Raising Taxes Was Inevitable

The Prime Minister’s statement yesterday primarily provided an excuse to raise taxes to help the NHS and support social care funding. But this was surely very predictable. In March I said this after the Chancellor published his budget: “Reaction to yesterday’s budget was generally negative, but nobody likes higher taxes. The general view is that the Chancellor has just kicked the bucket down the road. More borrowing in the short term to finance the recovery and keep people in employment, but much higher taxes later. I think the budget is a reasonable attempt to keep the economy afloat and could have been a lot more damaging for business if he had taken a tougher line”.

You only have to consider the many billions of pounds being expended in the NHS to counter the Covid-19 epidemic and to support businesses which had to shut down to see that higher taxes were inevitable.

We are now getting the predicted higher taxes. The main points announced were:

  • National Insurance rates for both employees and employers will rise by 1.25%. Mr Johnson said he “accepts that this breaks a manifesto commitment, which is not something I do lightly. But a global pandemic was in no one’s manifesto”.
  • Those over 60 but still employed will also pay National Insurance for the first time from which they were previously exempt.
  • Taxes on dividends will also rise. Dividends are taxed based on your income tax rate. Basic-rate payers will now pay 8.75% tax on dividends, up from 7.5%, higher-rate payers will pay 33.75%, up from 32.5%, while top-rate payers will pay 39.35% up from 38.1%.
  • The “triple-lock” on state pensions will be suspended which will reduce the anticipated income rise for pensioners.
  • Pensioners will also be hit by a proposal to raise the limit for when obtain free prescriptions from age 60 to 66.
  • In total it is suggested that the total tax take will be the highest it has been since the Second World War and undermine the Conservatives claim to be a low tax party.

What do we get in return?

The extra £12 billion a year raised will mainly be spent helping the NHS recover from the Covid-19 pandemic and, eventually, on protecting people from extortionate social care costs. But there are few details on how the money will be spent. However there is a claim that the extra taxes raised will be hypothecated as a “health and social care levy”, i.e. cannot be spent on anything else, although the rules can be changed later of course.

One specific commitment is to introduce a lifetime social care cost limit of £86,000 per person from 2023. This may help people to avoid having to sell their homes if they have to go into residential care. But it only applies to basic care costs not to food and accommodation.

There will be a new means test if people live in their own homes. They will get all their social care funded by taxpayers if they have less than £20,000 in assets — excluding the value of their home. They will be partially funded if they have assets worth up to £100,000.

Comments:

  • The advantages of the self-employed paying themselves via dividends rather than in salaries will be further reduced. For those who receive dividends on investments it is important to try and reduce those by moving the investments into tax free ISAs, SIPPs or VCTs. Clearly it will also increase the relative value of companies that are growing their retained profits or doing share buy-backs rather than paying out profits in dividends.
  • Will the extra money for the NHS actually improve the services? As a big personal user of the NHS I welcome it but will more money make a difference? The service has certainly declined in the last year with waiting lists for operations growing to millions nationwide (I had to pay privately to get one done for example). There is a shortage of doctors and nurses and that is not easy to fix quickly as training takes a long time as does building new hospital facilities. The total funding for the NHS is now comparable to other European countries but the level of service provided is not as good – just compare the number of hospital beds, particularly intensive care ones, or doctors per head of population. This is where the NHS proved to be so sub-standard during the pandemic. This is a management problem which more money might not cure.
  • Social care likewise needs wider reform but will more money help? It is not clear.
  • The media comments lauded the ability of those who need to go into care homes from avoiding selling their homes. But why should they not be forced to do so? This looks like a sop to the wealthy home owners in the shires who want to pass on their homes to offspring. I do not consider it fair that young workers should be subsidising such funding by rises in taxes on them. So far as I am concerned, I am quite happy to erode my personal wealth to pay for the medical or social care costs I need. My offspring should not be relying on collecting big inheritances.
  • Is it a good idea to impose extra costs on businesses and deter them from employing more people? This is surely a damper on economic activity generally and will reduce returns to investors. But employment levels are high and increasing the cost of employing people might encourage higher productivity. At this point in time, I therefore do not oppose it, but I am not one of those in employment who will be paying the higher NI rates.

The key question is what else could the Chancellor have done to raise taxes? The alternatives are probably no better.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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