The budget’s phoney boost to National Insurance revenue
Growth has been revised down significantly, but from 2016 onwards, National Insurance (NI) revenues will start to climb substantially – that’s what the Office for Budget Responsibility’s new economic and fiscal outlook is telling us. I think we are in danger of having the wool pulled over our eyes.
I posted earlier today about the government’s decision to bring forward the single tier state pension. This reform was supposed to be fiscally neutral, but it actually increases the government’s revenue because the windfall to the Exchequer from the end of NI rebates (associated with the soon-to-be-abolished state second pension) has not been included in the calculation of cost neutrality.
So the government’s attempt to introduce a fairer state pension, in a country which spends less on pensioner benefits than most comparable countries, is in effect a spending cut. Worse than that, as the budget figures confirm, the early introduction of the new system is being used to mask another round of disappointing economic results.
The economic and fiscal outlook shows that, despite the revising down of growth, the NI revenue forecast for 2016/17 is £2 billion higher than that forecast in December last year. The 2017/18 forecast is £1.8 billion higher.
However, we cannot ignore the fact that public sector employers will be spending, from 2016/17, around £3.3 billion in NI contributions because of the removal of the rebate. The change is arguably a necessary element of moving from the current, messy state pension to a more simplified system that provides a clearer platform for private saving.
But instead of compensating public sector employers for this extra cost, which would be in accordance with the principle of fiscal neutrality, the government has made no attempt to ring-fence the new NI revenue.
If the Chancellor had stuck to the government’s commitment of fiscal neutrality (which is the very least we should expect), NI revenue in 2016/17 would instead by £122 billion, and £129 billion in 2017/18. This would represent a lower projection from the December 2012 figures of £1.3 billion and £1.5 billion, much more in line with the lower revenue now forecast for earlier years.