Low tax conservatism is dead, but fiscal conservatism is back in fashion

The Prime Minister and Chancellor made huge policy decisions this week, raising taxes to spend more on the NHS and protect the assets of those facing high social care costs. But the tsunami of announcements can also hide the biggest decisions they’ve taken: to bury the idea of low tax conservatism but resurrect, after a pandemic-induced lull, it’s (not closely related) cousin – fiscal conservatism.

The final nail in the low tax coffin was this week’s £14 billion a year National Insurance-based tax rise. Being prepared to face up to the tax consequences of announcing big permanent increases in the size of the state deserves credit. As does the fact the Government listened to the many critics of a National Insurance rise, and tried to address some of its fairness problems by extending it to working pensioners and dividend income.

But despite these welcome changes, the new Health and Social Care Levy is still deeply flawed. It falls disproportionately on the working age population. A typical 25-year-old today will pay an extra £12,600 over their working lives from the employee part of the tax rise alone, compared to nothing for most pensioners (only one-in-six pensioner households have earnings).

And because the Levy is focused on earnings, other sources of income are exempt – including rental income that tends to go to higher income households. Of the 1.9 million buy-to-let landlords, two-thirds are in the richest fifth of households. You’d rather be a landlord than a working tenant.

To see the big picture of where Boris Johnson has taken the Conservative Party, under the combined pressure of the pandemic and healthcare spending pressures, we need to combine the Health and Social Care Levy with the Corporation and Income Tax rises announced in the March Budget. Together that takes you to £36 billion of tax rises – that total’s over 1.6 per cent of national income, more than in any Budget since at least the mid-1970s.

Those tax rise have supported more spending. Despite the headlines about social care, the priority for spending has actually been other Department of Health and Social Care priorities: the NHS and dealing with the pandemic. Only a fifth (£5.4 billion) of the new spending in England over the next three years will go on social care.

That funding has been set aside to improving the means test through which people are asked to contribute to the costs of their social care. This is a welcome and overdue socialisation of the risk we all face of high care costs. But dangers remain.

The smaller than expected social care package means the government has prioritised changing who pays for care, rather than directly addressing the growing problem that far too few people are getting the care they need in the first place. More broadly, the policy may not live up to its marketing, with those in modest homes with few financial assets still needing to put a charge on their homes if they need significant residential care.

The cap will offer more support to families in the South, who will see a greater share of their assets protected if they hit the cap, and are more likely to hit the cap given higher care costs. In contrast, it is the increased generosity of the means-test that will have relatively more impact in lower wealth regions. In the North East, only 29 per cent of individuals aged 70-plus have sufficient assets that they would receive no state support.

The return of fiscal conservatism to the driving seat in government can be seen in the Chancellor’s confirmation of the overall spending totals for the forthcoming Spending Review. These totals make clear the Chancellor’s intention to fund any further Covid-19 related costs (such as education catch-up funding) from tax rises or spending cuts elsewhere, rather than extra borrowing: a clear change in fiscal approach from the pandemic so far.

More broadly, while health and care spending will rise, these totals also confirm that the day-to-day spending power of unprotected departments, such as local government and prisons, will be cut further in 2022-23 and will not rise significantly in the coming years remaining well below 2009-10 levels (in real terms per capita).

This continues the pattern of decision making of recent decades, leaving Britain set for an NHS-dominated state. By 2024-25, the Department of Health and Social Care will account for around 40 per cent of all day-to-day government spending, up from 28 per cent two decades earlier.

The Treasury has banked £5 billion from ditching the Triple Lock, and will likely receive a further £25 billion from the improved economic forecasts from the Office for Budget Responsibility next month. While the social care announcement may define the Prime Minister, how this upcoming fiscal windfall is spent may help to define the Chancellor’s legacy.

While low tax conservatism may be dead, fiscal conservatism in the Treasury is alive, well and back calling the shots after the big borrowing of the pandemic.

This article was originally published on PolticsHome