The increase in National Insurance revenue made possible by the abolition of the rebates associated with ‘contracting out’ from the second state pension, which the Chancellor has decided to bring forward by a year to 2016, provides the funds for many of Budget 2013’s most eye-catching announcements. The government will say this is simply moving money around the public sector, but in practice it will produce a further squeeze on public services.
Many will of course support the decision to introduce the Dilnot reforms to social care finance, at a cost of £1 billion per year from 2016/17. The same applies to the new Employment Allowance which offers a £2,000 discount on employer National Insurance costs (a measure targeted at helping smaller employers) at a cost of £1.3 billion in 2014/15, £1.4 billion on 2015/16, and £1.6 billion in 2016/17.
These are the two measures that we know will, for certain, be funded by state pension reform (from 2016/17). The Financial Times reported earlier this week that the new system of childcare support will also be funded through the end of contracting out rebates. The budget figures are less clear on how this policy will be funded, but it seems to be costing an additional £0.75 billion per year from 2016/17, having been phased in from autumn 2015.
Dilnot + Employment Allowance + childcare support = new spending of £3.3 billion in 2016/17. The abolition of the rebates = new revenue of £5.5 billion.
The loss of the National Insurance rebates will cost private sector employers £0.6 billion, but they can pass this cost onto their employees. Private sector employees will therefore lose £0.6 billion through occupational higher pension contributions or lower pension outcomes, plus £0.2 billion from losing their own rebate. In theory, however, this will be offset by a higher state pension when they retire (although in practice there will be many individual losers). The same applies to public sector employees: they will pay higher National Insurance, totalling £1.4 billion, but receive a higher state pension as a result.
The problem lies in the treatment of public sector employers. They will rightly not be able to pass on the cost of lost rebates to their employees, having benefited from a raft of recent cost-saving measures regarding public sector pensions. But this means they must find £3.3 billion per year from 2016 out of existing budgets. The Chancellor said in Parliament today:
Public sector employers will have to absorb the burden, as is always the case with tax changes. Any spending review in the next Parliament will, of course, take the £3.3 billion cost into account.
But after Dilnot, the Employment Allowance and childcare support has been paid for in 2016/17, there will only be £2.1 billion of the £5.5 billion left, with no guarantee that even this will be used to prevent a stealth grab on the public sector. For example, the government could claim to be maintenance of the NHS budget in real terms, without recognising this extra cost to the NHS which is due entirely to developments in other policy areas.
Public sector employers should not have to absorb the burden, because state pension reform was supposed to be fiscally neutral. Unless they are compensated, the delivery of public services will be put under pressure. And although public sector workers are, on the one hand, treated favourably by the reforms, the cost to their employer will surely have an effect on jobs and pay in the public sector in the very near future.