Health and Social Care Levy (Repeal) Bill

Lord Macpherson of Earl's Court Excerpts

2nd reading & Committee negatived & 3rd reading
Monday 17th October 2022 Lords Chamber

[Lord Macpherson of Earl’s Court (CB)]

My Lords, I welcome the Minister’s opening remarks on the Government’s economic policy. The Chancellor should be congratulated for restoring a more sensible fiscal policy and a modicum of calm to the gilts market, and for listening to his Treasury officials.

Returning to the Bill before us, the health and social care levy has few friends, so I will probably make myself unpopular by speaking in its defence—a defence less of its detail, which I will come to, and more of the principle behind such a levy. On a day when the Chancellor has rightly unpicked much of his predecessor’s mini-Budget Statement, he may have missed a trick in not keeping this levy in place. It is worth revisiting why it was introduced.

There are massive spending pressures on the National Health Service and the social care system. Those have not suddenly gone away over the last few weeks. Indeed, judging by the length of waiting times, they have got worse. We are still dealing with the aftershock of coronavirus, which exposed the weakness of the social care sector. The fact is that this country delivers social care on the cheap. We rely on underpaid workers and a thinly capitalised private sector. It is no wonder that its shortcomings have been exposed. It is also unrealistic to expect doctors, nurses and care workers to accept cuts in their real wages year after year. Above all, the much-awaited demographic timebomb is already upon us. The old-age dependency ratio is set to rise inexorably in the decades ahead.

I sometimes wonder whether the Government read the Office for Budgetary Responsibility’s Fiscal Risks and Sustainability report. It was published as recently as July. If Mr Kwarteng had read it, perhaps he would still be in post. It shows health and social care projections rising from 9.7% of national income in 2026 to 10.2% in 2031, to 11.9% in 2041 and to 13.7% in 2051. That is an increase of 4% of GDP, which is the equivalent to £100 billion a year in current prices.

Meanwhile, much of the tax base is eroding. We no longer have substantive oil revenues and tobacco duty revenues are rightly in decline. As the country moves from petrol-fuelled cars to electric vehicles, fuel duties are likely to decline. In the end, the best way of raising revenues is to rely on the big taxes: income tax, national insurance and VAT. We can all fantasise about getting more tax from the rich, and I certainly support having a go at that, but actually it needs to come from the taxes that everybody pays.

The health and social care levy is based on national insurance. It is therefore likely to be a buoyant tax. It also has the positive feature of linking the raising of revenue to increasing expenditure. Now is not the time to go into a long discourse on hypothecation. I am not in favour of hard hypothecation; that was tried with the road fund before the war and it did not work: it created rigidities in the public finances. But it is important that taxpayers understand why their taxes are rising. Linking increased tax to increased spending, as Gordon Brown did in his 2002 Budget and Mr Sunak did in 2021, ensures that higher spending is funded and sustainable, and a tax increase is more acceptable.

In my view, it is inevitable that the health and social care levy will be resuscitated at some point. When it is, I would recommend a different tax base. The problem with national insurance is that it is paid only on employment income. It is not payable on rents, dividends or pensions, however well off the pensioner is—and old people are exempt altogether. The big change in income distribution in my lifetime is that old people are less likely to be poor than younger people.

It is right that the tax burden should be shared across the generations. Mr Sunak tried to put right some of the anomalies in national insurance, but he did not put right all of them. I strongly recommend that any future levy is based on the income tax base and not the national insurance base. Indeed, the whole issue would be made much simpler if national insurance and income tax were fully integrated, although, having explored that for many Chancellors, I will not hold my breath.

Meanwhile, we are burying the levy. I recognise that I am one of the few mourners, but I am confident that, whatever the Government and Opposition are saying now, one day it shall rise from the dead.