Next week Philip Hammond will be presenting his first Budget and he has a number of fires to put out. Over the past couple of months, one of the most pressing concerns has been the crisis in social care funding, largely caused by spending cuts to local government.
Hammond is expected to announce emergency funding for councils and social care, which in turn will take pressure off the NHS. Thanks to a large January budget surplus, he has some fiscal wriggle room, but the Government recognises the need for real reform.
Later this year, the Government will be presenting its plan for social care. One of the options which has caught Hammond’s eye is a social care levy targeting wealthy estates. This is the very same policy George Osborne and Hammond denounced as a ‘death tax’ in 2010 when it was first proposed by the Labour Government.
As Theresa May begins to craft her appeal to OWFs (ordinary working families), it might be good politics to introduce another tax on the rich in order to resolve the social care crisis, but it certainly is not good economics.
The most significant problem is that a social care levy is not a fiscally sustainable solution. By 2039, 24.3% of Britain’s population will be aged over 65. Average life expectancy is expected to rise to 85.3 years for women and 82.5 years for men by 2030. This means that the amount of revenue required by the social care levy will increase every year in the coming decades.
Fiscal creep would be the inevitable result. Future rises in demand for social care will encourage successive governments to extend the social care levy to more and more families outside of the wealthy elite in order to raise sufficient revenue.
There is also reason to doubt that a social care levy would be an efficient way of raising revenue. Inheritance tax already fails to raise much revenue due to tax avoidance. For example, the Duke of Westminster recently avoided a hefty inheritance tax bill through the use of trust law. If there is a large level of people avoiding the social care levy, then the Treasury would have to increase and broaden it in order to raise more revenue.
A further complication with introducing a social care levy is that hypothecated taxes are an inefficient way of managing revenue. Even if the levy raises more than what is required, then spending the additional revenue on other services defeats the point of hypothecation, but other areas of spending would not benefit if it is all spent on social care regardless.
To ensure a more fiscally sustainable and efficient funding system for social care, the Treasury could enact a new vision for fiscal devolution. Local councils are already responsible for administering social care funding yet they remain dependent on central government for revenue.
New legislation is required to empower local councils by introducing a local income tax and local sales tax to fund 50% of local expenditure. This would have to be implemented in such a way as to avoid increasing the overall tax burden. With these new fiscal powers, local councils would be able to raise significant revenue in an efficient way for their services, including social care.
A social care levy is an unsustainable and inefficient tax which would fail to resolve the fundamental problems with social care funding. Instead, a bold reforming vision for fiscal devolution is needed to help provide for society’s most vulnerable and improve the quality of local governance.