The UK government’s widely-followed announcement that it would increase national insurance taxes by more than one percent to fund reform of the social care system has sparked a fierce political debate over whether to help fund the NHS. Many conservatives are outraged that this means breaking an election promise not to raise taxes, while others, especially on the left, argue that taxes on the young and relatively poor are levied to help older, wealthy pensioners. It is unfair to put those who have their own homes.
Beyond this controversy, there are much broader issues about the future of Britain’s welfare state after a decade of austerity and the ravages of the pandemic. The social-care row is an early salute in a debate that will last until later autumn when Chancellor Rishi Sunak announces his comprehensive spending review, which will set the course for the next general election.
The problem for Conservatives securing their electoral victories in “red wall” constituencies, which voted Labor reliably in the north of England, is that they are somewhat indifferent to them. The government has promised its new working class voters to “level up” and not to do more austerity.
Boris Johnson also promised to reform social care during the 2019 election, to reform a system that requires most people to sell their homes for old age care despite paying taxes throughout their lives. it occurs. This would cost more than £10 billion annually.
Yet the chancellor has set a tough set of fiscal targets to tackle the huge budget deficit created during the pandemic. The government has borrowed £2.2 trillion, roughly the size of the entire UK economy. How does it square the circle?
UK net debt as a % of GDP
So far, Sunak has managed to reassure the public that he is on their side by demonstrating to the markets that he will not be a soft touch. He indicated in the March 2021 budget that he would levy taxes to meet his targets, announcing higher taxes on companies from 2023. This met with relatively little criticism and proved popular with the public, and the same is true of the proposed enhancement. National Insurance.
But more importantly, the chancellor has made it clear that the less visible part of public spending will have to work harder to finance a freeze, freezing public sector salaries in the 2020 spending review . And despite reluctantly giving additional funding for nurses in 2021, public sector salaries – which comprise a third of all spending – are likely to fall again.
Meanwhile, Sunak has asked all government departments to save 5% “efficiency” and cut staffing levels. And although the government remains committed to high-profile spending on health, education and defence, these departments may not get enough to restore spending to pre-austerity levels, while less favored ministries may realistically require further cuts. may have to face.
The chancellor has been particularly careful not to make any long-term spending commitments for non-departmental spending, such as a permanent increase in the universal debt. In fact, he is potentially laying the groundwork for permanently reducing pensioners’ benefits.
Soon after the announcement on social care, Sunak is expected to temporarily suspend the so-called “triple lock” on state pensions, another manifesto commitment. It stipulates that pensions grow at a rate of 2.5% each year, in line with either the rate of inflation or average earnings, depending on which it is highest. Once again, political ruckus seems inevitable.
Meanwhile, the funds actually allocated to the regional “leveling” agenda are extremely modest, with headline-grabbing proposals for Freeport, but only a small amount of discretionary spending to improve city centers and disadvantaged areas.
Read more: What exactly is ‘leveling up’? What do we know about Boris Johnson’s agenda – and what doesn’t?
One lucky chancellor?
The economy, which is recovering faster than expected from the pandemic, has lessened the chancellor’s immediate challenges. This has reduced spending and increased revenue by around £25 billion, which could ease the immediate pressure on spending.
And one result – a sharp rise in inflation – has also helped Sunak temporarily. Wage inflation will push more workers into a higher tax band, further increasing tax receipts, and higher prices will mean higher VAT returns. Inflation also reduces the value of public debt in real terms.
For the foreseeable future, a combination of strong growth and modest inflation will be the most effective way to meet the Chancellor’s key goal of stabilizing the debt-to-GDP ratio, and therefore reassuring the markets. But if inflation rises further, the Bank of England could raise interest rates, which could increase the cost of repayment of huge government debt. Currently, the interest rate paid by the government on its loans is currently at its lowest level in more than 300 years.
However, despite recent helpful economic data, the UK (and many other countries) are at a turning point in the role of government. Future needs for public spending are likely to be much higher than previously thought, and postponing decisions to deal with them will make the final cost much higher.
The first challenge is to tackle the economic legacy of the pandemic, and the damage done to businesses and individuals as well as government services. The second is to deal with the steady decline in UK productivity since the 2007–09 economic crisis. This has stagnated wages, widened the gap between rich and poor, and contributed to the political malaise that saw the Conservatives win in 2019.
What is even more serious is that the UK population is getting older. This would put further strain on public finances, require much more spending in health and social care than is currently proposed, and also affect pensions (public and private).
Finally, the government must finance the rapid decarbonizing of the economy to prevent catastrophic climate change. Despite the UK hosting the COP26 summit in November, it is something Sunak has shown little forethought for doing.
Rishi Sunak has demonstrated a genuine political understanding in these difficult times that may well increase Boris Johnson’s chances of succeeding as Prime Minister and ensure a Conservative victory in the next general election. But his actual place in history will depend on how he responds to the extraordinary challenges of the era. Winning the argument over higher funding for social care is important, but it is just one of many financial problems the government has to address.