Storm in a Teacup

Deliverance Day minus 29 and the Labour and Conservative parties are embroiled in their continuing and fruitless argument about their respective proposals for National Insurance contributions, while the LibDems look on from the sidelines encouraging them like a man offering to hold Dave’s and Gordon’ coats. Given the contradictory claims you could be forgiven for thinking that these decreases or increases are going to save or destroy the economic recovery. The outcome of this fisticuffs will not make one bit of difference to the economy, but it is important for employees making the contribution. If they are £500 a year better off, they can choose what to do with the extra money that they are allowed to keep – the Government is not giving it to them.

With the extra money they could pay off some of their debts, such as the credit card with the highest rate of interest. If they then cut up the card not only will they be better off, the bank will also have more money to lend (liquidity). If millions of people do the same the banks will have funds to lend to small businesses and that will help the economy. If people put the extra money in to a long-term building society account it will be there for a rainy day and the building society can lend to new customers and first-time buyers. That will stimulate the building and housing markets, and that will help the economy. If people decide to spend the extra money, that will help the economy. This seems to be a win win win situation, so long as people are sensible and do not fritter it away on wine, women and song.

Labour denies this and says they need the £6billion to spend on policing, education and the health service. This amounts to 0.4% of GDP and in any case it will increase the employment costs of those three services by £690million. A reduction in the NI contribution will reduce their employment costs and help them to meet their efficiency saving targets. It is like switching the deckchairs on the Titanic. Put simply, are the people better at spending their money or the Government?

This argument is unnecessary and diverting attention from more important issues. Labour is entangled because they have adopted the tactics of the US Democratic Party. That is, attack everything the opposition propose, rubbish it and question how it is to be funded. Later, if it is a good idea recycle the idea and adopt it. Labour has a special unit dedicated to this purpose and nothing must go unchallenged. They also write to and e-mail the media in force, posing as ordinary members of the public. It’s rather childish and pathetic. In the case of the NI reduction Gordon Brown says the idea has been drawn up by the Conservatives on the back of an envelope and that it will cripple the economic recovery. Vince Cable accuses the Conservatives of school boy economics and says they must explain how the reduction will be paid for. The Conservative explanation is shouted down by Labour and the LibDems. Is this of any really interest for us?

Well yes, because it opens a can of worms. National Insurance pays for the state pensions, unemployment benefits, and maternity and bereavement benefits. Why is the Government spending our contributions on other services that should be funded by general taxation? The answer is that the Treasury uses the NI fund like granny’s piggy-bank. They borrow from it, promising to pay it back but it never is paid back. Some people claim that the NI fund does not really exist; it is now merely an entry in a set of accounts. The Treasury wants to merge NI contributions in to the income tax system and have been aligning both systems including the threshold for payment. Business wants to abolish the employer element of NI claiming it is a burden on economic expansion. The Conservatives claim the proposed increase is a tax on jobs and will stifle job creation and lead to job losses. Chancellor Darling counters that it will not affect the total number of jobs in a growing economy. Vince Cable wants to concentrate on taking more people out of the income tax system. None of them produce evidence to back up their claims.

They are all wrong and are only tinkering at the edges. Resurgence set out its proposed reform of the taxation system in the Party Programme, adopted in November 2008. Our starting point was the National Insurance system. In that respect, the Conservatives have also correctly identified that NI is the key to reform. Our proposals are radical and aim to make NI simpler to administer and easier to understand. They also ensure that NI remains separate and ring-fenced, with employers paying a fair contribution towards social security. More to follow.

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