Promises to fund a sustainable and equitable social care system fit for a wealthy 21st century state, thus banishing remnants of a Victorian one reliant on a Poor Law welfare model, have been broken by successive governments.
On September 7 to redeem his pledge on entering Downing Street in July 2019, in effect, to finally ‘Get Social Care Done’, Boris Johnson announced his government’s intention to fund £36bn additional expenditure on health and social care expenditure over three years starting in April 2022, through a 1.25% increase in employee and employer national insurance (NI) rates.
Barely a week later the Commons had passed the necessary legislation with a 56-vote majority, with only ten Conservative MPs voting against.
By deploying political panache, has Johnson finally broken out of the social care circle to nowhere, or is his Plan a clever funding sleight of hand that will mainly offer piece of mind to wealthy homeowners concentrated in London and the sub-regions with the most buoyant economies and house prices, protecting the inheritances of their lucky heirs?
The devil of course, will depend, not only, as ever, on the backing detail of subsequent policy announcements but in the scope and nature of any future implementation process and subsequent funding support for social care.
What can be said now, is that Johnson’s Plan is largely confined to a new funding mechanism – the Health and Social Levy, operative from April 2023 – designed to meet his Party’s NHS pledges in the post-Covid environment, with a relaxation of social care means-testing combined with an introduction of a £86,000 cap on user lifetime contribution, tacked-on.
People with modest assets will remain at risk of losing most of their assets and possibly even their home if they need long-term residential care. Transferring the primary payment burden to working households through a payroll levy on earnings received by employees and paid by employers is economically sub-optimal and distributionally unfair compared to alternative sources including income tax.
In that light, this extended post first provides background to Johnson’s Plan, before going on to link its provisions, as they are currently known, to their expected efficiency and equity impacts.
It then considers the implications for future reform within the wider political context set by the real fiscal crisis of the state: that is the structural need and demand for social expenditures has and will continue to outstrip political (based on electoral) willingness to pay, without shifts in political methodology and electoral engagement.
Finally, the scope and space that Johnson’s Plan potentially provides such a needed shift is discussed.
The social care system in outline
Social care is the name given to the range of care and support services to help frail and disabled people to remain independent, active, and safe – for example, help with getting out of bed, bathing, and preparing cooked meals, and getting necessary medication, provided in a residential care home or at home (domiciliary) setting.
It is a local authority responsibility, generally discharged through the commissioning of services from independent care providers. For-profit providers account for 83% of the care home beds and the voluntary sector a further 13%, with the remaining 4% of care home beds run by local government or the NHS. Readers are signposted for further information to the briefing and the bibliography produced this month by the House of Commons library.
The focus of this post following Johnson’s Plan is on care for the elderly, but sight should not be lost that adult social care is not just or even primarily about older people. Demand for support from working-age adults has increased more than twice as rapidly as from pensioners – partly due to falling mortality rates and medical advances: the life expectancy for someone with Down’s syndrome, for instance, has almost tripled over the last four decades. The provision and funding of care for people of working-age must be ‘fixed’ as completely as much it must for older people.
In the past councils used to provide residential care in its own homes and staff until limitations on available capital and funding availability encouraged a shift to private providers who could raise capital easier and convert or purpose-build homes.
Between 1980 and 2018 the number of local authority residential care beds fell from 141,719 to 17,100; during much of the same period, the number beds provided by independent providers (whether owned by the largest private equity-owned providers, housing associations or charities) increased to 243,000 from 76,811.
In recent decades the care home industry has also consolidated. Four private companies owned by private equity or hedge fund investors now dominate the market. They and other entrants into the market were attracted by favourable demographics and property valuations – at least in London and south-east and other sub-regions benefiting from buoyant property prices – and a revenue stream underpinned by state funding.
This encouraged some over-expansion funded by debt, leading to Southern Cross going bust in 2011 and the then-largest provider, Four Seasons, having to be rescued by another private equity purchaser in 2019.
Squeezed LA fees and increased staffing costs exert significant headwinds. These are likely to grow in intensity along with pressures to improve the pay and conditions of frontline care staff in post-Covid and Brexit-environments marked by staff shortages and growing vacancies.
The annual cost per person in residential home sits generally in the £30,000 to £50,000 range, depending on level of care/nursing support provided and location.
About half of the £15-20bn income in the social care industry still comes from the state, with the remainder paid by self-funded residents, who can pay more than 40% more than LA-funded residents.
A feature of the industry is that such funders, in effect, cross-subsidise LA-funded residents. A 2016 Competition and Markets Report (which also provides substantial background, albeit not up-to-date, information) advising an average differential of £236 a week (over £12,000 a year).
In outline, the essential features of the current means-tested funding system are:
- Care home residents with capital exceeding £23,250 (the upper capital limit) are not eligible for any local authority funding support. They must pay all their costs above that limit;
- Care home residents with capital between £14,250 (the lower capital limit) and £23,250 (the upper capital limit) are eligible for funding support, but must contribute a ‘tariff income’ of £1 per week for every full or part £250 their assets above the lower limit, towards the cost of their care;
- Care home residents with capital below £14,250 are eligible for full funding support and are not charged any ‘tariff income’: their capital is effectively completely disregarded;
- The non-mortgaged value of the person’s home (housing equity) is not counted as an asset if a spouse or dependent also lives in the home, nor is the value of the home counted towards any means-tested assessment of individual contribution to domiciliary care;
- A person eligible for local authority funding support is also required to contribute part of their income towards the cost of their care, whether residential or domiciliary; subject to any earnings or other disregards, including an amount each week for personal expenses and (if applicable) household bills, called the Personal Expenses Allowance for people receiving residential care; and the Minimum Income Guarantee for people receiving domiciliary care;
- There is no cap on the lifetime care costs, which are thus unlimited beyond the upper capital limit of £23,250; meaning that an individual needing residential care or long-term support can pay thousands of pounds for care over their lifetime: even to the point of expending their assets to the point that they, or more usually their family ultimately need to resort to selling their home on their behalf.
In the words of the Resolution Foundation’s, Torsten Bell: “The cap stops you losing your house, the floor stops you losing everything”.
The lower capital (asset) limit of £14,250 can be considered as the ‘absolute floor’ below which no individual care contribution (other than for personal expenses payable out of pension or other income) is required, rather akin to the personal tax allowance on which income tax is not payable.
Contributions are then levied on a sliding scale until the upper capital (asset) of £23,250 is reached, above which contributions on assets are, in effect, then charged at a 100% marginal rate with no cap or upward limit.
A low limit or floor on the asset (capital) above which user contributions are required is thus combined with a lack of a cap on total lifetime expenditure limiting liability.
It is estimated that one in seven households needing care for long term severe disability (due to dementia, for example) must sell their home to pay for their residential care or spend more than £100,000 on care in total.
The NHS and Social care: siblings in name only
The NHS and social care provision and funding systems could not be much more different.
NHS treatments for both chronic and acute medical treatments, including emergency treatments for catastrophic events such as accidents, heart attack or strokes, are free at point-of-use, as are elective treatments, General Practitioner (GP) and out-patient services.
Provision and access across the board is rationed by available budgets, human and other resources, and policy guidelines assessed with reference to clinical need.
UK-wide tax subvention predominately funds the NHS with a variable quarter met by an annual transfer from the National Insurance Fund secured from employer and employee contributions.
The secular trend of health expenditure has been inexorably upwards during the last fifty years in annual real increase and in ratio of total public spending and GDP terms.
Unpicking the first outturn indicator, the Institute of Fiscal Studies (IFS) in a 2019 commentary reported that UK public spending on health grew in real terms by an average annual rate of 3.6% between 1949−50 and 2018−19, but lower than 1.5% during the post-2010 fiscal austerity years.
Annual outturn expenditure often exceeded the budgeted planned allocation, as governments topped up health spending to meet particularly acute emergent demand and other pressures that could not be accommodated within allocated budgets.
Social care is local authority funded, accounting for over half of the total spending of many councils.
The local authority sector was the worst affected by post-2010 fiscal austerity. Adult social care spending per person was 7.5% lower in real-terms in 2019–20 than 2009–10, with reductions concentrated in the 2011-16 period.
Central government financial support is provided to cover the annual general expenditure of individual councils, not their social care activity specifically. Revenue support grant is based on an assessment of the ability of each council to meet local needs from its own council tax base, itself subject on residential property valuations frozen since 1992. Some councils had their grant allocations slashed by as much as 65%.
Council tax levels levied locally for many decades have also have been subject to strict centrally imposed limits.
Since April 2016, councils have been empowered to raise an additional dedicated social care precept of up to 3% without needing to call a referendum; additional time-limited specific grants in support of their adult social care activity were also allocated centrally. These measures of limited amelioration were widely recognised, however, as papering over the cracks caused by the deep and wider Whitehall squeeze on local authority funding.
At an individual level, social care provision is severely means-tested. As the preceding section outlined, it is only free for people possessing assets less than the lower capital limit of £14,250 in value (termed here: the lower absolute floor), with individuals needing residential care required to pay all costs when their assets (including their housing equity) exceed the upper asset threshold of £23,250 (termed here: the upper floor).
Yet when people become older and frailer, the distinction between the medical and social care dimensions of their situation tends to blur to the point of indistinguishability.
Health expenditures, according to a September 2016 Office of Budget Responsibility (OBR) report, at constant 2020-21 prices rise slowly and steadily from an average per capita c£1,500 for cohorts of people in their mid-forties, before doubling in the 60’s cohort to c£4,000, then doubling again to over £8,000 for cohorts in their late eighties and later (Chart 2.3).
The OBR report, with the relevant literature generally, highlights that proximity to death is a more important influence on health spending than is age, per se: hospital costs increase significantly in the final months of life for an average individual regardless of their age; a higher proportion of older age cohorts will be subject to the much higher costs associated with the final months of life when it can occurs regardless of age.
In need and demand terms, the chance catastrophic curse of dementia and other age-related disabilities have and will continue to affect more and more people as the population ages: according to the Office of National Statistics, the proportion of the over 75s within the UK population doubled since 1967; looking forward, the number of over 85s is projected to double again over the next 20 years.
These are events that individuals cannot predict (other than indirectly through genetic history or indirect markers), prevent, or plan for through insurance (theoretical possible, but no such market currently exists) or other means.
The need and case for reform has been clear and urgent for decades.
Social Care reform: Waiting for Godot
Spasmodic efforts over the decades by governments of varied hues to introduce reform to address that gaping hole in welfare state protection were nullified by subsequent procrastination and inaction.
Speaking to the Labour Party Conference that followed his historic 1997 election victory, Tony Blair declared that: “I don’t want [our children] brought up in a country where the only way pensioners can get long term care is by selling their home“. In accordance with his government’s manifesto promise, a Royal Commission was established, which in 1999 recommended (with minority member dissent) that: “all long-term personal care should be provided free, funded from general taxation”.
Its proposals, other than that nursing care in nursing homes would be made free (funded by the NHS), were soon kicked into the long grass: the cost was considered counter to the New Labour’s fiscal commitments and other priorities. Only the newly devolved Scottish administration in 2002 introduced free personal care in 2002.
A 10-year hiatus followed, marked much more by talk than action. Green Papers, policy, and official and independent review announcements grappled (unsuccessfully) mainly with issues centred on the development of the personalisation of care and the development of individual care budgets.
Then a ‘Big Care Debate’ (rather echoing the ‘Great Education debate’ that then prime minister James Callaghan launched in 1978) was conducted in 2009.
That year, Andy Burnham, the-then Secretary of State for Health did publish proposals for a ‘national care service’. They, however, failed to get cross party-political traction (now needed that New Labour electoral hegemony was clearly waning and uncertain): the compulsory contribution funding model that he advanced proved a sticking point in the lead-in period to an imminent general election.
Nonetheless, a White Paper, Building the National Care Service, was published just before that 2010 general election.
It committed Labour to establish another commission “to help to reach consensus on the right way of financing a National Care Service… that will be led by local authorities, in partnership with the NHS, and working with third sector organisations, the private sector and communities… which will meet the needs of people when they need help, free when they need it (that) will be for all – whoever you are, wherever you live, whatever your circumstances”.
That ambitious rhetorical reach was accompanied with the rider that new service would need to be built ‘in stages’ within a context set by needed ‘fiscal consolidation’.
After Labour lost power at that election, the new Conservative-Liberal Democrat coalition government asked Andrew Dilnot, Oxford economist and former Institute of Fiscal Studies (IFS) director, to chair another commission, with a remit to deliver an affordable and sustainable funding system or systems for care and support for all adults in England (Dilnot).
Dilnot published in 2011. It declared that “Our system of funding of care and support is not fit for purpose, and has desperately needed reform for many years”, accompanied with the clarion call: “Now is the time to act”.
That call was underpinned by a systematic and evidenced reform agenda. Its core proposals were:
- Individual lifetime contributions towards social care costs capped to between £25,000 and £50,000; £35,000 was the posited “most appropriate and fair figure” for that lifetime contribution cap (the cap);
- The means-tested upper asset threshold (the upper floor), above which people are liable for their full care costs, to be increased from the then (and still current) £23,250 to £100,000;
- Individuals possessing financial and/or housing assets between £14,250 (lower asset threshold or absolute floor) and the proposed new £100,000 upper floor, to pay a contribution (around 30% of eligible assets) towards their residential care, with the state paying the remainder;
- Local councils to decide how much care is needed and its cost in each individual case;
- The cost ‘meter’ on individual contributions would then start until contributions of each individual reach the prescribed lifetime contribution cap; then it would stop, save that residential care residents should incur a charge for on-going ‘hotel and food costs’, capped at £7,000-£10,000 per year;
- Councils to assume that people funding procuring privately provided care themselves will spend the same amount as someone publicly supported but possessing the same needs;
- The means-tested threshold for home care to disregard the value of the recipient’s home, with individuals needing such care to continue to receive income means-tested support;
- People born with a care and support need or who develop one in early life should immediately become eligible for free state support to meet their care needs, not subject to any means test;
- National eligibility criteria and portable need assessments to be introduced to ensure greater consistency of treatment.
In short, Dilnot’s proposals kept the capital means-test absolute floor personal allowance at £14,250, but greatly extended the range of income in which individuals qualified for partial support from £23,250 to £100,000, within which a proportional 30% charge would be levied on their capital assets, until a £35,000 lifetime contribution cap reduced their marginal contribution or tax rate to nil.
Dilnot’s analysis and proposals attracted general approval. Such approbation did not translate into effective and timely legislative action, however: it took four years for the Coalition government to enact the 2014 Care Act – and then largely at the instigation of Lord’s cross benchers and again on the cusp of another general election.
When the Conservatives won that election in 2015 with an overall working majority, it then postponed indefinitely the implementation (including legal backing for a £72,000 cap) of the Act’s provisions, for reasons connected to the continuing period of fiscal austerity presided over by the chancellor, George Osborne.
When Theresa May went to the polls in May 2017 in the aftermath of the 2016 Brexit referendum that had forced David Cameron’s resignation as prime minister, and with George Osborne also gone, her ‘strong and stable government’ election banner, to all intents and purposes was torn down by the half-thought-for social care plans that she then chose to highlight (at the behest of key advisers wanting to broaden Conservative appeal to northern working class voters) during the campaign.
The upper asset threshold or floor below which councils pay for all or part of a person’s social care was to be raised from £23,250 to £100,000, but that Dilnot proposal was yanked together to the inclusion of the housing equity asset worth of homeowners still living in and needing care at home into the capital means test calculation, as it is for people receiving residential care (which did not follow Dilnot).
To soften that pill, the facility for people receiving residential or nursing home to have the cost of their care taken from their estate after their death (deferred) was extended to people receiving care at home.
May’s proposals were quickly dubbed the ‘dementia tax’.
They meant that individuals would receive state support towards their needed social care costs if they possessed less than £100,000 of financial and property assets.
But once that £100,000 upper capital limit was passed the marginal withdrawal rate would become 100% (all care costs to be met by the individual receiving care form their capital where not met by income). That would mean that a person, for instance, with savings of £10,000 and housing equity of £200,000– would, in the absence of a cap, potentially faced losing most or all their assets, save for the £14,250 allowed for by the absolute floor.
That is because everyone possessing more than £100,000 assets and receiving care would then face a marginal contribution or withdrawal rate of 100% on their assets once the new £100,000 upper capital threshold was passed instead of, as they currently do under the current system, £23,250.
It would also have meant that people possessing moderate, but not insignificant, assets, greater than £23,250 but less £100,000 in residential care, would have – subject to the detail of the scheme if it had been progressed (such as the absolute floor level and the rate of withdrawal levied between £23,500 and £100,000) would have paid less.
Take, for instance if a 30% contribution or withdrawal rate was levied between £14,250 and £100,000; then someone receiving care in a residential home owning £100,000 of assets would have paid a maximum of c£26,000 under May, compared to potentially c£80,000 under the current system.
But faced with a furore, Mrs May soon retreated, talking about introducing a cap ‘at a level to be proposed in a future Green Paper’. Her proposals were already effectively dead, however. They are a widely considered to have contributed to the subsequent reduction of the Conservative overall majority to six.
The inclusion of housing equity into the asset means-test for home care was puzzling.
The equalisation of the application of the asset means-test between recipients of residential and home care was advanced as justification; yet the latter is more supportive of independent living and by its nature is less expensive to the public purse.
It also served (disastrously) to focus attention on that people receiving home-based or residential care could potentially much of their housing equity, and away from the keystone proposal of a near fivefold increase in the means-tested upper capital floor threshold: hardly an astute or indeed helpful piece of political presentation.
Shell-shocked by the experience and embroiled in the Brexit saga that finally sunk her premiership, social care reform was put again on the Whitehall backburner.
Then the day after becoming prime minister in July 2019, Boris Johnson, elected Conservative party leader by his MPs and party membership on a ‘Get Brexit done’ platform, declared in front of his new home, 10 Downing Street, that he would also fix “the crisis in social care once and for all with a clear plan (that) we have prepared”, with legislation to follow that year, so that “nobody needing care should be forced to sell their home to pay for it”.
Johnson’s Social Care Plan
It was not until 8 September 2021 that his government published its plans in the command paper: Build Back Better: Our Plan for Health and Social Care (the Plan), which proposed:
- A lifetime contribution cap on personal care costs of £86,000 (using the powers available in the 2014 Care Act) to be introduced from October 2023. On reaching that cap, people receiving care will no longer be required to make any contribution towards their care from either their income or capital;
- The upper capital limit (the threshold above which somebody is not eligible for local authority support towards their social care costs) to rise from £23,250 to £100,000, operative from October 2023 (the threshold limit for each member of a couple to be £50,000);
- Lower capital limit (the lower asset threshold or absolute floor below which no contribution towards care costs from capital is required) to rise from £14,250 to £20,000;
- People with capital (assets) between £20,000 and £100,000 to contribute up to 20% of their chargeable assets per year (in addition to their income);
- The capital means test will be based on total assets, including both the value of a person’s home and their savings, except that for a person needing to continue to live in their own home their housing equity – as under the current system- will be excluded from the assessment of total chargeable assets (the housing disregard).
- The amount of income that care recipients can retain after contributing towards their care costs (the Minimum Income Guarantee and the Personal Expenses Allowance) to be increased in line with inflation from April 2022 onwards.
In short and simplified form, from October 2023 onwards, anyone with assets or savings worth less than £20,000 will receive full state support; anyone with assets worth between £20,000 to £100,000 who cannot pay for their care from their income will become eligible for capital-means tested help with their care costs up to a 20% proportional charge on their eligible assets until the overarching £86,000 cap is reached when their liability to meet costs form either their income or capital ends.
Applying the tax analogy applied earlier, the personal capital allowance is increased to £20,000; a 20% contribution, withdrawal or ‘tax’ rate is applied on capital asset wealth between £20,000 and £100,000, subject to an absolute cap lifetime contribution rate of £86,000, beyond which the marginal tax rate on both income and capital then drops to zero.
The Plan was both incomplete and lopsided insofar that any detail on future care provision was largely absent. It was also not rooted from consultation with the public or private providers of care, nor meshed with medium and long-term costings of funding requirements related to a minimum-defined standard of care provided regardless of postcode, nor were alternative delivery options calibrated to a future wider care vision.
It ringfences only £5.4bn of the £36bn to be raised from the NI increase for social care funding (£1.8bn cf. to the annual £12bn-plus proceeds of the NIC increase). The rest will go to the NHS. Although the Plan expresses a weak and unconfident hope that that limited share “could possibly increase towards the end of the three-year 2022-25 period”, the additional future allocations required for the establishment of a fit for purpose client responsive care system are clearly contingent on the prevailing NHS funding situation.
The scale of the Covid-related backlog combined with continuing rising costs and the rising real demand profile of the NHS (estimated to require annual real increases in expenditure of c4% per annum to accommodate) means that the social care sector can expect a continuing long wait for their release.
More Waiting for Godot, then – at least unless significant new funding is made available for social care on top of what the Plan currently proposes.
The Plan is indeed and instead predicated upon local councils continuing to meet demographic and unit cost pressures through council tax and other receipts, and from ‘long-term efficiencies’.
This is within a funding environment where the overall level of local government funding (which will impact upon level of the total level of revenue that each council can raise) is to be determined ‘in the round’ in the forthcoming Autumn 2021 Spending Review (para36).
To all intents and purposes that will be driven by Treasury-driven pressures to close the unprecedented Covid-related fiscal deficit. The fiscally hawkish chancellor, Rishi Sunak, wants to cut the deficit from 12% per cent of GDP in 2020-21 to 4.5% in 2022-23: a big ask, dependent on the economy bouncing back both sharply and sustainably, and one that almost inevitably will rule out additional borrowing for either health or social care purposes.
Social care will consequently continue to be provided by councils in England subject to constrained annual funding allocations and to restrictions on their council tax revenue-raising capacity.
On the expenditure side, care costs are almost certain to rise faster than inflation, with care worker vacancies over 100,000 and rising, during a period when the backlog of care cases, as estimated by Age Concern, could reach 1.5m. Under the government’s plan self-funders will also be able to ask their council to arrange their care to ‘help them find better value’.
It is also doubtful that without dedicated training and other investment in human skill capacity and conditions that sufficient trained and motivated staff will be available to meet a growing level of future demand need, whether that is derived from the government’s plans, a loosening of rationing constraints, or from demographics. Most care worker vacancies in the recent past have been taken by migrants; this is unlikely to be possible without modification to current post-Brexit immigration policy. Given such a backdrop, it remains to be seen whether the £500m included in the Plan to support social care workforce-related reforms will prove sufficient.
Is the Plan, therefore, a mere political presentational sop to its core Conservative over 65 and homeowner voter constituency, and, as such, subject to a high risk of future unravelling when buffeted by future on-the-ground reality?
The centrepiece £86,000 cap figure is certainly suggestive of Treasury penny-pinching, which does not augur well for the securing of sustainable funding for a future and sustainable client-centred and responsive social care service.
At a distributional equity level, suffers from two, paradoxically, linked problems. First, a cap means that once reached represents a ‘cliff’ that when crossed means liability (or put another way, the its marginal tax rate) becomes zero; and, second, the £86,000 proposed cap is set high enough to still wipe out or take out a substantial proportion of the housing wealth of homeowners residing in low house-price areas, including many in Red Wall seats, breaching Johnson’s manifesto promise.
Both can be traced back to Dilnot. The fundamental problem is that a cap by definition does not rise proportionately or progressively with housing asset wealth, either at an individual or regional level: a shortcoming that has been compounded by subsequent and regionally skewed housing asset inflation.
Back in 2011, Dilnot had noted that someone who had lifetime care costs of £150,000 could lose up to 90% of their accumulated wealth, before asserting that the report’s proposed combination of a £35,000 lifetime contribution cap and an extended means test floor would ensure instead that no one going into residential care would have to spend more than 30% of their assets on their care costs (Dilnot termed this as the asset depletion rate; used interchangeably in this post with contribution, withdrawal, or ‘tax’ rate).
Yet that still presented a distributional equity problem shown in Table 1: the asset depletion rate peaks for households possessing around an initial £100,000 asset stock (product of the c30% contribution applied on assets applied above the £14,250 absolute floor up to the £100,000 upper floor, before dropping sharply regressively as asset wealth rises), begging the equity-based based question of the fairness of taking c30% of the the assets of homeowners of modest assets when a lower proportionate and capped share is taken from more asset-rich households.
|Initial level of wealth||Maximum individual spend on care||Maximum asset depletion rate|
Source: Author adaptation of table that was included in Dilnot Policy Paper
As it stands, the Plan’s £86,000 cap is set high enough to risk some homeowners living in low house price areas, or in retired person or leasehold accommodation that have lost capital value over the last ten years, who need residential care accommodation, to still lose their homes. It will also heavily impact upon tenants reliant that have some but modest financial savings assets, especially such individuals receiving care at home; it thus discriminates in favour of those with housing equity rather than financial asset wealth.
The incidence of user contributions, as Table 2 indicates, under the Plan will in future peak for people requiring residential care who possess assets within the £150,000-£175,000 range (incurring an asset depletion rate of nearly 50% – compared to the Dilnot 30% level); incidence (the maximum depletion rate) then falls becoming ever more sharply regressive for people with housing equity or other wealth above that level, noting that apparently as many as one-fifth of those aged 65 or above now own more than £1,000,000 in assets compared to the c.£300,000 average asset wealth of someone aged 65.
|Initial level of wealth||Maximum individual spend on care||Maximum asset depletion rate|
End results are more clearly perverse and inequitable under Johnson’s Plan: someone with £175,0000 worth of assets might have to pay £20,000 more than a neighbour with £150,000, but the same £86,000 as someone owning £1,000,000 or £2,000,000, while the ‘average’ pensioner owning £300,000 assets will lose a lower proportion of their assets than someone owning less than half of that, but a much higher proportion than asset millionaires needing long-term care.
A recent Conservative Chancellor, Stephen Hammond, put the message that it partly conveys – slightly paraphrased – thus: “we are asking lower income workers, such as supermarket shelf fillers, to subsidise the inheritances of affluent homeowners”. Put another way, the Plan caters more for the future financial interest and peace of mind of the voters of Amersham and Chesham that it does for their counterparts in Consett.
That takes us to how the Plan will be paid for: its centrepiece.
The Health and Social Care Levy (the Levy)
For the 2022-23 year only:
Employee National Insurance Contributions (NIC’s) on earnings and employer NICs (both Class 1) on earnings paid, and self-employed (Class 4) NICs charged on their trading profits will increase by 1.25%, which will mean that:
- Employee NICs will be levied at a 13.75% rate between the current NIC £9,564 lower earnings and the £50,268 upper thresholds; earnings above the upper threshold will attract a rate of 3.25%.
- Employer NICs will be levied at a 15.5% rate on employee earnings above £8,840.
- Self Employed Class 4 contributions on profits will be levied at a 10.25% rate on trading profits above £9,568; and 3.25% on trading profits above £50,270; self employed weekly flat rate Class 2 NIC contributions (set at £3.05) are unchanged.
The Plan also includes a 1.25% increase on the tax levied on company dividend income (when received outside the tax free wrappers of Individual Saving Accounts (ISA) and Self-Invested Personal Pensions (SIPPS), and the first £2000 of dividend income received outside these wrappers). It is expected to contribute £600m a year within the total £12bn raised for health and social purposes (£13.2bn in total, minus £1.8bn compensation paid to public sector employers for their NIC increase).
From April 2023, the NICs above will revert to their former 2021-22 levels but the increase of 1.25% on the rates levied above the lower and upper thresholds will be collected separately and additionally under the umbrella of a dedicated Health and Social Care Levy, provided with its own legislative status and dedicated line on employee pay slips.
23% of families in England contain someone above the SPA. Even when the social care levy is applied on earnings received by people over the SPA, the IFS reported on 7 September that only about 2% of its total revenue from the Levy will come from pensioner families, compared to the 14% share that they would contribute from an increase in income tax yielding the same level of revenue.
This is largely because NICs, unlike income tax, is a payroll tax that is not levied on state or private pension income (when received at whatever age) – the predominant pensioner income source. Nor is it levied on certain categories of investment income, including property income, such as from buy-to-lets and share dividends.
People above the State Pension Age (SPA), not in employment, will thus escape any additional contribution (save for the dividend tax increase, if applicable to them), despite them belonging to the demographic with both the highest average wealth levels and the one most likely to need social care, at least in the short-to-medium term.
Compared to the employee NIC schedule, the income tax schedule also contains more progressive rate bands. Its basic rate of 20% begins to take effect only once individual taxable income exceeds the £12,750 personal allowance; the employee NIC lower earnings threshold is lower at £9,564.
That divergence means that people on very low annual earnings, including those on the national minimum wage, can pay more in NIC than they do in tax, or pay NIC even though they are not liable for tax.
The Levy’s tax burden (incidence) will fall overwhelmingly therefore upon working age employees and employers; this is in accord with the long-term trend for the tax burden to shift towards people of working age and away from pensioners; secular trend not offset by new liability for working pensioners to pay the Levy.
A working-age person with average pre-pandemic earnings (£28,388) will pay 20% of their income in income tax, NICs, and the new levy; a pensioner receiving the same amount in pension income will pay just 11%: almost half the rate of the working-age employee.
That secular trend has been paralleled by a reinforcing one of untaxed – save for limited inheritance tax and capital gains tax liability on sales of non-primary residence homes – individual real housing wealth growing greatly to the particular benefit of wealthy pensioners and their heirs.
Working households spend a higher proportion of their net income than do wealthy pensioners and as the NIC increase differentially impacts on working households more than would an equivalent revenue-raising income tax rise, its overall downward impact across the economy on take home pay, consumption and employment, all other things being equal, will be higher, so constraining the future profits and investment capacity of firms and earnings of working age individuals.
The increased NIC employer contribution rate will likewise add pressure on firms to adjust prices upwards and wages downwards, especially in competitive sectors inhabited by small businesses whose labour costs account for a high proportion of their total costs. Such businesses often employ low paid workers (the employer NIC rate of 13.8% is levied above a very low annual threshold of £8,860, except for employees aged under 21 or for apprentices aged under 25).
Another horizontal inequity (different outcomes for different groups with otherwise the same income circumstances) associated with the Plan is that the combined NICs rate on employment income (including employer NICs) will rise from 25.3% to 28.8% compared to a rise from 9% to 10.25% for a self-employed worker: an increase of 3% rather than 1.5%.
This will widen the relative tax benefit of self-employment arrangements – which are often designed to minimise tax liability relative to PAYE working – and thus can be expected to induce perversely behavioural changes tending to reduce total revenue raised.
Overall, therefore, according to a range of independent commentators, Johnson’s choice to raise revenue through an NIC in preference to an income tax increase will prove both economically deleterious and socially inequitable compared to what could have been the case with possible revenue-raising alternatives.
That said, recognition is due that given the political obstacles that Johnson faced in raising the equivalent amount in tax or borrowing, his recourse to the third best (or even fourth best if additional borrowing is included) NIC funding route in preference to wealth and the income tax rises, was probably necessary, while its political execution and management was efficient and effective.
That brings us around the underlying problem, of which the current health and social care crisis and Johnson’s Care Plan belated and imperfect response to it is simply a symptom.
Social Care and the Real Fiscal Crisis of the State
Johnson’s Plan required him to explicitly jettison his personal (made in the signed foreword titled Boris Johnson’s Guarantee) Conservative Party 2019 manifesto commitment not to raise the rate of income tax, VAT or national insurance.
That core Conservative principle since 2015, his fix NHS funding and social care commitments and the chancellor’s deficit reduction intentions, proved irreconcilable.
Essentially, the Levy is a new tax raising mechanism to raise and earmark an amount equivalent to around 0.5% of GDP first and foremost to close the endemic NHS funding gap.
That latest gap, which while grossly aggravated by the Covid pandemic, stemmed from earlier Conservative austerity under-funding.
Health spending, after adjusting for the growth and ageing of the population, stayed broadly flat between 2009−10 and 2016−17, before rising over the three years to 2018−19, remembering that average real increases throughout that decade was c1.5%, well below the post-war average annual real increase outturn of 3.6%.
That below trend outcome may have been been sufficient to meet demographic pressures, according to commentators, but it was not enough to also meet all the other upward ‘relative price’ pressures (such as, new medical technology and treatments, and as a labour-intensive industry: wage pressures) that continuously characterise the NHS.
The real focus and purpose of Johnson’s Plan is to provide a mechanism to secure additional funding for the NHS to overcome record waiting lists and other pressures that Covid and previous underfunding bequeathed: an electoral imperative.
That the Levy can also possibly part-fund his social care pledge is but a collateral secondary benefit: the commitment of his chancellor to accelerate closing the fiscal deficit and reducing public debt would have otherwise precluded its progression.
Johnson and his advisers calculated that the chosen NIC funding-is more electorally palatable than a direct income tax increase: the erroneous post-Beveridge perception lingers that NICs constitute a social insurance contribution paid by working people to pay for their pension and NHS care and other ‘hard times’ contingencies from accumulated contributions (never true from the outset of the post war welfare state). Employer NICs and their indirect and delayed impact on take home earnings and consumer price levels are also far less visible in their effects on take home pay than is an income tax hike.
In that he followed a path previously trodden by Labour: in 2002, when New Labour chancellor Gordon Brown raised national insurance rates to boost NHS spending (but on a temporary time-limited basis during a period when waiting lists had reached record levels) it was apparently seen in Treasury circles as ‘the most popular tax rise in history’, when it was then, as it is now, a relatively regressive imposition compared to an equivalent income tax rise.
The UK does not have an embedded continental-style part social insurance welfare state funding model: it has a pay-as-you-go model contingent on short-term political decisions, rather belied by the fact that in 2020-21, national insurance raised c£147bn, more than VAT at 128bn, and not that much less than the total £198bn raised that year from income tax.
Pensions accounted for £101.bn, nearly two-thirds of NI receipts that year. As the the new state pension is dependent on a 35-year contribution record, to state that NI is simply another tax is not entirely accurate. But other benefits are only loosely related to the contribution record of recipient individuals; in any case, they do not provide an adequate replacement of previous employment income nor necessarily provide one above the poverty line. Each year the amount raised by NI generally exceeds often substantively that paid out in benefits, explaining why a variable quarter-odd can be transferred to support health expenditure for which there is no state insurance scheme.
The NHS, as noted in an earlier section, is predominately funded from other general taxation sources, and social care from a mix of local authority and user own funds.
The final total that individuals can be obligated to pay towards their lifetime social care has been, is, and will remain under Johnson’s Plan potentially prone to chance catastrophic events outside their control: quite contrary to the founding principles of national insurance and the welfare state.
One of the core overarching themes of ASocialDemocraticFuture is that the structural need and demand for social expenditures has and will continue to outstrip political (based on electoral) willingness to pay: that is without shifts in political methodology and electoral engagement: the real fiscal crisis of the state (the crisis).
The Conservative enshrined self-denying ordinance on raising income tax, NICs, or VAT was just the most extreme and obvious case in point of that crisis, reflecting earlier New Labour practice.
The resulting reliance on stealth taxes such as insurance premium tax, or more materially on failing to align tax thresholds with inflation (fiscal drag) so steadily bringing steadily more people into the higher tax bands are both its consequences and symptoms (it is estimated that 1.3m new and 1m higher rate taxpayers will result from the 2020 Budget decision to freeze tax allowances from 2022-23 for the remainder of this parliament). Cross-party local competition to freeze annual tax council levies, whether practised by Conservative shire or Corbynite metropolitan councils, another.
The public policy and funding neglect of the social care sector – related to the weak political voice of its users – cannot be divorced from the massive contribution that care homes made to Covid-related excess deaths: the most shameful and shocking consequence of the crisis, but others, such as inhumane conditions in prisons, inadequate and dangerous mental health services, and cuts in care support for vulnerable young people and youth outreach work, generating death or serious harm, provide obvious other examples.
Put into a wider international context, Britain’s social expenditures remain relatively low to European norms as a proportion of national income – the overall UK tax burden (with the Health and Social Care Levy included), expressed as a per cent of national income is expected to reach 35.5% in 2023-24 with the Levy and the earlier Corporation Tax rise included; that compares with 39% in Germany and 40% in France (noting that definitional and compositional issues mean that the comparison is not strictly like-for like).
It is high, however, historically. A tax-take of 35.5 per cent of GDP would be the highest rate reached since 1950 at the height of the post war reconstruction drive.
The core structural problem is threefold. The level of social expenditures across some key areas, including health, and education, and, of course adult social care, are too low to attain universal standards compatible with individual human dignity and collective needs, in tune with the expectations of a population living in one of the world’s wealthiest advanced economies and one of its longest established welfare states.
Second, little apparent willingness exists within the electorate to action the trade-off between welfare state benefits received and taxes contributed. Benefits can be long-term and their costs not easily relatable to individual consumption or experience; a prime example is social care: the prospect of our future need for social care whether due to old age frailty or dementia is thrust to the very back of our minds; by the time it could be needed we will not be in a state of mind to calibrate what is being offered to our past tax and NI contributions.
Increases in tax, in sharp contrast, invariably result in tangible impacts upon household budgets in the the-here-and-now. Most of us might profess an abstract willingness to pay more for better services yet faced with a choice at election time to pay less or more in practice next year, the calculous of personal interest tends to take over.
Unsurprisingly, political parties vying for votes for power and presence within a competitive electoral market-place subject often to headline soundbites and headlines that can hide or distort the real facts, promise improvements in services but are less than forthcoming and honest about the how these are going to be paid for; or promise that both can be reconciled when they can’t; or even worse , simply ignore or put on the back burner needed reforms, such as to council tax or to social care.
During recent decades that reality has become an unassailable foundation of political principle and discourse, amply demonstrated.
The third, and end-result, is that the funding public services expenditures is not only insufficient and inefficient but inequitable in content and form, as are the taxes raised to pay for them in incidence and impact. Expediency, in short trumps both efficiency and equity.
It is no surprise therefore to this website that Johnson has not honoured yet his ‘fix social care’ pledge, resorting rather to a NIC funding presentational fix that will result in economically sub-optimal and unfair – and ultimately unsustainable – distributional outcomes.
That said, at many levels, the Levy does mark a potential crossing of the Rubicon in social and fiscal policy terms. Its scale and presumed period of imposition (at least three years, but permanency is implied by is dedicated legislative status) with its revenue ringfenced for health and social care expenditure purposes, define the clearest departure in tax public policy since the Thatcherite and subsequent New Labour repudiation of the alleged ‘tax and spend’ days of the full employment and welfare state post-war consensus era.
Whether Covid-enforced or not, Johnson’s government has unfurled the ‘party of low tax’ banner (never true for the majority, in contrast to the wealthy or high-income minority) from the Conservative pole, replacing it with one of ‘needs-must’ when events demand.
Well, what does that or might mean for the future shape of social democratic political process and outcome?
Politics and Social Democratic values (methodology) and social care reform
The future development of Johnson’s Plan into the medium- and long-term, including the Levy, will be contingent on the result of next election, expected anytime from 2023 onwards.
Labour, accordingly, will not necessarily have to identify a funding source to pay for a future need-based and sustainable social care system that it might offer to the electorate: it will already be there; that is unless the Levy is put in cold storage or NICs reduced before then on the ground that ‘improvements in the economy now allow for needed reduced tax burdens on working people’.
Labour could commit in government to re-distribute the Levy’s proceeds; or to replace it in full or part with an alternative and more equitable and economically efficient funding source, as part of a wider shift towards wealth and property-based co-payment taxation (where individuals and the state share contributions for defined purposes) without therefore necessarily having to increase the overall tax burden.
Labour’s leader, Keir Starmer, has already slammed Johnson’s Levy as an unfair imposition on working people, but has declined to set out firmly Labour’s alternative. Other prominent Labour figures outside the shadow cabinet have been less shy.
Andy Burnham, the former New Labour Health Secretary and current Metro Mayor of Manchester, has led the way, arguing that: “The fairest way of providing social care is on NHS terms through a national care service, and the fairest way of raising the funding to pay for it is by taxing wealth, not work. The government should be looking at reforming taxes and reliefs on assets, land, pensions, property and excessive earnings and profits before hitting younger, low-paid workers with the bill”, before reprising an earlier decade-old “10% levy imposed on estates” proposal.
But that could have done by the Brown government of which he was a member. It wasn’t.
Labour did not propose funding social care in 2010 through increased taxes on wealth and property because of fears concerning their electoral impact and immediate practicability. That remains the case.
Wealth taxes are easier to prescribe than deliver in practice. They require the liquidation of assets, unless their payment is delayed until death or at time of asset transfer, or unless the rate levied is set low enough to be paid from current income, which would mean reduced coverage and yields unless its incidence was limited to the very rich; that then would suffer from problems of avoidance, and also limited yields.
A wider base embracing those, for instance, own housing equity exceeding a set threshold, rubs against the fundamental problem of how to treat the asset-rich but relatively income-poor pensioner and working families.
In the absence of a cross-party consensus – unlikely – an opposition party linking social care or other reforms to new taxes on people’s assets and homes that would make tangible inroads into the day-to-day budgets of households would invite almost certain electoral and policy defeat – at least in the absence of a compelling and understood engagement narrative that demonstrates and links enlightened self-interest at an individual voter level to economic and social rationality and fairness at the societal level.
No easy answers. The biggest elephant in the room is council tax, currently a property rather than wealth tax. It is demonstrably is unfair and inefficient both in incidence and in its impact on the housing market. Households in low price areas pay more both in absolute and proportionate terms than those residing in areas where average house values exceed £500,000.
An august range of independent bodies have called for reform for decades, most recently and clearly summarised in a Fairer Share campaign manifesto, endorsed by former Conservative Minister and current social policy activist, Lord David Willets. All, however, without moving the political dial seemingly an iota.
Such a ‘big bang’ reform would take time to implement, require transitional arrangements, and would be subject to cancellation by successor governments, even assuming a party proposing it as a flagship policy commitment rather than a vague aspiration was elected. Although a nil net cost reform would produce many more winners than losers, the crisis presupposes that such a far-reaching and substantive reform should result in greater fairness, efficiency and revenue, thus providing an opportunity – in the absence of cross-party consensus -for electoral competitors to paint it as a tax increase.
That, of course, further underscores the need, however, for a shift in political narrative and methodology concerning the link between social benefit and tax contribution.
Given the opening that Johnson’s Plan provides, variants of a housing and other asset levy calibrated to household total net housing equity and other financial asset wealth, which could be paid in lifetime instalments or delayed to when downsizing or death occurs, does seem to offer the most immediately opportune and fair way forward. Inevitably, however, it will attract the catchy ‘death tax’ epithet from opponents and media during the cut and thrust of an election campaign.
Certainly, a progressive levy on wealth would be patently fairer than either the current or the Johnson Plan arrangements, where individuals needing care face chance contingency.
But it would mean: ‘spend now: get the money to pay for it later’, requiring, meanwhile, the needed expenditure for health and social care reform to be met from other tax sources, or from borrowing. That is unless an institutional mechanisms could be established, perhaps with public guarantees, that transparently could allow the levy to be paid by variants of equity release mechanisms outside public borrowing totals.
Other variants of the same theme, could be to phase out the Levy, replacing it with a widened capital transfer tax covering primary residence transfers (the current exemption costs around £25bn to £30bn in taxation foregone), using the same justification that that wealth rather work is being taxed to provide better health and social care and security for all.
They would however involve inroads into family housing equity, with incidence falling on those who need or choose to move often – a problem that could mitigated perhaps, however, by a linked reduction in Housing Stamp Duty. Proceeds could then justifiably be ringfenced, not just for the funding of health and social care, but also for the mainstreaming of affordable housing into public and private sector provision models.
Or the Levy could be retained with its incidence recast within a wider alignment of NI and tax lower thresholds, as was promised in the 2019 Conservative manifesto.
Another tax relief currently costing around £25bn a year is pension contribution relief. That could undoubtedly be targeted better to the benefit of low- and middle-income earners, and transferred in part for health and social expenditure purposes.
What can be said with certainty is that the Labour opposition must set the debate and future agenda, meshing both it a values-led vision for the welfare state in general and health and social care. Now is the time or never.
In that light, the most relevant recent official pronouncement by the current Shadow Social Care Minister Liz Kendall in April 2021 , which, notwithstanding its worthy emphasis on “taking a ‘home-first’ approach by increasing the use of early help and technology to help people live independently for as long as possible and expanding the options between “care at home and at care homes”, tended to follow usual groove of generalised critique and future unspecific aspiration. Future efforts should be marked and developed through a detailed and broad-based strategy and policy development process, both within the party and with external stakeholders.
A successful and sustainable reform requires that it is rooted on a vision of what the future social care system should look like and its relationship with the NHS or whether, indeed, the NHS should become the National Health and Care System (NHCS); the total level of funding required over the medium-term to realise that vision; the possible share and implications of that total met by public and private sources (including user charges) with respect to both equity and efficiency drivers; and how minimum client-need based universal standards can be combined with user choice and provider innovation and flexibility.
Such an electoral and stakeholder policy engagement process would depart from the political mores or methodology that governments and parties have increasingly applied since the advent of New Labour times, one more dependent on tactical news-release and more recently occasional Twitter and like pronouncements.
A necessary and vital departure, however, not just for effective and sustainable social care reform, but for wider social democratic ends. Otherwise Johnson could well determine outcomes, for better or worse, over the next decade.