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2.43 pm
Ms Gisela Stuart (Birmingham, Edgbaston): Debates such as this provide a welcome opportunity to take a broad view of a subject. It is useful to remember that welfare reform encompasses whole strands of issues. The actual rate of benefit is significant, but it is part of a wider agenda.
When Labour came to Government, the status quo was clearly unacceptable, for two distinct reasons. First, the benefits system had grown in such a way that even if we intended to continue with the underlying philosophy,
the system itself had ceased to be able to deliver, and it needed modernisation. Benefit chimneys simply did not relate to each other, and the system was not viable.
Secondly, society had changed to such an extent since the major benefit reform that followed the second world war that many prevailing assumptions required to be challenged seriously. We needed to consider both the future and the current structure of the system. We had to think of claimants dependent on the system. Any change that we bring about must therefore be sensitive and gradual, but we must simultaneously look ahead to see how change will affect future generations.
Post-war changes in society were demographic, but the dynamics of society changed too. We all live longer now. That did not mean only that there were more people of a certain age. It meant that people aged 70 and 80 were no longer revered for their wisdom, because there were suddenly so many of them. Deference to such groups was changed because the composition of society changed. Retirement age was once safely assumed to be fixed. Indeed, we should remember that Beveridge assumed that people would live only a few years after reaching retirement age. That age is, however, no longer a proper base for policy making. To say that 60 or 65 is a fixed retirement point does not take us far in considering how people's working patterns have developed.
The debate about pensioners will become sterile unless clear distinctions are made about the needs of state pensioners and those who draw benefits who cannot effect any change in their circumstances. It is up to Government to provide a framework for those people, but merely to debate whether to upgrade the basic state pension by one means or another takes us little further forward, in that it does not deal with the comprehensive needs of pensioners.
For future generations, we must consider the needs of those who are in work and who can provide for themselves: the Government's role lies in providing a proper structure that will enable them to save for their retirement. We must distinguish between those people and part-timers, people who take career breaks and those who will never earn enough from their work to put away money for retirement. We must also consider the people who simply do not fit into the cash and taxation structure, such as carers. The needs of those different groups must be carefully separated out before we can press ahead. It is sad that the needs of different groups are often mixed up in debates such as this one, so that there is no coherent argument.
The Government have made a tremendously good start in trying to restructure welfare. I am extremely pleased by the way in which benefits agencies, employment services and local authorities are being brought to work together. That allows those organisations to focus once again on the needs of the people who are the system's beneficiaries.
However, we must also return to creating incentives for work instead of dependency. The working families tax credit, help with child care, and especially the national minimum wage are significant in that regard. Among the changes I most look forward to are the single gateways, the 12 pilot projects that will be monitored so that we can see whether they should go national. Those projects display a change of approach, from being passive and reactive to being proactive and enabling.
One issue is often ignored in welfare debates. If we wish to restore faith in the social security system, we must restore the faith of the beneficiaries and of those who work in the system. However, we must also restore the faith of those who pay for the system--the taxpayers. People are prepared to pay taxes only if they feel that they get value for money.
The social security system is most obviously financed through income tax, and it is interesting to consider who contributes most to that. The top 1 per cent. of taxpayers pay 20 per cent. of income tax, and the top 10 per cent. pay 48 per cent. of the yield. The next 40 per cent. pay a further 40 per cent. That leaves the bottom 50 per cent. of taxpayers contributing 12 per cent. of all income tax. There is considerable distortion in the system, but income tax is only one part of the funding.
International comparisons are often interesting, and I should like to draw attention to figures from Germany. I do not assume that Germany's rates are desirable, or that the United Kingdom should move towards them. My point is that we can have a system where people pay considerable amounts into the social security system while having faith in it and trusting it. The figures must be considered in that context.
Taxation as a percentage of gross domestic product in the United Kingdom and Germany is roughly the same. In Germany, it is 38 per cent., in the UK 36 per cent. However, on social security taxation as a percentage of tax revenue, in Germany, employees pay 17.6 per cent. and employers 20.5 per cent., compared with the UK, where employees pay 7.2 per cent. and employers 9.6 per cent. In the European context, that is very low.
When people think of our main sources of taxation revenue, they always think about income tax but forget taxes on consumption, but we raise about one fifth of our taxes from VAT. What are the knock-on effects of that? Why does it matter to social security? It matters significantly, because unless people have faith, and there is some transparency about the money that they put in so that they feel a right to draw on it when they are in need and the stigma of scrounging is reduced, we will not progress but will repeat the patterns of the past 30 years.
We should remember how income tax has progressively become a burden on lower income groups. It was not until the 1960s that families clearly below average income started paying income tax at all. At that point, income tax became an important factor in determining work incentives. Income tax rates matter when people decide whether it is appropriate to work. Taxation became a work disincentive in the 1960s. The resulting poverty and unemployment traps are one of our most intractable social problems, the result of 40 or 50 years of development. The working families tax credit is an important first step to breaking that vicious cycle.
I have a few words on national insurance contributions. I hope that the House is capable of intelligent debate, and that we can consider the upper earnings limit without Opposition Members jumping up to ask whether I advocate scrapping it; I do not. I am saying that we should intelligently consider national insurance contributions and the hypothecation argument in a social security context.
I have some basic facts. National insurance is levied at a flat rate of 10 per cent. for employed workers paying class 1 contributions. There is a slightly lower rate for those who have contracted out of SERPS, the state
earnings-related pension scheme. National insurance contributions affect work incentives and play an important role in the poverty and unemployment traps. Interestingly, the Thatcher Government were able to increase national insurance contributions step by step, while reducing income tax; it appeared that they had reduced the burden on working families when actually they had not. In 1979, national insurance contributions stood at 6.5 per cent.; by 1983-84, they were 9 per cent. The lower bands were restructured and by 1994, they were at 10 per cent. For many people, that eroded all their headline income tax rate gains.
The regressive aspects of national insurance contributions are most clearly shown by considering different income rates. Someone earning the average income of £20,000 a year will pay about 8.6 per cent. of his or her annual income. Before someone asks how it can be 8.6 per cent. when the rate is 10 per cent., I should explain that a lower rate is deducted on the first portion of income. For a very highly paid person earning £200,000, national insurance contributions are payable only up to the upper earnings limit of £25,220. The remaining £174,780 are not subject to national insurance contributions, which, for such people represent only1.1 per cent. of their income. That is directly contrary to the principle embodied in income tax: as income rises, the percentage deduction should increase.
The Government have realised this and taken some steps to start to address the inequalities of national insurance contributions. All employees will benefit from the abolition of national insurance contributions below the lower earnings limit. It is interesting to consider why the Thatcher Government got away with such changes while making people think that they would be better off, when national insurance contributions are shown on pay slips just like basic income tax. The reason is that our taxation structure is not transparent or easily understood. If people do not know how they pay for the services that they should expect, confidence cannot be restored.
I want to discuss hypothecation, which is a tempting solution to that problem.
Mr. John Burnett (Torridge and West Devon):
Before the hon. Lady goes on to hypothecation, is she arguing that national insurance contributions should be subsumed into income tax?
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