We cannot tax workers until the pips squeak – reforms will have to be bolder

Nick Timothy

The politics of demography are giving way to a new politics of taxation. With growing numbers of pensioners – dependent on the taxpayer for health treatment, social care and pension payments – and a relative decline in working-age people paying taxes, change is on its way.

Twenty years ago, one in six of us were older than 65. Today, it is one in five of us. Within 20 years, it will be one in four of us, and by then working-age people will comprise less than 60 per cent of the population. And as our society ages, the number of people suffering long-term health conditions will grow. In the past four years, the number of people requesting social care increased by 120,000, and demand will only grow further. By 2040, the number of dementia patients will almost double to 1.6 million people.

More recipients and fewer people to pay presents a problem. Ministers can put up taxes, hitting younger people already struggling to buy family homes and save for pensions. They can cut pensions and public services, hurting and impoverishing many older people.

And they can force people to retire later. Twenty years ago there were around 300 pensioners for every 1,000 working-age people. After George Osborne increased the retirement age, the old-age dependency ratio fell to 288, but in two decades it will be back up to 360.

This and the pandemic, which has caused NHS backlogs and record public debts, was the context in which the Prime Minister announced his huge tax hike last week. The new Health and Social Care Levy will fund extra NHS and social care spending.

Libertarians and low-tax Tories reacted with horror. Some refused to address demographic facts and Covid’s legacy, and simply denounced new spending and the taxation to pay for it as socialism.

Others accept the challenge, but argue it is time to reimagine the role and size of the state. This is, in part, already the story of the past decade or so. Austerity did not only cut the state, it was also about cutting budgets like policing and local government while increasing spending made necessary by our ageing population.

But now the argument is that we need to change the parts of the welfare state and public services with the greatest demand: the payments and services used mostly by older people.

When it comes to pensions, we have already moved some distance in this direction. The retirement age has been delayed. Saving for private pensions is embedded in the national culture, aided in recent years by automatic enrolment. And now the Treasury has the pensions triple lock, and potentially other pensioner benefits, in its sights.

Rishi Sunak has already said, for the year ahead, he will change the pensions triple lock – which guarantees that the state pension will increase by the rate of inflation, the growth in wages, or 2.5 per cent, whichever is highest – so it does not match wages, which are expected to spike as the economy opens up after lockdown. Benefits like the winter fuel allowance – which goes to pensioners rich and poor, at a cost of £2billion per year – will also come under scrutiny.

As the NHS budget increases, some question our model of healthcare too. Those of us who use the NHS know there is bureaucracy and waste to be eliminated, and that Covid is often presented as a reason for the absence of basic services, especially in GP surgeries. Reform is needed urgently. The reform required, however, is not of the kind favoured by the libertarian Right.

It is not immoral, as the Left often claims, to argue for an insurancefunded health model, and neither would such a system mean accepting the iniquities of the American healthcare system. An insurance model would resemble the health systems of most European countries and still guarantee universal provision.

But moving to a system of copayments or insurance would create a hierarchy of care. If the purpose of change is to increase budgets by allowing some patients to top-up their care with private payments, or by paying more expensive premiums, those who could pay more would get better and faster treatment than those who could not. There is no public support for such a position, and neither is there a real need for it. Health reform should focus on removing the bureaucracy of the NHS internal market and restoring local control and accountability, not further marketisation.

Regardless of reform, however, the health service, like social care, needs more funding. The best way to increase tax receipts is through growth, and the best way to help people to prepare for old age is to make them more financially resilient, with savings and a home of their own. But even this is necessary yet insufficient. The politics of demography mean an increase in overall taxation is unavoidable, and the new politics of taxation therefore ask not which taxes to cut but who should pay how much?

In the long term, the Health and Social Care Levy will only increase. Perhaps National Insurance will be folded into the levy and it will become a hypothecated NHS tax. This might make it easier for ministers to make the case for future tax rises, but with voters knowing exactly what they are paying, it might make the NHS more accountable too.

Social care funding remains far more controversial. The Government is raising payroll taxes on younger workers, many of whom struggle to pay mortgages or cannot afford a home of their own, to fund the care of people with significant accumulated wealth and to protect the inheritances of those left behind. It is not just an issue of intergenerational fairness, as is often said, but fairness within generations too: the Government plans to redistribute not only from the young to the old, but from the working poor to the younger rich.

From the Boston Tea Party to the poll tax, taxation has always been political dynamite, capable of blowing up governments, prime ministers and policy programmes. The Government is right to be bold, ignore its critics and find a way of paying the bills. But in the end if it wants to avoid entrenching great disparities in wealth it will need to bolder still. In an age of higher taxes, we cannot tax the workers until the pips squeak. Those with accumulated wealth will have to contribute more too.