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Society, Politics & Law

National Insurance: Ignoring past contributions

Updated Thursday 8th April 2010

Plans to increase National Insurance payments proved controversial - but why do employers so dislike this form of taxation?

With the General Election just a few weeks away, politicians are once again squabbling over tax, just like they did back in 1992. Alan Shipman, lecturer in economics at The Open University, shares some of his thoughts about the recent controversy over National Insurance.

Twenty-three chief executives of large companies have written in support of Conservative plans to reverse the National Insurance (NI) increase proposed in the Budget. History is replaying itself. Before and after the Conservatives’ return to power in 1979, large-company bosses campaigned vociferously (and successfully) for abolition of the National Insurance Surcharge introduced by Labour in 1977.

Now, as then, the heads of industry call National Insurance contributions a “tax on jobs” – correctly noting that an employer contribution adds to the cost of taking on new staff. The implication is that reducing the tax, as with scrapping the surcharge, will make it cheaper to recruit, encouraging firms to expand and speeding the reduction of unemployment.

The macro-economic case for the NI increase is that the UK must assure international creditors of its intention to bring down the wide budget deficit (projected at £167bn for 2009/10) once recovery is under way. The proposed one per cent rise in NI contributions is substantially the largest of the revenue raisers proposed in the Budget, expected to raise £6-7bn from 2011/12.

Without it, the next government will have to make even deeper cuts in public spending than those already promised – already more draconian than Mrs Thatcher’s – if it is not to miss the deficit reduction target. Shadow Chancellor George Osborne, who has accused the government of bringing the deficit down too slowly, had a tough time recently explaining how he’ll find the additional spending cuts needed to keep down public borrowing without the increased NI, given Conservative promises to ring-fence the National Health and defence budgets. 

Alistair Darling Creative commons image Icon Agencia Brasil under a CC-BYlicence via Wikicommons under Creative-Commons license
Chancellor Alistair Darling proposed a hike in NI in the recent budget

The UK is not alone in letting social insurance degenerate into tax. Few countries still have NI that specifically finances social benefits, with eligibility closely linked to contributions. So critics aren’t far wrong in calling the higher NI contribution a stealth tax, resorted to by parties which have vied for three decades to reduce the basic rate of income tax, and would never dare to raise it again with an election weeks away.

It’s also a tax whose administrative cost falls largely on employers - another reason they complain so loudly when it’s the focus of revenue-raising efforts.

But today’s corporate protestors should be careful what they wish for. To make NI a genuine insurance scheme again, employer contributions would have to rise further to substitute the current top-up from general taxation. Most large companies are already having to dig deeper to plug large holes in their pension funds, and buy private health insurance for employees no longer satisfied with the NHS.

Surcharge

Re-balancing the NI fund was one of the motives for the National Insurance Surcharge, an explicit two per cent payroll tax that ran in the UK from 1977 to 1985. The Surcharge came from the same drawing-board as Selective Employment Tax (SET), a cash amount levied for each employee from 1966 to 1973. This was ‘selective’ in that sectors the government favoured were refunded the full amount of the tax, and 30 per cent extra – an explicit attempt to steer the creation of employment, as some sectors were regarded as more productive than others.

SET’s main targets were service industries, and the main beneficiary was manufacturing. This was inspired by economic theories, especially associated with Nicholas (later Lord) Kaldor, which presented manufacturing as conferring wider benefits of investment, employment and export generation while services and construction were mainly parasitic on industrial activity.

Such thinking went into retreat as first North Sea oil, then a deregulated financial services sector, generated their own investment boom and masked the UK’s chronic inability to match its manufactured imports with exports. But now (barring miraculous discoveries west of Shetland) the oil surplus has gone, while the financial sector’s rescue costs have cancelled out much of its earlier economic benefits.

Financial Services Authority chairman Lord Turner wondered out loud last year whether there was anything ‘productive’ about London’s once-prized financial engineering. Both big political parties are proposing a special tax on banks to follow on attempts to recoup their post-crash bonuses.

Anti-NI protest

Once NI explicitly becomes a payroll tax, governments can choose to tax some industries more heavily than others – promoting employment in sectors viewed as beneficial and sustainable, and deterring it in those judged less kind towards the social or natural environment.

The appeal to those in power of redirecting private-sector activity through tax is already shown by a range of measures, from ‘green’ taxes to the Conservatives’ marriage promotion plans.

Companies whose bosses signed the anti-NI protest include four dependent on oil-burning (Tullow, JCB, easyJet, Virgin), four rooted in alcohol (Diageo, Whitbread, SABMiller, Mitchells & Butlers), and nine large retail groups that lure households to spend when the economy’s external imbalance requires them to save more. The UK’s climate change commitments will require tougher levies on the first group.

Recent parliamentary reports highlight the health and public-order costs linked to the products of the second.

Those signatories will be hoping the next government either keeps or scraps the NI contribution rise, and doesn’t try a selective middle course.

Find out more

Can we learn anything about 2010 from previous elections? Follow us as we Rewind 92.

Where does National Insurance come from in the first place? Explore the birth of the Welfare State.

 

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