National Insurance Contributions (Secondary Class 1 Contributions) Bill

That is not the path chosen by this Government. Our number one commitment is economic and fiscal stability. That is why, as a result of the Budget—and only because of the measures contained in this Bill, combined with other difficult decisions we have taken—instead of £22 billion of unfunded spending plans, within three years not a single penny of day-to-day government spending will be funded by borrowing.

Yes, it was a significant Budget, on a scale commensurate with the challenging inheritance we faced. And yes, it did mean taking difficult decisions. As a result, however—and only made possible by the measures contained in this Bill—we have now wiped the slate clean, creating a platform of stability in the public finances.

The Budget made another very important choice: to keep the manifesto commitments we made to working people to not increase their income tax, their national insurance or VAT. Compare that with the choices made by the previous Government, who chose to freeze income tax thresholds, costing working people nearly £30 billion. This Government could have chosen to extend that freeze, but that was not the choice we made. Instead, from 2028-29, personal tax thresholds will be uprated in line with inflation once again. However, keeping those promises to working people, while repairing the public finances and rebuilding our public services, did mean we had to take some very difficult decisions on spending, welfare and tax, including those in the Bill before your Lordships’ House today.

The Bill contains three key measures: first, an increase to the rate of employer secondary class 1 national insurance contributions from 13.8% to 15%; secondly, a decrease of the secondary threshold for employers—the threshold above which employers begin to pay employer national insurance contributions on their employees’ salaries—from £9,100 to £5,000; and, thirdly, measures to protect small businesses by more than doubling the current employment allowance from £5,000 to £10,500. The Bill will also expand the eligibility of the employment allowance by removing the £100,000 threshold so that more employers now benefit.

I of course understand that some of these measures mean asking businesses to contribute more, and I fully acknowledge that some impacts will be felt beyond businesses too. These are difficult decisions, and I understand and respect the legitimate concerns that have been raised, including by business. However, taken together, the measures in the Bill mean that more than half of businesses with national insurance liabilities will either see no change or see their liabilities decrease. Some 865,000 employers will now not pay any national insurance at all, and over 1 million employers will pay the same or less than they did before. All eligible employers will now be able to employ up to four full-time workers on the national living wage and pay no employer national insurance contributions. The Government are also setting aside support for the public sector of £5.1 billion by 2029-30, ensuring that there is sufficient funding for our vital public services, including the NHS.

I also recognise that concerns have been raised about the wider economic consequences of the measures contained in the Bill—concerns I am sure we will hear in today’s debate. Let me be clear: not to act was not an option. The choices we have made were the only route to putting the public finances back on a stable path, while protecting working people and rebuilding the public services. The economic data we have seen in recent months is, of course, disappointing; in particular, the recent growth figures show the sheer scale of the challenge we face. However, there would have been far greater costs to continuing with the irresponsibility and instability that has been a near-constant feature of the past 14 years: from the chaos of Brexit and the disastrous deal that followed, through to the Liz Truss mini-Budget, which crashed the economy and devastated family finances.

Let us remember that the OECD now expects the UK to be the fastest growing European G7 economy, and at the Budget, the independent Office for Budget Responsibility was clear that, with particular reference to our capital investments, the Budget will increase the size of the economy in the long term. On living standards, the OBR forecast shows that real household disposable income will increase in real terms in each year of this Parliament; the level of real wages will rise by 3% over the next five years; and the number of people in employment will rise by 1.2 million over the course of this Parliament. Our planning reforms, pension reforms, skills reforms and industrial strategy will all contribute to higher growth, but none are yet included in the OBR’s forecast.

The measures contained in the Bill also contribute to significant new investment in the NHS. That vital investment—amounting to £25.7 billion extra for the NHS over this year and next—is only possible because of this Bill. It includes £1.5 billion for new surgical hubs; more than £1.25 billion to deliver over 1 million additional diagnostic tests; over £2 billion for technology and digital improvements to increase NHS productivity and save staff time; and £880 million more in local government spending to support social care. All of that will support the NHS to deliver an extra 40,000 elective appointments a week, helping us to bring waiting lists down more quickly.

The choices we have made are the right choices. They are not the easy ones, but the responsible ones: to rebuild the public finances, to protect working people and to invest in Britain’s future. None of those things would be possible without the Bill. It is of course possible to make different choices: to ignore the problems in the public finances, to continue to neglect our public services or to fail to protect working people. Noble Lords may wish to argue for that during today’s debate, but this Government were elected with a mandate to fix the foundations of our economy. The Bill delivers on that mandate and provides a foundation of stability on which we will now build long-term, sustainable growth. I beg to move.

Amendment to the Motion

In the course of today, colleagues will address many of these issues, as well as the impact on devolved authorities, town and parish councils and veterans. We will follow with amendments to the Bill in its next stages. However, our deepest concern, and where we will focus our efforts, is the impact on community care and social care, with significant consequences for the NHS. The Conservatives drove this sector into the ground. The Government are setting up the Casey commission, to report in 2026 and 2028, but this sector is in crisis now. We cannot understand how the Government cannot see the harm that NICs increases will do to this vital sector.

Our research has revealed that the NICs hike will cost GP surgeries some £125.5 million a year, which is equivalent to funding 2 million appointments. Hospices, which face a £30 million bill, have warned that they may have to withdraw beds. Research from the Nuffield Trust shows that the cost to adult social care alone will exceed £900 million next year. I point out to the Minister that this is more than the extra funds that the Government allocated to the sector in the last Budget. It in effect wipes it out, and then some. We risk losing many small care providers and seeing large ones cut capacity. Pharmacists and dentists will not receive compensation in full. Surely the Government must recognise that the knock-on effects will undermine their ambitions to revive the NHS; this in turn will undermine jobs and economic recovery. My colleagues will expand much further.

The last Government failed the economy, failed our public services—including the NHS and social care—and, I fully accept, pursued a scorched-earth policy with the public finances. However, this Bill is not the way forward. We ask that this House press the Government to step back and reconsider. I beg to move.

Sadly, the financial world is of a similar view. On 3 January, the critical measure of confidence, the 10-year gilts yield, was at 4.59%, which was higher than its peak after the Kwarteng Budget. In Germany, the bond yield rate at the end of December was 2.38%, and even in Italy it was only 3.52%. This morning, we had a stark warning from the British Chambers of Commerce that more than half of firms were planning to raise their prices in response to tax hikes announced by the Chancellor in October. Business confidence is at a two-year low.

The Government introduced several business-related measures in their Budget, and unfortunately, they were overwhelmingly negative. The increase in employer national insurance contributions, which I will come on to dissect, was accompanied by the partial removal of non-domestic business rate waivers dating back to Covid; a further increase in minimum wages; and an affirmation of plans to introduce costly new rigidities into the labour market. This was a quadruple hit on our hard-working businesses, and that is before accounting for the IHT changes that have so unsettled family businesses and our farming community.

The minimum wage is, of course, something we do not oppose, but it introduces further costs to businesses, especially small businesses, at a time when they are drowning in extra burdens. These businesses all play a crucial role in helping the British economy to grow, which is what we all want.

A number of sectors have released reports detailing the profound consequences these measures will have on their businesses, and this has highlighted the extent to which the Government fail to understand not only the private sector but how to promote and encourage a growing economy. The December growth figures from the ONS were very disappointing: down 0.1%, as were the OECD and IMF comparisons.

The noble Baroness, Lady Kramer, actually set out the Opposition’s position on the various sectors affected. However, her amendment is too kind to the Government; the NICs changes are a jobs tax on all business and not-for-profit sectors, not just a few. Passing it will have no effect on the Bill and do nothing for the groups mentioned. Instead, we need the Liberal Democrats to join us, on Wednesday, in opposing the Bill’s committal to Grand Committee. The Floor of the House is the revising Chamber that can be relied on to delve into vital detail and the perverse effects of such legislation. There is huge concern across the country and we should be debating this Bill, which can be amended—unlike money Bills—in Committee in this Chamber.

I turn to some individual sectors. The Government have angered businesses across retail. Over 70 businesses sent a letter to the Chancellor outlining their concerns. Big employers, including Tesco, Sainsbury and Next, said that:

“For any retailer, large or small, it will not be possible to absorb such significant cost increases over such a short timescale. The effect will be to increase inflation, slow pay growth, cause shop closures, and reduce jobs, especially at the entry level”.

We find it particularly concerning that the Government maintain a rhetoric that they are pro-growth and pro-business, without listening to the very businesses that can help them. If they did, they would realise that their plans have not been thought through and that they will have far-reaching consequences in closures and the prevention of growth.

The retail sector estimated that the measures introduced in the Budget will cost the sector up to £7 billion a year, and that these costs will be offset through a reduction in headcount, a freezing of wages and increased prices for the consumer. From my own retail experience and observations in recent weeks, I believe that we risk more insolvencies and empty shops on the high street. This is all too likely to have a multiplier effect on confidence and investment. Reports state that the Centre for Retail Research forecasts over 17,000 store closures in 2025, confirming my fears.

UK hospitality will also pay a high price in adapting to the new taxes. The sector indicated that it will pay at least £1 billion as a result of the increase in national insurance alone and that this will hit its far from buoyant profits. Take an example: a survey from the British Institute of Innkeeping indicates that 40% of independently operating pubs will have to reduce their opening hours as a result of this increase in national insurance contributions alongside the other harmful measures towards businesses included in the Budget. As a pub-goer, I know that turning up to a closed pub puts one off going to the pub again and that that has a multiplier effect.

The increase in NICs is unusual in causing pain to many not-for-profit sectors. They often get by, despite straitened circumstances, because of their workers’ passion and hard work. A good example is our wonderful hospices, as we heard during the PNQ. The charity, Together for Short Lives—a children’s hospice—estimated that this specific increase will put up the cost of providing such hospice care by £5 million across the sector. This will have a seriously detrimental impact on already underfunded hospices and will reduce the availability of lifeline care for children across the country. The Marie Curie charity concluded that the NICs changes will force it to reduce headcount and limit services, with more terminally ill patients staying in hospital, which is bad for them and the NHS, at a time when the debate on assisted dying has highlighted the inadequacy and unevenness of hospice provision. I hope that the Government are listening.

Regrettably, this is part of the wider picture of underfunding in social care, which has already been highlighted. The Nuffield Trust says that independent care providers will face £940 million in additional costs. That dwarfs the £600 million of support introduced in the Budget.

The Government are rightly trying to make more use of pharmacies to tackle waiting times, and yet Community Pharmacy England says that they will be hit by an extra £50 million a year. GPs are caught, as we heard: the Institute of General Practice Management estimates extra costs of about £20,000 a year for the average practice. Ironically, the BMA says that, as public authorities, they are unable to access support via the increased employment allowance. They look with envy and surprise at arrangements already made to protect the NHS and Civil Service from the NICs hikes.

Finally, there is the extraordinary impact on nurseries, where the last Government did so much to extend childcare and help more mothers into work, which boosted growth. The National Day Nurseries Association estimates that the combinations of NICs and salary increases will mean an extra £47,000 on average per nursery, and that those providing more than 50% government-funded childcare will also be deprived of the employment allowance.

I look forward to hearing from others in this debate about the effect of these changes and their unfairness and perverse impacts on so many sectors.

To conclude, we cannot support the key provisions of the Bill. It is a betrayal—yes, a betrayal—of the promise in the Labour manifesto that all reasonable people interpreted as a commitment not to increase national insurance. The stuff said about “working people’’ does not cut the mustard. Moreover, we know from the OBR that the national insurance changes alone will reduce labour supply by 0.2% and add 0.2% to inflation by 2029-30. Sadly, we are already seeing this in business recruitment plans.

We look forward to carrying out our scrutiny functions effectively as this important Bill progresses. It would be very helpful if the Government could update us with their latest view of the impact of the proposed changes on jobs, wages and prices. We are very much in favour of a proper evaluation of policies in the light of experience, and, accordingly, we will be tabling a proposed new clause requiring the Chancellor to publish an assessment of the NICs increases on the employment rate a year after the passing of the Bill. I know from my time as a Minister that such amendments are routinely resisted by the system but that they can be helpful down the road to a responsible Minister keen to do the right thing.

In short, our position is that, even if the Government thought it was right to raise many billions in taxation, this is the wrong way of doing it. The country will regret it.

It is important to look at national insurance in the round. The incidence of employers’ national insurance is almost identical to that of employee national insurance. The last Government cut the rate of employee national insurance from 12% to 8% earlier this year. They should not have done so, since that only added to the deficit, but they did, and I am happy to make a virtue of its economic impact in the labour market broadly off-setting the negative impact of the measure in the Bill. The cuts in employee national insurance make it cheaper to employ people; the rise in employers’ national insurance makes it more expensive. The net effect is broadly neutral, and many have argued that it would have been a lot easier to cancel the employee cut and leave employers’ national insurance unchanged, but here we come back to the manifesto commitment.

I will confine my remaining comments to how national insurance contributions might develop from here, given that whoever is in power in the decades ahead will be under pressure to raise more in tax. First, I worry that national insurance rates are too high and income tax rates too low. During my adult life, the combined rate of national insurance has risen from 14.5% to 23%, while the basic rate of income tax has fallen from 34% to 20%. The only reason I can see for this change is a belief that taxpayers are less averse to paying national insurance than income tax. However, the evidence for that is increasingly thin. More significantly, to use the language of the last century, the trend has benefited rentiers and capitalists at the expense of the workers.

Secondly, if Governments remain determined to keep income tax and national insurance separate, I would encourage the Treasury to consider the base for national insurance contributions. As I said, it is anomalous that national insurance is not chargeable on interest income, dividends or rents. It is also anomalous that employees cease to pay national insurance at pension age. I declare a personal interest, since I will reach pension age in six months’ time.

Thirdly, there is the issue of the self-employed. I completely understand why the Government have chosen not to increase self-employed national insurance in the Bill. The last Chancellor who sought to do so was, after all, the noble Lord, Lord Hammond of Runnymede, and that was what is known in the trade as a courageous decision—I was not entirely surprised when he was forced to back off very quickly. There may have been some logic for the self-employed paying lower national insurance when we still had income-related benefits to which they were not entitled, but those days are very long gone. As the OBR and others have pointed out, the Bill will encourage employers to find ways of recasting their employees as self-employed. I therefore ask the Financial Secretary what plans the Government have to make this more difficult.

Finally, I encourage the Government to consider how the costs of an ageing population will be financed. I have long argued the case for a health and social care levy paid by employees, employers and the self-employed. The last Government were sensible enough to introduce one—indeed, its abolition is one of the only surviving measures of the notorious Truss-Kwarteng mini-Budget—and sooner or later, and probably not in this Parliament, a Government will have to return to such a levy. As and when that happens, I would encourage the Treasury to consider as wide a base as possible, the better to keep the rate down. In the meanwhile, painful though it is, I see no alternative but to support the Bill.

However, my principal point has been raised in the briefing sent to a number of your Lordships. It is the impact of the proposed increases on the transport sector that is devoted specifically to serving children with special educational needs. As I understand it, local councils will be covered by proposed grants and compensation for the increases in this Bill where they directly employ staff in school transport. However, this does not extend to private industry, which employs some 100,000 people in this sector as drivers and passenger assistants. Many are part-time, whose employment will be caught by the provisions of this Bill for the first time. All are trained in serving special needs children and many are over 50 years of age. If contracts become unviable as a result of these measures and companies return them to local authorities, it will introduce a degree of turmoil into the lives of children, many of whom are on the autistic spectrum and for whom consistency is vital. Failure to maintain their education because of gaps in SEND transport will have serious consequences. I hope that the Minister will note this. It will further increase unemployment among the over-50s, whom we want to keep from the ranks of the economically inactive. Therefore, will the Minister consider two measures to ameliorate this situation? First, will he consider an emergency grant to local authorities for the fiscal year 2025-26 to address immediate and unplanned shortfalls arising from the increased costs to the SEND transport sector? Secondly, will he submit long-term funding provision for SEND transport services to phase 2 of the comprehensive spending review in order to extend support through to at least March 2028?

I do not intend to vote for the amendment in the name of the noble Baroness, Lady Kramer, but I am grateful for the opportunity afforded at this Second Reading to express my concerns to the House about the impact of the Bill.

The HMRC says—I assume that the Minister will not challenge HMRC’s figures—that 940,000 businesses will lose an average of £800 per employee, at a time when the economy is stagnant. Six months of this Government have brought growth to a complete, shuddering halt, and brought back the ghost of stagflation to our country, which we remember in the 1970s as the inheritance that we got from irresponsible government policies.

The list of organisations—private sector, public sector and charitable—in this country is endless. We have just heard from the right reverend Prelate about the problems for the Church in meeting the stipends—it might be worth reducing the contribution in reparation for alleged crimes against slavery to meet that requirement. We have heard from leading retailers that there will be major store closures. We have heard from pubs and restaurants already severely damaged by the impact of Covid, along with the rest of the country, about how they will be affected.

Faced with that—faced with the problems in the hospitality industries and others—this Government decide to reduce the schedule to people who are paid £5,000 a year in order to create a requirement to pay national insurance. They say, “We are going to compensate that because you can apply for a rebate”. That means more bureaucracy and more impediments to businesses that are struggling. In my time I have done quite a bit to support Marie Curie Cancer Care, so I know intimately how important its work is. This measure will cost that organisation £3 million. That is a lot of coffee mornings up and down the country, with volunteers raising money for charities such as Marie Curie.

There are many other examples, such as homeless charities, childcare, which has been mentioned—single parents are already struggling, yet we are told this is not going to affect working people—and universities. Then there is the nasty, vicious imposition of VAT on private schools, which will mean that many children with special needs are no longer able to get the support they need because the state sector is unable to provide it. I know the Government will say, “People who are designated will get support”, but it takes years to get an assessment and there are many kids—the right reverend Prelate mentioned children with autism—for whom a move from school is disturbing.

Then there are parish councils and GPs. I had a representation from the BMA telling me that this was iniquitous and would have an impact on GPs—absolutely so. That is the same BMA that was campaigning and striking for more money for doctors, and now it is arguing that there should be more money for GPs because the Government are saying they need the money in order to pay that obligation.

I understand that I have a different figure for the cost of adult social care. It is true that the last Government messed up on social care, and that this House was unanimous across all Benches on the need to address social care to protect the NHS. Where are the people on the Benches opposite now speaking up for social care, where I believe the costs are nothing short of £2.8 billion?

Perhaps I have been a little tough on the Chancellor, but she is right about one thing: we desperately need growth in this country. The reason we are not getting it is that the state has become too large and overmighty; it has become a cuckoo in our country’s economy. The Government said this Budget was necessary in order to stabilise the economy, but what have they done? They have not only added this tax but increased borrowing at a time when the costs of borrowing are growing as a result of the actions they have taken.

We keep hearing that Liz Truss crashed the economy because she made tax cut proposals that were not equally balanced by cuts in public expenditure and, as a result, the market for 10-year gilts went up. I have to tell the Minister that, as has been pointed out, the market for gilts is now at a higher level than it was then. So am I entitled to say he has crashed the economy because of the imposition of this tax?

Of course we all know that taxes are too high and that the previous Government allowed that to happen, but that was because we had Covid and Ukraine. The only reason why this Government are continuing to increase borrowing and so on is that they want to have a bigger state.

If we are to get Britain working again, we need to get people back to work. I actually agree with the noble Lord, Lord Macpherson, about merging income tax and national insurance because, as I hope I have demonstrated, it is a fantasy to treat it as being anything other than a tax. Indeed, the tax commission that I chaired for George Osborne in 2006 recommended that, but they were not too keen on the idea because it would make it absolutely transparent how much of people’s hard-earned money the state was taking in taxation. The noble Lord is right about that.

I also find it extraordinary that as someone—your Lordships may be surprised to hear—who is over pensionable age, I do not have to pay national insurance on my income. The Minister asked us to say what else they could have done. Well, they could have done that instead of imposing a tax on employment. It is estimated—of course, we do not have the proper figures—that more than 9 million people in this country who are of working age and capable, in theory at least, of being at work are not working. To resolve that situation by making it more expensive for people to take on others as employees seems to me an extraordinary act of madness.

The CBI, an organisation that I do not often cite, believes, following a survey of its members, that 50% of them think that the imposition of these national insurance changes will result in its members cutting the numbers of jobs, and that two-thirds of its members believe that it will curtail recruitment. Bloomberg estimates that 130,000 jobs will be lost. The noble Lord, Lord Macpherson, talked about full employment; how can we do so when we have so many people not working at all? This is a nonsense. He also talked about the importance of addressing the numbers of elderly people who now have to be supported by a shrinking working population. I have to say to him—nothing personal, you understand—that having index-linked final salary pension schemes in the public sector and increasing the burden on people in the private sector, who do not enjoy such gold-plated pensions, is simply unsustainable.

If those on the Front Bench opposite are worried about black holes, they should consider the black hole represented by that. It is a contingent liability of £1.3 trillion, which makes the £22 billion black hole look like an asteroid compared with it, or with the black hole that student loans are creating. It is estimated that the nominal debt on student loans will be more than £1 trillion in 25 years. These are the black holes that should be addressed.

The truth is that our country is running on empty. We desperately need to reinvigorate the private sector to create the wealth to meet those obligations, and we are not going to do that by hobbling and damaging the private sector with impositions of this kind. If the Government want growth, we need less bureaucracy—not a quango being created every week. We want to be encouraging investment from overseas, not penalising it and forcing people to leave by introducing non-dom taxes. I personally know a large number of people who have already left the country. There must be a huge number because I do not know that many billionaires, unfortunately.

If you tax something, it is usually because you want less of it. Taxing employment makes no sense at all. If you want to tax something and to look at other sources of revenue, deal with the unfair competition from Amazon and other online retailers with our high street retailers. Deal with gambling, as the noble Baroness said, or with welfare dependency, which is partly at the root of the problems in this country.

The Government’s great boast, they say, is “Not a penny more on payslips” as a result of this Budget. Sadly, for many there will be no more payslips and no more pay increases. I hope that the Government think again and that there will be an opportunity in Committee for us to send a message to the House of Commons to rethink this incredibly damaging proposal, which goes to the heart of the Chancellor’s pledge to get growth in our country.

The black chasm of economic failure is undeniable and obvious to all. The failure is inherent in the ever-longer NHS waiting lists and a GP service that is virtually non-existent in many parts of the country. The neglect of hospital buildings means that many are now so dilapidated as to constitute a danger to the occupants. The Budget allocates £25 billion over the next two years to start repairing those years of neglect, with £13.6 billion to invest in new buildings, equipment and technology—the largest capital investment in the NHS for over 15 years. Noble Lords of the party opposite should tell us whether they support that investment or not.

To take another example of the result of Tory neglect, consider the report of the Defence Committee in another place. What it describes as the “hollowing out” of Britain’s Armed Forces since 2010 has undermined UK war-fighting resilience. The British Army’s Regular Forces—currently about 75,000 troops—would, we are told, struggle to field even one war-ready division. That is the result of Conservative neglect of our military. The Budget increased defence spending in real terms by £2.9 billion for next year. Of course that is not enough, but it is a start, to begin repairing the damage.

I could go on. There are school buildings that are dangerous, prisoners released early because of insufficient investment in the prisons estate, court buildings in serious disrepair, our roads defined by the number of potholes, and local council budgets cut through and beyond the bone. Underinvestment and neglect of the public sector have been bywords of economic policy for the last 14 years, with capital budgets raided to fund current needs—and there, sitting opposite, is the guilty party. As all serious commentators appreciate, there is no quick fix for these problems, but the Labour Government have made a positive start in the Budget by increasing capital budgets for 2025-26 and onwards. Which of these investments would noble Lords opposite oppose?

We have heard all the standard excuses—the pandemic, Ukraine—but that will not wash when we recognise that, over the 14 Tory years, the UK suffered not only persistent public sector neglect but the lowest rate of private sector business investment in the UK. That is no accident. The cheerleaders of austerity depressed business confidence and their persistent neglect of the public sector—and public sector investment—confirmed those depressed expectations. Living standards stagnated and, without investment, growth in productivity—the fundamental key to improving living standards—was negligible. The only Conservative growth strategy was uncontrolled immigration.

So the first question is: was the budgeted increase in taxation necessary to start the long task of repair? The answer is undoubtedly “Yes, it was”. But now to the second question: was employers’ national insurance the right tax to choose? There is the obvious issue of Labour’s manifesto commitment not to increase the taxation of workers’ income. But, given both the necessity of raising taxation and the Government’s overriding objective of economic growth, let us leave the manifesto commitments aside and focus on the merits of choosing employers’ national insurance.

The key variables to secure increased growth are: efficient use of national resources, a boost to public and private investment and sustained growth of productivity. No one likes tax increases, even essential ones, but the key to investment is the confident expansion of growth of demand in a stable financial environment. The overall fiscal balance in this Budget will increase overall demand with a public sector injection of £24 billion in the next financial year and will ensure financial stability. But what of the impact of employers’ national insurance on the efficient use of resources, business costs and productivity? Here, the detailed economic analysis of the OBR provides us with a firm starting point for debate.

As all noble Lords are aware, the Conservative Government pursued a cheap labour policy, neglecting investment in skills—look what has happened to further education colleges—and relying on mass immigration to meet labour needs. This cheap labour policy de-incentivised labour-saving investment, hitting productivity growth hard. If we examine the impact of the employers’ national insurance rise, we see that the effect is quite the opposite. The OBR, in estimating the impact, assesses that firms will pass on most, but not all, of their higher tax costs to employees. Once the labour market settles down, the OBR estimates that 76% of the total cost is passed on through lower wages—that is called lower costs to business, by the way—leaving 24% of the cost to be borne by employers. Overall, the OBR expects firms to reduce the demand for labour, as we have heard.

These results will have two major advantages. First, as noble Lords are aware, there is a significant labour shortage in the UK at the moment, due in no small part to the large post-Covid withdrawals from the labour force. More efficient use of labour is highly desirable, while the overall fiscal balance will sustain aggregate employment levels. Secondly, an increased cost of labour will encourage firms to look for ways to reduce overall labour costs, economising on a scarce resource and increasing productivity. Combined with new employment rights and a higher minimum wage, the increase in employers’ national insurance will encourage investment in training and equipment, boosting productivity, especially in labour-intensive services where higher productivity is most needed.

Let us compare these outcomes with an alternative, such as increasing employees’ national insurance, or increasing income tax. That would have a direct impact on demand, reducing profitability, and there would be a reduction—probably quite a small one—in the supply of labour. There would be no incentive to increase productivity.

When noble Lords opposite actually come clean and tell us what their alternative proposals might be, they should compare them with the measures in this Bill, which will result in a relatively small increase in business costs, as the OBR points out, a more efficient use of labour and an increase in productivity.

In the face of 14 years of serious underinvestment in the foundations of economic growth—the health of the workforce, education and skills, transport, criminal justice and defence—increased taxation is a regrettable necessity. That the Chancellor has managed both to provide a fiscal boost and to stabilise government finances is to be applauded. That she has, by the measures outlined in this Bill, chosen a taxation strategy that will enhance the efficient use of labour and produce vital increases in productivity deserves not just high praise but the total support of this House.

The specific tax change that we are looking at in this Second Reading debate is a major part of that problem. It is a well understood principle in economics that if you tax a thing you get less of that thing, and if you tax jobs you will get fewer jobs. Even now, Britain has one of the lowest tax wedges in the OECD—the gap between what employers have to pay employees and what they actually receive. European economies with typically higher tax wedges have many more problems with youth unemployment and long-term unemployment. Countries with very high tax wedges, such as Germany, Spain and Italy, have long-term unemployment more than one-third higher than ours. Spain’s is two-thirds higher, Belgium’s is nearly twice as high and Italy’s is highly still. With these measures—and the new employment regulation that is coming our way soon, no doubt—we are heading the same way too. Hiring is falling already, at 23% lower than a year ago. The OBR forecasts a lower participation rate—the “drag” from employer national insurance contributions, as it puts it, which boosts the decline in the participation rate by 50%.

The Government know perfectly well that this effect exists, even if they do not want to acknowledge it more than they have to. We can tell that they know that it exists because they are having to compensate the public sector to mitigate the problem. In so doing, they are reinforcing a divide that already exists between the public and private sectors. My noble friend Lord Forsyth alluded to this just now. Wages are already higher in the public sector and pensions are much more generous. Now the Government are beginning to establish the principle that the public sector should be protected from the consequences of the Government’s own decisions—just like the French nobility before the revolution, who did not pay the taxes imposed on everybody else. It did not end well for them and it will not end well for the Government, or for this country, if they create a privileged class that does not contribute to economic growth but just feeds off it.

As a result of this, we are seeing much more complexity, yet we need simplicity, not complexity, in the way our fiscal and tax systems work. The principle that is being established means that if you are fortunate enough to be on the payroll of the public sector you are shielded from some of these changes, but if you are unlucky enough merely to supply the public sector—for example, as has been said, a car firm taking special needs patients to hospital—or if you merely carry out public sector functions, such as hospices, then you will be on your own. As a result, we are going to see—indeed, we are already seeing—ever-increasing and, in many cases, entirely reasonable demands for exemptions or changes to the rules from those who happen to fall beyond this boundary. There will be new reasons to lobby, new reasons to generate complexity and new reasons to push up costs over time.

The last thing we need is more taxation. I urge noble Lords to look at the OBR’s fascinating historical public finances databank—I find it fascinating, anyway. It shows that, after the Autumn Budget, we now have public sector spending at around its highest level ever, outside the world wars and the pandemic, and taxation is at the highest level it has ever been in this country, even during wartime.

It is true that we are seeing huge strains on the public sector—courts, schools, roads, transport and so on. That is obvious, but we are seeing those not because taxes are too low but because growth is too low. We are exhausting the capacity of the economy to pay for the public goods that we all want to see. There is only one way to resolve that problem, which is to get the boot off the private sector and allow it to generate wealth. The Minister spoke of stability. We all want stability, but there are different kinds of stability and, if we are not careful, we are going to get the stability of the morgue in the British economy. We need activity, dynamism, change, energy and growth. Reversing the trends that we are on against all those things is of huge importance. That, by the way, is why it is so important that Committee on this Bill should be on the Floor of the House.

There is no manifesto commitment to this measure and it is right that we do everything possible to reduce its impact. The non-crisis British state is the biggest it has ever been, and any responsible Government will be trying to reduce it—for example, to what some, at least, regard as the halcyon days of the first Blair term, when the state was a whole 10 percentage points of GDP smaller and, not coincidentally, trend growth was a whole 1% of GDP higher. The current route of spending more and producing less will drive people out of work, crush growth and lead this country to penury, and these NIC measures will take us one further step down that road. The Government need to think again.