Gemma Tetlow, Chief Economist, Institute for Government

This article forms part of the LGA think piece series 'Towards a sustainable adult social care and support system'.

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One big challenge facing UK governments over the next few decades is how to meet the health and care needs of the country’s ageing population.

Projections from the Office for Budget Responsibility suggest public long-term care spending will need to rise from 1 per cent of national income in 2018-19 to 2 per cent by 2058-59 – or by around £20bn a year in today’s terms – to maintain the current level and quality of public provision.

Faster spending growth would be required if the government wanted to address some of the existing problems with the social care system or to implement some form of cap on individuals’ contributions to their care, as recommended by the Dilnot Commission.

Tax rises would be needed

Simply borrowing more to cover these costs will not be an option. Growth in demand for social care will occur alongside rising demand for healthcare and growing pension costs. Meanwhile revenues from existing taxes are expected simply to keep pace with economic growth.

If no new taxes or changes to existing taxes are announced, the OBR predicts that spending pressures of an ageing population will push public borrowing up to 13% of national income in 40 years’ time. This is a level not reached during the financial crisis and would not be sustainable.

Government intervention is required to help insure the costs of social care

If taxes do not increase to help meet this cost, individuals will increasingly be left to meet the costs of social care from their own pockets. Whether and how much care someone will need is uncertain. Most people will need little or no care but a small number require a significant amount of very expensive nursing home care.

But there is no private market for insuring this risk. Without it, individuals will be left needing to put enough money aside to meet potentially very high care costs. If they do not, they may be unable to afford the care they need. This could ultimately put pressure on a future government to raise public spending on social care to avoid unpalatable headlines or mounting pressure on health services.

That there will be a need for more spending on health and social care is broadly uncontentious. But it has become difficult for politicians to suggest raising taxes to pay for it. The reception received by the ‘death tax’ in 2010 and the ‘dementia tax’ in 2017 mean political parties are reluctant to discuss the options.

Hypothecation is not the way forward

Survey evidence suggests voters are much more likely to support the idea of a tax rise if they believe the money will be used to fund health care. As a result, there has been growing support for the idea of a hypothecated tax rise, earmarked specifically for health and care spending.

But a hypothecated tax would not be the simple panacea it is often presented as. A pure hypothecated tax would lead to health and care spending fluctuating undesirably through the economic cycle. More elaborate designs would be less transparent and could in effect be nothing more than a politically expedient way of selling a tax rise.

Furthermore, revenues from most taxes are forecast to grow roughly in line with the economy in coming years. In contrast demands for health and social care spending are expected to grow much more rapidly. Introducing a hypothecated tax that met short-term health and care spending needs would not prevent the same questions arising again in future: How much do we want to spend on public health and social care? How can we raise taxes to pay for it?

Where could tax rises come from?

What is needed to ensure a sustainable long-term spending settlement for publicly-funded social care is broad cross-party agreement on the need to raise more revenue and where this should come from.

Without that members of the public can have no surety that they will not face large, uninsured costs of care later in life.

There are many ways that additional revenues could be raised. There are many inefficiencies and inequities in the UK tax system – such as the taxation of property – that could be addressed while also raising money.

There are some ways that make less sense. National Insurance contributions – an oft mentioned source for hypothecated revenues – have many problems. They tax earnings but not other forms of income, meaning a given increase in NI will be more of a discouragement to work than raising the same revenue through income tax. NI is also less progressive than income tax, placing more of the burden on lower earners.

Exactly who should pay is a distributional question that only politicians can answer. But this is an area of policy where cross-party agreement – at least on the scope of services the state should provide and the scale of overall taxes required to do that – would be desirable. That would provide the kind of certainty that service providers and individuals planning for later life need, just as the cross-party backing for the Pensions Commission proposals achieved for pension saving.

Gemma Tetlow
Chief Economist, Institute for Government