The Government’s recent announcement to increase National Insurance contributions by 1.25% to fund improvements in social care has, I know, been met with both interest and, from some, real concern as to how these proposals will impact them and their loved ones. Parliament voted on this measure on Wednesday and I think it is important to set out my thoughts in detail to make clear my position.
I am instinctively against increasing taxes and believe political parties should do everything within their power to honour the manifesto pledges upon which they were elected. The Conservative Party’s commitment to not increase Income Tax, National Insurance or VAT at the last election was made in good faith, at a time when no one could have anticipated the pandemic before us. Since then, the economy has suffered its largest annual contraction since 1709 and the Government has had to borrow more money than ever before in our peacetime history to protect millions of jobs and keep the economy afloat. Any responsible government must respond to the financial situation as it finds it. The dictum, attributed to Keynes – when my information changes, I change my conclusions – is a mantra I have stuck by throughout my political career, and it is one that strikes me as a good footing for policy formulation too.
At the same time, the failure of successive governments, consisting of all three major political parties – Labour, Lib Dem and Conservative – over many years to grasp the nettle and fully address the pressures on our social care system has left the sector under immense strain. This has only become more acute as a result of COVID-19, with an estimated 300,000 people currently on local authority waiting lists for adult social care in England. In terms of the NHS, there are now over 5 million people waiting for treatment, and estimates suggest the waiting list could potentially rise to 13 million people.
Social care budgets simply aren’t coping with demand and the reality of our ageing population means even more money will be needed in the future to ensure everyone is cared for properly and with dignity. Indeed, during the next decade there will be two million more people in Britain over 75 years of age, and the number of people aged 85 or over will have risen by a third between 2014 and 2024. From a local perspective, Bromley has the largest population of pensioners anywhere in London. In short, doing nothing isn’t an option.
Addressing the gaps in provision, and making sure the system is fit for purpose for the future, is a complex problem for which there is no perfect solution. The options available to us are broadly threefold: cut expenditure in other important areas, something no one wants; borrow more and shoulder younger generations with even greater debt; or, reluctantly, raise taxes. In terms of the latter, only a broad-based tax like Income Tax, VAT or National Insurance can raise the sums needed for such a significant investment. A wealth tax, as some have suggested, simply wouldn’t generate sufficient funds.
Of these, National Insurance has a number of advantages. There is a clear precedent for it, with Labour raising National Insurance by 1% in 2003 to increase funding for the NHS; it is progressive, with those earning more contributing a greater share (in fact, the highest earning 14% will pay around half the revenues); unlike Income Tax and VAT, it ensures businesses also pay; and it is internationally comparable, with France, Germany and Japan increasing social security contributions to fund social care provision. What is more, of the three, it is currently the only available route to make sure the levy is UK-wide, and unlike Income Tax and VAT, National Insurance already directs a ringfenced proportion of receipts to the NHS (and has done since 1948). It is for these reasons that National Insurance, over other options, was chosen as the best way forward.
That is not, though, to say it is perfect, and a number of legitimate concerns have been raised, not least on the intergenerational fairness of using National Insurance and the impact this rise will have on businesses. While I take those points, on both, it is important to provide some context. Almost half of social care expenditure is on working-age adults, including those with disabilities, so the old/young narrative is far more complex than is often assumed. Were we to raise the sums required from just those over the age of 40, as some have suggested, then the levy would need to be set 60% higher, placing a much larger burden on many ordinary families. That said, it is only fair that those working over the state pension age should pay as well, as the Government has proposed, and that dividend tax rates are increased equivalently.
In terms of business, the Employment Allowance means around 40% of businesses will not be affected at all by the levy. The next 40% will face an average increase of just £450 a year, likely to be less than 0.1% of their average turnover, and big businesses will continue to pay the most, with 70% of the money raised from business coming from the largest 1% of employers.
Were the necessary legislation to be approved (we are due to begin debating it in the House of Commons on Tuesday), then the proposed 1.25% increase will come into effect from April 2022 and will be delivered through a new ringfenced Health and Social Care Levy that is formally separated from National Insurance Contributions from April 2023. It is expected to raise around £12 billion a year and the revenue will be legally and operationally “hypothecated” (or, in other words, ringfenced), with HMRC sending the funds directly to the NHS and social care funding bodies. To improve transparency, contributions will appear on people’s payslips so everyone can see how they are helping to fund health and social care.
You can find a full and detailed explanation of the proposals here:
There is no easy solution and good governance means sometimes having to make tough decisions. Although we will still need an informed and serious public discussion about how we fund these pressures long term – which are only going to grow - this plan will help tackle the backlog (allowing for around 30% more elective activity by 2024-25), upskill the social care workforce, and importantly, provide greater certainty for those who need social care, as well as their families.
I hope, by writing candidly and factually about the challenges before us and the limited options to solve them, the above sheds some light on why this difficult decision has been made.