Something has to be done about spreading the burden of funding social care for the elderly. It’s not simply a question about getting more money into the system, though that certainly needs to be done. It also about fairness, for at the moment, some people have their life savings wiped out by having to pay the fees of a care home or nursing home in their old age.
But how? Andy Burnham has said he is prepared “to expend quite a lot of political capital” to do something about this, and there have been suggestions that there should be changes to inheritance tax (IHT) to raise the funds.
One idea he spoke about is that there should be a National Care Service funded by a levy of 10 per cent on “everyone’s assets, savings and homes”, though this was before he became a candidate for the top job. But this runs into a huge political problem: opponents call it the “death tax”.
Benjamin Franklin, who helped draft the US Constitution, famously observed that: “In this world nothing can be said to be certain, except death and taxes.” A “death tax” would run the two together. IHT is already the most unpopular tax of all, largely because it is seen as double taxation: people pay taxes all their lives and then they have to pay yet more after their death.
So while IHT is ripe for reform, adding yet another “death tax” on top would not only require “quite a lot of political capital”. It might not even bring in any more money, because for the really wealthy it would be yet another inducement to spend their retirement years in a country that taxed inheritance more favourably.
So what’s to be done? The good news is that there is a plan and it does not need a huge amount of money. The bad news is that it has not been implemented. Back in 2011, a commission chaired by the economist Andrew Dilnot looked at how to improve our social care system. The key element was to cap people’s total costs for their care, so that people who had to have long-term care would not have their entire wealth wiped out.
It was accepted in principle, and the Tory/Lib-Dem Coalition government actually brought in the Care Act in 2014 to put this plan into action – only for it to be scrapped by Theresa May’s government. It was then revived under Boris Johnson, but delayed and then scrapped when Labour took power in 2024, despite the estimate that it would only cost £5bn a year to cap long-term costs so that no one would have to pay more than £86,000 for their care.
Labour then set up another commission, this one headed by Baroness Louise Casey, which will produce its interim report by the end of this year and a final one in 2028. Now there is to be another rethink, but given the history since 2011 and the rate of turnover of prime ministers, it is hard not to be cynical about what will end up actually happening.
So there’s the challenge facing the Prime Minister, and at the moment there is simply a tidal wave of speculation as to what he might do. Two separate issues are in play.
One is how to reform the present social care system, and in particular how to cap the costs of long-term care.
The other is how to raise more money, because some additional funding will be needed.
Politically it makes sense to link the two, because paying additional inheritance levy might seem more palatable if it were presented as paying for social care organised by the new National Care Service. But in reality the money raised from taxation and other receipts – £1.232trn in the last financial year – goes into one huge pot, which is then doled out to the different spending departments.
So in political terms, Burnham has to make a big judgement. Can he and Chancellor John Healey make inheritance taxation seem fairer, by enacting changes that increase the total revenue but in exchange stop people having to run down their life savings and maybe sell their homes because they have to spend several years in a care home? Since Yvette Cooper has been named Secretary of State for Health and Social Care, it looks as though any additional levy will be branded as paying for a National Care Service.
But in economic terms the Government has to decide if this is the most sensible way to raise more money. There have been suggestions that switching to a 10 per cent levy on all estates could raise an additional £18bn a year, but that is tiny in the context of more than £1.2trn of revenue, or indeed of a debt interest bill amounting to £110bn this year.
Maybe a less radical approach might be more successful – and more likely to survive after Burnham leaves office. He could simply adopt the main Dilnot proposals right away, and set to work, in an orderly, methodical way, to simplify our vastly overcomplicated tax system so that it brings in a bit more money with much less hassle.
The harsh truth is that there is no “get out of jail” card for Burnham that suddenly fixes the country’s public finances. But he deserves credit for trying to tackle a problem that previous leaders of both major parties have failed to do. What we have at the moment is grossly unfair, and that is wrong.
Further thoughts
One of the most depressing things about the way politicians talk about money is how disingenuous they are. There was a good (or rather a sad) example of this from Rachel Reeves shortly before she was fired. The recent increase of £15bn in the defence spending plan was partly paid for by cutting £700m expenditure on roads. But the two have nothing to do with each other, and in any case the cut only covers 5 per cent of the increase.
A similar example was the notion that putting VAT on private school fees paid for more teachers. The current estimate is that this will raise an additional £1.5bn a year, though that is disputed, and in any case, demand for teachers is determined by the number of schoolchildren, which is going down. So you could say that the VAT money actually went to help build more roads or spend more on defence. And in the context of £1.232trn of tax revenue, an extra £1.5bn is so small as not to matter either way.
So why do they do it? I think the idea is to make public finances more directly understandable – the “we are raising this tax to pay for that spending” line. But actually no Chancellor I can recall ever said “we are raising this tax to pay for the higher interest we are paying on the national debt”, which is at the moment the third largest government outlay after social welfare and the NHS.
Back in 2018/19 before the pandemic the government spent £43bn on interest. Last year, as noted above, the figure was £110bn. In the first three months of this financial year it spent £33.3bn on interest, £1.6bn more than the forecast by the Office of Budget Responsibility. Yet there has been hardly any public discussion of this.
It would be great if the new Chancellor adopts a more direct approach, explaining what is going right and what is going wrong with public finances, because there are some things that don’t look too bad. For example, tax revenues are all right. That is helpful because VAT gives a direct number on sales for half the economy – roughly half of what consumers spend is liable for VAT. National insurance receipts are a bit soft, as private-sector employment has weakened a little, but it hasn’t fallen off a cliff. And income tax, the biggest revenue source of all, is doing well, with strong PAYE revenues.
So I wish we will get a more honest explanation of what is happening from Healey than we did from Reeves, and one without all the political stuff about it being the Tories’ fault. Indeed the biggest single thing he can do is to restore faith in UK fiscal management, and I can tell you the measure of that which I find most helpful.
It is the yield on 10-year gilts. We have to pay a higher rate of interest than any other G7 economy – just over 5 per cent yesterday against the next highest, the US, on 4.65 per cent. When our rate drops towards the middle of the pack, as it was for most of the time under the Coalition and Tory governments, he should take the credit, and I promise to applaud.
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