Higher taxes? We ain’t seen nothing yet

It’s my fault. Well, mine and 12 million others. We are living too long. Were it not for us, there would be no social care crisis, the NHS would have plenty of money, and taxes would not need to rise. 

My intention here is not to induce guilt in my fellow post-war baby boomers, but to argue that much of the debate in Britain over the past few days about taxes, social care and the NHS has missed the point. Of course the details matter about who will pay how much in the next two or three years. But the big picture matters more. The first decision for sunseekers is to choose the right resort, not where to sit on the Gatwick Express.

The events of the past few dates have roots that go back far further than Boris Johnson’s election promises, or even David Cameron’s arrival in Downing Street some 11 years ago. To make sense of the forces at work, we need to go back to the days when Britain’s prime minister was Winston Churchill.

Long-term time series are seldom precise. Definitions change, as do the ways we measure things. However, broadly comparable public spending data can be traced back to 1953. Much of the analysis that follows is derived from figures painstakingly assembled by the Institute for Fiscal Studies. 

The first challenge is to find the numbers that tell the clearest story. For example, it helps a bit – but only a bit – to observe that Britain’s economy has grown more than a hundred fold, from £17 billion a year to well over £2 trillion, or that health spending, £500 million a year in the early 1950s, is heading towards £200 billion a year – a four-hundred-fold increase. Such figures take no account of inflation, economic growth or, in the case of the NHS, technical and demographic change.

The clearest way to see what has happened is to look at shares of gross domestic product (GDP). If government spending stays constant by this measure – that is, if it grows in line with the economy – then tax rates can stay the same. But if spending overall outstrips GDP, then taxes must rise in the long run.

Stripped to essentials, here is what has happened since Churchill’s day. The number of people over 65 has more than doubled, from fewer than 6 million to more than 12 million. My generation is now gobbling up a far larger share than our grandparents did of government spending on health and social security. And, of course, all the time advances in medical technology have also been adding to the bill. The overall result is that government spending in these areas has jumped from 8 per cent in 1953 (NHS 3 per cent, social security 5 per cent) to 18 per cent today (7 per cent and 11 per cent, respectively). We pensioners don’t get all of this, but the great – and growing – majority is spent on us. 

The rest of the story is a mixture of good news and bad news. The good news is that, over the past seven decades, there has been a magic money tree. Most of its fruit has come from the peace dividend. Since 1953, defence spending has fallen from 9 to 2 per cent of GDP. In addition, successive governments have squeezed spending on public investment – housing, transport and so on. This has fallen from 5 to less than 2 per cent. This is not something for us as a nation to be proud of, but it has helped the sums to add up. Put defence and investment together, and the total spend is down from 14 to 4 per cent of GDP – a ten-point drop that, hey presto, has allowed NHS and social security spending to rise by the same amount.

Now for the bad news. The magic money tree is dead. Its shrivelled branches will yield no more fruit. The UK is committed to keeping defence spending at 2 per cent of GDP. And all the pressure on public investment is for it to rise, not fall – not least to revive Britain’s infrastructure. Besides, we can be sure that the additional pressures to spend more on health, pensions and social care will continue to grow faster than our economy. What the government has done with the contentious “health and social care levy” is to buy a little time, not solve the long-term problem.

  • Let us leave to others the immediate consequences of the new tax on dividend incomes, those in low-paid jobs and pensioners who keep on working. Here are the long-term choices that we all face:* Sustain the present systems for supporting the health, incomes and social welfare of everyone who needs them. This will involve steady rises in taxation: probably not every year, but certainly every decade. Recent headlines about the highest ever peacetime tax burden will become a regular occurrence. How should this burden be shared between labour, capital and property? Between different age groups? Between the rich and less rich?
  • Decide we can’t afford to keep ratcheting up taxes and prefer a smaller state that taxes less. Make the NHS a more basic service and reserve the most expensive drugs and latest technology for those who can afford them. Means-test social care and require older homeowners needing care to fund it themselves. Scrap the “triple lock” on state pensions – rather than just suspending it for a year, as the government has just announced –  and use only the rate of inflation for adjusting pension levels.
  • Sustain the NHS, provide decent social care, and ensure older people can enjoy a reasonable standard of living – but find sources of funding other than taxes. In fact, successive governments have nibbled at this approach in some areas of public policy: think of student fees and recent reforms to employee pension arrangements. The concept of co-payments, where costs are split between different funding sources, could be spread far wider. For example, part of the cost of future social care needs could be handled by the insurance market; like car insurance, it would be compulsory, but different providers would compete for our custom.

Are any of these options ideal? No. Is one better than the others? That’s a matter for debate. The problem is that it’s a debate that none of the parties has the courage to lead. Instead, we shall have periodic dramas, like the one we are now witnessing, leading to short-term fixes that break election promises and which may or may not work. And even if they do work, they will simply defer the crisis until next time.

This blog was first published by Tortoise