A national insurance hike to boost social care would be built on a misunderstanding
Boris Johnson and Rishi Sunak have, it is reported, agreed to pay for long term reform of social care by raising national insurance by a penny in the pound for both employers and employees.
The move would raise an estimated £10bn annually.
The government is braced for unease among its backbenchers because the Conservatives promised not to raise income tax or national insurance in their election-winning 2019 manifesto.
It perhaps ought not to be too worried about that. The prime minister can always point to the crisis in social care and the need, more broadly, to repair the public finances after the COVID-19 pandemic.
The chancellor, meanwhile, can point out that one of his predecessors, Gordon Brown, did something similar in his April 2002 budget. Having pledged not to raise income taxes in Labour’s election-winning 2001 manifesto, Mr Brown broke the spirit of that promise, slapping more than 4 million workers with a 1% increase in national insurance.
The risk of breaking an election promise is the least of the problems with this proposal.
For a start, the move will perpetuate the myth that national insurance is some kind of special safety net, hypothecated to pay for pensions, unemployment benefits and other elements of the welfare state such as the NHS.
It is remarkable how many people still believe this when, for many years, national insurance has simply been income tax by another name.
Yes, there is something called the National Insurance Fund, but essentially it is a government accounting wheeze.
The money raised in national insurance contributions is insufficient to pay for the benefits and public services that many people think they do. It just disappears, effectively, into the government’s coffers and is spent in the same way that revenues from income tax, VAT and corporation tax are spent.
Because the UK state pension system is a so-called ‘pay as you go’ system, the national insurance paid by today’s workers pays the pensions of today’s pensioners, not their own.
This misunderstanding of national insurance may be precisely why the government is proposing going to go down this route.
The Treasury risks hurting those worst affected financially by the COVID crisis through any rise in NI contributions
Polling suggests people are happier paying national insurance rather than income tax because they genuinely appear to believe they are getting something, a benefit, for doing so.
It is why chancellors down the years have reached for national insurance as their favoured stealth tax. In 1979, national insurance receipts were equal to half of income tax receipts. This year, according to the Treasury, they will be equal to roughly three-quarters of income tax receipts.
There are also other problems with this proposal.
One is that it exacerbates intergenerational unfairness. Unlike income tax, workers of state pension age do not pay national insurance on their earnings, so the hike will fall entirely on younger workers.
Moreover, because national insurance – unlike income tax – is levied only on earnings, rather than other sources of income, such as interest on savings, the cost of this measure will fall disproportionately on younger people rather than older ones.
In other words, having made sacrifices throughout the pandemic to protect older people, younger people will again be paying through their earnings for a benefit that will benefit older people rather than themselves.
This move, then, may deepen the problems the Conservatives have with younger voters.
An explicit aim of reforming social care is to prevent people having to sell their homes to pay for such care. Younger people, unable to buy a home in the first place, may wonder why they are being asked to pay higher national insurance contributions so that others may keep theirs.
Others will criticise the lack of progressivity in this proposal.
All workers (other than those earning more than £100,000 annually and who do not benefit from the personal allowance) can earn up to £12,570 before they have to start paying income tax. By contrast, national insurance kicks in as soon as a worker has earned £9,568.
Accordingly, a wealthy pensioner living off a generous final salary pension or on income from their savings and dividends will not be paying this proposed hike, but a low-paid worker earning just £184 per week will be.
Another major problem with this proposal is the unwanted consequences it will have. Taxes, by their nature, reduce the activity on which they are levied. It is why chancellors tax smoking heavily.
Because this proposed national insurance will fall on employers, as well as employees, it will make the cost of hiring someone more expensive.
Higher payroll taxes mean fewer people in work and, potentially, lower growth. It is why, in response to Mr Brown’s national insurance hike in 2002, the then-Conservative leader, Iain Duncan-Smith, called the move a “tax on jobs”.
Gordon Brown introduced an extra tier of National Insurance in 2002
So, too, did David Cameron and George Osborne when Mr Brown ordered his chancellor, Alistair Darling, to announce a 1% rise in national insurance in March 2010 to pay for the financial crisis. Mr Darling had wanted to increase VAT instead. Mr Brown’s decision ensured Labour had barely any support from business in that year’s general election.
So, to conclude, what the PM is proposing is a tax increase that will disproportionately hit younger and low-paid workers while making it harder for employers to hire people.
Or, as Nick Macpherson, the former permanent secretary at the Treasury, put it on Twitter: “Rentiers and trustafarians won’t have to pay a penny. And the low paid young will subsidise the wealthy old. Higher spending does require higher taxes. But national insurance is a regressive tax on jobs.”
Quite.
English water companies have collectively been given the lowest environmental rating by the Environment Agency (EA) since records began.
Companies were ranked on a scale of one to four stars. Out of a maximum score of 36 stars for all nine companies, the firms together scored 19, the lowest since the EA began monitoring.
The only utility to receive the highest four-star rank was Severn Trent, the agency said in its annual performance assessment.
The number of serious incidents, in which “significant” environmental harm was caused, increased by 60% last year compared to 2023.
Just three companies were responsible for the vast majority of incidents.
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Thames Water – the country’s biggest supplier – Southern Water and Yorkshire Water were responsible for 81% of all incidents.
Only two firms out of nine – Northumbrian Water and Wessex Water – recorded no serious incidents.
More monitoring, inspections and data have meant that knowledge of pollution in English waterways is now greater than ever. In turn, the amount of reporting has been greater.
Other factors driving the figures are underinvestment and poor maintenance of infrastructure, as well as wet and stormy weather.
Firms have again been called on by the Environment Agency to “urgently” improve their performance. There had previously been a trend of improvement since records began in 2011, but the latest figures indicated a “dip”.
In addition to pollution incidents, companies were assessed on self-reporting and compliance with permits.
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Is Thames Water a step closer to nationalisation?
A separate report by water regulator Ofwat published on Thursday showed “mixed” performance with improvements in sewer flooding and pipe leakage, but only two companies reported a reduction in pollution incidents over five years.
Regulation of the sector has been criticised in a once-in-a-generation review of the water industry by career civil servant Sir Jon Cunliffe. In the wake of it, the government says Ofwat is to be retired.
Pressure has mounted on utilities across the UK as the public has sought action on poor water quality and rising bills.
Thames Water, in particular, is struggling under a £20bn debt pile with the government lining up insolvency practitioners.
US sanctions against Russia’s two largest energy companies, the state-owned Rosneft and privately held Lukoil, are perhaps the most significant economic measures imposed by the West since the invasion of Ukraine.
If fully implemented, they have the potential to significantly choke off the flow of fossil fuel revenue that funds Russia’s war machine, but their power lies not in directly denying Russia access to the tankers, ports and refineries that make the oil trade turn, but the US financial system that greases the wheels.
Ever since the invasion, the Russian government has proved masterful at evading sanctions, aided and abetted by allies of economic convenience and an oil industry with decades of experience.
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New US sanctions on Russia: What do we know?
While the West, principally the EU, has largely turned off the taps and stopped buying Russian oil, China, India and Turkey became the largest consumers, with a shadow fleet of tankers ensuring exports continued to flow.
Data from the Centre for Research into Energy and Clean Air (CREA) shows that while fossil fuel revenues have fallen from more than €1bn a day before the war, they have remained above €600m since the start of 2023, only dipping towards €500m in the last month.
None of that oil has been heading for the US, but these sanctions will directly impact the ability of the Russian companies, and anyone doing business with them, to operate within America’s financial orbit.
According to the order from the US Office for Foreign Asset Control, the sanctions block all assets of the two companies, their subsidiaries and a number of named individuals, as well as preventing US citizens or financial institutions from doing business with them.
It also threatens foreign financial institutions that “facilitate transactions… involving Russia’s military-industrial base” with direct or secondary sanctions.
Vladimir Putin chairs a meeting in Moscow.
Pic: Sputnik/Reuters
In practice, the measures should prevent the two companies from accessing not just dollars, but trading markets, insurance and other services with any financial connection to the US.
Taken in harness with similar steps announced by the UK earlier this month, analysts believe they can have a genuinely chilling effect on the market for Russian oil and gas.
Russia’s customers for oil in China, India and Turkey will also be affected, with the largest companies, state-owned and private, expected to be unwilling to take the risk of engaging directly with sanctioned entities.
Indian companies are already reported to be “recalibrating” their imports following the announcement, which came just a week after Donald Trump announced an additional 25% import tariff on Indian goods as punishment for the country’s reliance on Russian oil.
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That does not mean that Russian oil and gas exports will cease. There are other unsanctioned Russian energy companies that can still trade, and ever since the first barrel of oil was tapped, the industry has proved adept at evading sanctions intended to interrupt its flow from one country or another.
Any significant increase in the oil price beyond the 5% seen in the aftermath of the announcement could also put pressure on the White House, which is at least as sensitive to fuel prices at home as it is to foreign wars.
But analysts Kpler expect the sanctions to cause “an immediate, short-term hiatus in Russian crude exports, as it will take time for sellers to reorganise and rebuild their trading systems to circumvent restrictions and ease buyers’ concerns”.
And Russian gas will, for now, continue to flow into Europe, where distaste for Vladimir Putin‘s imperial ambitions has not killed the appetite for his fuel. While the EU has this week imposed sanctions on liquified natural gas (LNG), they will not be fully enforced until 2027.
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