Health and Social Care Levy Bill

Lord Macpherson of Earl's Court Excerpts

2nd reading & Order of Commitment discharged & 3rd reading
Monday 11th October 2021 Lords Chamber

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

My Lords, I draw attention to my declaration of interests in the register, including the ownership of a flat that I rent out.

I have long been in favour of a health and social care levy and, unlike most former Treasury officials, I am in favour of the hypothecation set out in the Bill. It was clear long before we knew about Covid-19 that the country would need to spend more on the national health service and social care. Demographic pressures have been building for some time and are set to increase further over the next three decades. The events of the last year have confirmed that care home provision is simply not good enough. It is a mark of a civilised society how a country treats those in need of the greatest care.

It has also been clear for some time that the Government have lost the will to find offsetting spending savings to pay for demands on our health and social care system, so taxes have to rise. I have no great problem with that. With gilt yields rising, debt interest promises to be the fastest-growing programme in the spending review. Better to finance current spending out of revenue than through borrowing. So I congratulate the Treasury and the Minister on achieving something all too rare: persuading an oversensitive No. 10 to accept a tax rise that breaks a manifesto commitment. This is not a forced tax rise of the sort that followed crises in 1976, 1992 and 2009 but a discretionary one. The Government are choosing to spend more, so they are taxing more.

I am tempted to leave it at that, but I feel duty-bound to take issue with three aspects of the tax. First, there is the issue of fairness. It is a principle of sound taxation that the tax base should be as wide as possible to keep rates as low as possible. Here I fear the Treasury has missed a trick. The health and social care levy should be paid by everyone, old as well as young, and should be payable on all income.

I welcome the Chancellor bringing dividend income into the levy’s coverage, but I am puzzled that rental income is exempt. The fact is that rental income has its own income tax schedule, Schedule A, so it would be easy enough to ensure that such income bore a higher rate of income tax. Indeed, for much of income tax’s 220-year existence, unearned income incurred a higher tax rate than earned income. That has been turned on its head over the past 40 years as Governments have chosen to channel tax increases through national insurance and tax cuts through income tax. However, the issue of rental income is a matter not just of fairness but of economic efficiency. Housing already receives substantial privileges, which further entrenches the bias in favour of property investment over equity investment. Rentiers generally do not need additional privileges—they have enough already.

I am also concerned that the levy further increases the differential in tax between employees and the self-employed. However, having spent 30 years of my life trying to persuade politicians to close this gap, only to see the noble Lord, Lord Hammond of Runnymede, try and fail the year after I left the Treasury, I am sufficiently realistic to accept that there is a zero chance of correcting this anomaly.

My second concern is that Government have decided to apply the levy to employers by increasing the rate of national insurance that they pay. This is sleight of hand, as the incidence of the tax and its economic effect is the same whether it is borne by employees or employers. It would have been much more transparent to introduce a levy of 2.5% payable only by individuals. I fully understand that taxing employers is easier politically—they do not have many votes—but, as always with tax, there is no free lunch. Employers’ national insurance is a tax on jobs. Tax more employment and you get less of it. That is why Margaret Thatcher abolished the national insurance surcharge in the 1980s.

I recognise that this Government have a rather different attitude towards business. The Chancellor has announced over £40 billion of tax increases this year. Nearly two-thirds of these will be borne by business in the form of high corporation tax and national insurance. That may be good politics, but at a time when Brexit has made it more important than ever that the UK is business-friendly, it is almost certainly bad economics. That, in turn, makes me wonder whether the Government will succeed in making the tax increase stick. Over the past 50 years, there has been many a radical tax change. Tax rates have swung wildly, new taxes have been created and old taxes abolished, but throughout this period, the tax take has remained stubbornly stable. No Chancellor has managed to get tax receipts above 34.1% of national income. Many Chancellors have forecast a rising tax take, only to be disappointed. This Bill envisages a tax take not seen since the days of Sir Stafford Cripps. I am sceptical it will deliver it.

My final point relates to where the money will be spent. I can see the case for capping the care costs individuals pay, but I agree with the noble Lord, Lord Forsyth, that it likely to have many unintended consequences. The social care cap is a simple income transfer from those who pay the levy to those who benefit from the cap. Of itself, it does nothing to increase the capacity of the social care sector. Given the travails of the past 18 months, that should surely be the priority at the current time. It would be tempting to rely on increased funding for local authorities, but, again like the noble Lord, Lord Forsyth, I fear that will not be forthcoming. It is not a protected programme, and recent Governments, since 2010, have chosen to squeeze local authorities over and over again. So, as well as looking forward to the increase in the social care levy, we will be looking forward to many an increase in council tax.

To conclude: I support this Bill, but the design of the levy has flaws. I hope that once the levy is in place, the Government will seek to address some of its faults.