1 May 2019

Does an ageing population really mean tax hikes are inevitable?


How will we cope with the costs of an ageing population? Yesterday, in an article for The Daily Telegraph, David Willetts made the case that this will soon become the issue in British politics.

His piece was prompted by a new report from Damian Green MP on the future of social care, published by the Centre for Policy Studies (which I run) and outlined on this site by James Heywood.

Willetts points out that just keeping our current promises to the elderly will add £36 billion to public spending by 2030. The conclusion he comes to is that taxes need to rise — especially on the elderly, and especially on the property wealth they have accrued over the years. Sorry, tax-cutters, but that’s just the way it is.

The Willetts argument is, essentially, that demography is destiny. But I’m not quite convinced.

It’s very clear, when you actually ask them, that people don’t want to pay more taxes. For example, Damian’s paper suggested that the funding gap in social care — which everyone accepts exists and is a serious problem — could be filled by putting a penny on National Insurance for the over-50s, but that this was a last resort and it would be far preferable to find the money from savings elsewhere.

Still, even the merest hint of a suggestion of potentially paying taxes — even if earmarked for providing better care — had some people up in arms. John McDonnell, of all people, suddenly started castigating the Tories for their sinister plans to tax people in order to provide better public services. Labour, he insisted, would simply “fund social care properly”, without specifying in any way who would be doing the funding.

But it’s not just about politics. When you raise taxes, you’re taking more of people’s money. So before we ask people to pay for a single extra penny, we need to do everything we can to make sure that we’re spending what’s already collected as wisely as possible — and that whenever we increase spending in a particular area, we are spending the money wisely.

All too often, however, this simply doesn’t happen. When the Government announced that it would be increasing NHS funding, a huge amount of energy was expended on the question of whether the NHS budget should rise by 3.5 per cent a year or 4 per cent a year or whatever other figure, with extremely detailed predictions about what each different figure would mean for care quality.

As with social care, the pressures of an ageing population certainly are putting pressure on the NHS, and will continue to do so. But as we pointed out in a Centre for Policy Studies briefing note, the long-term effects of pushing up NHS productivity (or letting it fall back) massively outweigh the effects of extra funding. This indeed is why Matt Hancock’s focus on improving NHS technology is so welcome, for reasons set out in a far-sighted report by Alan Mak.

The same is true of Damian Green’s paper this week.

For me, the most interesting part of it wasn’t that he pointed out that there is a funding gap in social care — everyone who’s looked into the issue accepts that (and, in fact, the estimates used in the report were drawn from others’ work).

It wasn’t even that he suggested how to fill the gap. It’s that he pointed out that the entire structure of the social care system isn’t geared up to give proper value for money. (Something I also pointed out in my weekly column in City AM.)

Since 2000, productivity in the social care system has fallen significantly. Making it work more efficiently would, as with the NHS, be the equivalent of putting billions more back into the system.

One reason for this inefficiency is that making councils responsible for social care funding means that they are incentivised not to build care homes or retirement housing — because you’re increasing the number of elderly residents, which will in due course hammer your budget.

The result of this is that care home provision has stagnated even as the elderly population has soared. Astonishingly, we have a tenth of the amount of retirement housing compared with comparable countries.

This means the care homes we do have are overcrowded and often pretty old when care quality in modern homes is much, much better and more efficient. And it means the lack of beds flows back into the NHS, causing huge problems there.

To make matters worse, it means that elderly people stay in homes that have become too big for them, because there isn’t enough suitable high-quality housing to downsize into.

And so, while will definitely need to spend more money on the elderly, we need to ensure that the systems we’re putting that money into are fit for purpose — that we’re spending that money as effectively as we can.

In short, before we put up taxes, we need to scrutinise every penny of public spending. In fact we’re working on proposals ahead of the Spending Review to identify approx £30 billion in savings that could be used to pay for social care and other priorities (like tax cuts).

Caring for the elderly is a huge challenge. Getting government to spend its money wisely is an even huger one. We need to do both.

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Robert Colvile is Director of the Centre for Policy Studies and Editor-in-Chief of CapX.