Why increasing National Insurance to pay for Welsh Social Care is a shabby Tory move

Steve Thomas

Lord Dilnot once condemned the social care system as “the most pernicious means-test in the whole of the British welfare state”.

A solution for funding the burgeoning costs of elderly social care has been the “Holy Grail” that has managed to elude all governments of whatever political hue. Older people are genuinely terrified of losing life savings or using the value of their house to pay for care costs. This is particularly resonant for those who will succumb to dementia.

Now leaked media reports suggest that Boris Johnson and Rishi Sunak, has come up with a supposed “solution”. In a major political volte face from the Conservative manifesto, it appears that they will reveal a hike in national insurance of 1% that will see around 25 million people pay extra tax.

The implications of this for Wales are huge. As a solution to fund social care in one of the poorest nations in the UK, national insurance (NI) is dreadful answer.

This system goes back to Lloyd George’s National Insurance Act 1911 and cast on the principle of a “ringfenced” fund between what you put in and what you get out. It has led to the quaint perception that your money goes into a pot with your name on it, held safely until you retire.

This is of course a financial myth. But the survival of this fiction has allowed Westminster politicians from Gordon Brown to Rishi Sunak to pull budget “rabbits out of hats” from behind a veil of ignorance.

Ultimately the distinction between income tax and national insurance is notional. In effect national insurance is an employment tax on working people. By increasing this it indefensibly places a disordinate burden on young people and low earners.

This produces massive intergenerational inequality and sees lower earners paying more tax. For example, someone who is self-employed can make as little as £6,515 per year (a third less than the state pension) and still be required to pay national insurance.

No one is suggesting that the state pension is a road to riches. Thousands of Welsh pensioners live in poverty.

Millionaires 

However, many do not. In 2018 a report for the ONS showed that 22% of UK pensioner households are millionaires when housing wealth, occupational pensions and other assets are considered.

In effect the proposal to increase NI puts a greater tax burden on the poorest in society to safeguard the inheritances of the wealthiest who stop paying it when state pension age is reached. The resonances with the poll tax are uncanny.

What does this mean for Welsh Government? To date they have taken the approach of seeing what UK government comes up with on a funding solution. However, prior to the Senedd Elections the then Local Government Minister Julie James MS highlighted the possibility of Wales “going it alone” if the Westminster government failed to produce a set of social care proposals.

She added that “We did an enormous amount of work in the last Senedd about what could be done with social care in Wales. We have some plans ready to go”.

This is correct since much original thinking has emerged from Wales on the subject. The 2017 report by Gerry Holtham and Tegid Roberts proposed a system of enhanced social insurance which had the merit of tackling intergenerational equality. This would accumulate in a sovereign wealth fund based on higher contributions for the over 50s. Another option was to use social care as one of the first Welsh Taxes to be raised nationally which would accrue circa £300m. But it was deemed to be too ambitious a place to start.

The Westminster solution offered by the Johnson Government is hugely controversial. Already business bodies are antagonistic. The prospect of raising employer payroll taxes post pandemic to pay for the necessary investment fills them with dismay. Raising employers’ NI is a tax on jobs just when the furlough ends.

Many Tory backbenchers see this proposal as flying in the face of the low tax Brexit Britain promised in their Manifesto. Rumours abound that some “rowing back” may occur.

Broken Tory promise 

For Welsh Labour the issue allows them to happily point out a broken Tory promise not to raise taxes. However, the devil is in the detail. The Welsh Government is committed to the sustainable funding principles of the Future Generations Act and tackling some of the highest levels of poverty in the UK. The NI proposal to fund Social Care contradicts both these principles.

Indeed, it presents another massive problem for the devolution settlement. Huge swathes of Welsh public expenditure remain in Westminster control. Social protection (including all benefits, state pensions and elements of social care) is the largest expenditure area outside the purview of the devolved settlement. It accounts for circa £15 billion.

The First Minister has declared that the time is not right to devolve “the benefits system and taxation in a wholesale way”.  He is right that it would be foolish to underestimate the scale and complexity of this challenge. As the partial devolution of benefits to Scotland shows it is a process not an event. But this is not to dismiss it. Should benefits be devolved to Wales it could mitigate against some of the worst aspects of UK policy.

It is already obvious that the introduction of a Wales UBI Pilot by Welsh Government has zero chance of Westminster support. But the NI proposal has an even bigger immediate impact.

The question is whether Welsh Government is legally bound to “hold its nose” and to go along with this flawed policy or could they employ tax variation powers? It has in the past it used its powers to raise payment thresholds to £50,000 before you will be required to pay for all your own care home fees. This contrasts with England where the upper capital limit is £23,250.

But NI contributions are collected at the UK level by HMRC, and it remains a specific reserved matter under the Wales Act (2017). Welsh Government could still introduce its own tax, but then there is the danger of double taxing the Welsh population for would the Treasury exclude Wales from NI rises?

Shabby compromise 

Ultimately, the NI proposal couldn’t be further from the much-vaunted promise to “solve the social care crisis” made by Boris Johnson during his first speech in Downing Street in 2019. It is a shabby compromise that asks Wales’ younger and lower paid workers to contribute more than older and wealthier people.

There are many other solutions. In 2019, UK Labour promised to “provide free personal care for people over 65 who need help and invest an extra £8 billion into adult social care”.

Andy Burnham the Labour Mayor of Greater Manchester and others have suggested a wealth tax to pay for this, while some Tory backbenchers are arguing for it to be met from general taxation. In Scotland the cost of providing free personal care for older people in 2017/18 was £480.4 million.

These figures are astronomical and nobody underestimates the scale of the budgetary challenges facing Welsh Government post pandemic. But the Number 10 sanctioned leaks of the Johnson Government’s NI proposal will not tackle the problems of social care.

It will remain a “Cinderella” second-class auxiliary health service.  Equally important it yet again exposes a huge flaw in the devolution settlement when action by a UK Government contradicts the Welsh approach to social policy.

Ultimately social care deserves a solution based on Mark Drakeford’s principle of “clear red water”. But do Welsh Government have the powers and resources to currently implement this?

It may well be that the best current hope is yet another “Boris U-Turn”.