Social Security (Contributions) (Re-rating) Order 2012

My Lords, that was a brief and focused debate, and I am grateful to the noble Lord, Lord Eatwell, for focusing on what is clearly an important issue, which is the question of the basis on which benefits and contributions are uprated. The noble Lord asked about the targeting of the Bank of England as changed by the previous Government of rail fares and a host of other things. Certainly the starting point on which we agree is one on which he is the acknowledged expert and I am not: that the measurement of inflation is far from an easy matter, as was shown when the last Government moved the targeting of the Bank of England but did not seek to change the basis on which a number of other government-related measures. The ones we are talking about today were not changed. Getting consistency across the piece, even if that is theoretically the right answer, is something which his Government certainly did not do. In answer to the questions about the effects of the move of some of the indexation to the CPI it is important to point out, first, that in some cases lower increases may be beneficial. For example, increasing the lower earnings limit by the CPI, which is typically lower than the RPI, means that over time more people will qualify for contributory benefits because the lower earnings limit will rise more slowly. Similarly, the weekly class 2 and class 3 national insurance contribution rates will rise more slowly over time under CPI indexation. If you look at national insurance contributions in isolation, some people will be worse off because the primary thresholds and the lower profits limit—the point at which they start to pay class 1 or class 4 national insurance contributions—has risen by less in 2012-13, but I should point out, as I did in my opening remarks, that the income tax personal allowance will go up significantly, by £630. We are trying to get what the Government believe to be the most appropriate measure of the general level of prices, given that CPI is calculated in a way that more accurately reflects consumer shopping habits in response to price changes. I see a wry smile across the face of the noble Lord, Lord Eatwell. We probably do not have time for an intellectual analysis, but that is the underlying basis on which the switch has been made. As has already been pointed out, the CPI forms the basis of the Bank of England's inflation target and is indeed more consistent with the European Central Bank harmonised index of consumer prices. I am not sure that there were questions about that, but there were assertions about it, and I hope that that clarifies the Government's position on the noble Lord's main points about the RPI and CPI. On the question of the impact on individuals, let me give as much information as I have to hand. About 40,000 people will have to pay national insurance contributions because of the changes; 21 million people will lose by £6 a year; but the increase in the income tax personal allowance to £8,105 in 2012-13, to which I just referred, reduces tax bills by £214 for basic rate taxpayers, easily outweighing the small increase in national insurance contributions through the CPI indexation—£6 versus £214 as the impact of those two offsetting measures. In addition, the Government have introduced a significant above-indexation increase in the primary threshold in 2011-12 of £29 per week, so all class 1 national insurance contribution payers earning up to about £21,600 will pay less in national insurance contributions in 2012-13 than they would have done under the usual indexation of national insurance contribution thresholds since 2010-11. I am not aware that there is available information on the impact on individuals, which clearly depends on all sorts of future decisions, not least about what happens to personal allowances in future years.