24 May 2017

May’s manifesto U-turn doesn’t bode well for Brexit


Why did Theresa May make such a dramatic U-turn on social care costs? The Conservative Party’s 2017 manifesto has a pretty innocuous section on the subject. It notes that, at present, anyone with assets of above £23,250 who receives residential care must pay social care costs.

It also observes the unfairness, perversity and distorted incentives in the current system whereby, if care takes place within the family home, that home is exempt from the asset test, meaning old people who would be better cared for outside their own home have powerful incentives to insist on being cared for in an inappropriate place. To respond it suggests three measures:

– First, we will align the future basis for means-testing for domiciliary care with that for residential care, so that people are looked after in the place that is best for them. This will mean that the value of the family home will be taken into account along with other assets and income, whether care is provided at home, or in a residential or nursing care home.

– Second, to ensure this is fair, we will introduce a single capital floor, set at £100,000, more than four times the current means test threshold. This will ensure that, no matter how large the cost of care turns out to be, people will always retain at least £100,000 of their savings and assets, including value in the family home.

– Third, we will extend the current freedom to defer payments for residential care to those receiving care at home, so no one will have to sell their home in their lifetime to pay for care.

Pretty innocuous, right? No change in the core principle of the current system — people are currently charged for social care if their assets are high enough, and people would be charged under the Manifesto policy if their assets were high enough.

The change, such as it is, is twofold: remove the perverse incentive to be cared for in one’s own home by including that in the asset test (which is surely a sensible move – it was always daft to have exempted the house from the test once the system had started only claiming the costs back from the person’s estate after death); and the asset threshold would be taken up from the rather low £23,250 to a more sensible £100,000.

The manifesto doesn’t mention anything explicit about a cap on total social care cost deductions from an estate. But the manifesto does say this: “We consider [this powerful combination of these three measures] more equitable, within and across the generations, than the proposals following the Dilnot Report, which mostly benefited a small number of wealthier people.”

What were the proposals following the Dilnot Report (rather old now, since it was published in 2011)? They were that “the means-tested threshold, above which people are liable for their full care costs, should be increased from £23,250 to £100,000” (sound familiar?) and that:

“Individuals’ lifetime contributions towards their social care costs – which are currently potentially unlimited – should be capped. After the cap is reached, individuals would be eligible for full state support. This cap should be between £25,000 and £50,000. We consider that £35,000 is the most appropriate and fair figure.”

Indeed, there were “proposals following the Dilnot Report”: although there is no cap at present, there was due to be a cap of £72,000 from 2020.Thus, the manifesto appeared to rule out a cap. That would, of course, have been welcome. For what could be more naturally Conservative than the idea that if something is being done for you and you have the money to pay for it, you should pay for it?

Some commentators seem to see a tension between charging estates for social care costs and raising inheritance tax thresholds. But, in fact, these are natural counterparts. If someone only had assets at death because their savings had been subsidised by the state, then of course it would be legitimate for the state to tax that inheritance.

If we are to cut taxes on inheritance (as we surely should), the inheritances in question must have been truly the property of the person leaving them, not the product of a state bung.

Others say that the need for social care is a lottery. In which case, buy insurance.

Social care costs are very well-suited to private insurance obtained early enough in life. There’s no non-diversifiability of risk. In other words, it’s not going to be the case that some years everyone claims and others no-one does – as might be the case for, say, tsunami insurance. Twenty years before receiving social care you are unlikely to know if you’ll need it, so there’s not much moral hazard. Private insurance should be able to work well.

Obviously the private insurance market for social care costs won’t have been functioning very well for the past few years, because people weren’t sure if social care was going to be nationalised or have a low fee cap in the future, so it wasn’t clear that it would be worth buying insurance.

But with more policy certainty there should be no problem. Dilnot thought that in order for a private insurance market to develop, there needed to be a fee cap. But that’s only true to the extent people were insuring themselves against paying any fees at all. They could buy different grades of fee coverage insurance (eg “up to £50,000”, “up to £150,000”, “up to £500,000”). There’s no good reason why that couldn’t work.

All of that could have been an argument to have at the consultation stage. Instead, Theresa May and her team give every impression of being spooked by a Labour surge in the polls since last week, with many showing Labour support in the 33-35 per cent region.

I don’t believe one should take that very seriously. During an election campaign people use polling answers to comment on the latest events. For example, Liberal Democrat polling support spiked after the first 2010 TV debate (we called it “Cleggmania”). But all polling respondents were really doing was saying who they thought had done best on the TV. They were never intending to vote for that person.

Polls during a general election campaign are rather like X Factor voting. Respondents say who they thought was best on Saturday night, not whose album they’re going to buy.

So polling respondents didn’t approve of what they understood of Theresa May’s manifesto, and accordingly said they’d vote Labour, boosting its poll rating. But they won’t really vote Labour. Labour isn’t going to get 35 per cent. It isn’t going to get 30 per cent. It’ll be lucky if it gets 25 per cent.

This is obvious to anyone who follows politics closely. But apparently not to Theresa May’s team. They were so spooked that on Monday they announced a humiliating and pretty much unprecedented U-turn on a central plank of a general election manifesto, making fools of those of us (including Cabinet ministers) who had spent the previous four days defending the policy.

They have form on this. After a couple of days of bad headlines Philip Hammond was forced into a humiliating U-turn on his 2017 Budget, even though the headlines had moved on by the time the U-turn was announced.

Is this the way Theresa May intends to conduct the Brexit negotiations? By declaring something is a Brexit red line, then after three days of fuss announcing that it isn’t a red line, was never a red line, and nothing has changed? Because if it is, is it too late for us to ask to have someone else in charge of the negotiations?

Andrew Lilico is an economist and political writer