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The ‘Fairness Insurance’ opportunity for Clegg

February 28th, 2011 Posted in Liberal Philosophy, Tax by

Liberal Democrats policies have made their mark on the Coalition. The most significant being the AV referendum, raising the income tax threshold, introducing the pupil premium, and “green investment”.

However, these items seem thin  by comparison with Conservative reforms such as academies, NHS decentralisation, and the universal welfare credit.

Nick Clegg needs similar major achievements to his name in 2015 if he wishes to maximise Liberal Democrat chances of success in the election.

‘Alarm-Clock Britain‘ has not caught on. Cameron’s vision of the “Big Society”, appears to drive Coalition strategy for now. It’s time for Clegg to initiate his own radical vision and big ideas.

One potential area might involve reforming National Insurance and the State Pension; the Liberal Party’s greatest achievements in the 20th century.

With the introduction of the Universal Credit the system is in flux, leaving National Insurance and the State Pension open for reform. NI was originally based on the contributory principle, and provided in the event of unemployment, ill health, accidents, injuries, or loss of a spouse.

However, a recent CPS report has shown how NI contributions have become a stealth tax on earned income. They inhibit job creation, penalise low income earners, and fail to fund the state’s pension liabilities. NIC’s will lose all justification if Steve Webb’s plan for a flat rate pension is introduced.

If Clegg could address this issue then we would see a clear demonstration of Lib Dem influence and a significant achievement to be proud of in 2015.

An alternative “Fairness Insurance” could replace NIC’s with a voluntary flat rate National Insurance Tax set at 10% income, with a 10% cut to the basic rate of income tax to compensate for low income earners. This would effectively integrate National Insurance into Income Tax and shift the burden onto individuals, rather than employers, as the CPS proposed.

If an individual chose to pay the tax then the revenue would go into a Personal Savings Account (PSA) which could then be used by the individual to insure for unemployment, healthcare, and other savings. This would simplify the system by abolishing the National Insurance Fund and the complicated method of collecting NIC revenue.

In addition to this, the new Citizen’s Pension should be based on a more sustainable basis as proposed by the recent IEA paper “Sharing the Burden”. This would restore the contributory principle, tackle the problem of pension liabilities, and provide a safety net for the poor.

However, an individual who chooses not to pay the National Insurance Tax would be able to organise their own private insurance plans, retirement funds, and savings.

Such a reform to National Insurance would be a bold stroke by Clegg. Thus far, Clegg has used ambitious rhetoric with his call for “the biggest shake up of our democracy since 1832”. Yet the Protection of Freedoms Bill has failed to live up to expectations, especially with its failure to scrap control orders, and the cost of living has continued to rise drastically.

Clegg has to have policies to match the rhetoric he has been using, otherwise he risks ridicule. This will show in 2015 if he has few major achievements. David Cameron’s rhetoric has also been overblown but he will likely be credited with a balanced budget, economic growth, and significant reforms.

The tuition fees debacle, failure to scrap Trident, and support for spending cuts has alienated the Liberal Democrats’ largely social democratic/protest vote/local interest electoral base. Clegg has started to pursue the C1’s and C2’s (i.e. “Alarm-Clock Britons”) who elected Thatcher.

If he is serious about expanding his party’s electoral base then reforming National Insurance will be a crucial first step as it will demonstrate his influence, secure economic growth, and establish a reputation as a champion of the less well off. This will help tackle the disillusionment which has accompanied Clegg’s Deputy Premiership.

 Guest post from David Cowan, an intern at the Institute for Economic Affairs, writing in personal capacity

4 Responses to “The ‘Fairness Insurance’ opportunity for Clegg”

  1. Philip Walker Says:

    NICs have lost almost all justification already. The system is unduly complex, and the formulae come from quite literally another age: they all work on weekly pay, when most people are paid monthly and think about annual incomes. The simplest reform would be to scrap it, and employer’s NI, and put the extra on income tax at all bands. (Sadly, only Ukip propose this, which means it’ll be treated about as seriously as the rest of their platform deserves.) We’d cut bureaucracy and reduce the amount people have to spend on accountants. We might even be able to get away with putting less on income tax than we’d taken off NI, if the dynamic effects were strong enough.


  2. Leslie K. Clark Says:

    Interesting article but the picture is disturbing. Normally Bruce Forsyth’s chin dwarfs the size of the average National Insurance card.


  3. Steve Travis Says:

    Philip – what would you propose for employers’ NI?


  4. Philip Walker Says:

    Steve: I don’t quite follow your question, but I think I know why. If you’re coming at this from the point of view that employers bear the burden of employers’ NI, then this isn’t true: the employee, in effect, pays employers’ NI by receiving lower gross wages. [1]

    Therefore, we should scrap employers’ NI and roll it up in the increasing income tax tax. The employee bears it anyway, and this way the formal and effective incidences are aligned.

    [1] If you don’t believe this, then consider that employers’ NI is a cost of employing someone and the employer doesn’t care whose bank account gets the money. Scrap employers’ NI, and wages will be bid up to compensate. The increase to income tax ensures that this is a budget-neutral move.


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