was a better measure. But the report published last month by the Economic Affairs Committee of this House pointed out that the Government are not above inflation-measure shopping. For example, when the Treasury is paying out benefits and tax credits, it uses CPI; when consumers are paying student loan repayments or facing increased rail fares, it uses RPI. The coalition Government ditched even CPI, limiting most working age tax credits and benefits to a 1% annual increase from 2013-14. The current Government went further still and froze those tax credits and benefits at their 2015-16 levels until 2020.

The effect of the decision to cut the value of some of the core benefits—which, contrary to what the Minister said in his introduction, go to some of the poorest, most vulnerable people in our country—has been causing huge hardship. Inflation has been running ahead of what was anticipated when the Welfare Reform and Work Bill was passed, which introduced this freeze. That impact assessment cited the OBR forecasts for CPI inflation for each year of the freeze period; the forecasts ranged from 0% to 1.9%. The forecast for 2019-20 was 1.8%; in fact, the relevant CPI rate is 2.4%. That is good news for the Exchequer, which scores a much higher saving than was predicted. Adam Corlett of the Resolution Foundation estimates that the full freeze will now save the Government around £4.4 billion a year, which is half a billion more than originally forecast, and a large part of that saving—a £1.5 billion cut—will effectively begin in April 2019. As Adam Corlett notes:

“So much for ‘the end of austerity’”.

When introducing the rationale for this freeze, the Minister mentioned the importance of fairness, sustainability and fiscal discipline. When the equivalent regulations were introduced last year by the noble Lord, Lord Young of Cookham, he offered a series of justifications for the freeze. These included the claim that the growth in welfare spending had contributed to a record level of debt and was unsustainable, and that it was necessary to make sure work paid. He also mentioned that the Government had taken other steps such as increasing the minimum wage and tax allowances.

These are familiar refrains. Since 2010, Ministers have been telling the country that they cannot afford to pay benefits and tax credits at decent levels. The coalition Government famously said that,

“those with the broadest shoulders should bear the greatest burden”.

Yet a detailed study by Ruth Lupton et al of the coalition Government found that,

“the poor bore the brunt of its changes to direct taxes, tax credits and benefits”.

Meanwhile, with the exception of the richest 5%, those in the top half of the distribution were net gainers from the changes. The researchers found:

“Perhaps surprisingly, overall the ‘welfare’ cuts and more generous tax allowances balanced each other out, contributing nothing to deficit reduction”.

In other words, the coalition austerity cuts were not needed to reduce the deficit but to pay for tax cuts. And the tax cuts did not go to those who needed the help most. If you increase the personal tax allowance, someone earning, say, 70 grand a year gets the benefit of all of it. A single mum working 35 hours per week during school term-time at minimum wage does not earn enough to benefit at all.

If the aim were to incentivise work, why include working tax credit and child tax credit, which are paid to people in work? Those people in work are finding not only that their wages have been squeezed, but the system that is meant to top up their household incomes has been slashed just when they need it most. It is not true that all sick and disabled benefits are exempted, because the ESA for those deemed not fit for work but who are in work-related activity have been frozen as well, as have benefits paid to mothers of young babies whom even the Government does not expect to work.

So I would like to ask the Minister some questions. Will he tell us the rationale for these cuts, given what I have said? I am interested to hear his response to the question he was asked about the impact assessment. Also, what assessment have the Government made of the impact that the freeze has had on poverty levels? What is the Government’s latest estimate of the savings to the Exchequer of this four-year freeze in tax credits over and above the amount originally scored? If he cannot tell me that, could he write to me? Will he commit to return to annually uprating all benefits and tax credits by inflation from 2020?

My Lords, I thank the noble Baronesses, Lady Janke and Lady Sherlock, for their questions on these important orders. I do not dissent at all from the assessment by the noble Baroness, Lady Janke, that we are talking here about some of the most vulnerable people in society, and therefore that our approach should be extremely focused.

Nor, though, would I want the accusation to stand that we have been somewhat impassive to the needs of people in the circumstances in which they find themselves, because one of the greatest routes out of poverty, as we all know, is that of employment. This may not be very helpful, but the noble Baroness referred to my noble friend Lord Young taking these orders through last year. At the time he mentioned the increase in employment, which is now at record levels—I am sure that she, being fair-minded, would recognise that as being something that is helping the poorest in our society immensely; the reform of benefits to ensure that work always pays; and some of the important measures that have been taken, not least the national living wage, the increase in which by 4.9% to £8.21, significantly above CPI, will mean an increase in full- time wage workers’ annual earnings of over £690. Unemployment has fallen by over 1.1 million since 2010.

At the time when my noble friend took the orders through, we made a serious point and there was a rationale for the arguments being made for welfare reform. From 1997-98, welfare spending rose by £84 billion in real terms—

I am sorry to interrupt, and I am sorry that I missed the beginning of the Minister’s statement. Before we move on to the more general question about spending, I do not think he has addressed my noble friend’s point. Given that paid work is supposed to be the best route out of poverty, why are the Government freezing the tax credits paid to people in paid work?

That decision was taken through the 2016 Act that I mentioned in my introduction. It was taken then as part of the need to get our public finances into the right order. That was the rationale for it. I say to the noble Baroness, who is someone else who cares immensely and focuses on these areas, that that was the rationale that we used at the time.

On the specific questions, I turn to the point about CPI that was raised by the noble Baroness, Lady Sherlock. She said the previous Government had announced in the Summer Budget of 2010 that CPI would be used for the indexation of benefits and that they would review the use of CPI for the indexation of taxation and duties. Consistent with that, the default indexation assumption is CPI. RPI is no longer recognised as a national statistic.

The noble Baroness, Lady Janke, asked about the impact of the benefit freeze. The Government are committed to taking action to help the most disadvantaged, with the focus on tackling the root causes of poverty. Our welfare reforms are incentivising work and supporting working families. Since April 2016, the universal credit childcare element has covered up to 85% of eligible childcare costs. We will be investing over £6 billion a year in childcare by 2020. Since 2010, 300,000 fewer children are living in absolute poverty and 630,000 fewer children are living in workless households—a record low. We are committed to helping lone parents to find work that fits around their caring responsibilities. We have extended free childcare for three to four year-olds for working families to 30 hours a week, with over 340,000 children benefiting in the first year.

The noble Baroness, Lady Sherlock, asked some specific questions, which she very kindly said that she would give me the opportunity to answer in writing. If that is acceptable, I will write to her and copy in the noble Baronesses, Lady Janke and Lady Lister, who have also spoken in the debate.

Motion agreed.