Boris Johnson has unveiled an additional 1.25% levy on national insurance paid by wage earners and employers, which will raise £14 billion a year to help pay for the NHS and reforms to social care. Coming on the back of rises to income tax and corporation tax that were announced in the budget in March, it is the latest example of the government using tax rises rather than austerity to rein in public finances that have been hit by the cost of the pandemic.
We asked Alex de Ruyter, a Professor of Economics at Birmingham City University, to explain how it would affect different parts of society.
Q: How will the levy hit the different groups who are affected by it?
Raising national insurance (NI) contributions is going to disproportionately affect wage earners. This means it will disproportionately affect ethnic minorities and women. Those in receipt of universal credit who are also working will have the double whammy of being hit by higher NI as well as losing £20 a week when the temporary increase for COVID ends on October 6.
The principal beneficiaries are going to be those who now stand to inherit what would otherwise have gone on social care. These will overwhelmingly be those of a middle class, white British background and their numbers are concentrated in the south-east of England. There is some disquiet among so-called “red wall” Conservatives – those in the north who used to reliably vote Labour – but there is probably enough within the measures to placate MPs representing these regions.
After all, additional funding for the NHS tends to be popular among this group, and while the £86,000 lifetime spending cap on social care costs is unlikely to benefit them as much as their southern counterparts, the increase in state support for those with assets between £23,000 and £100,000 will. For the pensioner in Hartlepool in a three-bedroom terraced house worth £40,000, there will be advantages (albeit much smaller than for many in leafy districts in southern England). The real losers will be those without assets.
As far as employers are concerned, it doesn’t necessarily follow that increasing their NI contributions will mean they pass on the costs in higher consumer prices. We know that raising corporation tax rarely if ever results in a price rise to the same amount (after all, corporation tax is a tax on profit, not revenue). And prices depend on a variety of factors including how much market power the company has in its sector and the cost of imported raw materials. Also remember it is the job of the Bank of England and not the Treasury to control inflation.
As for whether employers paying more NI could affect the potential for employees to take advantage of worker shortages to demand wage increases, that potential only exists in jobs where workers have specialist skills and can’t easily be substituted for someone else. For example, lorry drivers benefit from the fact that not everyone can afford the cost of getting an HGV licence.
You will also not make a big difference to social care with this levy. Apart from the fact that most of the £14 billion a year this will raise looks likely to go to the NHS, you would need a root and branch shift to make a real difference to social care. That would mean giving staff decent wages, improving facilities and ending the way that it currently benefits those who can afford it. We would be talking about full state provision comparable to the NHS, to pay for which we would probably need to move away from taxing income towards taxing assets and wealth.
Q: How will highest tax burden since 1950 affect the economy?
It’s difficult to talk about the magnitude of how consumption patterns will change without building models, but it’s something of a red herring to talk about the tax burden because it depends on who you are taxing. The announcement looks designed to benefit the government’s traditional voter base: people who own their own homes and who are in receipt of a pension.
Q: What are the consequences of shifting the burden of taxation further towards younger people?
Over time, we have shifted the burden of taxation towards income and consumption. A corollary is that we don’t tax assets enough, which creates a real fairness issue. It’s not fair that people who inherit assets get all the benefits without doing anything for it.
And while it may be true that older people spend more than younger people, and therefore our consumer economy benefits from that, it does not follow that older people would spend less if you taxed them more. If I have £100,000 to buy a Jaguar, I’ve probably got enough to pay £105,000 for it. There’s more than enough evidence to show that the rich save while the poorer spend. Since the rich tend to be older, it suggests they could spend more.
Q: Is tax-raising an improvement on austerity?
Austerity isn’t over. For government departments that aren’t ring-fenced, there are more spending cuts likely to be coming in. Also, tax-raising is only an improvement if you tax the right people. By disproportionately hitting the poor, this levy is just austerity by another name.
As for this notion that there isn’t a magic money tree, we have seen that there was for COVID. With interest rates at unprecedented lows, the government has a lot more capacity to spend and help people than would otherwise be the case. Margaret Thatcher used to compare the public finances to a household as a way of arguing for “balancing the books”, but the government is not a household: it’s collective and immortal.
Essentially I am a Keynesian: if you invest in the economy, you are growing your productive capacity and that will enable you to pay down debt in time. I wouldn’t want to set a limit on how far you might take this, but if public debt is close to 100% of GDP at present, I would be comfortable under current borrowing conditions if it was 150% of GDP. Japan has a public debt of well over 200% of GDP, for example.
Alex de Ruyter does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.