Page last updated at 18:30 GMT, Wednesday, 7 April 2010 19:30 UK

National Insurance: Who's got it right?

Robert Peston
By Robert Peston
Business editor, BBC News

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Throughout the election campaign the BBC's expert team of journalists is examining the key claims made by politicians and assessing what their policies and promises mean to you.

Welcome to Reality Check. Today I'm examining the political argument over National Insurance.

Gordon Brown and David Cameron have again traded blows on the issue in their final Commons clash before the election.

The Conservative leader argued Labour would "kill" the economic recovery with the planned 1% National Insurance increase, due to take effect next year.

The Tories, who have the backing of more than 60 business leaders on the issue, have pledged to reverse most of the proposed rise if they take power.

Cameron and Brown clash over National Insurance and spending plans at PMQs

But the prime minister said that would mean spending cuts that would threaten vital public services as well as Britain's economic recovery.

So who has got it right?

In order to answer that, you would have to take a view on whether the economy can withstand the £6bn of public spending cuts which the Tories would make in the current year, to make up for the revenue that they would lose by not implementing that tax rise in full.

Some would say they are arguing over a relatively small amount. The 1% rise in NI is expected to raise about £7bn a year. Government receipts for 2010-11 are expected to total £541bn, while the deficit is forecast at £167bn.

Chart showing NI as proportion of government receipts

But Labour says such cuts would jeopardise the recovery. Economists are split on whether Labour is right.

Actually, even before making that judgment, you have to decide whether it's possible to eliminate £6bn of so-called government waste as quickly as that.

Then you would need to make a judgment about whether companies really would shed jobs or choose not to hire new people if the cost of employing them were to go up due to the National Insurance increase.

Business backing

Common sense suggests that if the cost of employing people rises, all other things being equal, companies will indeed hire fewer people.

And the Tories say that if every major business lobby group plus 69 individual business leaders are making that point, well it must be credible - since these are, to state the obvious, important employers.

FROM THE WORLD AT ONE

Luke Johnson, founder of Risk Capital Partners and one of the latest business leaders to criticise Labour's plan, has described it as "economically illiterate".

That said, Labour points out that employment levels continued to rise the last time it increased National Insurance - although, at the time, the economy was not just out of recession, it was booming.

Now, the Conservatives would also argue that the private sector is more efficient at generating the revenues and wealth that pay for public services than the public sector.

Which would be another reason for not increasing the tax burden on the private sector.

GMB Union boss Paul Kenny on Tory plans

There is, however, one important counter-argument, about the nature of the good society.

An important dividing line between Labour and the Tories in this election is over how much of their plans to cut public borrowing should be financed by spending cuts and how much by tax increases.

The Tories would cut £4 of public spending for every additional pound they would raise from new taxes.

By contrast Labour would reduce state expenditure by just £2 per pound of new taxes.

That difference in approach is as much about ideology, about how big the state should be, as it is about economics.



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