David Willetts is President of the Resolution Foundation, a Conservative peer, and author of ‘The Pinch: How the Baby Boomers Took Their Children’s Future‘.
Jeremy Hunt’s decision in his last two financial statements to go for cuts in national insurance contributions was the right thing to do. It focussed tax cuts on people in work. Just for once, it shifted Conservative priorities towards people of working age rather than providing yet more help for pensioners who have done very well since 2010. Their benefits are up by far more than inflation whilst families have had cuts.
The Chancellor’s decisions are also an opportunity to shape a wider political narrative. There is an opportunity to make these national insurance cuts part of a positive story of help for younger people. That means a shift to the strong Conservative theme of spreading property-owning democracy. It is an optimistic message about boosting opportunity for people in work.
The next step to deliver this could be cuts in stamp duty– lowering the costs of buying a house and also encouraging older property owners with more space than they need to trade down. Young people now occupy less living space than they had a generation ago whereas older people have more living space – one of the many ways in which the balance between the generations has shifted. The big prize would be a Britain where people could build up assets by saving out of their earnings rather than one where inheritance is increasingly important as the main route to wealth.
However, Conservatives might instead use these national insurance cuts as steps to abolishing national insurance altogether. There are risks in this approach. First, national insurance is actually a relatively popular tax – it is no accident that Margaret Thatcher and her Chancellors were happy to put an increased burden on it. It is more popular because it is seen as funding the parts of the welfare state that people most value.
David Lloyd George originally introduced National insurance contributions to help fund health care and the belief that it helps fund the NHS lives on. However, the Beveridge report then shifted national insurance after the Second World War to funding the state pension. Again, rather popular. And it did have a certain transparency – contributions being paid into the national insurance fund and pensions paid out.
Sometimes the critics argue there should have been a real fund with assets to discharge these liabilities but there is no evidence Beveridge wanted a real fund. Anyway, the Government is not a private entity. It does not need a fund to own shares in British companies to discharge its obligations: it uses its power to collect tax or national insurance. But as national insurance is seen as underpinning the welfare state there is a risk that getting rid of it altogether would be seen, however wrongly, as a threat to programmes people really value.
National insurance has one other advantage – it conveys the sense of some sort of conditionality for accessing the welfare state. You have to pay in before you can get out. If you are not able to make those contributions because you do not have an income then a citizen can be credited instead. This is how many continental European systems still work. But unlike in many continental countries there is no significant contribution condition for any part of the British welfare state now.
That is one reason migrants travel across Europe to get to the UK. A contributory welfare state is harder for them to access. There is an argument that the contribution condition is particularly important in times when there are such surges of people across national boundaries
A contribution condition – plus credits in specified circumstances – could in turn be reinforced by an ID card. That could records contributions and credits. India has introduced such a system very successfully in the past few years. Contributory benefits plus ID cards could be a powerful signal that one is a British citizen with a set of rights and responsibilities that go with that.
One reason people voted for Brexit was concern about the flow of migrants linked with a fear that somehow they could access the welfare state without having contributed in the past. National insurance and ID cards would be more effective than Brexit at tackling people’s anxieties about how the integrity of the British welfare state can best be protected.
This agenda would mean that instead of abolishing national insurance it should be reformed to broaden the base on which it is levied and bring it closer to income tax. So for example people above pension age who work do not pay employee national insurance: this should end. There could even be an extension of national insurance to other forms of income apart from work.
There might actually be a stronger political narrative in reviving and strengthening the contributory principle rather than removing it from the British welfare state. There is a big prize here.
The post David Willetts: The case for the contributory principle appeared first on Conservative Home.
Click this link for the original source of this article.
Author: David Willetts
This content is courtesy of, and owned and copyrighted by, http://www.conservativehome.com and its author. This content is made available by use of the public RSS feed offered by the host site and is used for educational purposes only. If you are the author or represent the host site and would like this content removed now and in the future, please contact USSANews.com using the email address in the Contact page found in the website menu.