Ben Gummer: Let’s call national insurance what it is – just another tax

Lloyd George explained the need: the harsh conditions experienced by working people around the country, and the dangers that they faced if they fell sick or could not find work. He described the insurance systems that were provided by insurance companies, employers, friendly societies and trade unions. He measured their efficacy and worth, identifying where coverage was greatest and where it was most sparse. He then set out the solution: a national insurance fund into which workers, employers and the state would pay, to provide for medical aid for sick workers, maternity cover for workmen, their wives and women workers, benefits for limited periods of unemployment, and payments in time of sickness. The provisions would be managed through the existing private institutions, except for unemployment payments, which would be provided by the labour exchanges.

All that took the Chancellor more than two hours to describe. It was after 6pm when he concluded: “Something like 15,000,000 people will be insured, at any rate against the acute distress which now darkens the homes of the workmen wherever there is sickness and unemployment. I do not pretend that this is a complete remedy. Before you get a complete remedy for these social evils you will have to cut in deeper. But I think it is partly a remedy. I think it does more. It lays bare a good many of those social evils, and forces the State, as a State, to pay attention to them. It does more than that. Meantime, till the advent of a complete remedy, this scheme does alleviate an immense mass of human suffering.”

Thus was made the first substantial plantation of the welfare state.

I am giving this account because I think it important to explain why national insurance was called national insurance. There was indeed a fund, one that was intended to be in surplus within 15 years of its creation, at which point Lloyd George anticipated that additional benefits would be made available, most likely to the families and dependants of workers.

Well, the fund did not work out quite like that. At every turn, the link between contributions and benefits was eroded, to the point where it now barely exists. That link will become nugatory with the introduction of universal credit and the single state pension, both considerable reforms of this coalition Government. What remains of national insurance is not really a contributions-based system, but a system of entitlement.

Let us be straight. National insurance is now a tax. It has all the features of a tax. Money paid in this financial year in national insurance contributions is used to pay this year’s costs of pensions, health care and much else besides. The surplus in the national insurance fund is transferred to other Government spending. The more robust commentators have explained that it is not an insurance system but a giant Ponzi scheme.

Were national insurance a much smaller tax, we would call it a stealth tax. That was certainly how Gordon Brown used it.

All I propose at this stage is a two-fold reform: first, a simple change of name, which would cost next to nothing; and secondly, the merger of the national insurance fund into general Government funds, which would save administration costs.

The result would be that we would have made an important move in being clearer, simpler and more transparent about how our constituents are taxed, on what and where it is spent.

I must admit to feeling some trepidation and regret at treading on ground laid so splendidly by the Welsh wizard. His presentation had the desired effect. It made less controversial a scheme that might otherwise have been opposed, as indeed it was in any case – not least by some of the trades unions. Most importantly, it did, as he thought it would, lay bare a good many social evils and force the state to pay attention to them.

The provisions were not by any means remedies, as he had hoped, but life for millions is much better as a result. That is a giant achievement, but we must not let romance get in the way of honesty. National insurance is no longer what it was designed to be. We now pay for the welfare state of Lloyd George’s creation out of general taxation. We should therefore get rid of the fiction of national insurance contributions and call it what it is: an earnings tax.

Ben Gummer is a Conservative MP who has introduced a Parliamentary bill on the renaming of national insurance. This is an edited version.