By Chris White
Less than two years after pledging not to raise the rate of income tax, VAT or National Insurance, the Prime Minister today admitted that he would break his manifesto commitment and introduce a new 1.25% rise in National Insurance contributions to fund health and social care reform. In addition, the Government also announced that it would be suspending the pensions triple lock.
For a natural optimist, standing at the despatch box and announcing not one but two broken manifesto pledges must have been a bitter pill to swallow. Boris said that the “global pandemic was in no-one’s manifesto” and made a brave face of pointing to the fairness of the plan, which will introduce a new health and social care levy from 2023.
The plans have inevitably come in for notable criticism, not least from the Institute for Fiscal Studies, which said that National Insurance is “not the right tax” to increase to pay for social care reforms, indicating that an increase in Income Tax would be better. Perversely, the Government will be creating a third tax on income in the levy, alongside National Insurance, in order that the ‘official’ income tax is not increased – the ultimate ‘third rail’ of British politics that must never be touched.
Creating a third tax on income, alongside the initial use of National Insurance, adds additional complexity to an already complex system. As Mark Wallace from ConservativeHome has pointed out, it is a not an ‘insurance’ scheme, but a second income tax – there is “no pot being paid into, not contributions in any meaningful sense, and no deal by which what you pay in buys you the benefits that are supposedly purchased.” In reality, it is just a second income tax. Whilst today’s decision is the right one, the way in which it has been devised will not lead to a fairer system, just one that is harder to navigate.
Interestingly, Conservative backbenchers were relatively quiescent, with few MPs being openly critical and a snap vote held tomorrow to introduce the reforms is expected to pass easily. In reality, many Conservative MPs are sympathetic to the Prime Minister’s position, even if they aren’t prepared to say so publicly. The manifesto pledges not to increase taxes and maintain the triple lock were always going to be broken once the scale of the pandemic’s impact on the public finances became known. In 1976 when the UK had to be bailed out by the International Monetary Fund (IMF) Government spending was the equivalent of 46% of GDP – now it is 52%.
The tax rises in this year’s Budget went only part way to filling the fiscal gap. Quite simply, the scale of spending must fall, especially as the Government cannot rely on a continual supply of cheap borrowing. Wherever the Government looks, there is demand for spending to address the numerous structural challenges facing the UK. Whether it is achieving net zero or fixing social care, the demand for spending is ever present. The Spending Review and Budget announced today will attempt to set some much-needed fiscal discipline and spending envelopes for departments over the next three years.
Ultimately, the Government’s decision to grasp the nettle and reform social care is to be applauded. Successive Governments have repeatedly ducked the issue, but is undeniable that once the system is reformed it will largely be fairer, introducing a form of collective insurance against the last great and largely uninsurable personal risk each of us face. The Prime Minister tried to give a dose of reality to those present in the Commons today, and that is to be welcomed. It will be interesting to see how the electorate repays that honesty in the coming months.