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How to fund social care

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For more than a decade, governments have struggled to find a way to fund social care. Everyone can agree that there is a need but finding the way to fund this has so far eluded the best brains in the government and the Treasury. This is perhaps unsurprising as the challenge of funding social care ‘ticks all the wrong boxes’ as far as the Treasury is concerned.

The reason why this would be so difficult is threefold. First of all, you are providing another service which would be free at the point of delivery. As we know from the NHS, the demand for these services will always grow. Second, this is revenue expenditure and therefore has no time limit or payback. Once agreed, there will be no going back. Third, an ageing population will mean that demand will remorselessly increase.

The putative £10bn cost, as indicated in the Dilnot report, is merely the hors d’oeuvre for a much higher bill down the generations. 

So how does a government which is bound by the manifesto pledges of the triple lock of no increases of income tax, national insurance, or VAT square this circle?

Income tax rises would appear to be out of scope. Even without the manifesto commitment, the combined marginal rate of tax and NICs for a basic rate taxpayer comes to 32%. Add in the auto-enrolment contribution (net of tax relief) and you arrive at 36%. Add the 9% student loan repayment and a graduate starting work is potentially faced with a marginal rate of deduction of 45%.

VAT at 20% is already high and, as Norman Lamont or George Osborne would tell you widening the scope of VAT and reducing zero rates provokes a very fierce reaction.

So, what is left?

Capital taxes raise a small amount compared to the total tax revenues and it is unrealistic to see them being able to shoulder this burden. So that leaves national insurance contributions or, to keep within the manifesto commitment, a separate dedicated charge using the NICs structure. NICs are the second largest revenue raiser and, crucially, voters have accepted increases in the past without an electoral backlash. Tax experts may argue that it is just another form of income tax, but they fail to identify the important differences between income tax and national insurance contributions, which may make NICs the mechanism to fund social care.

  1. NICs still operate on a contributory basis. You need 35 years of contributions or credits to obtain the full state pension. Interestingly enough, when one accesses the personal tax account, this information is one of the first pieces to be displayed. 
  2. NICs have been adapted in ways to protect some individuals more than others. So, for example, secondary NICs up to the upper earnings limit are not applied to young people, apprentices, and some ex-members of the armed forces. Primary contributions are not applied to persons beyond the state pension age. Therefore, the mechanism of NICs could be adapted to support a surcharge in the following way.
  3. In order to qualify for full social care support, one would need say 25 years of contributions. In order to avoid an even higher marginal rate of tax for those entering the workforce, one could start the surcharge at say the age of 35. The surcharge could then continue beyond the state pension age on the basis that it is persons later in life who would obtain the most immediate advantage.
  4. The surcharge should apply to the self-employed as well as the employed and could be extended to cover dividends as well as potentially rents, so that a larger population proportion of the population actually pays this charge and are eligible for social care support.
  5. As with NICs, there could be a facility to pay for years where there have been insufficient earnings, or an individual is abroad.
  6. Given the substantial burdens that have been placed on employers in recent years, the only increase I would suggest would be a surcharge on class 1A and class 1B employers’ NICs to make up for the anomaly that there is no employee NICs on benefits.

The plan I have outlined differs from what we understand of the government’s latest thinking in that it is not a simple hike in national insurance but instead a surcharge devoted to social care. The charge is designed to be paid by older adults and therefore avoids the objection that it is once again the young paying for the old. The other difference is that by having a social care surcharge rather than an increase to NICs, one can levy it on a wider base of income, which would have the advantage of bringing more people within this safety net, using the contributory principle.

Like all plans for raising taxes this would undoubtedly have some drawbacks, but it is possibly the least worst option and it gives a stable framework for the funding of social care.  

What I have not suggested is the level of the surcharge. That would depend on the level of support given for social care. I believe that any debate on this would be better informed and balanced if our elected representatives realised that decisions to increase funding would have a direct effect on their constituents’ take-home pay.