IFS initial response to the Prime Minister’s announcement of New tax will fund health and social care reform

“Today’s announcements on the Health and Social Care Levy (#HealthandSocialCareLevy) constituted a Budget in all but name says Paul Johnson @TheIFS:

“£14 billion of tax raised through a supposedly new tax, equivalent increases in spending on health and social care, and an announcement of spending totals for the next three years certainly constitute a major fiscal event. After a quarter century of dithering we may finally have settled on a solution for improving the structure of social care funding, as well as an increase in the amount spent publicly on it.

“We have a funding package for the NHS which should be enough to prevent post pandemic waiting lists from spiralling. For “unprotected” departments, the announced spending totals might be enough to avoid cuts, though this is far from certain and depends on the extent of future virus-related spending. 

“A levy of 1.25% on employee earnings and on employer wage costs (so a 2.5% overall increase in the tax rate on earnings), will raise £14 billion a year. The extension of this levy to those over state pension age and to dividends is welcome, but this remains a tax which will be overwhelmingly borne by workers with very little coming from pensioners. This continues a trend seen over many decades of the burden of tax being shifted towards earnings. The creation of an entirely new tax will mean yet more quite unnecessary complexity. 

“Both spending and tax will ratchet upwards over the next few years. Taxes will reach their highest sustained level in the UK. This was always going to be an inevitable consequence of ever growing demands on health and social care, and would have happened eventually  irrespective of the pandemic.

“It is disappointing that the government did not find a better package of tax measures to fund these spending increases. A simple increase in income tax would have been preferable. But  overall much needed reforms to social care are being introduced and unavoidable pressures on the NHS are being funded through a broad based and broadly progressive tax increase. That is better than doing nothing.” 

Paul Johnson, IFS Director