Boris Johnson has done a great service for politicians everywhere by testing the political waters for tax increases. He and his Chancellor of the Exchequer, Rishi Sunak, are ratcheting up Britain’s taxes to pay for care homes. And Covid of course. Pretty much everything it seems.
The new tax is not really that new: a levy on labour incomes (i.e., salaries, wages and self-employment) of 2.5 percentage points, with an increase in dividend taxes of half that. Boris – with flagrant disregard for Econ 101 – claims that business will share this burden. Sorry Boris and Rishi – labour taxes fall on labour.
Meanwhile, the Financial Times gloomily opines that the move will raise the UK’s tax burden to the highest level since 1950 – about the time when Boris’s hero, Winston Churchill, was heading for a second term as PM.
Boris has a reputation for being better on the strategic than the tactical decisions. So, will the tax increase work?
As a policy measure, it looks dubious. Most of the annual £12 billion expected to be raised will go to an unreformed monopolistic health service, with the hope that this clears the slate of the post-Covid backlog and then deals efficiently with natural growth. Good luck with that.
Just £1.8 billion of the total is expected to go to social care. And nearly half of that, according to Ryan Bourne of the Cato Institute, is for “protecting inheritances” (through a government promise to preserve wealth by capping an individual’s basic lifetime social care costs at £86,000).
That ‘basic’ qualification looks significant, however, as individuals are likely to have to pay their bed-and-board costs, as well as for any quality frills they chose above the government-mandated minimum.
Perhaps the best that can be said is that it keeps the care system out of the hands of Britain’s bureaucratic NHS and retains the link between payment and service.
When it comes to the political strategy, Boris is taking some big bets on the future.
First, he is betting that his voters will prefer higher taxes to painful decisions on public spending (although chances are they will have a bit of both).
Secondly, he will be hoping the growth impact is limited. He might be helped here, at least in relative terms, if other governments follow his lead.
Thirdly, that the policy meets the social need without saddling him with a personal responsibility for fixing social care (which, as most politicians know, is not really fixable).
As Ryan Bourne puts it:
“The paradox is that the more the Prime Minister builds this up as “sorting” social care, the greater the political risks to the Government if quality doesn’t improve, the NHS eats all the money, or people realise the limited scope of the sop to inheritees”.
Boris may continue to be lucky of course but there will be some in his party who feel he has missed a Thatcherite opportunity – perhaps the crucial opportunity – to tackle the imbalance in public spending and settle Britain on a growth-focused post-Brexit path. Joining the high tax club means he will now depend even more on other areas of economic policy – like regulation – to provide an edge.
When Margaret Thatcher took office in 1979, Britain’s level of taxation was well above the Western European and OECD averages; when she left it was heading below them – and this coincided with a long period of much better relative economic performance.
Perhaps if Britain’s growth schleps along at European levels for long enough there will be another chance of a Thatcher moment. But not now and not in the UK.