20 July 2021

A tax on jobs to pay for social care is a terrible idea

By Eamonn Butler

“We promise not to raise the rates of income tax, National Insurance or VAT,” said Boris Johnson’s 2019 election manifesto. How times change. Ministers were floating a plan to raise National Insurance in order to pay for social care, before yet again delaying any announcement on this crucial area of reform.

Of course, the Tories have form on threatening to break a manifesto pledge before swiftly u-turning. In 2015, David Cameron promised a similar “five year triple tax lock”. His 2015 election manifesto said four times that it would not increase NI – shortly before the Chancellor, Philip Hammond, tried to raise it for the self-employed.

Perhaps the public accept that the costs of Covid have made such promises (like Rishi Sunak’s pledge to “balance the books”) unsustainable. But raising taxes for social care? That’s new. When Boris indicated on the steps of Downing Street that he had an ‘oven-ready’ plan for social care, did he really mean ‘half-baked’?

Raising National Insurance, even for the best of reasons, will probably do more harm than good. NI is a very bad tax. It’s not ‘insurance’ at all, of course: the money it generates goes straight into the Treasury to spend on anything from HS2 to electric cars. But it is a tax on work and on workers. If you are in a job, you will probably pay NI Contributions. Your employer, though, will pay a lot more.

As every economist knows (though politicians find it hard to grasp), when you tax something, you normally get less of it. We tax earnings with income tax, and self-improvement with progressive rates of income tax. NI taxes jobs. So we get fewer jobs and lower earnings. 

And most businesses in the UK are small businesses. Because the rules on income tax and NI are different, that makes payroll complicated. Fine if you are a big company with fleets of accountants, time-consuming and wearing if you are a small company. 

Start-ups are particularly disadvantaged. Economists have been amazed how many new start-ups have been created since lockdowns started to be eased. Most will probably fail – a sad fact of economic life – though hopefully, new ones will come along. Yet the biggest factor in thwarting start-ups is high taxes, which makes any NI rise a jobs and growth killer. Quite simply, starting a business takes a huge risk. Entrepreneurs might have to mortgage their homes, dispense with income and forget treats like holidays for many years. When taxes raise the cost of doing business, they raise the risk of not making future profits, and maybe not even breaking even. So fewer entrepreneurs take the chance. And those that do are more cautious about expanding and creating new jobs. 

That is bad enough for us as consumers, because there will be fewer new businesses to fill the gaps in the economy – look at the boarded-up shop fronts in any provincial town, and even in London – due to lockdown failures. But it is really bad news for people who have lost their jobs during the pandemic. And really, really bad news for younger people who have been disproportionately impacted by lockdowns.

Saddest of all, this tax rise intended to “transform social care” will do no such thing. Our social care system is completely broken. Spending more taxpayers’ money on it is like pouring petrol into a rusty engine – it still gets you nowhere. 

The majority of care homes run by local authorities are over 20 years old and no longer up to standard. Some are converted hotels with narrow corridors, awkward stairs, and tiny bedrooms. Huge long-term investment is needed.  That will not come from governments, who invariably stint on capital spending because it doesn’t show immediate returns. Instead, we need to bring in long-term independent-sector investors, like pension funds, creating higher-value, professional partnerships running better facilities. 

Assistance delivered to people in their own homes by visiting carers is hugely substandard too. Local authorities focus on price per hour, not the service quality delivered. And new drugs that stave off the worst effects of Alzheimer’s mean that more dementia sufferers will be living longer at home, so getting home care right is vital. Again, there’s no point at throwing money at today’s system. We need to engage with independent providers who can employ Artificial Intelligence and other technologies to help monitor people, support them effectively, and integrate their social and medical care. Providers who are much more focused on the quality, training, recruitment and retention of carers than local authorities are today. 

In terms of getting new money into social care, the many pressures on taxpayer funds and the growing demand for social care, necessitate new ways of helping families make greater provision for their own care. People are reluctant to save or insure for something that will affect only one in three of them. But we could make insurance viable by the state picking up the ‘long-tail’ costs of the minority who happen to need many years of care. Insurers would also put greater pressure on providers to keep their costs under control and deliver better quality and value.

There is one last point. It’s unpopular, but there are no popular solutions to a crisis that governments have let mushroom for decades. Half of local government care spending goes on younger people with physical, mental health, learning and other problems. But in terms of the care of older people, it is fair to say that the older generation have had a pretty good deal from the state so far. They enjoy many special benefits – such as free bus passes, free TV licences, winter fuel payments and triple-lock pensions. In a delicious irony, most people of pension age also pay no NI Contributions either. Is it perhaps time that we ask older but well-off people to make more contribution to their own generation’s care costs?

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Eamonn Butler is Director of the Adam Smith Institute.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.