National Insurance for the Right Purpose

Deliverance Day minus 27 and time to set out our proposals to overhaul the National Insurance Scheme, so that it is easy to understand and simpler for the employers to administer and save costs. We would increase the threshold for payment of the employee’s National Insurance contribution to the annual equivalent of the Income Guarantee. Reduce the employee NI contribution to 10p in the £ and remove the cap on payment. Introduce an employer NI contribution based on a 10p in the £ payroll tax. The critics will say that if the Conservatives proposal to rescind next years increase in NI contributions will reduce the take by £6billion, then our proposals will result in at least £12billion less being collected and if the employers reduction is added, it might be a total reduction of £20billion. They will further say that it would lead to an inevitable cut in the state pension. They will be wrong. They will also say that we cannot afford the overhaul of NI at the present time. But, there has never been a right time and it could be 2030 before the Country’s finances are sorted. It is not a question that we cannot afford it. The fact is that we cannot afford not to make the NIS fairer. It is about doing it because it is the right thing to do.

Labour have created the pensions crisis and they are now telling us that in the future people will have to work to an older age, perhaps for fifty years. This month they reduced the number of qualifying years to thirty, in order to get the basic state pension. Now where is the logic in that?  Thirty-five years would have been more realistic and in the future it might have to be forty-two years. Harriet Harpie pushed this through for the benefit of women who had not got the requisite contributions record. This will be a blunt instrument that will have some unintended consequences. They are further complicating the system. They have left the cupboard bare because they have used the accumulated funds for a purpose other than intended.

So let’s be clear. There is a National Insurance Fund and there is also a National Insurance Reserve Fund to top up the main fund if necessary. Even though pensions and benefits are paid on a pay-as-you-go basis there is usually an annual surplus, which at the present time has a balance of £54billion although the working balance is only £8billion. The Government has borrowed the difference to use on the NHS and also in the future on education and policing. There was a clear choice; use the surplus to increase pensions and benefits or boost public spending. Before New Labour took the second option, any surplus would have been invested in gilt-edged securities. It is also worth noting that the estimated notional surplus by 2012 will be £115billion as a result of the two contributions increases forced through by Brown and Darling. In the 2001 General Election, Labour promised that there would no increase in income tax. They got round that promise by increasing the NI contribution. Having done it once they think that they can get away with it again.

Any promises about not increasing income tax have been overtaken with the new 50p rate and there will be other increases after the Election if Labour win. They have also broken all their financial golden rules, including the one about only borrowing for the purpose of infrastructure investment. It is not clear that the new extra borrowing from the NI Fund is going for investment, or whether it will be used to plug a revenue hole. It is also not clear when the Government is to repay the borrowing to the NI Fund, or whether the annual interest of £1.3billion paid to the NI Fund is a reasonable rate of return. There are so many questions to be answered and we know that Brown and Darling never give a straight answer. We are therefore calling for an independent audit of the NI Fund and Reserve Fund in the public interest. We also want to return to the previous practice of investing NI surpluses in gilts and ring-fencing the Funds so that surpluses can be used to pay for a fairer state pension.

We will move the calculation of contributions from a weekly method to an annual basis, and the threshold for payment will be bench-marked against the minimum income guarantee. Anyone with an income less than that will not pay NI contributions. The income guarantee for this year is £132.60 per week. The threshold for NI contributions would therefore be £6895 an increase on the Government’s figure of £5720. We would cancel the proposed 1p contributions increase and also reduce the rate from 11p to 10p in the £ above the threshold; and remove the upper earnings limit. To compensate middle earners we would push up the 40p income tax rate and introduce a 30p rate.

The employers contribution scales would be swept away to be replaced by a simple 10% on the total payroll, which would include bonuses and payments in kind. Some employers, mainly new and small, would pay less. Larger employers, especially those on a bonus system, would pay more. This is more equitable. There would be no need for the special tax on bonuses or for the employee income tax rate of 50p. The overall effect would be neutral and may actually result in a boost to the NI Fund, but with it being used for its intended purpose. An increase to the basic state pension to bring it in line with the income guarantee of £132.60, instead of the actual £97.65 would ensure that no old people missed out on the pension credit. This would not be means tested, but anyone with a second pension would have some clawed back through income tax. It would get rid of a lot of red-tape and reduce the cost of administration at the Department of Works and Pensions.

Labour don’t do simple. If they did, people would be asking more questions.


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