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Merging tax and national insurance - whither contribution-based benefits?
So, it seems that amongst the announcements expected in tomorrow’s Budget by the Chancellor George Osborne, we may hear about initial plans to merge income tax and national insurance. See, for instance, this week’s Spectator:
As I say in the Mail on Sunday, the thinking behind it is that if people were more aware of how much tax they really paid, they’d be more inclined to vote for low-tax parties. At the moment, National Insurance is one of the taxes people are least aware of as it is simply deducted from their pay cheque. It is no coincidence that the most unpopular taxes—council tax, inheritance tax—are the ones that voters are most aware of paying. Equally, if income tax and National Insurance were merged, Labour wouldn’t be able to use increasing National Insurance contributions as a politically cost-free way of raising money to spend on the NHS.
Or a recent Third Sector article on the issue of Gift Aid:
Office of Tax Simplification recommends merging national insurance into the basic rate of income tax, but sector is doubtful such proposals would go ahead. Changes to the tax code proposed by the Office of Tax Simplification could increase the value of Gift Aid by hundreds of millions of pounds, charity tax experts have said.
The OTS, launched by the Chancellor, George Osborne, in July last year to provide an independent review of UK tax reliefs, recommended merging income tax and national insurance in its final report, published last week. If the proposals went ahead, charities could claim Gift Aid on national insurance payments, as well as on income tax.
Or this from the Observer:
Government plans to merge national insurance and income tax expected in this week’s budget could be “politically explosive” and create a new system of winners and losers, tax experts have warned.
[Mike Warburton, tax director at Grant Thornton] said that merging income tax and NI could create winners, such as stay-at-home mothers, whose state pension would no longer be linked to how much NI they pay. But losers could be pensioners or individuals who do not work, whose savings would be taxed at a new, higher rate of income tax. It could also hit people who pay the full amount into their pension over their working lives, as they would no longer qualify for an “enhanced’ state pension.
In light of all of the above, I was wondering what people here thought about the possible implications for welfare benefits? We could see the end of, or major changes to entitlement conditions for, cont-based JSA (already limited to 6-months), cont-based ESA (to be limited to 12 months), bereavement benefits (bereavement allowance, bereavement payments, widowed parent’s allowance), maternity allowance, as well as necessarily changes to calculating rates of retirement pension payable.
Additionally, the fundamental concept of the welfare state being an insurance scheme that you pay into when you can and which pays out when you cannot would be broken. Would this lead inevitably towards a state of privately-paid unemployment and sickness insurance coming into being, with a (very) basic scheme of subsistence payments to support those who could not afford such insurance schemes?
Anyone have any thoughts on this?
Additionally, the fundamental concept of the welfare state being an insurance scheme that you pay into when you can and which pays out when you cannot would be broken. Would this lead inevitably towards a state of privately-paid unemployment and sickness insurance coming into being, with a (very) basic scheme of subsistence payments to support those who could not afford such insurance schemes?
I would say that is the way it is going, we will end up not paying for insurance provided by the Government but by private sector bodies. Another loosened brick from the welfare state.
The myth of the ‘national insurance fund’ is finally shattered. An opportunity to debate a more equitable ‘social insurance’ scheme, perhaps? Watching with interest.
Alan
This looks like left hands and right hands. There are extensive amendments to the ESA and JSA rules in the Welfare Reform Bill, not to mention the alteration of the payment period for ESA. The explanatory notes mak it clear that the draftsmen of the Bill believe that both ESA and JSA will continue as short-term contributory benefits side by side with the means-tested UC.
Just been announced in Budget statement that consultation on this will be taking place, long term project over a number of years.
The ring fencing of the National Insurance Fund was broken back in 1989/90 as way of siphoning off funds to use elsewhere.
Partly as a result of weakening of contributory benefit levels in the 80s, a surplus had built up in the Fund - for example, remember earnings related additions to Unemployment Benefit which were abolished back in 1982 or thereabouts?
In reality because of this, NI has largely become another form of taxation rather than an insurance principle which commands respect.
Merging tax and No is therefore a logical step given this trend - albeit a highly undesirable one as it will mean that the system is so broken that if a future government wished to restore the insurance principle, it will be harder to do so and it further erodes people’s buy-in to the benefits system, making cuts even easier to impose.
I must say I agree with Jan about the lack of public debate. While I can understand that taking a pragmatic approach is one solution (as proposed), it fails to address the question of ownership of the system. Social security is a vital element in our adult lives, yet we are given no say in how it is delivered, despite handing over billions in NI contributions each year. I would like to see a system where people were offered offered choices and flexibility, including incentives. More contentiously, I would like to see a system divorced from government, although I accept that central government would ultimately have to underwrite any new system. However, it seems the stakeholders are not going to get a say, instead, we will continue to have social security ‘done to us’, instead of participating as contributors.
The Chancellor is reported as remaining committed to the contributory principle , and he did refer to the new flat rate pension proposals as “contributory” and, I think deliberately set higher than Pension Credit.
Also, the Welfare Reform Bill while abolishing IBJSA and IRESA retains the contributory versions as short-term benefits. I was discussing this at work today (not CAB) and the consensus was that in effect it is only the collection methods that are being merged into a single deduction, but part of it will still be treated as contributions for benefit purposes.
I expect there will be a lovely nother opportunity to respond to a consultation paper jolly soon.
I found the research the Telegraph was referring to (Demos think tank) http://www.demos.co.uk/files/Mutual_benefit_-_web.pdf?1299256527. There is a country comparison table buried in there. This apparently demonstrates we have the lowest percentage replacement income in times of sickness etc. out of a number of wealthier western nations. It would take someone with a bigger brain and more time on their hands to assess if it is a fair comparison. I’m always suspicious of like-for-like comparisons and I think you probably have to be an economist to understand all the issues.
At least the flat rate pension proposals would address the savings in old age issue.