National Insurance Contributions Bill

Public Bill Committee, 15 January 2008.

Christopher Chope (Conservative, Christchurch)

Before we begin, I have a few preliminary announcements to make. If people wish, they can remove their jackets; I see that one or two hon. Members have already done so. Will all members of the Committee please ensure that their mobile phones and pagers are turned off or are switched to silent mode during our proceedings?

Adequate notice should be given of amendments. As a general rule, I do not intend to call starred amendments, so the reality is probably that the time for amendments is passed.

We are still in the early days of taking oral evidence in Public Bill Committees, so it might be helpful if I explain the procedure to make it clear to everyone. The Committee will first be asked to consider the programme motion on the amendment paper, for which debate is limited to half an hour. We will then proceed to consider a motion to report written evidence and a motion to permit the Committee to deliberate in private in advance of the oral evidence sessions that I hope we can take formally.

Assuming that the third motion is agreed to, the Committee will then move into a brief private session. When the Committee has deliberated, witnesses and members of the public will be invited back into the room and our oral evidence session will commence. If the Committee finishes its questioning at a reasonable time before One o’clock—I understand that that is the expectation—it will move on to the more familiar proceedings of clause-by-clause scrutiny of the Bill, after a short suspension to rearrange the room. I hope that that is clear. I now call the Minister to move the programme motion.

Christopher Chope (Conservative, Christchurch)

Copies of any submission that the Committee receives will be made available in the Committee Room, but none has been received so far. I call the Minister to move the motion on deliberating in private.

Christopher Chope (Conservative, Christchurch)

We will now hear oral evidence from the Minister and officials from the Treasury and Her Majesty’s Revenue and Customs. I welcome the witnesses here today. Minister, would you like to introduce the witnesses, and would you be happy to go straight into questions?

Ian Gibson (Labour, Norwich North)

Without implying that this is necessarily bad, is this just a money-raising exercise, principally because you will do anything to get money into the bank for the Exchequer?

Ian Gibson (Labour, Norwich North)

How was this anomaly picked up, and how long has it been in existence? 1066? Magna Carta?

Mark Field (Conservative, Cities of London and Westminster)

I support simplification and can understand one of the ideas behind the Bill. What thought was given by the Treasury to try to make the matter revenue-neutral: in other words, by reducing the upper earnings limit to such a degree that this whole aspect was revenue-neutral? Was any consideration given to reducing the upper earnings limit, rather than to increasing the limit at which national insurance is paid, to get to that point? I can understand the idea that the Treasury would wish to simplify the entire system—that makes a certain amount of sense—but clearly, the way in which the current Treasury has decided to go about this will hit middle-income earners who are about to, or are already, paying income tax at the upper earnings limit. Why was this not made revenue-neutral in such a way that the interests of those people were protected?

Mark Field (Conservative, Cities of London and Westminster)

If I can just pick up on that, there is no disputing the fact that revenue will be raised as a result of the Bill—the question asked by the hon. Member for Norwich, North—but someone must be losing out. If you are saying to me that the middle-income families will find this revenue-neutral, who exactly will be losing out as a result of these measures?

Rob Marris (Labour, Wolverhampton South West)

Dealing with the anomaly that the Minister referred to in her response to my hon. Friend the Member for Norwich, North, I wonder why the alignment of the upper earnings limit and the upper accrual point is being done in two stages. Prima facie, it occurs to me that, after the first step of that alignment, which is effective from April 2008 until April 2009, when the second full step of alignment will be made, the anomaly to which the Minister refers will continue. If that is the case, why?

Rob Marris (Labour, Wolverhampton South West)

I am sorry to interrupt you, but we are dealing with legislative change now. My initial response to your initial response is that we have a Bill in front of us, why could we not do it now?

Rob Marris (Labour, Wolverhampton South West)

I quite understand that. It strikes me that for a year, between April 2008 and April 2009, we will not have the simplification that we will have from April 2009 onwards. I wonder what the legislative constraints to which Mr. Athow referred are, given that we have a Bill before the House now.

Rob Marris (Labour, Wolverhampton South West)

That ratio will not be broken from April 2009 onwards then?

Rob Marris (Labour, Wolverhampton South West)

So am I right that we are getting partial simplification from this April and full simplification for April next year?

Jeremy Browne (Liberal Democrat, Taunton)

On a quick point of clarification, in this immediate year, it will stay within the seven and a half times threshold, but it will be no more simple than the current arrangements. You could say that it will be halfway between confusion and simplicity.

Jeremy Browne (Liberal Democrat, Taunton)

On a point about clarification, what would stop the simplification happening with immediate effect, with the legislation being passed to enable that jump to happen in one go beyond the seven and half ratio?

David Gauke (Conservative, South West Hertfordshire)

I wish to clarify the anomaly to which the Minister referred earlier. I got the impression that you were talking about the upper accrual point and the fact that we are going to run into some difficulties, as opposed to the upper earnings limit? If there is an anomaly, it is the fact that you stop paying national insurance contributions before you start paying higher rate income tax—a gap that has existed for a while.

David Gauke (Conservative, South West Hertfordshire)

Can we just turn to the question of Budget losers? I take your point that, in isolation, the changes to the upper earnings limit will raise revenue—£1.1 billion in 2008-09, and £1.5 billion in 2009-10. One could look at it as part of an overall package, but my memory is that the analysis done by the Institute for Fiscal Studies showed that a group of people earning in the range of £39,000 to £40,000 would lose out overall? Considering it not in isolation but overall, they would lose out. Is that analysis correct? Obviously, there will be some winners and some losers, but I want to identify who are the losers in the overall package. I think it is in that region. Am I correct?

David Gauke (Conservative, South West Hertfordshire)

How many are we talking about?

David Gauke (Conservative, South West Hertfordshire)

I apologise—you might have said this, and I might have missed it—but how many of the 5.3 million are in the £39,000 to £40,000 bracket? Was that figure in there?

David Gauke (Conservative, South West Hertfordshire)

That would be interesting. Incidentally, when I was on the Treasury Committee, I remember asking the then Chancellor whether he agreed with the 5.3 million estimate produced by the Institute for Fiscal Studies, which he did not. But there you go.

David Gauke (Conservative, South West Hertfordshire)

They are the people who will be better off, but they are not the people that the IFS identified as the losers. I take your point that they are marginal losers, but there will be different groups and we must bear in mind fiscal drag. However, may I follow on from a question raised by Mr. Field about how this will work? I take the point that, in simplistic terms, the tax increase—the increase in national assurance contributions and the doubling of the 10p band—paid for the 2p off income tax. In broad terms, that is what it did. How did that work? Did an instruction come from up on high saying, “I want to knock 2p off income tax; find me some ways to fund it!”? I am curious about how the Treasury works in these circumstances.

David Gauke (Conservative, South West Hertfordshire)

I suppose I am asking what drove it. Was the analysis that it would be good to have two rates for personal income or was it a case of wanting to find extra money to fund the 2p off income tax, so that the Chancellor could announce it at the end of his Budget and put the Leader of the Opposition on the back foot? What drove the decision?

Rob Marris (Labour, Wolverhampton South West)

So you admit that he did?

David Gauke (Conservative, South West Hertfordshire)

It was the intention.

David Gauke (Conservative, South West Hertfordshire)

On redistribution, Minister, my memory of the IFS analysis—ignore our relatively small group of 39,000 to 40,000—tells me that it was not a bad Budget for those on middle incomes but that many people who earn less than £18,000 were losers, if only by a small amount. In that sense, from a redistribution point of view, it was a curious Budget, because some of the losers were at the poorer end of the scale.

David Gauke (Conservative, South West Hertfordshire)

This question might be one for the officials, because they were at the Treasury at the time. Did the Treasury, when officials were working through the process of reaching a Budget, ever model a tax-neutral realignment of national insurance and income tax? If you did, I should like to know what it looked like. I assume that it would have a higher level at which people start to pay higher rate income tax. Did you ever model that?

David Gauke (Conservative, South West Hertfordshire)

I might be confused. There are two ways of aligning. You can raise national contributions up around the limit, so people pay 11 per cent. for more, or you could reduce the point at which people start paying higher rate income tax, so rather than paying 22p—it is now 20p—they start paying 40p. In a way, the fact that the Government have raised the upper earnings limit raises less revenue than the alternative approach. Is that correct?

David Gauke (Conservative, South West Hertfordshire)

But if you wanted a revenue-neutral measure, you would shift up the rate at which people pay higher rate income tax. The higher rate threshold, in other words, would go up higher still. I have not done the sums, but rather than 43p, it would be 45p or 46p. Is that correct?

David Gauke (Conservative, South West Hertfordshire)

I am asking whether, if you wanted the realignment to be revenue-neutral, you would raise the point at which you started paying 41 per cent.?

David Gauke (Conservative, South West Hertfordshire)

Presumably, that must be right. If you wanted to make the changes in isolation—I accept your point that they are not being made in isolation—the point at which people started paying 41 per cent. would be higher than is currently proposed by the Government.

David Gauke (Conservative, South West Hertfordshire)

I suppose that what I am asking is whether you ever looked at that as one of the options presented to Ministers, or was it always a given that 2p was coming off income tax and therefore we needed to raise more revenue from elsewhere.

Christopher Chope (Conservative, Christchurch)

Let Jeremy Browne come in on this one.

David Gauke (Conservative, South West Hertfordshire)

I have more questions on clause 1, but there are other issues on which I could come in.

Jeremy Browne (Liberal Democrat, Taunton)

I have a couple of questions further to Mr. Gauke’s. If you wanted to make the proposal revenue-neutral, you could, as you said, make the point at which it kicks in at 41 per cent. higher than is proposed in this legislation, or presumably you could have raised the threshold at the lower point as well. You could have given money back to people at the lower end of the scale, rather than the people at the upper end of the scale.

Jeremy Browne (Liberal Democrat, Taunton)

Was one option that was considered a halfway house whereby you would have gone halfway towards making the measure revenue-neutral—funding a 1p rather than a 2p cut in the basic rate—or was that considered less politically dramatic than the 2p cut? Or was the attraction that of having 20p and 40p as the two simple thresholds on the basis that both are divisible by 10, rather than 21p and 40p?

Jeremy Browne (Liberal Democrat, Taunton)

We are talking about, I think, 5.3 million losers under the overall arrangements. The question is whether you feel that the then Minister could have said, “Wait a second. I can identify two big groups of losers.” That is those who benefit almost or completely from the lower, 10p rate but do not earn enough to benefit from the reduction from 22p to 20p in the basic rate, who are relatively low earners, and the people who benefit from the admittedly somewhat anomalous position of their marginal rate going down—the £39,000 to £40,000 income earners. Those are the two big groups that took a big hit from the Budget.

Christopher Chope (Conservative, Christchurch)

We are talking about national insurance.

Jeremy Browne (Liberal Democrat, Taunton)

Including the proposals on national insurance that we are discussing today.

Christopher Chope (Conservative, Christchurch)

Perhaps the question can be rephrased in the context of national insurance alone.

Jeremy Browne (Liberal Democrat, Taunton)

Do you want me to have another stab at that? As the Minister said, these measures are all considered as part of a package. The changes to national insurance funded the proposals, as did the abolition of the 10p rate. Interestingly, as the Minister has admitted, that meant that there was a redistribution from some people on relatively low earnings, who benefited from the 10p rate but did not earn enough to benefit from the cut in the basic rate to higher earners—something that struck many people as a curious political feature of the budget.

Justine Greening (Conservative, Putney)

Just a couple of follow-up questions. Can I clarify whether the work done by the Institute for Fiscal Studies that looked at winners and losers was done on the Budget outcome? Presumably it did not include the quantified impact of bringing forward the flattening of the state second pension, which is the other half of this Bill. Is that fair? The figures were included in the pre-Budget report?

Justine Greening (Conservative, Putney)

It was not included in the figures. Okay. My second question is brief, and it is about the Minister’s comments on incentivisation to work. The key people who were losers from the Budget were, generally, single people with no children. In terms of their typical profile, I guess that they would tend to be younger people. How does that stack up with our levels of youth unemployment? Although we all understand the desire to ensure that families with children are supported and that child poverty is tackled, that longer-term aim of ensuring that young people are in work in the first place seems to have been undermined by this aspect of the Budget. Was that matter discussed prior to the Budget?

Christopher Chope (Conservative, Christchurch)

Does anyone want to answer that? The reason that I am allowing that question is that the Minister, herself, has said that one of the objectives of all this—

Justine Greening (Conservative, Putney)

Mr. Chairman, that is precisely why I am asking the question.

Justine Greening (Conservative, Putney)

But, it strikes me that perhaps the easiest time to get those who are unemployed into work is before they have additional barriers to work. Taking care of children as single-parent families is clearly identified as a barrier to work. Obviously, employed people who then have children will often get support from their employers. So, it seems that perhaps the danger of the Budget was that it undermined the best time to encourage people to go into employment, which is before they have children.

Christopher Chope (Conservative, Christchurch)

We will move on to something else now. David Gauke.

David Gauke (Conservative, South West Hertfordshire)

Mr. Mitha mentioned earlier the ratio that exists between the upper earnings limits and the primary threshold, which is essentially being abolished within this legislation. Can I ask what the purpose of that ratio was? Why does existing legislation contain a ratio between the upper earnings limit and the primary threshold?

David Gauke (Conservative, South West Hertfordshire)

We know that it needs to be reformed because of the changes that we have been discussing about increasing the upper earnings limit. Do we know what the upper earnings limit primary threshold ratio will be for 2008-09 and 2009-10?

David Gauke (Conservative, South West Hertfordshire)

So presumably we know the figure for 2008-09.

David Gauke (Conservative, South West Hertfordshire)

Do we know what the primary threshold will be for next year?

David Gauke (Conservative, South West Hertfordshire)

Do we know what the upper earnings limit will be for next year?

David Gauke (Conservative, South West Hertfordshire)

Do we know the upper earnings limit for 2009-10?

David Gauke (Conservative, South West Hertfordshire)

If, as the then Chancellor said in his Budget speech in March, that higher rate income tax will be payable at £43,000 and that there will be an alignment at which point the upper earnings limit will be at the same point, presumably all we need to do is to work out what £43,000 is on a weekly basis and that will give us our number. Or am I missing something?

David Gauke (Conservative, South West Hertfordshire)

I understand why you want to clarify that point, but the then Chancellor was able to make the statement that he did in March. Let us say that it was a reasonable thing for him to have said. The Treasury and the Bank of England have not changed their inflation projections. They still talk about 2 per cent., as they did then. Let us for argument’s sake use that £43,000. Is the £800 based on the assumption that it will be £43,000?

David Gauke (Conservative, South West Hertfordshire)

We know that the primary threshold for 2008-09 is £105. Presumably we would be safe to assume that it will not be lower than £105. I do not know historically whether the pattern is that we might expect it to be up another £5 or £2. I do not know the range of the usual increase in the primary threshold on an annual basis. Can you help me on that?

David Gauke (Conservative, South West Hertfordshire)

Of course, I would not hazard a guess on what the economic circumstances will be next year, but one might expect a small increase of around £2 to £5.

Jeremy Browne (Liberal Democrat, Taunton)

If it went up by that sort of figure—let us say, from £105 to £110—we would stay within the seven and a half ratio, because 110 times seven and a half is more than 800. For want of a quid or two on the bottom rate, we will have to legislate to get rid of a 6.5 to 7.5 per cent. threshold that has existed for 16 years, so that it could be 7.55 per cent. or whatever.

Jeremy Browne (Liberal Democrat, Taunton)

But my point is that it is so fractional—I am struggling to divide 800 by seven and a half, which comes to something like £109. You are so close to getting within that without having to take us through this legislative process of abandoning the 7.5 per cent. safeguard as some would see it.

Jeremy Browne (Liberal Democrat, Taunton)

But instead of increasing the bottom threshold to £108.50, you could increase it to £109.50, and spare us this legislative change. Some people may be suspicious that, when you have got rid of the seven and a half, there is only one way to go, which is up and up.

Jeremy Browne (Liberal Democrat, Taunton)

But you could have achieved that objective by increasing the starting point, which now goes up to £105. Obviously, the more you increase that, the easier it is to get within the seven and a half. You have to be careful not to increase it so much that you drop below six and a half.

Jeremy Browne (Liberal Democrat, Taunton)

My final point is that the changes were made around 1992 and included the legislative safeguard that the figure would not be more than seven and a half times higher than the bottom one. A concern that some people may have is that that safeguard is being removed and is not being replaced with a higher level of eight, rather than seven and a half or eight and a half. As I understand it, there is no specified higher level, and it will not require primary legislation in future to change that. Some people will say that they understand that you want to align the two and to simplify the matter, but if you are doing that and all it requires instead is to break the 7.5 multiplier and to make it 7.52 or whatever it will be—it will be a fraction over 7.53—you are opening the doors to go up and up as high as the Government may wish at the time. It seems strange that, for 0.03, this legislative change is required. Some people may fear that Ministers in the future may exploit or even abuse it, when it would require only a tiny tweak to stay within the current limit.

David Gauke (Conservative, South West Hertfordshire)

Mr. Browne rather took my line of questioning—seamlessly—and pursued it.

Jeremy Browne (Liberal Democrat, Taunton)

Sorry.

David Gauke (Conservative, South West Hertfordshire)

I do not know whether Mr. Marris wants to come in; I was going to broaden the question to ask about the way in which national insurance contributions are changed.

Rob Marris (Labour, Wolverhampton South West)

I have a specific point. Let us consider what Mr. Browne said about the limit going above seven and a half to eight and so on. Contrary to the implication of what you said, Minister, if that were to happen and the upper earnings limit ratio went to eight and a half, for example, would not people in the top slice, between seven and a half and eight and a half, pay less tax? The point at which they start paying 40 per cent. would be higher.

David Gauke (Conservative, South West Hertfordshire)

Before we return to the issue of national insurance contributions and the constitutional way in which they are changed, you said, Minister, that there was not really a restriction on the lower end. But if there is a ratio, it restricts both ways, and you cannot cut the rate at which people start paying if you have a ratio that holds you steady at the top. I have not expressed that very clearly, but it applies both ways, and the point of the ratio is that it stops a big distance between the primary threshold—it used to be the lower earnings limit—and the upper earnings limit. Is my understanding correct?

David Gauke (Conservative, South West Hertfordshire)

I should advise everybody to double check any numbers that I calculate, but to follow Mr. Browne’s questions, if the primary threshold in 2009-10 went up to £107—that is at the lower end of our expectations for an increase—and the ratio of seven and a half continued, that would get us above a weekly figure of £800, I think. Correct me if I am wrong.

David Gauke (Conservative, South West Hertfordshire)

So where did the £800 come from?

David Gauke (Conservative, South West Hertfordshire)

Fine. So the figure that we should be looking at is therefore £850, is it, for the purposes of this analysis of what the primary threshold would be and so on?

David Gauke (Conservative, South West Hertfordshire)

I suspect that your calculations might be better than mine. So we are looking at about the £850 figure, to achieve the objective. Therefore, if we were on £105 or £107, the ratio of seven and a half is clearly not going to work, but a ratio of about eight would work.

David Gauke (Conservative, South West Hertfordshire)

I think it would be helpful to the Committee to have an understanding of how national insurance contributions are changed generally. Perhaps it would be even more helpful to do that in comparison with income tax. Obviously, they are both taxes on income, and the relationship between the two is getting closer by the year. Could someone guide us on how rates and thresholds of national insurance contributions are set, compared with income tax?

David Gauke (Conservative, South West Hertfordshire)

I am sorry to interrupt. You mention what happens when there is a shortfall in the fund. What happens if there is a large surplus in the fund? Do Ministers ever recommend a decrease in national insurance? There is a large surplus at the moment, is there not?

David Gauke (Conservative, South West Hertfordshire)

At the moment, the Government Actuary recommends that the fund should maintain a balance equivalent to 17 per cent. benefit spending, which is around £10 billion. In March 2006—I do not know whether there are more up-to-date figures—the balance of the fund was £34 billion, which is £24 billion higher. Are those figures correct?

David Gauke (Conservative, South West Hertfordshire)

It is essentially another tax, is not it? The relationship with spending on benefits is pretty indirect.

Mark Field (Conservative, Cities of London and Westminster)

You mention the money put aside for the NHS. To our mind, that area has totally muddied the waters between income tax and national insurance contributions. It is not, perhaps, too fanciful to suggest that a future Government—perhaps even this Government—might look to do a similar thing by putting a penny on national insurance for the education system, or some other form of moneys. You mentioned earlier that it is a pay-as-you-go system. It now seems apparent, from what my colleague, Mr. Gauke, said, that the reserves are at an historically high level. Is there a realisation that there are likely to be significant takers from that fund in the foreseeable future? Is it the perspective of the Treasury, at least, that it is a prudent device?

Mark Field (Conservative, Cities of London and Westminster)

Thank you for that answer. Mr. Mitha, do you regard the notion of moneys coming out of that historic fund for the health service, which has come about very recently, as undermining the very notion of having that ring-fenced fund?

Jeremy Browne (Liberal Democrat, Taunton)

I understand the official hesitation about answering what is quite a political question, but the answer to the question is yes, is not it? However worthy the cause, that it is a contributory insurance scheme no longer applies—the same with the 1p running right through the system. It means that national insurance is no longer what it says on the tin. The rationale for merging it with income tax is all the greater after the changes that were used to fund the NHS and to honour the promise of not raising basic income tax made at a general election.

David Gauke (Conservative, South West Hertfordshire)

What would be the implications of the changes that we are examining today—in other words, the increase in the upper earnings limit? Presumably, more will go into the national insurance fund, because more will be paid through national insurance contributions. Do we therefore expect this balance to rise further in the medium term?

David Gauke (Conservative, South West Hertfordshire)

I shall avoid a discussion of the number of people who are on out-of-work benefits, which has remained stubbornly above 5 million; but presumably, we can expect the national insurance fund balance of £34 billion to increase yet further. That is not necessarily a criticism, but it is the implication.

Rob Marris (Labour, Wolverhampton South West)

On that point, it obviously depends on the call on the fund. But the call on the fund will be less because the higher rate earners affected by the changes in the Bill will get a lower state second pension than they would have done, and the flat-rating, as it is called, will be achieved by 2031, instead of 2035. What will be the saving on the national insurance fund by bringing that date forward by four years?

Rob Marris (Labour, Wolverhampton South West)

Would I be right in thinking that the calls on the national insurance fund will grow with the state second pension, or is that not coming from that fund? The state second pension is fairly new and an increasing number of people will start to draw on it as the years go by.

Rob Marris (Labour, Wolverhampton South West)

Broadly speaking, subject to the exception to which I referred for higher rate earners between 2031 and 2035, would I be right in thinking that the state second pension’s call on the national insurance fund is likely to increase in the next 30 years?

Rob Marris (Labour, Wolverhampton South West)

I would just comment as a politician that it is quite a good thing that we have that surplus if calls on the fund are going to increase anyway, even when the economy remains strong and unemployment is relatively low.

Justine Greening (Conservative, Putney)

On a point of clarification, Minister, you said at the beginning that the national insurance fund worked in tandem with the need to increase or decrease Government borrowing. So if there is a surplus of £24 billion over what is required, does that, by definition, mean that the Government have had to borrow £24 billion less?

David Gauke (Conservative, South West Hertfordshire)

About the same amount was lent to Northern Rock. We could cut out the middleman.

Can I just return to the question about the procedure for national insurance contributions, which we started on before I sidetracked the Committee with the issue of the national insurance fund surplus? Essentially, Mr. Mitha, you are saying that national insurance contributions—thresholds, rates, etc.—are set by regulation. How does that compare to income tax, just so that we can have this on the record?

David Gauke (Conservative, South West Hertfordshire)

What are the respective mechanisms through which changes are made? I understand that Ministers take a view about what the economy and the public finances require and make decisions accordingly, but national insurance contributions are dealt with by regulations and income tax is dealt with—

David Gauke (Conservative, South West Hertfordshire)

Entirely through the Finance Bill.

Is any consideration given to reforming the way that national insurance contributions work? It seems a bit of an anomaly. I take your point about the restrictions on how national insurance is spent. Income tax and national insurance are both essentially taxes on personal income: one is done through primary legislation, and the other is done through secondary legislation. There appears to be an anomaly. Has any consideration been given to reforming that? Perhaps that is a question for the Minister.

David Gauke (Conservative, South West Hertfordshire)

We certainly do not. [Interruption.] I think that I am safe in making that point. Are you suggesting that you might, Minister?

David Gauke (Conservative, South West Hertfordshire)

We have agreement on that, anyway.

Given that, as you say, the spending of the national insurance fund goes on the health service, as well as contributory benefits, and given the professed desire for greater simplification and the fact that we are making these changes to the upper earnings limit to align with higher rate income tax, is there any view to take this further? For example, there are currently differing definitions of earnings.

John Whiting, former president of the Chartered Institute of Taxation, partner at PricewaterhouseCoopers and a fairly resident expert on Radio 4’s “Money Box”, says: “It is worth noting that the alignment of income tax and mixed thresholds does not complete the alignment of the two levies that many, especially employers, would like to see. We still have differing definitions of the earnings subject to the levies with various anomalies.” He goes on to say: “Hopefully the review of income tax and NIC alignment started by the recent PBR will produce changes that will pay a real simplification dividend, even if this will mean another NIC Bill.” Where are we in relation to the review of simplification in this area?

David Gauke (Conservative, South West Hertfordshire)

Thank you. That answer was helpful in informing the Committee, but I come back to this point, Minister: is there any concern that the parliamentary scrutiny of reforms to national insurance contributions, compared to income tax, is inadequate? We go through this process of separate Bills, but why do we not debate these changes as part of the Finance Bill, as we do with every other tax?

David Gauke (Conservative, South West Hertfordshire)

I take your point on timing, but the issue with the ratio that we have been debating is not an issue for 2008-09. We know that the ratio will be below seven and a half. The issue is for 2009-10. If this were debated later in the year, whether with the Finance Bill or not, there would still be time to make the changes for 2009-10, so that the ratio is reformed. What is the cut-off point at which it is too late to amend the ratio for 2009-10?

David Gauke (Conservative, South West Hertfordshire)

So there is not a specific cut-off point, as such. It is a case of giving notice to employers, because there is an administrative burden involved in any change.

David Gauke (Conservative, South West Hertfordshire)

But, for example, we are debating this Bill, but we cannot tell employers what the primary threshold will be for 2009-10. When will that announcement be made?

David Gauke (Conservative, South West Hertfordshire)

So October, November or December.

David Gauke (Conservative, South West Hertfordshire)

Is there a huge administrative gain for employers in knowing today what the upper earnings limit will be for 2009-10, when they do not know what the primary threshold will be? Presumably, they make their adjustment together. I ask that in curiosity; I do not know the answer.

David Gauke (Conservative, South West Hertfordshire)

So the administrative burden from this Bill is the upper accrual point?

David Gauke (Conservative, South West Hertfordshire)

So I come back to my point, as long as the announcement for the upper earnings limit and the primary threshold is made in October, November or December, there should be plenty of time to do what they need to do. I do not necessarily mean in this year but in future years. Is that a reasonable thing to say?

David Gauke (Conservative, South West Hertfordshire)

We are, therefore, coming back to our comparison with income tax and national insurance contributions. The Finance Bill does the changes for income tax for that year—the year that we are in. Therefore, this summer’s Finance Bill will deal with everything from 2008-09. At the same time, we need to do the national insurance contributions. For argument’s sake, we could not do it at the same time because we are actually a year ahead. Therefore, the two could not be aligned in that sense.

David Gauke (Conservative, South West Hertfordshire)

That is very helpful. I come back then to one of the points that we started with. We have a very different system for national insurance contributions. If we go back to the mid 1970s, the Executive’s ability to make changes by regulation to the system was restricted by things such as the ratio between what was the lower earnings limit, now the primary threshold, and the upper earnings limit. That structure is now being dismantled in this Bill.

Rob Marris (Labour, Wolverhampton South West)

I want to probe some more. If national insurance contributions and the figures and thresholds have to be nailed down by the September before the April, and income tax is not nailed down until the June after the April when the Finance Bill goes through, how will we get continuing alignment for the years 2010-11 onwards? That cannot be done unless you pull out your calculator after the September nailing down of the national insurance figures to tell you what income tax will be from the following June without a political decision on what that income level will be.

Rob Marris (Labour, Wolverhampton South West)

Will that be the case for the upper earnings limit as well?

Rob Marris (Labour, Wolverhampton South West)

Do correct me if I misunderstand you, but in terms of what I might call the political landscape, the income tax thresholds and so on are going henceforth to be moved from the March Budget to the September pre-Budget report, otherwise we will not be able to have the alignment that the Bill seeks?

Rob Marris (Labour, Wolverhampton South West)

What other parameters besides rates?

Rob Marris (Labour, Wolverhampton South West)

So, understandably, we are going to continue with the system of not having alignment for those over the age of 65 who have earned income.

Ian Gibson (Labour, Norwich North)

Is there a masterplan, a head sheet of what will happen year by year and month by month? Have you done that?

Ian Gibson (Labour, Norwich North)

We do not like assumptions, because you sometimes get blown off course. We want facts and good statistics to back them up—a bit of analysis.

David Gauke (Conservative, South West Hertfordshire)

Does the Minister agree with Mr. Marris’s question that, as far as the political landscape is concerned, this is going to make the PBR a more significant event than it currently is? Does it throw up any practical concerns? We know that the state of the public finances can change fairly dramatically from the autumn through to March, when the Budget is announced. Indeed, that has happened a fair bit in recent years. Therefore the decision as to what you do with income tax is going to be made at a time when you are less sure of the state of the economy and public finances than previously was the case. Is that a concern?

David Gauke (Conservative, South West Hertfordshire)

I presume that we are talking just about thresholds, rather than rates. There is no reason why the rates of income tax could not be changed in the March Budget.

Justine Greening (Conservative, Putney)

One of the issues that arose on Second Reading was the chronology of when the fact that the flattening of the state second pension needed to start earlier was identified. When was that consequential issue identified by the Treasury?

Justine Greening (Conservative, Putney)

Was there a reason why this particular impact was not flagged up in the Red Book at the time of the Budget?

Justine Greening (Conservative, Putney)

Where is the narrative highlighting that in the book?

Justine Greening (Conservative, Putney)

Where in the Red Book? I just want to find which paragraph outlines the impact on the state second pension and the flattening period and the possibility of bringing that forward.

Justine Greening (Conservative, Putney)

So that was not mentioned?

Justine Greening (Conservative, Putney)

Okay, was there a particular reason why that was not specifically mentioned?

Justine Greening (Conservative, Putney)

Was there a sense of the size of this impact in terms of revenue? In the pre-Budget report it totals up to £730 million over the comprehensive spending review time frame. Was there a sense that it was of that order, in terms of impact?

Justine Greening (Conservative, Putney)

If you had got through that process of assessing the financial impact of this and if those figures had been understood at the time of the Budget, have you made any assessment of the changes that would have been made to the winners and losers conversation that we had earlier this morning about the numbers of households who would have been better off? Do you have any understanding of how that would have differed.?

Justine Greening (Conservative, Putney)

I suppose that the context for my question is that the total policy decisions for 2008-09 and 2009-10 were, I think, pitched by the Government as essentially revenue-neutral. Obviously had those impacts been included, that picture would probably have changed.

Justine Greening (Conservative, Putney)

How long did it take you to get through that process? When did you first have an understanding of what the likely revenue and costs would be? Was it two or three months after the Budget?

Justine Greening (Conservative, Putney)

Why did you not start that process earlier, so that it was finished by the time of the Budget?

Justine Greening (Conservative, Putney)

I absolutely understand that those are complex calculations, but I am just trying to understand why that process did not start well before, presumably at the time of discussion about the overall Budget package. Why was that not included as part of the discussion and calculation process?

Justine Greening (Conservative, Putney)

You managed to do some calculations on things in the Budget such as gift aid and an increase in benefits that had a net impact of £5 million. What I am trying to find out is why calculations on that—which over two years toss it up to £730 million, a substantial sum of money—were not prioritised to be done in time for reflection in the Budget.

Christopher Chope (Conservative, Christchurch)

Right?

Justine Greening (Conservative, Putney)

Actually, I still have some questions. I was just pausing for thought over whether to pursue that particular line. Perhaps I will move on.

Christopher Chope (Conservative, Christchurch)

David Gauke.

David Gauke (Conservative, South West Hertfordshire)

I would just like you to clarify something about the figures in the Red Book, Mr. Athow. I apologise if you do not have a copy in front of you, but items 20 and 21 deal with income tax and national insurance contributions. The first regards the phased alignment of five thresholds; the second relates to raising the higher rate threshold and upper earnings limit. As far as the projections of the financial implications to the Exchequer for, say, 2009-10 are concerned, is that figure net of the additional rebates that will need to be paid to opted-out second state pension funds as a consequence of the higher national insurance contributions?

David Gauke (Conservative, South West Hertfordshire)

Had that been quantified here?

David Gauke (Conservative, South West Hertfordshire)

Just to explain why I asked the question: in the PBR, in the list of revenue-raising items, a saving is identified, which essentially the Government are explaining is the additional cost incurred because more rebates are being paid out, which was not the intention. I understand that, but was that additional cost picked up here? I am slightly worried that we might have double counted that saving, because we did not identify the additional costs in the first place, but now we are identifying the saving in the PBR. I am sure that that has not happened, but I would be grateful to know why not.

David Gauke (Conservative, South West Hertfordshire)

I am grateful for that clarification. Also, can I clarify whether Ministers were informed of the matter prior to the Budget being announced on 21 March?

David Gauke (Conservative, South West Hertfordshire)

I am sure that they were, but were they informed of that matter? Were Ministers aware of that?

David Gauke (Conservative, South West Hertfordshire)

Was the Chancellor informed that there would be a knock-on impact for the second state pension as a consequence of the changes in national insurance contribution that he was due to announce?

David Gauke (Conservative, South West Hertfordshire)

And work had commenced on that before?

Christopher Chope (Conservative, Christchurch)

I think that Philip Dunne has a question.

Philip Dunne (Conservative, Ludlow)

It is on a similar topic, relating to the decision taken to address an anomaly that appears to have been identified primarily by the Pensions Policy Institute rather than by Ministers, which is that this should be dealt with by a revenue-raising measure at the front of the process rather than by deferring the alignment to a flat rate second pension at the back-end of the process. Will you explain why the decision was taken that way around?

Philip Dunne (Conservative, Ludlow)

I am not concerned so much to understand the process, which we discussed earlier, but about the decision taken that the right approach to the problem was to raise revenue via alignment at the earlier periods, rather than to give up alignment in 2030-31. [Interruption.] I am sorry—not to give up the alignment, but it could have been allowed to align in 2035. Why was it decided that that was a more important criterion than allowing it to slide slightly?

Philip Dunne (Conservative, Ludlow)

I am sorry, but you misunderstood the question. I am not arguing for the do-nothing option, but for considering impact assessment option 4, which was to introduce the upper accrual limit in 2012, when the other measures will be introduced. For a reason that we have not got to the bottom of, you decided that that was not appropriate, although it would have pushed out alignment to 2035. That seems to have been the primary objective; the Government decided to stick to 2030, which, albeit, will raise more tax from people over the next few years.

Philip Dunne (Conservative, Ludlow)

Did you consider the potential impact on the industry in the event that the pension regime does not come in in 2012? This Bill will pass before the end of the tax year. At this point, it is the only piece of legislation that relates to the package of measures introduced in other legislation such as the Pensions Act 2007. However, this Bill is the only one that will bite before 2012, and it remains uncertain whether the earnings link will be restored. You are therefore encouraging the industry to go down a particular course that may or may not link with other measures in subsequent years.

Philip Dunne (Conservative, Ludlow)

I have just one question to follow that up. I hear what you say, but I fail to understand why the industry would be thrown in confusion and would not know what would happen in 2012 if we legislated for, or if you had chosen, option 4, which would have made the upper accruals limit in 2012 clear.

Christopher Chope (Conservative, Christchurch)

Did Justine Greening want to come back on anything?

Justine Greening (Conservative, Putney)

I wanted to clarify the figures and what was included in what figure. Minister, you talked about the windfall impact—the unintended windfall—resulting from the alignment of the upper earnings limit and the upper accruals rate. Was that windfall included in the Budget figures?

Justine Greening (Conservative, Putney)

Okay, I understand. So the reversal of that windfall featured in the pre-Budget report as an impact.

Justine Greening (Conservative, Putney)

And the rebates were not included in the Budget book.

Justine Greening (Conservative, Putney)

I want to pick up on that because, on Second Reading, both my hon. Friend the Member for South-West Hertfordshire and I probed about which figures were in which book—the Budget and the pre-Budget report. The colleague of the Minister who is here was clear about the fact that the flat-rating of the second state pension being brought forward was in the Budget book and, at the time, my sense was that it could not have been given what you have said today and my understanding of what was done.

Can we have some clarification? When the Minister said the hon. Member for Putney

“asked whether we knew at the time of the Budget that there was an issue about aligning the state second pension—flatrating the upper earnings limit—and about the changes that the Bill brings into effect to prevent unintended windfalls for those who earn above the higher earnings limit. We knew that that was the case, so this is not, as has been alleged, incompetence—in fact the figures featured in the Red Book as part of the national insurance contributions calculations”,—[Official Report, 17 December 2007; Vol. 469, c. 664.]

that was incorrect. Preventing unintended windfalls was not in the Red Book; it was in the pre-Budget report and, quite rightly, it could be said that it was a clawback and used as part of the figures that paid for the changes on inheritance tax, but it was not in the Red Book. That was incorrect.

Justine Greening (Conservative, Putney)

But what I am trying to get to is that on Second Reading—

Justine Greening (Conservative, Putney)

Not at all. I am trying to understand the clarification.

Christopher Chope (Conservative, Christchurch)

Let us not anticipate the questions.

Justine Greening (Conservative, Putney)

Not at all. As an accountant, it was something that particularly interested me. I wanted to understand what was in which series of figures. The clear message that we got on Second Reading was that the prevented “unintended windfalls” were included in the Budget book. All I am trying to clarify is that although it is a complex area, that was incorrect. Actually, the figures are correct and it was in the pre-Budget report that the unintended windfalls adjustment was made.

Justine Greening (Conservative, Putney)

I think that if you read back through the quote, you will find that it is at odds. But I understand the position and that is the result that I was trying to achieve. Thank you.

Christopher Chope (Conservative, Christchurch)

Does anyone else have any questions? In that case, it remains for me to thank the Minister and her officials for coming along. At various stages, officials have said that they do not know the answer and that they can go away and find out. I hope that the Minister will ensure that, whenever those references were made, the necessary inquiries will be made and the information provided to members of the Committee. I hope that she can arrange for that.

Philip Dunne (Conservative, Ludlow)

I endorse your statement, Mr. Chope. The Minister read out a list of bands of income that would be affected and the number of people who would be affected. Some of us may have managed to scribble them down, but it would be most helpful if the Committee could be provided with a full copy of the impact assessment on individuals.

Christopher Chope (Conservative, Christchurch)

Do you have the reference there, so that everyone is clear?

Christopher Chope (Conservative, Christchurch)

I thank you very much indeed for coming along.

Further consideration adjourned.—[Claire Ward.]

Clause 1

David Gauke (Conservative, South West Hertfordshire)

I beg to move amendment No. 1, in clause 1, page 1, line 2, leave out from ‘In’ to end of line 5 and insert

‘section 5(3)(b) of the Social Security Contributions and Benefits Act 1992 (c. 4) (earnings limits and thresholds for Class 1 contributions), omit the word “half”.’.

Christopher Chope (Conservative, Christchurch)

With this it will be convenient to discuss amendment No. 5, in clause 2, page 1, line 14, leave out from ‘In’ to end of line 18 and insert

‘section 5(3)(b) of the Social Security Contributions and Benefits Act (Northern Ireland) 1992 (c. 7) (earnings limits and thresholds for Class 1 contributions), omit the word “half”.’.

David Gauke (Conservative, South West Hertfordshire)

May I say, Mr. Chope, that it is a great pleasure to serve under your chairmanship—there was no opportunity to say that formally in the morning’s evidence session? I also thank the Financial Secretary and her officials for their assistance this morning. It is the first time that I have conducted an evidence session of that sort, and I think the same goes for the Financial Secretary. It was an interesting experience, enjoyed by some but possibly not by others.

Before discussing amendments Nos. 1 and 5 in detail and what precisely we are trying to do, it might be helpful to touch upon the broader issue that we discussed this morning. Although we welcome the simplification of the system and share the Government’s view that the objective of aligning national insurance with income tax is desirable, one of our concerns, which we seek to address with amendment No. 1, is that the way in which the Bill is drafted could lead to a substantial reduction in Parliament’s ability to scrutinise legislation in those areas.

As we discussed this morning and questioned the officials, national insurance contributions—their rates and thresholds—are generally amended by secondary legislation within a framework of restrictions laid out in primary legislation. One of those restrictions is that the upper earnings limit must be between six and half and seven and a half times the primary threshold. That restriction is being taken away. I put it to the Financial Secretary this morning that she was “dismantling” those restrictions—a word that she did not disagree with. We are left in a position in which a Government are capable of increasing the upper earnings limit through a simple affirmative resolution procedure, which has not previously been possible. Consequently, personal taxation could be increased by 11 per cent. for all earnings over £43,000, with very little parliamentary scrutiny.

Some Members might welcome that as a desirable policy. My point is not to argue the pros and cons of that particular policy but to argue that it would be wrong to make such an increase without proper parliamentary scrutiny. It is worth stressing that there is a strong body of opinion within the governing party that there is an argument for increasing tax rates. I will not dwell on that, but there is the Fabian Society paper “Narrowing the Gap”, launched in March 2006 by the Foreign Secretary and the Secretary of State for Children, Schools and Families, which called for a 50p top rate tax. Also the Exchequer Secretary—who spoke on Second Reading—was asked, at a Fabian society fringe event at the last Labour party conference, if her party faced a challenge from its opponents regarding the top end of the tax scale; she replied that it did and that she for one hoped that they would be doing a bit of talking about it. Here is an easy way of legislating for just that—one affirmative resolution and we can have, effectively, a 52 per cent. top rate band.

Rob Marris (Labour, Wolverhampton South West)

Can the hon. Gentleman talk us through that a bit more? My understanding is that if one takes, for example, the lower earnings limit of £100 which, using the current ratio of seven and a half, would cap the upper earnings limit at £750 a week, and then one changes that ratio to eight and a half, the figure would go up from £750 to £850. For some taxpayers that would, in fact, be a tax cut, because the point at which they would start to pay 40 per cent. tax would move from £750 to £850 a week. Is that not contrary to what the hon. Gentleman said?

David Gauke (Conservative, South West Hertfordshire)

I am grateful to the hon. Gentleman. He could easily bring me on to one of the other amendments. To answer briefly, there is nothing in the Bill that means that an increase in the upper earnings limit for national insurance contributions will also mean an automatic increase of the point at which people will start to pay higher rate income tax. We will discuss that in greater detail in a few minutes. Were such a thing to exist, his logic would be absolutely right. But it does not exist and therefore it would be perfectly possible to abolish the upper earnings limit on the basis of an affirmative resolution and consequently have a much higher rate of tax on personal income. That was, essentially, the policy of the Labour party in the 1992 general election, which was when the Financial Secretary and one or two other members of the Committee were first elected to Parliament. [Interruption. ] Many moons ago the Financial Secretary says, and I know that that is not her position now. I think that that policy was abandoned after the 1992 general election.

I was interested, looking at Hansard from 16 December 1993, to see that my hon. Friend the Member for Ribble Valley (Mr. Evans) took an intervention from the then hon. Member for Liverpool, Broadgreen—now the Financial Secretary—in which she said:

“The hon. Member has spoken about the need to ensure that those contributing to the fund contribute enough to pay benefits. Why is it that the Government's proposals retain the ceiling on national insurance contributions, which throws the greatest burden on people on lower earnings?”

My hon. Friend then asked the then Member for Liverpool, Broadgreen if that was Labour party policy, and the response was:

“It is a question of fairness and the importance of ensuring that people contribute fairly to the national insurance fund.”—[Official Report, 16 December 1993; Vol. 234, c. 1327.]

My argument is not to take on the merits of that case, although I disagree with it and I think that the Financial Secretary disagrees with it; it is not stated Government policy. However, it is perfectly possible for a future Government, if not the current one—but certainly not one that I would be involved in—to say, “We wish to raise”—[Interruption.]I am touched by the views of the hon. Member for Wolverhampton, South-West on where the future may lie. The fact is that the Bill will enable such a momentous policy and a substantial change in the way taxes are calculated to be carried out by simply abolishing the upper earnings limit. There is nothing within the proposed structures to prevent that from happening, and we therefore seek to deal with that objective in some of our amendments.

Can I also discuss the issue of the ratio that we discussed a little this morning? We pursued the matter with officials to try to properly understand what the requirements are and whether it is necessary to change the current arrangements. I think that there was some uncertainly in all parties as to what the exact numbers would be. I have gone away and done some sums on what the upper earnings limit would be on a weekly basis. The then Chancellor in his budget speech of 21 March 2007, Official Report, columns 826-27, stated that the top rate of income tax from April, 2009 will start at £43,000. I am not quite sure what methodology the Treasury used to translate that figure into a weekly amount, but if that is done on the basis of dividing that by 365 and then multiplying by seven, we end up with a figure of £824.66. If in those circumstances in 2009-10 the primary threshold is £110—we do not yet know if it will be that, but we know it will be £105 the previous year—the ratio of seven and a half which exists in the current legislation, would actually be sufficient.

To be fair, if the sum was done in a slightly different way—by simply dividing £43,000 by 52—we would end up with a figure of £826.92. That would be slightly over the limit. So, as the hon. Member for Taunton pointed out, seven and a half looks to be there or thereabouts. It might not do quite what is necessary, but it is very, very close. Is it therefore necessary, in these circumstances, to completely throw out the structure that we have, and could we not simply widen the ratio to somewhere between six and eight rather than six and half to seven and a half? Were we to do that, we would not only comfortably be able to meet the requirements on the basis of the numbers we have, but there would be quite some leeway.

Even on the basis of the primary threshold for 2009-10 remaining at £105—that is no increase at all from the year before—that would still enable the upper earnings limit to be raised to £43,800, well in advance of the £43,000 that we have in mind. If the primary threshold were to rise by £5 to £110 and we had a ratio of eight, we could increase the upper earnings limit to £45,886.

Jeremy Browne (Liberal Democrat, Taunton)

One of the attractions of keeping the seven and a half multiplier as the upper limit is that if the Government want more leeway at the top of the scale, they would need to increase the bottom number—the £105 or £110 figure. That would have the helpful benefit of assisting some lower earners, who have missed out due to other tax changes in the Budget.

David Gauke (Conservative, South West Hertfordshire)

The hon. Gentleman is right, and, of course, this would be another option available to the Government if they were to find themselves short by a relatively small amount. That is an argument for maintaining the current ratio. It is a reasonable argument, and the criticism that could be made of amendment No.1 is that we are being too generous to the Government by allowing them to widen the bands in this way. But that is the intention behind amendment No.1, as well as amendment No. 2, which applies the same provisions within the equivalent legislation for Northern Ireland.

I should say a word about how the amendments work. Anyone who has just picked up the amendments and looked at amendment No. 1 could be forgiven for thinking that it is somewhat curious, because all it does is omit “half”. I should explain that in context. Section 5(3) of the Social Security Contributions and Benefits Act 1992, as amended by the Welfare Reform and Pensions Act 1999, states that the upper earnings limit is seven times the primary threshold or that it

“exceeds or falls short of 7 times that sum by an amount not exceeding half that sum”.

I confess that the first time—indeed, the second, third and fourth times—I read that, I was somewhat confused. At one point I thought it meant something different. I will say, reasonably confidently, what I think it means. The “that sum” is the primary threshold: so, we are talking about seven times the primary threshold and about an amount not exceeding half the primary threshold. The primary threshold is £100 at the moment, so if the upper earnings limit is not seven times that, which is £700, then as long as it is within half of £100, or £50, then it complies with the ratio. I hope that makes it all terribly clear, Mr. Chope.

On that basis, by deleting “half”, I have not done much for the elegance of an already inelegant clause or section but, essentially, that means that as long as we are within an amount equivalent to the primary threshold on either side of seven times the primary threshold, then we comply with the ratio. That mechanism expands the ratio from between six and half and seven and a half to between six and eight.

The purpose behind the amendment, and subsequent ones, is to attempt to provide some protection for Parliament. It does not prevent the Government from making the changes to the tax system that were outlined in the 2007 Budget. We will hear whatever objections will be made, but all of us, on both sides of the Committee, believe that Parliament has an important role, particularly in the area of taxation, and should guard that role carefully. The current proposals give too much freedom to the Executive and too small a role for Parliament. Politicians from all parties have spoken about the importance of Parliament. Here is a practical example of where there is a problem. The amendment is, in some respects, a small but technical measure, but could prevent the sort of abuse that I outlined at the beginning of my remarks, where a Government may come in and make a fairly substantial change to the taxation system but through a means that involves little parliamentary scrutiny.

Rob Marris (Labour, Wolverhampton South West)

May I take the hon. Gentleman back to omitting “half”, which I have been pondering? He will correct me if I misunderstood what he said—that omitting “half” would change the ratio from between six and a half and seven and a half to between six and eight. My understanding is that the “half” is a margin of error figure, so that it is around 7. So, if one omits “half”, it has to be spot on 7, it does not expand it to between six and eight.

David Gauke (Conservative, South West Hertfordshire)

The hon. Gentleman raises a fair point. That is how I understand it. He is right that section 5(3)(a) says that it has to be seven times, before then going on to the margin of error. I have not deleted that in its entirety. What I have deleted is “half”, where the margin of error is half the primary threshold. If we take out “half”, we just have the primary threshold. I hope that that clarifies the position. The margin of error—it was helpful of the hon. Gentleman to use that expression—is widened, becoming the value of the primary threshold both up and down, rather than half the primary threshold.

This is a modest amendment, which will not prevent the Government from achieving what they have set out to do. However, it will permit parliamentary scrutiny to continue and prevent any large-scale increase, or indeed abolition, of the upper earnings limit without appropriate parliamentary scrutiny.

Jane Kennedy (Labour, Liverpool, Wavertree)

Let me add my words of appreciation to those offered by the hon. Member for South-West Hertfordshire and say what a pleasure it is to serve under your chairmanship, Mr. Chope. This morning was an interesting experience—[ Interruption. ] I apologise if it was not quite as interesting for some members of the Committee as it was for others, but I certainly need debriefing about it to see how valuable it was. As I said, I had not expected a number of the questions. Sensibly, a lot of questions dealt with the figures, which was absolutely appropriate, and we had a thorough sitting. I hope that that means that we will have a fairer wind than we might otherwise have done this afternoon.

The hon. Gentleman made an elegant speech and he is always thoughtful when challenging what the Government are doing. He talked about a momentous change in the way in which the Government are allowed to set the rate of national insurance contributions. He said that nothing in the new structures would prevent a future Government from using the Bill as a lever significantly to increase tax rates. He was also concerned about parliamentary procedures and the opportunity to consider proposals properly.

I do not want to go too wide and I shall come to the amendments, Mr. Chope, but let me say at the outset that the Government’s reforms of the welfare state since 1997 reflect our aim of eradicating child poverty and supporting people to balance their work and family lives. The personal tax package that we discussed at some length this morning represents the next stage in our programme to reform the tax and benefit system. The Bill is required to ensure that those changes can be fully implemented and that the benefits of that package can be fully realised.

The hon. Gentleman asked why we cannot introduce a new ratio to calculate the upper national insurance contribution limit. We see no reason to reintroduce an arbitrary ratio, given our proposal that future changes to the upper earnings limit will be subject to approval by both Houses of Parliament. As we have made clear, removing the restriction on the upper earnings limit will provide for significant simplification and allow the two main rates of income tax and NICs to apply to the same bands of income, creating one of the simplest personal tax structures in any developed country.

Given that commitment, I see no reason why the 11 per cent. level at which employees stop paying NICs should be subject to legislative restrictions, when the point at which they start paying NICs is subject to none. We could apply a cap of a multiple of the primary threshold in the way that we have done, but there is no similar restriction on the level of the primary threshold, and we touched on that this morning.

David Gauke (Conservative, South West Hertfordshire)

The Financial Secretary raises a fair point about the restriction at the bottom end. Ideally, if one is going to have a restriction at the top end, one should have a restriction at the bottom so that one could lower it in such a way as to break the ratio. The Financial Secretary’s criticism is that there is no restriction at the bottom end, but there is of course a ratio. So, it would not be possible to reduce the primary threshold to a low figure unless the Government also reduced the upper earnings limit by a correspondingly low amount. In that sense, the continuation of the ratio protects both the top and the bottom.

Jane Kennedy (Labour, Liverpool, Wavertree)

I do not accept the hon. Gentleman’s point. As we discussed this morning, the lower earnings threshold is aligned with the lower income tax threshold. We have been working to keep those in alignment for a considerable time. We are now seeking to align the upper level. Our primary goal is the policy objectives I was talking about earlier. Simplification being one of the major drivers of those, we will establish that link, and seek to maintain it. To reintroduce a legislative restriction on it would limit the Government in its work towards achieving its objectives.

As I have said, each year Members of both Houses will have the opportunity to debate the increase in the upper earnings limit, as the regulations will be subject to the affirmative resolution procedure. It was made clear at the introduction of the primary threshold that it was introduced to ensure that the point at which income tax and mixed liability begins is the same. The advantages of our approach are clear. It will reduce the burden on future legislative programmes, while retaining proper accountability to the House and an opportunity to debate the issue.

The hon. Member for South-West Hertfordshire used quotes from one of my earlier speeches as a rookie in 1993. I have a quote for him, although it is not one of his. It is interesting how rapidly hon. Members, when in Opposition, adopt a certain position. On 18 February 1997, when the right hon. Member for Richmond, Yorks (Mr. Hague) was Secretary of State for Wales, during the debate on the Welsh Development Agency Bill about the removal of the borrowing limit imposed on the Agency, he said that:

“The Bill provides that future increases of the financial limit shall be made by secondary legislation, using the affirmative resolution procedure. The advantages are clear.”

We have seized upon those advantages. The speech continued:

“It will reduce the burden on future legislative programmes while retaining proper accountability to the House and an opportunity to debate the issue.” —[Official Report, 18 February 1997; Vol. 290, c. 75.]

It is absolutely fair and proper that the Opposition express concern and seek to defend the right of the House to proper scrutiny of the Government’s actions, but secondary legislation is a perfectly proper, well tried and tested route by which to do that. I do not have any reason to believe that what we are proposing will undermine the ability of either this House or the other place to scrutinise legislation or Government decisions. I know that the hon. Gentleman has put the amendment forward in a probing manner and I ask that he not press it to a vote.

David Gauke (Conservative, South West Hertfordshire)

I am not entirely satisfied with that response and I do not think that that will surprise the Financial Secretary. I know that she says that there is a Government commitment to ensure that national insurance contributions are linked to higher rate income tax—indeed, we will turn to an amendment that relates specifically to that—but no protection will exist in legislation. It came out in the evidence session this morning that the purpose of the previous legislation was to prevent an abrupt increase in the upper earnings limit irrespective of national insurance contributions.

I am not persuaded by the Minister’s arguments or her plea to us not to press this. I think that I will press the amendment to a Division. We might well be outnumbered, but the principle remains the same. Parliamentary scrutiny will not be achieved adequately—

Jeremy Browne (Liberal Democrat, Taunton)

I assure the hon. Gentleman that he has my support on this issue. The fact that the Labour party and the Conservatives have proven to be equally cavalier in their dealings with the House only strengthens my resolve to back him.

David Gauke (Conservative, South West Hertfordshire)

We are now up to four. Who knows how many on the Labour Benches are persuaded? I can see at least one Labour Member who has a reputation for defending parliamentary sovereignty, but I am not sure whether he is paying attention. With regard to the example given by the Minister, I was not quite sure it was a tax matter.

Jane Kennedy (Labour, Liverpool, Wavertree)

It was a financial matter.

David Gauke (Conservative, South West Hertfordshire)

It involved money, but I am not sure that it involved the raising of revenue, and I think that is an important point. It is a principle—

Jane Kennedy (Labour, Liverpool, Wavertree)

Level of borrowing limit.

David Gauke (Conservative, South West Hertfordshire)

A level of borrowing limit is somewhat different from a tax-raising power. I will press the amendment to a Division.

David Gauke (Conservative, South West Hertfordshire)

I beg to move amendment No. 2, in clause 1, page 1, line 6, leave out subsection (2).

Christopher Chope (Conservative, Christchurch)

With this it will be convenient to discuss the following amendments: No. 3, in clause 1, page 1, line 12, at end add—

‘(4) In section 5(6) of the Social Security Contributions and Benefits Act 1992 (earnings limits and thresholds for Class 1 contributions), at end insert “and may not include any increase in the upper earnings limit in excess of the retail price index for the month of December in the preceding tax year.”’.

No. 4, in clause 1, page 1, line 12, at end add—

‘(4) In section 5(3) of the Social Security Contributions and Benefits Act 1992 (earnings limits and thresholds for Class 1 contributions), omit the words from “which” to the end of the subsection and insert “does not exceed the level of earnings at which the higher rate of income tax becomes payable.”’.

No. 6, in clause 2, page 1, line 19, leave out subsection (2).

No. 7, in clause 2, page 2, line 5, at end add—

‘(4) In section 5(6) of the Social Security Contributions and Benefits (Northern Ireland) Act 1992 (c. 7) (earnings limits and thresholds for Class 1 contributions), at end insert “and may not include any increase in the upper earnings limit in excess of the retail price index for the month of December in the preceding tax year.”’.

No. 8, in clause 2, page 2, line 5, at end add—

‘(4) In section 5(3) of the Social Security Contributions and Benefits (Northern Ireland) Act 1992 (earnings limits and thresholds for Class 1 contributions), omit the words from “which” to the end of the subsection and insert “does not exceed the level of earnings at which the higher rate of income tax becomes payable.”’.

David Gauke (Conservative, South West Hertfordshire)

The amendments essentially relate to the same issue. There is no need to repeat the full arguments, but there is a dismantling of the restrictions that apply to increases in the upper earnings limit for national insurance contributions and, for that matter, the primary threshold. We think that that is undesirable and wish to address it.

Amendment No. 2 would remove clause 1(2). That in itself—the Minister might have been inclined to point this out—weakens the position because it would remove regulations specifying the upper earning limit from the list of those subject to the affirmative procedure. However, the amendment must be taken with amendment No. 3, which would carve out from those matters that can be dealt with by regulations, whether subject to the affirmative or negative procedure, any increases in the upper earnings limit in excess of the retail price index for the previous year.

We have been reasonable enough under amendment No. 3 to permit increases in the upper earnings limit in line with prices. However, if amendments Nos. 2 and 3 were agreed to and the Government wished to increase the upper earnings limit by a higher rate than the rate of inflation, which presumably will not be a routine occurrence, they would need to do so through primary legislation.

Rob Marris (Labour, Wolverhampton South West)

I invite the hon. Gentleman to withdraw amendment No. 3 because it would not do what he just suggested to the Committee. It relates to an increase in the retail price index in not the previous year, but the month of December, which is not what he intended it to say.

David Gauke (Conservative, South West Hertfordshire)

My understanding is that the retail price index is always an annual figure. I think that this wording is used in other legislation. I can see where the hon. Gentleman is coming from and I can check that, but I think that the same formula is used elsewhere. If I am wrong, he makes a very strong argument. I think that the amendment would do what I say it would, and if it would not, I will withdraw it.

David Wright (Labour, Telford)

We are about to find out.

David Gauke (Conservative, South West Hertfordshire)

Indeed. While we are finding out—inspiration comes to us all—I will address amendment No. 4, which is the most persuasive amendment in the group

The Financial Secretary has reiterated today that the Government’s policy objective is to align the upper earnings limit with the point at which higher rate income tax starts to be paid. Indeed, that is what the then Chancellor said in his Budget speech of 21 March 2007. Earlier, the hon. Member for Wolverhampton, South-West said that if one prevents any increases in the upper earnings limit, one somehow prevents people from having a reduction in taxes. There was a reasonable assumption that this Bill would confirm the policy objective that the Government have maintained ever since the 2007 Budget: the link between the upper earnings limit and higher rate income tax. However, there is no link in the Bill.

The amendment, subject to any comments, suggestions or criticisms about its technical quality, would enable the Government to increase or decrease the upper earnings limit as they thought fit, but, when doing so, the higher rate income tax band would vary with it. It would formalise the policy objective that the Government have announced, which we support. The argument in the Budget was that this will simplify matters and we will have two rates on personal income. Amendment No. 4 would ensure that that happened.

We heard today from officials the view that announcements about the threshold for higher rate income tax will be made in the autumn statement—or the pre-Budget report, as it now is—at the same time that announcements are made for national insurance contribution thresholds. So, from a practical point of view, it appears that the Government are rightly going to follow up on their policy announcement. We heard from the Minister a couple of moments ago how they have maintained the link for the lower earnings limit. All that we are seeking to do is to formalise the link so that it is detailed in the Bill. If the Government ever wished to change their mind and break that link—if they wanted to abolish the upper earnings limit, to give an extreme example—they could always do so through further primary legislation.

Amendment No. 4 is essentially supportive of the Government’s objectives. It would merely formalise things and protect the position of Parliament, once again, by enabling it to scrutinise any departure from stated policy.

Jeremy Browne (Liberal Democrat, Taunton)

Will the hon. Gentleman just clarify whether the amendment would enable the Conservative shadow Chancellor to introduce a flat-rate tax, which I understand he was considering, although he appears to have gone cooler on the idea in recent months?

Christopher Chope (Conservative, Christchurch)

Order. Before Mr. Gauke is tempted to answer that question, may I say that doing so would not be in order?

David Gauke (Conservative, South West Hertfordshire)

I am grateful for your guidance, Mr. Chope. I will not respond, other than to say that we favour flatter and simpler taxes. To the extent that this measure is a simplification, we welcome it, notwithstanding our concerns that the realignment also results in an increase in tax. However, essentially we support the principle.

The group includes amendments that are equivalent to amendments Nos. 2 to 4 in respect of the Northern Ireland provisions. I will be particularly interested to hear the Minister’s views on formalising the link between the upper earnings limit and higher rate income tax.

Jane Kennedy (Labour, Liverpool, Wavertree)

I am grateful for the way in which these probing amendments have been put—she says hopefully! I shall talk about the group of amendments and perhaps mention amendments Nos. 3, 4, 7 and 8, which are intended to retain some form of restriction in primary legislation on the level of the upper earnings limit that can be set by secondary legislation. The rationale appears to be—again, it is similar to the debate that we have just had—that that provides a greater level of parliamentary control than is provided in the draft legislation. We debated that earlier, but I will come back to it.

Amendments Nos. 3 and 7 would amend clause 1 so that the upper earnings limit may not be increased by secondary legislation to a figure that is in excess of the retail prices index for the month of December in the preceding tax year. As clause 1 only applies to Great Britain, it appears that amendment No. 7 mirrors this restriction by amending clause 2 which is applicable to Northern Ireland, which is one of my favourite places.

There is a particular difficulty with amendments Nos. 3 and 7 in respect of linking the upper earnings limit to the retail prices index. These amendments would not allow the Government to align the upper earnings limit from 2009-10 with the point at which higher rate income tax becomes payable, which is one of our objectives, because they would not be able to raise the upper earnings limit in 2008-09 by £800 plus RPI. That would remove the main purpose of the Bill and a significant simplification of the national insurance contributions system.

We use the September RPI when calculating pensions and benefits uprating and the mixed re-rating procedures. That needs to take place before the beginning of the tax year. Those figures are also used in preparing the annual Government Actuary’s Department report. It would not be possible to use the December RPI figure and still have the necessary legislation and amended guidance in place in time. There would be a knock-on effect for software developers and employers. The hon. Gentleman should perhaps take the advice of my hon. Friend the Member for Wolverhampton, South-West about the amendment. The cost attached to accepting the amendment would be significant; we anticipate it could be around £700 million. I have talked about the fact that we currently use the September retail prices index and that using the December retail prices index would create real difficulties for employers and payroll developers in amending their software ahead of the start of the new tax year.

Amendment No. 4 is interesting as it also amends clause 1 and appears to be an alternative to amendment No. 3. However, I understand why amendments Nos. 4 and 8 are grouped together. Amendment No. 4 aims to restrict the upper earnings limit so that it cannot be increased by a secondary legislation above the level of earnings at which the higher rate of income tax becomes payable.

I understand the logic behind amendment No. 4, but both theoretical and practical difficulties are associated with it. Income tax is an annual charge and is calculated on a cumulative basis, but national insurance is based on an earnings period that is normally weekly or monthly. Liability is calculated each time earnings are paid, which means that, in legislation, the upper earnings limit is a weekly figure whereas the level at which the higher rate of income tax becomes payable is an annual figure. If amendments Nos. 4 and 8 were accepted, the weekly upper earnings limit could be set at any figure up to £39,825 based on the 2007-08 tax year. [Hon. Members: “A week?”] Per week. The upper earnings limit for 2007-08 is currently £670 per week. The amendment would allow the upper earnings limit to be increased by up to 60 times its current level, which is far in excess of what we want to do. It could allow the Government of the day to raise millions of pounds of additional national insurance contributions and I am sure that is not what Opposition Members intended.

Another reason why the amendment is substantially flawed is that the level at which the higher rate of income tax is to be set does not become law until after the upper earnings limit for that tax year has been set. The weekly upper earnings limit is set by regulations that come into force on 6 April each year, which means that the regulations must be laid before 6 April. Income tax is subject to the Finance Bill procedure and the Provisional Collection of Taxes Act 1968, which allows for changes to apply from the beginning of the tax year. I am not sure whether Opposition Members intended to bring the national insurance system into the Finance Bill but, as we discussed this morning, it would take primary legislation to do that. It is certainly not the Government’s intention to do so.

On amendment Nos. 2 and 6, the upper earnings limit can currently be raised by regulations subject to the negative resolution procedure. Under our proposals there would have to be a debate in both Houses before it could be raised. Amendment No. 2 seems to remove the requirement for the affirmative resolution procedure if either amendment Nos. 3 or 4 find favour with the Committee.

The change proposed in the Bill should not give cause for concern in terms of parliamentary scrutiny. The House always considers the affirmative resolutions that come before it extremely carefully and I assure the Committee that, as the Minister who often has to reply to such resolutions, one feels thoroughly scrutinised as a result of those debates. The amendments taken together or separately to leave the upper earnings limit to the RPI or to the higher rate of tax are unworkable for the reasons I have explained. I understand why the hon. Member for South-West Hertfordshire wanted to probe the Government’s position on some of those ideas, but I recommend that the Committee resist the amendments.

David Gauke (Conservative, South West Hertfordshire)

I am grateful for the Financial Secretary’s informative explanation. As I mentioned, amendments Nos. 2 and 6 need to be taken with amendments Nos. 3 and 7 because, as she rightly says, in isolation, amendments Nos. 2 and 6 would weaken the position.

On amendments Nos. 3 and 7, her remarks that September should be used for the date as opposed to December make a strong argument. I will read her remarks carefully, but if the amendments that we tabled had referred to September rather than December, I am not sure whether there would be an overwhelmingly strong argument against them, given what we heard this morning. If the Government are able to align national insurance contributions and income tax, it ought to be possible to look at the way in which the upper earnings limit is increased, in such a way as to provide a restriction on it in the same way as increases in thresholds for income tax have been since the days of the Rooker-Wise amendment, somewhat before my time. We will not press amendments Nos. 3 and 7 and consequently will not press amendments Nos. 2 and 6.

On amendments Nos. 4 and 8, I take the technical point that the Financial Secretary raises with regard to income tax being done on an annual basis and national insurance contributions being done on a weekly basis. As a consequence, technically it would appear that these amendments would give the Government greater flexibility than we intended and would, to all intents and purposes, be consistent with the Labour party’s 1992 manifesto. They would effectively enable the abolition of the upper earnings limit if any Government wanted to do so.

The amendments are therefore ineffective, but we will look at this issue again. If the technical point can be resolved and if there is an opportunity to look at this matter in a corrected form, we will do so. Given the comments about the interpretation of amendment No. 4 that presumably come from the Treasury, we will not press it and I apologise to my hon. Friends who might have been looking forward to another valiant effort in defending parliamentary accountability. [Interruption.] I have got troops behind me, but I not sure that they are of sufficient number. We may well have right on our side, but we will fight this battle on another occasion.

Mark Field (Conservative, Cities of London and Westminster)

I am afraid that the word “another” applies not to myself, but to my hon. Friend the Member for Ludlow. I think that he had other duties downstairs, listening to the great joys of the Olympics and the national lottery. I suspect that if we were to have a Division there, we might lose by slightly more than we would lose in a Division here.

David Gauke (Conservative, South West Hertfordshire)

In light of the comments made by the Financial Secretary, I will not press any of the amendments. However, we will look again at the issue raised by amendment No. 4 again. I beg to ask leave to withdraw the amendment.

Clause 3

Justine Greening (Conservative, Putney)

I beg to move amendment No. 9, in clause 3, page 2, line 29, at end add—

‘(5) Subject to subsection (6) below, this section shall not have effect between the dates 1st April 2012 and 31st March 2015.

(6) The Secretary of State may, before 1st April 2012 and in each subsequent year until 31st March 2014, apply the provisions of this section for a period not exceeding one year, by order made by statutory instrument.

(7) No order may be made by the Secretary of State under subsection (6) unless a draft of it has been laid before Parliament and approved by a resolution of each House.’.

Christopher Chope (Conservative, Christchurch)

With this it will be convenient to discuss amendment No. 10, in clause 3, page 2, line 29, at end add—

‘(5) This section shall cease to have effect on 1st April 2012 unless, before that date, both Houses of Parliament have by resolution approved an order laid before them by the Secretary of State under section 150A of the Social Security Contributions and Benefits Act 1992 (annual up-rating of basic pension etc. and standard minimum guarantee).’.

Justine Greening (Conservative, Putney)

The amendments relate to the discussion that we had, not so much in the evidence session today, but on Second Reading before Christmas. One of the major points that was discussed was that the Bill is part of an overall package of pension reform. It is a key component of a pension reform that achieved cross-party consensus. We raised our concern that in the Budget and pre-Budget report, which signalled the Government’s desire to bring forward the beginning of flat-rating of the state second pension, there seemed to be movement from the original pension reform package that we had agreed. That package came out of the Turner commission report and out of a desire, as the Government said, to try to simplify the national insurance and income tax system. We supported the pension reform package. At the time, although we had concerns about taking away the link between the extra additional earnings contributions people paid and what they then got back in the state second pension, we recognised that the pension package was a question of give and take and of what we wanted to achieve overall. Our concerns related to the fact that this was the “take” part of that package, and there was a big question mark over the “give” part, which was the re-establishment of the earnings link.

These clauses try to tease out from the Government whether we can make progress on getting some certainty about re-establishing that link. On Second Reading, Members raised concerns about the lack of certainty as to when that will happen. We discussed the fact that the impact assessment provided by Her Majesty’s Revenue and Customs identified 2.1 million people, who would have been paying income tax above the upper earnings limit and who would have been contracted out of the state second pension. Those individuals

“would either see a reduction in their take-home pay as they will get a lower rebate on their national insurance contributions than would otherwise have been the case or a reduction of the money that goes into their pension scheme”

There are clearly many people—2.1 million, to be precise—who are assessed as losing from these changes. We must know that the gains are going to happen, and when. The timing of that link was critical, and I am concerned that we have not had much certainty from the Government about whether they view re-establishing the earnings links as being affordable, or when that will happen.

Based on the evidence session today, my greater concern is that, at the time that the alignment of the upper earnings limit and the upper accruals point took place in the Budget 2007, there was not at all a clear understanding as to what impact this would have on people. Not only were options still being discussed as to how to deliver on this 2030 time frame for achieving the flat-rate state second pension, there was apparently no costing of the options because they clearly had not been worked up at the time. It seems the Treasury waded into this national insurance change without a good enough understanding of the breadth and nature of the impact it would have, particularly given that many of the people affected will be the very same people whom the Institute for Fiscal Studies has identified as losers from the Budget 2007.

These amendments are therefore all the more important in trying to bring some certainty to the process of delivering the pension reform package. Before I talk about the amendments themselves, can I ask the Minister to talk about the 2030 time frame when she responds, and why that particular date is so important? One of the other ways of achieving flat-rating would have been to make the changes that were made at the Budget, but then to allow the flat-rating to continue as planned, aligned with the re-establishment of the earnings link, and then have that flat-rating achieved at a slightly later date than 2030-31. Many Conservative Members would like to understand a little better why that 2030 time frame is so important that we have to create even more losers than we would have done if the Government had taken no action.

On Second Reading we were only given limited assurances by the Minister about when the earnings link for the basic state pension would be re-established. During my time serving on the Select Committee on Work and Pensions, the Secretary of State gave us, in the evidence session, what was I think his annual departmental review. I pressed him on when he would be able to re-establish the earnings link and he used a phrase that has been much talked about, that essentially the earnings link would be re-established at 2012, or at any event by the end of that Parliament, subject to affordability. I spent what felt like a long 15 minutes trying to get the Secretary of State to say whether he felt that the affordability aspect of re-establishing the earnings link took precedence over the 2012 time frame that was clearly the aspiration—if I can call it that—of the Government. I also asked him whether, if re-establishing the earnings link in 2012 was viewed as unaffordable given the length of economic cycles, he thought that perhaps by 2015 the economic cycle and economic situation would have turned around so much that re-establishing the link would suddenly become affordable in a long-term sense.

I did not make any progress—if anything, the message I got was that affordability was critical. That is why it is of particular concern now, given that the Government are obviously concerned about inflationary effects to the extent that police officers and prison officers have had their review board pay rises turned down or not accepted. Perversely, the Secretary of State for Children, Schools and Families has today accepted the pay review board outcome for teachers. Conversely, only last week in Parliament the Secretary of State for Justice said that he had not accepted the report of the prison officers’ pay review body because of the “exceptional economic circumstances”.

It is very important therefore for the Minister to talk about what her assessment is, from a Treasury perspective, of the affordability test that the Government have set themselves for re-establishing the earnings link. Because of that uncertainty, the amendments are trying to provide some certainty. If the earnings link is not re-established and we continue with the debate, we should not allow the Bill to mean that all that is being delivered for people in this country is giving—paying more national insurance contributions but not getting anything in return.

There are two alternatives. Amendment No. 9 essentially leads to an annual reassessment of the Bill, to give the House a chance to understand whether the re-establishment of the earnings link is on the Government’s agenda and will happen, or whether there is simply continued rhetoric with no delivery. That would mean that in the time frame in which the Government has said that it will look to re-establish the earnings link—mooted as 2012 to around 2015—we would annually have to reaffirm the impact of that part of the Bill. In terms of delivering the overall pension reform package, that would provide a safeguard for those people who are paying more—that they would not be paying more to get nothing in return.

Amendment No. 10 is harsher in many respects. It says that there is a time frame of 2012. Unless at that point resolutions have been put before the House, clearly guaranteeing when the earnings link will be re-established, the Bill would, by definition, have to lapse. The consensus would have been broken and the decoupling of the changes to national insurance and to the basic state pension would have been done to such an extent that the pension reform that we all agreed would not have been delivered. I hope that the Financial Secretary can use the opportunity to give us more assurances about the Government’s thinking on when they see the earnings link being restored. The amendments are designed to tease out how confident the Government are that they can deliver on the words that we have listened to in the House about re-establishing that earnings link.

Rob Marris (Labour, Wolverhampton South West)

I welcome you, Mr. Chope, to the Chair. This is my first speech to the Committee and I do not know if I have to declare an interest as an earning member of the public who will be affected by the changes proposed by the Bill—earning only as an MP and not moonlighting like many Conservative MPs.

Mark Field (Conservative, Cities of London and Westminster)

By 2012, moonlighting will be all that the hon. Gentleman will be doing.

Rob Marris (Labour, Wolverhampton South West)

Though perhaps not as financially successful as the hon. Gentleman, like him, I was earning more before I came than I am now, but I do not seek to boost my reduced earnings by moonlighting. On the more substantive point, I thank the hon. Member for Putney for making something exceedingly clear to me. Hon. Members on this side of the House have long thought that affordability for the state bears no relationship whatsoever to Conservative spending plans and does not enter the equation. It does with this Government and we are absolutely right to bear it in mind with whatever measures we propose to improve our society even further than we have in the past eleven and a half years.

Philip Dunne (Conservative, Ludlow)

I rise to support the amendments, because I felt that the evidence given by the Financial Secretary and her officials at the interesting pre-legislative session did not cast any further light on the Government’s willingness to commit themselves to any form of timetable for restoring the earnings link. The amendments are designed to tease that out, and I hope that the Financial Secretary will address herself to that point in her remarks. My near neighbour, the hon. Member for Wolverhampton, South-West, is being a little harsh on the Opposition in his assault on our willingness to accept fiscal rectitude and spending diligence. It is correct that we have been calling for the Government to restore the earnings link and to come up with a definitive timetable for doing so. That is, frankly, all we are trying to do in this debate in relation to these amendments. I look forward to what the Minister has to say.

Jane Kennedy (Labour, Liverpool, Wavertree)

I wonder which party disconnected the link in the first place.

This has been a useful debate and I will address my remarks to the amendments. I am conscious that we may be interrupted, but I will try and deal with the amendments as succinctly as I can. The hon. Member for Putney made her case in a well argued and reasonable way. She asked why withdrawing the earnings-related state second pension by 2030 is so crucial—why that date? It is quite straight forward. The date 2030 was recommended by the Pensions Commission in order to give defined benefit schemes time to adjust to the withdrawal of contracted-out rebates. It is part of a costed package of measures. If we extended past 2030, we would need to revisit the cost. It is also needed to provide certainty to savers about what their pension position would be.

Justine Greening (Conservative, Putney)

I am grateful to the Financial Secretary for letting me intervene so early. She is cherry-picking a little; that same Pensions Commission actually suggested re-establishing the earnings link in 2009-10 and by 2012 at the latest.

Jane Kennedy (Labour, Liverpool, Wavertree)

I will come to that point shortly when I talk about the earnings link. I shall deal first with amendment No. 9, which is concerned only with 2012 and beyond. I am a little confused: it is bit strange that hon. Members seem to be agreeing with me about the early introduction of the upper accrual point from 2009, which will allow us to keep to the timetable for state second pension flat-rating, but they now seem to be opposing the consensus achieved during the passage of the Pensions Bill last year by scuppering that same timetable when we get to 2012. I am not going to make a big issue about the consensus as I appreciate that, in the context of this Bill, we are actually debating the matter in a very good humoured way. I am not going to make big accusations about where people stand on the consensus. However, the amendment requires the upper accrual point of £770, as set out in the Bill, to cease to have effect between April 2012 and March 2015. What it does not do is to give any hint whatever about what is to happen after that date. Importantly, the amendment introduces uncertainty for many employers, who need to know in advance what the upper accruals point will be and who cannot wait for the matter to be settled by long and unnecessary debates—if you will forgive me, Mr. Chope—as I believe would be in this case, in the House.

However, the amendment as drafted is also fundamentally flawed. The effect of preventing clause 3 from operating in this way would mean reverting to the position as set out in the Pensions Act 2007. The Committee will recall that that Act gave us the power to set the upper accrual point from the flat-rating introduction year at the rate of the previous years’ upper earnings limit, or any other amount so determined.

Before I turn to amendment No. 10, I want to deal with the point made by the hon. Lady about creating more losers. We touched upon that this morning, but I want to get it into the record at this point of the discussion. It is important to remember that the impact assessment to which she referred looked only at the national insurance changes in the Budget 2007. Most employees earning at the upper earnings limit, or above, will be better off using the 2008-09 tax year, and I gave a detailed example of that this morning.

I turn to amendment No. 10, dealing with the earnings link. An unintended consequence of removing the cap on state second pension accruals would be that all earnings above the lower earnings limit would count for state second pension purposes. That would also have a knock-on effect on contracted-out rebates, which are paid on the same band of earnings as that on which state second pension accrues: that is, the rebate will be paid on all earnings over the lower earnings limit. The purpose of amendment No. 10, and in part amendment No. 9, as we have accepted, is to bring about a discussion on the timing of the up-rating of the basic state pension with earnings. I am delighted to cross swords with the Opposition on that. During the next Parliament, we will link the up-rating of the basic state pension with average earnings over the long term. Our objective is to do that in 2012, but in any event, we are required by the Pensions Act 2007 to do it by the end of that Parliament at the latest.

Justine Greening (Conservative, Putney)

I have a sense of dÃ(c)jà vu because I remember asking this question to the Secretary of State for Work and Pensions. What the Minister is saying is that if there is an assessment in 2012 that re-establishing the earnings link is unaffordable, and that assessment persists to the end of that Parliament, a possibly outgoing Administration would re-establish the earnings link, knowing full well that it was unaffordable for the country, and that that commitment to re-establish at any event takes precedence to affordability. Which is the most important driver: is it affordability, or is it this commitment at any event by the end of the Parliament to re-establish the earnings link?

Jane Kennedy (Labour, Liverpool, Wavertree)

We made clear that our commitment is subject to affordability and the fiscal position. However, we in this party are in a better position to look forward and say that, given the way that we have had success in managing the economy to date, we believe that we can introduce the earnings link in the next Parliament. Our proposals give people a legislative guarantee that that will happen and they have been costed on that basis. We do not make spending commitments such as this, certainly not Treasury Ministers—

Mark Field (Conservative, Cities of London and Westminster)

The Minister is talking to the lot behind her in regard to that, rather than to those on this side of the Committee. Does she not accept that she has used the word “guarantee”? This is anything but a guarantee. There is uncertainty in the system, not least because we do not have fixed-term Parliaments and have no idea whether 2012 will be at the end of a Parliament or at the start of one that might lead all the way through to 1217, at which point the affordability trigger comes into place. She used the word guarantee, but this is anything but a guarantee. There is a great deal of uncertainty, and the amendments tabled by my hon. Friend the Member for Putney tried to add a level of certainty to that uncertain picture.

Jane Kennedy (Labour, Liverpool, Wavertree)

We have already committed to make an announcement at the beginning of the next Parliament, specifying well in advance of 2012 the date for introducing the earnings link for the basic state pension. We basically have a straightforward disagreement here. We believe that we will clearly be in a position to take forward the re-establishment of that link.

Jeremy Browne (Liberal Democrat, Taunton)

The Minister keeps talking about the next Parliament, but we do not know whether there will be a general election this year, followed by a subsequent election in 2012. It might be that 2012 is arrived at not in the next Parliament, but in the one after that.

Jane Kennedy (Labour, Liverpool, Wavertree)

I remember an enjoyable by-election campaign in Eddisbury in Cheshire, which the current hon. Member for Eddisbury of course won. Our campaign, however, was based on a creative slogan, “Vote Labour or the fox gets it.” I distinctly remember the debate, which was a flagging up of our commitment to a totally separate issue, which I do not intend to debate today. I mentioned it because, given the degree of concern that the Opposition clearly have about whether their policies would allow them the affordable environment within which to re-establish the link, we could well approach the next general election with a clear campaign.

We are committed to doing that and have demonstrated our ability to deliver an economic environment within which it would be possible to do it. As far as the Conservative party is concerned, all we have is the fact that it was that party that decoupled it in the first place. I would be keen to let the British people make their choice about that issue, based upon the history.

As the Committee knows, our first priority has always been to tackle pensioner poverty. As a result, more than 2 million pensioners have been lifted out of absolute poverty and more than 1 million have been lifted out of relative poverty. Over the past 10 years, we have increased the amount of money received by pensioners faster than earnings have increased year on year.

Christopher Chope (Conservative, Christchurch)

Order. I hesitate to interrupt, but does that strictly relate to the terms of the amendment?

The rest of the debate is in Hansard.