Government sets out biggest tax rises in a generation to fund an NHS-dominated state

The Prime Minister has announced a flawed but badly needed £14bn tax rise – taking total tax increases over the past six months to £36bn a year by the middle of the parliament – to fund a major investment in the NHS, and offer more protection to those with assets from the costs of social care, the Resolution Foundation said today (Tuesday).

Today’s ‘social care’ announcement was a Budget and Spending Review in all but name. The Prime Minister set out a manifesto-breaking ‘National Insurance Plus’ tax rise of 1.25p that applies both to employees and employers.

This, combined with the Corporation and Income Tax rises announced in the March Budget, means that the medium-term outlook is for tax rises worth over 1.6 per cent of national income – a bigger rise than in any Budget since at least the mid-1970s.

With over 80 per cent (around £25bn over the next three years) of the additional spending announced going to the Department of Health for priorities outside social care, just £5.4bn going on social care, and unprotected departments facing spending cuts of £16bn a year by 2024-25 compared to pre-pandemic plans, Britain is set for an NHS-dominated state, while other services like prisons and local government remain under considerable financial pressure.

Since 2004-05, the Department of Health and Social Care’s budget has grown at twice the rate of overall public spending, meaning that by 2024-25 it will account for around 40 per cent of all day-to-day government spending, up from 28 per cent two decades earlier.

The Foundation welcomes today’s ‘cap and floor’ announcement on social care costs, which will deliver a long overdue improvement to the means test of who is expected to pay towards their own care. However, progress on who pays for care is not matched by much action addressing the problem that far too little care is provided in the first place, especially given rising levels of need.

The Foundation also welcomes moves to address some of the fairness problems that come with choosing to focus the tax increase on National Insurance, by raising dividend taxation and applying the new Health and Care Levy to the earnings of working pensioners.

However, it says the overall ‘National Insurance Plus’ tax rise is still deeply flawed, with significant increases for younger workers but no contributions from some landlords and most pensioners.

A typical 25-year-old today will pay an extra £12,600 over their working lives from the increase in employee National Insurance alone, compared to nothing for a pensioner relying on pension income.  The change also increases the incentive for firms to use self-employed labour rather than employees, something the Chancellor has promised to tackle rather than exacerbate.

Other announcements today include:

• The temporary scrapping of the pensions Triple Lock, which will save the Treasury around £5bn a year.
• The envelope for the Spending Review which confirms that the day-to-day spending power of unprotected departments will not rise significantly in the coming years, and remain around a quarter down on 2009-10 levels.

Torsten Bell, Chief Executive at the Resolution Foundation, said:

“Boris Johnson has thrown low tax conservatism out of the window, raising taxes on the working-age population to fund a big increase in NHS spending, and protect the assets of richer households from the costs of social care.

“Despite the pre-announcement focus on social care, it has actually taken a back seat in the Government’s plans, with the vast majority of spending announced going to other health priorities like the NHS.

“A major improvement to the means-test that determines how much people have to pay towards their social care bills is therefore combined with far less progress on ensuring more people actually get the social care they need.

“The Treasury has taken important steps to address some of the huge problems with using National Insurance as the basis of this tax rise by promising to tax dividends and the earnings of working pensioners from April 2023. But the Chancellor is still asking younger workers to pay more while many rich pensioners, among the biggest winners from today’s announcement, will not have to pay a penny.”