NI rise won’t pay for social care reforms

It is misleading to suggest that the two are anything more than fleetingly linked

I keep reading that the government is planning to increase National Insurance (NI) contributions “to fund social care reform”. I really don’t think that’s correct.

I don’t doubt that the government is planning to increase NI contributions. And that it is also planning to improve social care. But I question the idea that the one can really be said to be paying for the other. Even if the two things start at the same time – which is in doubt because there are suggestions that the NI increases may actually start much sooner – the link between the two would be tenuous.

When an element of government expenditure is increased and a government levy goes up at the same time, the equivalence between the two is short-lived. As time goes by, the factors driving the amount of income received are rarely, if ever, the same as the factors driving the amount of expenditure. So it must be a fiction that the former is funding the latter.

Take the current case as an example. The extra income received from an increase in NI contributions is driven primarily by the numbers of people in work, the amount they earn and the income thresholds for paying NI. But the expenditure will be based, almost by definition, on the cost of caring for people who have long since ceased to work.

Keeping the extra income and the extra expenditure in line with each other as the years go by would require a regular re-assessment of the additional NI charge and a re-adjustment whenever the two fell out of line. That won’t happen. In fact, the entire National Insurance system, which started out as a form of contributory social insurance (in which a person’s entitlement to specific social security benefits was linked to the contributions paid), has long since lost its link between contributions and benefits.

If the aggregate of all NI contributions no longer meet the benefits payable under the social insurance system, why should we expect individual categories of expenditure to remain linked to a specific percentage of NI charges? According to the Institute for Fiscal Studies (IFS), numerous reforms of contributions and benefits have taken place over the years with only minimal attention paid to the link between the two. And yet it is common for commentators to refer to new expenditure items as “paid for” by a specific tax or a specific element of an existing tax.

So much so, that even the head of the IFS, Paul Johnson, recently fell into the trap of associating the two when he told the Times newspaper: “Funding social care just from national insurance would be very inequitable. It would be a continuation of a long-term policy of hitting those of working age while protecting pensioners even for something designed to benefit people well over pension age. It’s a question of fairness.”

Pollsters often report that the public is willing to pay additional tax if the extra goes towards the NHS. By asking the question, those being polled are encouraged to believe that there is a real possibility that the two might be linked. I don’t think the pollsters ever ask whether respondents would like to see the NHS cut back again if the tax-take fell for a while, as happens, for example, in a recession.   

The reality is that taxes have to be viewed holistically, as do benefits. A major increase in benefits over the long term future – such as a radical improvement in social care – will almost certainly trigger the need for an increase in taxes (unless savings are made elsewhere). But it really is misleading to label a tax change in Year 1 of the new expenditure as “paying for” the new benefits.

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