National Insurance Contributions (Secondary Class 1 Contributions) Bill

I spoke about the regressive effect of the Bill at Second Reading and I was frankly astonished that the Minister’s Back-Benchers were not jumping up and down about the impact of the national insurance changes on the employment prospects of key groups such as female part-timers and young people. His Back-Benchers seem to have bought the disingenuous line, which has been run by the Chancellor and, indeed, the Minister, that these extra national insurance costs will be borne by businesses. The plain truth is that employers will not simply absorb the cost increases, as the Office for Budget Responsibility made abundantly clear: employees will pay, in the form of reduced hours, reduced pay increases or job losses. We will all pay in higher prices and, if that keeps interest rates higher for longer, home owners will pay too.

Part of the problem from the business perspective is the sheer scale of the increase in employers’ national insurance contributions, hitting them in just a few months’ time, at exactly the same time as the minimum wage hike. I expect that the Minister will say that the minimum wage increase is not in this Bill, but the plain fact is that businesses are facing a double whammy. Very few businesses can shrug off an increase of well over 10% in their payroll costs. The likelihood is that businesses will take rapid action to try to curtail the financial impact, but that action may well be suboptimal when looked at over a longer timeframe.

Recruitment freezes are the quickest way to put a lid on costs and they are already a feature of today’s uncertain business environment. The recruitment sector is therefore struggling and will doubtless have to reduce its own headcount in due course. If hours are reduced for part-time staff, that will have a particularly hard impact on women and their families, who are often dependent on the additional income that such jobs bring. Pay increases, other than for those on the minimum wage, will probably be held down, and most families are already struggling with inflation and will be hard hit if wages go down in real terms. We can also expect employers to reduce headcount. This is already happening, as a glance at the business pages of the media will confirm.

The noble Lord, Lord Eatwell, who is not here today, may well run his argument that this is entirely healthy, because it will encourage businesses to invest to reduce their reliance on labour and thereby increase productivity and release workers to be redeployed elsewhere in the economy. As I have said before, that is a nice theory, but it fails at a practical level. Businesses need confidence in the country’s economic prospects before they invest, and most business confidence surveys are well into negative territory. Many investment decisions are already on hold or being cancelled. In addition, we have high employment at present, thanks to the previous Government, but job vacancies are relatively low and falling. A more realistic outcome, at least in the short term, is that there will be fewer people in employment. The OBR calculated the impact of the national insurance changes as a loss of 50,000 jobs, but it could easily be higher than that.

My amendment is about ameliorating the short-term impact of the Government’s national insurance changes on businesses, so that they have more time to plan how they will absorb the increases alongside the additional minimum wage costs. If businesses have more time to work out the best way to cope, the impact on jobs and pay could well be softened. My amendment merely delays the full impact of the national insurance changes for an extra year, by phasing in the reduction in the secondary threshold over two years rather than make businesses face the whole impact at once next April. I am quite sure that the business community would prefer an even longer phasing in and would prefer it to apply to the increased rate of contributions as well as to the reduction in the threshold. My amendments are an attempt at a reasonable compromise. I beg to move.

Unfortunately, this change comes at a time when the employment market is at something of a tipping point. Again, it is no one in particular’s fault—it is the employment cycle—but every economic indicator that I can see, through both the ONS and my own work, suggests that the labour market is hardening. In every single discipline in the business that I work for, whether it is computer programming or product development for stores, the applicant to vacancy ratio is rising.

Let me give a flavour of that. Last year, when we took on temporary staff in the run-up to Christmas, the ratio of applicants to vacancies was up by 50% on the previous year. In the previous year, we had nine applicants for every shop job; last year, it was more than 13. In this environment, the speed of change will dramatically affect the national insurance threshold change’s impact on both people and inflation.

Starting with the social impact, it is inevitable that businesses will have to accelerate their plans to increase productivity. There are plenty of opportunities to increase productivity, mechanisation and artificial intelligence both being at the forefront of those opportunities; but one way or another, that increase in productivity means fewer jobs. The time we have to implement those changes will directly affect the social impact of those efforts to increase productivity. The faster the change occurs, the less time businesses and individuals will have to manage down employee numbers through the natural turnover of staff, which is the normal way we would try to implement any improvement in productivity, particularly in part-time work. Natural turnover of staff is quite high; if you can manage such changes through natural turnover, it dramatically reduces the impact on human beings.

It is a shame that the noble Lord, Lord Eatwell, is not here, because I have heard him say that labour becoming more productive—that is, going out into the workforce and finding other, more productive things to do—can be a good thing. It can, but it will take people time to find those additional jobs, and time is what these amendments ask for.

Last Wednesday, my noble friend Lady Lawlor highlighted the acute pressure that the threshold change will put on retailers. She was right. On that day, Morrisons said that, in the light of the Budget, it would have to go harder and deeper in its drive to reduce costs. It joined Sainsbury’s, which has already announced 3,000 job losses.

The second reason for phasing in this change is its effect on inflation. Again, it might be helpful if I give the perspective of the company I work for. It is in the fortunate position whereby the growth we are able to enjoy, the margins we have and the productivity gains we think we will be able to achieve, collectively mean that we will need to pass on an increase in prices of only 1% this year, as a result of the Budget changes. Had we not had those margins to absorb the changes, and had we not had those productivity gains, that figure would have been just over 4%.

In other industries, in particular the food industry, margins are much narrower than those enjoyed in fashion retail. My concern is that everything I am hearing from that industry means that we will see price rises in the order of 4%. Were the threshold change to be phased in over two years, that inflationary spike would reduce price rises to closer to the Bank of England’s 2% target. That in turn would pave the way for a faster reduction in interest rates, which is in everyone’s interest—including the country’s biggest borrower, the Government. Phasing in the change would reduce the social and inflationary costs of this increase.

I hope that the Minister will realise that we are not trying to attack the principle of what the Government are trying to do. We recognise the fact that the Government need to raise revenue from somewhere, but we are asking the Government to think more holistically about the knock-on effects on those very people who they maintain they are also trying to help.

With the assistance of someone who is much smarter than me on spreadsheets, I have tried to calculate the effect of all this. Although I am an economist by background, this is not a specialist area for me, so I would be extremely grateful if the Minister would ask the Treasury to comment on the numbers that I am going to give him. I think that they are right, but I would be more than happy to be challenged if they are not.

My premise is that the average UK earnings per full-time employee is £33,280. The number of full-time equivalents in the UK is bang on 30 million. If you increase the existing employers’ NI rate of 13.8% to 15% and reduce the existing NI threshold of £9,100 to £5,000, you get an increase in total NI take from £100 billion to £127.2 billion, giving you a total employers’ NI increase of £27.2 billion—or, to be precise, £27.154 billion—which is the sum that the Chancellor seeks. Fair enough. But, given all that we have heard today, what happens if employment reduces? You can put in any variable you like. I have taken what I regard to be a most reasonable suggestion of 3%. Let us say that, as a result of this, there is a 3% reduction in employment. Personally, I think it would be much more, but let us say 3%. At that point, the number of UK full-time equivalents becomes 29.1 million. The employers’ NI take goes to £123 billion, which is a reduction of £3.8 billion. But, at the same time, there is universal credit for those redundant full-time equivalents of £20,000 a head, which costs the Treasury £18 billion. If you add the loss of that universal credit to the reduction in NI take that I have just mentioned, you get a net loss of—guess what—bang on £27.05 billion. So, the 3% reduction in employment that I reckon will happen leads to absolutely no gain to the Treasury whatever.

I present those figures because I would like to be challenged on them and proven wrong, but I do not think that I am. Along with the signatories to the amendment, I hope that the Government will take this opportunity to reflect carefully, in the spirit of co-operation, as to whether it is wise to bring this measure in so harshly, so quickly.

Businesses are the backbone of the economy: they provide jobs, drive innovation and contribute to the prosperity of our communities right across the country. However, given the current pressures they are under, it is critical that we do not introduce changes that exacerbate their struggles. The sudden and sharp reduction in the secondary threshold will represent a huge burden, particularly for smaller employers, as we discussed last time, and for those grappling with rising costs and reduced cash flow. A gradual approach would ensure that the reduction was not a sudden shock to businesses and allow them to adjust their payroll and budgeting systems. It would be more predictable and manageable, and employers could plan and absorb the changes over time.

The IFS has found that the lowest salaries will be affected the most, with the lowest earners facing a larger than 4.5% increase in contribution, compared with less than 1.5% for the highest earners. It is partly because of the perverse effects and the adjustment issues that we are looking at today that the IFS has suggested that the Budget measure will—quite quickly—raise only £16 billion a year. My noble friend Lord Leigh has also modelled the impact of a 3% jobs cut, which he estimates would wipe out the revenue from the proposed changes.

We need to think again. My noble friends Lady Noakes and Lord Wolfson talked about the 10% to 13% increases coming in April, if you take NICs and the national minimum wage together; some delay or a reduction in the threshold would avoid the disaster, particularly on the high street, that I am so worried about.

I was talking to an excellent member of staff in the closing shop in Salisbury which I mentioned last week. She still does not have a job to go to. That has not been my experience of retail closures in the past; usually, the best employees are quickly snapped up by the competition. We have a bit of a problem here, and I would like to work with the Government to see whether anything can be done to alleviate the difficulties.