Thursday, 9 September 2021

Taxing times

 A government has finally done something about social care. Or at least it has a plan. Actually, it doesn't really have that either, but it has a funding mechanism, which is a start. Presumably the plan will decide how to spend the extra money. With the state of the public finances, I can understand them doing it that way round. The government should take some credit for grasping the nettle, having danced around it a long time. But given the not unreasonable expectation that social care will be (or has been) fixed the issue hasn't gone away and could easily come back to bite them.

I was travelling on the day of the announcement and so heard a lot of debate around the subject on the radio and then some more later on the TV news. All of the points you would expect came up, such as:

  • this isn't just about old people and dementia: half the social care budget is for younger people with care needs, often extremely acute and long lasting
  • will social care ever get to see the money? Initially it will go to clearing the NHS backlog. The Daily Mail's concern earlier in the week was that once the NHS gets more money it will be impossible to reduce it: social care could miss out again if the money can't be prised from the "gigantic maw of the NHS"
  • why should hard pressed young people, who don't own property or have an index-linked pension, pay for rich old people to have their assets and savings protected? This strikes me as a well made point
  • indeed, why should anyone be able to pass on inheritances down generations? One chap on Radio 5Live spoke cogently and passionately on this, advocating taking all the extra money needed from inheritance tax. Without actually sounding like a communist most of the time
  • equally, why shouldn't old people, rich or not, who have worked hard and saved all their life rather than blowing what they had on expensive cars and holidays, pass on houses or money to their children if that's what they want to do rather than spend it? A chap in his late 90s who had served in the RAF in WWII and noted that his generation had had it every bit as hard as today's young folk closed Nicky Campbell's phone-in with an passionate and heartfelt contribution. It strikes me that this desire is at least as strong in people who have accumulated relatively modest levels of wealth as in the "rich", who usually don't have a problem in side stepping inheritance tax anyway. And I've never understood why houses are so emotional - unless, as in some unfortunate examples, relatives stand to lose the roof over their head. For me all assets and wealth count the same, But it is an emotional issue. And not for the very rich - this hang up about property is very "middle England"
  • is National Insurance the right way to raise the money? Wouldn't income tax be fairer? Yes of course it would, but politically impossible as the basic rate of tax hasn't been increased in a long time. Over 50 years I've heard said, since James Callaghan was Harold Wilson's chancellor, though I haven't fact checked that
  • NHS and care workers will have to pay the tax (d'oh! Don't they and their relatives have care needs too?) While the NHS got a modest pay rise (or not so modest depending on your viewpoint) care workers in the private sector may or may not have had a rise but will still pay the extra tax, if they earn enough. One of my bugbears about NI is that it starts at £9,500pa whereas income tax starts at £12,500
I know it's not officially a tax, it's National Insurance, but it's really just a tax. The government's polling showed that a large proportion of the electorate think NI is the fairest way to do it. That, of course, is because a lot of them don't have a clue how NI works. It was Nye Bevan, Minister for Health the 1945 Labour government and credited as founder of the NHS, who said that the secret of the National Insurance Fund was that "there ain't no fund". The money goes into the general exchequer pot and is spent on current, not future funding needs. This has led some commentators to label it a Ponzi scheme. This strikes me as one of the most idiotic comments I've ever heard. For pensions and welfare of course new people have to come into the scheme and pay in to replace those who have retired and have started taking out. The reason the "fund" gets under pressure is because of the escalation of health costs. After all, the British old age pension is one of the least generous in the western world. When the welfare state started in the 1940s I doubt anyone would have been impressed if no-one had got an old age pension until they had been paying in for many years - it would have taken 4 decades or more to get going properly.

The reason national insurance was picked was because polling showed it was the least unpopular way of raising the money. Indeed, in the immediate wake of the announcement opinion polls showed slightly more people in favour than against, remarkable for a tax rise. Companies as well as individuals pay, so the pay packet hit is smaller than doing it all by income tax, even if we end up paying it in higher prices. Tax on dividends was increased and working pensioners now have to pay the NI. Non-working pensioners escaped. I know the triple lock was ditched, for now, but it would have been an anomalously high increase. I was amazed to hear some pensioners, who I wouldn't classify as poor, argue for the triple lock. Wealthier pensioners should undoubtedly have had to pay something for the additional benefit of the care costs cap.

The fundamental reason the government chose NI was that if the electorate hasn't woken up to the way it works in over 70 years they probably ain't gonna do so now.

There are, however, problems with increasing NI. The different threshold from income tax and the cap on NI payments for higher earners make the combination of income tax and NI stupidly non-progressive moving up the income scale. And because employer's NI is only paid for employees it may give an incentive for employers to encourage empoyees to go freelance, boosting the gig economy.

There are other slights of hand besides the fact that care won't get much extra at the start.  While care costs are capped at £86,000, that doesn't include accommodation costs. When Mrs H's mother was paying £800 a week for her care (out of her own money - and it was her money so we had no issue with that) I don't know what the split was between care and accommodation/meals etc. But I'd warrant a guess care would be far the smaller element. So when those callers on the radio were complaining about rich people being able to protect their assets, maybe not so much. The bills only finally stop when a person's assets diminish to £20k instead of £14k, though it will chunk down at less than half the rate it did. Not such a radical change then, in practice. Some people are going to be very upset in the future when the value of their home and savings vanishes in care home accommodation costs.

Another sleight of hand to watch for is that care costs will only be covered at the rate that the local authority pays for those whose assets mean they do not have to contribute. That might sound fair enough but Mrs H and I encountered the anomaly that local authorities do a bulk buy deal with care homes which means that they pay far less than self funders for the very same accommodation and services. It's bad enough when the person in the next plane seat has paid less than you have for one trip but when the person in the next care home room is costing the local authority significantly less than you are paying week after week that strikes me as iniquitous, as self funders are quite simply subsiding local authority residents as well as paying for themselves. Sajid Javid appeared to recognise this anomaly but this one needs keeping an eye on.
I'm not sure how closely these proposals match the Dilnott report of nearly a decade ago, though Dilnott is pleasantly surprised that something he gave only a 1 in 3 chance of happening is broadly coming to pass. Personally I would have preferred a proper insurance scheme. This is because it generates extra money over and above that from raising taxes. 

If we look at countries like Germany where more in total is spent per head on health than in the UK, a significant part of the reason for that is that individuals contribute through insurance premiums on top of what they pay in taxes. I read early in the pandemic that this was the reason for Germany having so many more intensive care beds available than the UK. The insurance companies require the providers to have the capacity available as they can't tolerate the risk of a policy holder not being able to be promptly treated.  Barring pandemics, intensive care requirements in the NHS are normally predictable and so it isn't considered necessary to have surplus capacity. So we run our intensive care assets much "hotter" and had little slack. But the result of the mixed system in Germany is more money is available in total - and more intensive care facilities were available to call on in the emergency. Those facilities had been sitting there created and staffed by richer people's insurance premia.

I'm applying the idea here to provision of care. Insurance is a better way to get the richer people to contribute more without presenting it as a tax. Why should you pay? If you have insurance then you benefit from the cap. What if you can't pay? If your income is too low the insurance would be paid for you. 

The other reason I think a genuine insurance scheme is the way to go is the nature of the risk, which hits some and not others, unpredictably. Some have to face high costs, others don't. Some for a short time, others for any years. This is a classic case for insurance. The premia would have to be a flat rate, not related to specific risk or age factors which would defeat the objective of getting people to pay in. 

There is a problem, as pointed out by former chancellor Lord Lamont: insurance companies have made it clear they do not feel it is a scheme they could operate effectively. I would guess that is because they can't at this stage quantify with enough certainty the likely costs. Lamont says that leaves the alternative of a nationalised insurance company scheme but "that could be years in the making". That is why we should have started thinking that way a decade ago. After all there has been a decade for the Conservatives to come up with a Conservative solution. However, given that we had wasted that  decade the political imperative was to seize it now. Why now? Because covid could be used as an excuse. Johnson's political calculation was that, having said he would fix this issue in 2019 before anyone was worried about bats and Wuhan he could seize the fact that the electorate would understand the need to clear the NHS backlog and segue the extra annual revenues into care. While opportunistic I think this may prove to be politically astute provided it works. But will it work? 

Where Johnson might have got this right is to spring it on us half way through the electoral cycle. However, budgets can seem winners for a while before unravelling. The biggest threat to this announcement by the time of the next general election must be the propensity of the NHS to spend everything it is given while not making any actual improvements. Some in the NHS are already rolling that wicket, preparing for failure by saying that the extra money isn't enough. It never is.

While £5.4 billion of the extra money will go straight to care the rest is not due to go in for around three years, which roughly takes us to the time of the next election. Though perhaps Johnson is thinking the election will be sooner, maybe in 2023, before the promise to clear the NHS backlog and switch the funds into care bites.
It was Blair who originally said the care issue would be fixed. (Like education. Which didn't get fixed either.) That's four PMs ago. Theresa May came up with some broadly sensible proposals in the heat of an election campaign and her resolve didn't withstand the heat of electioneering. That  was because she proposed to increase taxes to pay for it, which resulted in her opponents disgracefully branding it a "dementia tax". Disgracefully because they actually thought taxes should be raised to pay for it. Glory be, I haven't heard the hypocrisy of the phrase dementia tax this time. So far. 

Nevertheless it hasn't stopped the opposition criticising the breaking of Tory manifesto commitments and voting against the changes when they have consistently campaigned for taxes to go up for this reason. You might think this would take some brass neck but clearly that's not a problem for the LibDems and Labour, who both voted against something they have been calling for for a long time.

The critics weren't only on the left. Dominic Lawson, writing in the Sunday Times, noted that the PM had trashed one manifesto pledge (on tax) by keeping another (the guarantee that no-one needing care would have to sell their home to pay for it). Lawson noted that the if the plan was really about guaranteeing the elderly a dignified old age we would be talking about the quality of care provided. That we are not shows the "plan" is not about health or social care but about property. However, though Johnson told Tory MPs that he had acted as a true Conservative in defending "the right to pass on money", it may not be a success even in those terms - in which case Lawson predicts things will get really nasty. 

Writing in the same paper David Smith said "anybody who thinks last week's announcements have fixed social care has swallowed a lot of snake oil".

Time will tell whether these changes pave the way for care being "fixed" or whether, like the Blair/Brown increase in NI to provide more money at the NHS in 2002 it's just a way of throwing more money at the problem without actually fixing anything.. I fear this "solution" will alleviate the issues without solving them because a more sophisticated approach is needed. However, an opportunist like Johnson will never create the option of a sophisticated solution. And arguably an electorate that still hasn't realised national insurance is a tax after seven decades doesn't require sophistry.

Indeed it's not entirely clear that Johnson really understands the issues. A column was published in the Daily Mail the day after the announcement under the PM's name (well he was a journalist so he may have written it...) which said "Dementia is a bolt from the blue; cancer is another. If the latter strikes, you at least have the assurance of knowing the NHS will cover your treatment in full. If you suffer the former, you have no such consolation. As things stand, many people face the risk of financial ruin in their last years". But, PM, there is no treatment for dementia!

More seriously, it's not clear Johnson or his team has begun to formulate any solutions to the issues plaguing the provision and quality of care. Just how they plan to attract more people into care, requiring higher wages and career progression in a sector that mainly consists of a disparate range of small providers, is not at all clear.

What was clear to me and Mrs H as proxy consumers of such services for several of our relatives was that the costs are actually modest for the service provided but of course they still mount up frighteningly quickly. 

But one thing is clear: taxes are at the highest overall level for for many decades:

The latest increase comes on the back of Rishi Sunak being the first chancellor since Denis Healey to raise the rate of corporation tax. The increases have been spread as follows:

(The income tax 'rise' is the fiscal drag effect of not indexing thresholds, not a rate rise).

Record tax levels should not be too much of a surprise after an economic shock the likes of which has not been seen since the world wars. And on the back of an incomplete recovery from the global financial crisis. But it was also the way we were already heading. Some say Johnson's government is very right wing. Not on economics it ain't. Sunak is struggling to maintain any shred of the Tories being a party of prudent money. Even though Lord Lamont claims Maggie Thatcher would have backed the NI increase, this is a party of the Big State going for statist solutions.

Lord Lamont's column "UnTory? No, even Maggie would have supported this step" was in the Daily Mail on 9 September 2021

The Prime Minister's rather obsequious column "The whole nation owes campaigning Daily Mail and its readers a huge debt of gratitude " was in the Daily Mail on 8 September 2021. The Mail's campaign has indeed been to "fix" the care issue but from my recollection has mainly been about preventing the sale of houses.

Dominic Lawson's column "This is about inheritance, not the quality of care" was in the Sunday Times on 12 September.

David Smith's column "After this dog's dinner can we sustain record taxes?" was in the Sunday Times on 12 September.

Summary of tax hikes from the Daily Mail


  1. Very interesting Phil. As an old Tory you do a reasonable job of picking apart the issues of taxation. With regard to social care I remain, as an old liberal, far from convinced that it is in any way fixed, indeed my great fear is that the can has in reality been kicked down the road again.

    1. I agree, DM, it probably has unless something remarkable happens and the time bought by the announcement and the three year timescale is used unusually well.
      I also meant to include a reference to Robert Colville's Sunday Times column on 12 September in which he noted that, while some accused Johnson of shredding the party's reputation for low tax, the uncomfortable truth for the Tories is that the main place they had that reputation was in their own heads. Colville, a co-author of the Tory 2019 manifesto, says the new golden rule of British fiscal policy and arguably of British politics is that "the NHS always wins".