BORIS JOHNSON likes bold promises. When he became leader of the Conservatives in July 2019, he vowed to “fix the crisis in social care once and for all”. At the general election later in the year, his manifesto pledged not to raise a number of taxes. He won a landslide. Yet there is a problem with making contradictory promises: you can only keep one.
On September 7th Mr Johnson raised taxes. He announced a new health and social-care levy of 1.25% on both employees’ earnings and employers’ payrolls from April 2022 (at first in the guise of an addition to national insurance contributions, or NICs). Taxes on dividends will similarly rise by 1.25 percentage points. Mr Johnson argued the covid-19 pandemic had unexpectedly increased costs for the health service, which is true. Handily, the money can also be used to fund the prime minister’s social-care “fix”.
Conservative ministers spent the weekend before the announcement briefing the media that they did not enter politics to raise taxes. Mr Johnson simply ignored them. The measures will raise around £12bn ($17bn, or about 0.5% of GDP) a year for the exchequer. They follow a net tax increase of £25bn at the budget in March, mostly through higher corporation tax. This year has therefore witnessed the biggest rise in the tax bill since the mid-1970s.
Money for social care was expected to come from NICs. While the basic rate of income tax has fallen from 30% in 1980 to 20% today, NICs have almost doubled, from 6.75% on most workers’ earnings to 13.25% including the new levy. Chancellors like the fact that the cost is split between employers and employees, and thus can be hidden from workers. But critics argued that funding social care, which mostly benefits older households and their heirs, with a tax levied only on those below the state-pension age would be profoundly unfair.
The new levy represents a small improvement. It will apply to employees aged over as well as under 66, and the increase in dividend taxes further widens the net. Problems remain, however. Because pensions escape the levy, old folk will still pay just one-seventh of what they would have done had the money been raised through income tax. The levy will also distort the tax system. A firm using a self-employed contractor will be spared the 1.25% charge; one employing someone directly will not. Economists fear this encourages bogus self-employment, undermining both the fiscal base and workers’ protections.
Most of the £12bn raised will go to the health service. With treatment delayed during the covid-19 pandemic, the health service faces the longest queues since records began. There are 5.5m people awaiting treatment, and Mr Johnson warned that waiting lists could reach 13m before they start to shrink, as patients who had put off treatment come forward. But there is huge uncertainty about how many actually will. Health-care experts had thought ministers would wait to get a better idea before stumping up the cash.
Instead, funding will rise by around £8bn a year for the next three years, nearly as much as lobby groups had sought. Warning lights, in the form of referral and activity data, are already flashing, says Siva Anandaciva, chief analyst at the King’s Fund, a think-tank. Another reason for the generosity, he suspects, “is that you have three years to deliver before you go into an election. If you keep delaying, and if you don’t press go now, it is going to be inordinately harder to make headway later on.”
Social care will see a smaller funding boost. According to the Institute for Fiscal Studies (IFS), another think-tank, at an average of £1.8bn a year the increase represents a 9% rise in local authorities’ spending. That may sound like a lot, but the IFS does not think it will be sufficient to reverse cuts in the number of people receiving care seen during the 2010s—a decade marked by falling budgets, an ageing population and growing numbers of people with learning difficulties.
Yet the package will make a big difference to those who have to pay for care. At the moment, the cost is met in full by the state when recipients are down to their last £23,250. This floor will be raised to £100,000, and a new cap on costs will be set at £86,000, meaning people will no longer risk seeing their savings wiped out if they get dementia. Successive governments have come close to putting in place such a policy. Mr Johnson’s has finally grasped the nettle.
The tax rise makes the chancellor’s October spending review considerably easier. So, too, do economic conditions. Growth has been faster than expected at the budget in March. Borrowing looks set to be more than £20bn lower over this fiscal year. And on September 7th the government confirmed the “triple lock” on state pensions—a pledge to increase them by the highest of earnings growth, inflation or 2.5% each year—would be suspended owing to a pandemic-related surge in earnings. All of this reduces the likelihood of spending cuts in other areas.
According to Savanta-ComRes, a polling firm, the tax rise is even popular. A plurality say it was acceptable to break the manifesto in order to fund social care. But that may not tell the full story. As Dominic Cummings, Mr Johnson’s erstwhile adviser, has warned: “A core question at the next election would have been: what are the implications for taxes of Labour’s spending plans? The PM’s decision destroys this attack.” Any future promise to keep taxes low will carry less weight. It is not often that a Tory prime minister takes such a hit to fund public services.