PM pushes Conservatives away from low taxes and towards the NHS – but big fairness questions remain

The Prime Minister effectively announced a mini-Budget and Spending Review yesterday, in which he fundamentally redirected the Conservative Party away from low taxes and towards an NHS-dominated state. However, the detail of his plans risk failing some major tests of fairness, according to the Resolution Foundation’s overnight analysis of yesterday’s social care announcement.

Manifesto-breaking tax rises

The Prime Minister effectively broke the tax triple lock in the 2019 Manifesto with a £14bn National Insurance-based (NI) tax rise. Despite welcome improvements to a straight NI rise, the Health and Social Care Levy still suffers from some big unfairnesses of an NI rise, including:

  • Generationally unfair: the Treasury has extended the levy to the earnings of working pensioners, but only one-in-six pensioner households have earnings. In contrast, two-thirds have private pension income that is exempted from the Levy.
  • Landlords win: Because the Levy will be focused on earnings, other sources of income are undertaxed – including lots of rental income. Of Britain’s 1.9 million buy-to-let landlords, two-thirds are in the richest fifth of households.
  • Work longer, pay more: A typical younger working-age individual would need to pay an extra £12,600 over the course of their working lives from the employee part of the Levy alone.

Social care plan offers clarity over costs but the cost cap benefits the South

The social care changes will make a substantial difference to reducing the costs faced by many people who are unlucky enough to need long periods of social care. But the operation of the system will throw up many challenges, including:

  • The £86,000 cap on care costs will be of most benefit to those in the South of England. Not only will they see a greater share of their total assets protected by the cap, higher care costs mean they are also more likely to reach the cap and then receive state support.
  • In contrast, the expanded means-test will do relatively more to curtail pensioners’ spending on care costs in lower-wealth parts of the UK like the North East, where only 29 per cent of individuals aged 70+ have sufficient assets that they might receive no state support, compared to almost half in the South West.
  • The system in practice may struggle to live up to its marketing. Many people will still need to sell their home to pay for residential care, if they do not have significant other assets.

A post-pandemic political strategy

Yesterday’s announcement went far beyond social care with a further reshaping of the British state towards the NHS, but also a return to fiscal conservatism after the huge borrowing of the pandemic:

  • Over the past six months, the Government has announced £36bn of tax rises (on National Insurance, Corporation Tax and Income Tax thresholds) worth 1.6% of GDP – far bigger than any Budget over the past 50 years.
  • The share of overall day-to-day public service spending spent on the NHS is set to rise to 40 per cent by the middle of the decade, up from 28 per cent in 2004-05.
  • The Treasury has got the Prime Minister to agree that there will be no further spending increases this Autumn, despite further fiscal wriggle room. The temporary removal of the Triple Lock saves £5bn a year while the OBR could deliver a £25bn a year improvement to the public finances in their new forecasts. Unprotected departments face significant pressures as their day-to-day spending power will not rise significantly in the coming years, and remain around a quarter down on 2009-10 levels.

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

“Yesterday Boris Johnson was able to announce what the past three Prime Ministers have failed to – a plan to better protect people’s assets from the costs that come from England’s broken social care system that is likely to actually happen.

“But in reality social care played a mere supporting role in what amounted to the setting out of wider shift in the Conservative Party’s approach to policy and politics. The Prime Minister has turned his back on low taxes in favour of an NHS-dominated state.

“But while this new strategy fits well with the reality of a rapidly-ageing, and austerity fatigued, 21st century Britain, the PM’s new plan raises some major questions of fairness.

“The tax rises that will pay for a bigger NHS are generationally unfair, excluding rich retirees while prioritising wealthy landlords over their tenants. And while the social care cap will prevent people being hit with catastrophic costs, it will benefit Southern households far more than those living in Red Wall seats.

“Ultimately, the biggest winner from yesterday’s announcement was the Chancellor, who has been able to bank the savings from a tough settlement for unprotected departments and from ditching the Triple Lock. Low tax conservatism may be in retreat in the Conservative Party, but fiscal conservatism is alive and well in the Treasury.”