Something had to give. If he was to meet his pledge to fix the care system Boris Johnson had little choice but to break the Conservative party’s manifesto promise on tax. This was one occasion on which the prime minister was unable to have his cake and eat it.
The new NHS and social care levy will raise £36bn over the next three years, paid for by an extra 1.25% in the national insurance contributions paid by both employers and employees.
For good measure, the government also saw fit to break another election pledge when it announced that the triple lock on pensions would be broken this year. Johnson and the chancellor, Rishi Sunak, had the option of announcing the extra spending up front and waiting until the 27 October autumn budget before revealing how the extra spending was going to be paid for, but in the end decided to front it out and blame the broken promise on the global pandemic.
One thing is certain. What Sunak called the “permanent new role for government” means the days when the Conservatives were a small state, low tax party are over, not just today but for years to come.
The government was expecting criticism and duly got it. Unions said poorly paid workers were being asked to pay for the care costs of the better off. Labour said the plan was unfit for purpose. Paul Johnson, the director of the Institute for Fiscal Studies thinktank, welcomed the end of a quarter of a century of “dithering” but said it would have been preferable to find the extra money through income tax rather than NICs.
The plan was tweaked to defuse some of the criticism. People who work beyond the state pension age of 66 will be expected to pay the levy, although because only 10% of this group continues in employment the sum raised will be small: between £100m to £200m. Taxes on dividends will be raised by 1.25%: a move that will raise £600m, mainly from the better off but also from the self-employed. The bulk of the money raised will come from workers.
Although people on low incomes start paying NICs before income tax, the Treasury had four reasons for raising the extra money in the way it did: the precedent of Gordon Brown’s NICs increase in the early 2000s; the (somewhat spurious) argument that part of the NICs take is already ringfenced for the NHS; the notion that Germany and Japan have similar levies; and the fact that NICs are paid by both employers and employees – thus halving the costs to individuals.
Sources were eager to point out that the top 2% of earners will pay 20% of the levy, with the top 14% contributing around half.
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Business lobby groups were unhappy, pointing out that higher employer NICs mean firms will need to find the extra money in one way or another: by investing less, paying smaller wage rises or by taking on fewer new workers. The main burden of this “tax on jobs” will fall on big firms, with the Treasury estimating that 1% of employers will pay 70% of the NICs increase. This group includes the NHS, and £500m from the levy will be earmarked by Sunak to help hospitals with extra wage bill costs.
In theory, there were alternative ways of raising money that avoided breaking the manifesto pledge not to increase NICs, VAT or income tax. In practice it had to be one of the “big three” to raise £12bn a year. While a one-point rise in employee NICs and income tax raises around £5bn a year, similar increases in inheritance tax or capital gains tax raise around £100m.
After today’s mini-budget, the real thing next month is likely to be a tamer affair. As Johnson noted, Sunak’s second big tax-raising event of 2021 has left the UK with its highest sustained tax burden in its history and a permanently bigger state. Day-to-day spending by the government will be £100bn higher at the end of this parliament than it was at the beginning. The chancellor says borrowing must come down but the appetite to impose still higher taxes to do so will be limited.