With a few weeks until the election, the Conservatives have begun to firm up their policies on taxation and spending, and have pledged to partially reverse next years’ National Insurance increase. Under current plans, those earning over £20,000 would be hit with an NIC rise of 1p in the pound. The Tory proposal is to raise the primary NI threshold by £24 and the Secondary threshold by £21 a week, so that the increase won’t affect anyone earning under £35,000. This would be funded this through £6 billion of savings, such as scrapping expensive and authoritarian IT schemes like ContactPoint & the ID card database, as well as leaving unnecessary bureaucratic posts unfilled.
When National insurance was introduced in 1919, it was designed to fund payouts such as unemployment benefits and sick pay. Today it is simply an extra income tax. Driving a wedge between an employee’s salary and their cost to their employer, it discourages the hiring of low-skilled workers with marginal economic benefit, and is a burden to small businesses. The planned rise in National Insurance is a tax on economic activity and would have a negative impact on growth in 2011. As such, any moves to reduce National Insurance and the tax burden on citizens and business on the whole should be welcomed, and it is heartening to see the Conservatives recognize the importance of this, and making it a key part of their election campaign.
However, today’s announcement should not pass without scrutiny. The Conservative Party website claims that “seven out of ten people will be better off under the Conservatives”. However, it must be remembered that this is in relative terms to the outcome under Labour. The Conservatives are not actually delivering a real tax cut, instead they are moving around National Insurance thresholds. For example, the Upper Earnings Limit would be raised by £29 a week to help fund the change. For 30% of people, the reforms makes no difference to what they will pay, while many will be paying more NICs in 2011 than they are now.
One other problem is the lack of detail regarding the cuts and efficiencies that will actually fund this policy. While they claim to have identified £12bn of savings in government, half of these fall within ring-fenced budgets. Therefore, any money ‘saved’ in these departments will simply be ‘reinvested’ and spent in a slightly different way, instead of being used to tackle the budget deficit or lower the tax burden.
Yesterday’s announcement will certainly appeal to many. It definitely puts a bit more ideological distance between the two main parties and, whatever its deficits, it is definitely preferable to Labour's plans.