Vince Cable: Raising NI is a rank injustice and won’t fix the social care crisis

Vince Cable: Raising NI is a rank injustice and won’t fix the social care crisis
The government is cynically protecting the interests of elderly property owners who vote for them at the expense of younger, low income workers and renters who don’t

I ended last week’s column with what I thought was a logical conclusion: that the big increase in UK public spending and public debt resulting from the pandemic required extra taxes. The issue boils down to the question of how to tax fairly (reflecting ability to pay) and efficiently, doing as little damage to the economy as possible.

The government has bitten the bullet by abandoning its election pledge not to increase national insurance. By increasing NI by 1.25 per cent, it is estimated that £12bn can be raised. Through a complex piece of budgetary arithmetic this revenue will, it is claimed, simultaneously pay for the immediate crisis in the NHS to help clear the backlog of operations created by the pandemic and “fix” long term care. The optimistic assumption is that the NHS payment is a “one-off” and then all the funding can be switched to social care.

There are two separate, but related, problems wrapped up in the issue of social care. The first is lack of support at home for disabled people, the frail elderly and those with long term health conditions. Families are forced to make their own arrangements which often means a family member becoming a carer rather than working. Many others with care needs are isolated and neglected at home and are more likely to need hospitalisation.

The quantity and quality of care has fallen over time so that only about a third of elderly people judged medically to need care are receiving it through public funding. And demand is growing as a result of the rising number of dementia cases.

The main cause of a growing care crisis has been a squeeze on local authority funding, which has been more severely hit than other public spending. Councils have resorted to more severe rationing such that only the most extreme cases are being helped along, with a general decline in the service offered by councils’ domiciliary care services. It is estimated that £6bn is required to return to 2008/9 standards of care, let alone provide the improved pay, conditions and professional training required to attract more care workers, fill vacancies and meet rising demand.

The second problem arises from the use of means testing as a rationing device. Since those with assets worth over £23,000 – which means almost all property owners – are required to fund their own care, many simply try to live without. And for those with long term care needs such as dementia, there can be unlimited costs with annual bills of around £25,000 for home care or £75,000 for a residential home. In practice, this can mean selling the family home, with the loss of inheritance for relatives. Some of the liability can be met by insurance but insurers will only offer limited cover.

Some would say – including me – that that is tough luck but not a responsibility for taxpayers. But there is a sense of grievance because those whose condition requires hospital treatment receive entirely free health care while others have to pay because social care falls outside the NHS. I personally find the ethical arguments here rather questionable. Why should it be thought to be “fairer” to have ones loved ones die quickly and painfully of cancer rather than more slowly from a degenerative disease in a residential home? Why should inheritance be regarded as a basic right?

In practical, political terms, aggrieved property owners, who disproportionately vote Conservative, have obtained a commitment that social care costs beyond a certain limit, which cannot be covered by insurance, should be paid by the taxpayer.

The Dilnot Commission, established by the coalition government, recommended a cap but the Conservatives never implemented it in the absence of agreement on how it should be paid for. After years of procrastination, the government has announced its solution to this problem: a cap of approximately £80,000 paid for by national insurance increases.

The reasoning is that this represents a form of social insurance under which everyone in work pays something to cover the risks facing a minority. The problem is that national insurance has long since ceased to operate as a self-contained system of social insurance, as was envisaged by Beveridge and the creators of the welfare state. It has become just another tax and a tax that falls disproportionately upon the low paid and the young, since people above pension age do not pay national insurance.

The employees’ contribution of 12 per cent starts to be paid at only £9,500, per annum, well below the income tax threshold of £12,570, and on incomes which in annual terms are roughly half the minimum wage. And while income tax is applied progressively so that upper earners above £50,271 pay double the standard rate, upper earners above £50,000 only pay 2 per cent NI.

The optics are terrible: low paid workers paying more tax to help elderly property owners pass on an inheritance to their families. Even those Conservative MPs not known for their progressive instincts are embarrassed.

That is by no means the end of the problems presented by NI increases. Employers’ contributions are a tax on labour at a time when there are still large numbers, especially of young people, trying to find jobs after employment ceases to be subsidised by furlough payments.

The numbers don’t add up either. It seems wildly unlikely that the additional demands on the NHS will suddenly end in six months’ time, permitting a switch to social care. Moreover, demand for social care is believed to be rising by 4 per cent per year, while the yields from increased NI will only rise in line with the economy.

The government is trying to sweeten the political pill by arguing that pensioners will take a hit from suspension of the “triple lock”. Ministers have scrapped – temporarily – the earnings part of that “lock”, promising an inflationary rise, set at a minimum of 2.5 per cent. The overall move means that pensioners will continue (rightly) to be protected from sliding back into poverty, but low paid workers won’t be. Instead, they are expected to pay extra on their incomes, to protect property inheritance, even though they may well be renters themselves.

There are alternatives to this rank injustice. An angry Andy Burnham reminded us on the radio this morning that he came up with a better and more appropriate mechanism: taxing inheritances more effectively. He proposed this over 10 years ago as health secretary and the idea was dismissed as “a death tax”.

An additional or alternative measure could be to make property taxation (currently in the form of council tax) more equitable by establishing the tax rate as at least proportional to the property’s modern value. Several Conservatives have endorsed this approach. Taxing asset wealth rather than incomes would also capture some of the large unearned gains accruing from recent asset inflation.

Some Tory MPs are worried that their party will suffer from breaking an election pledge. I doubt that they need to worry. The government is cynically protecting the interests of elderly property owners who vote for them at the expense of younger, low income workers and renters who don’t. That could be said to be good politics. What it certainly isn’t is a good and fair policy to “fix” social care.