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.
When it comes to the drugs industry, Britain is suffering withdrawal symptoms.
This year, three of the world’s biggest pharmaceutical companies – Merck, AstraZeneca, and Eli Lilly – have pulled or paused UK investments worth almost £2bn, diagnosing that market conditions, specifically the NHS drugs pricing regime, make the UK a “contagion risk”.
The issue will be highlighted this week as Donald Trump begins his state visit, with executives called to give evidence to a parliamentary select committee on Tuesday, along with science minister Lord Vallance, a veteran of the pandemic, when government worked closely with pharmaceutical companies to speed up vaccine development.
How has this come about?
The UK pharmaceutical industry is one of those caught in the crossfire of Trump’s trade war.
In the trade deal agreed by the president and Sir Keir Starmer in May, the prime minister committed to “improve the overall environment for pharmaceutical companies in the United Kingdom”.
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What does the UK-US trade deal involve?
Four months later, those companies – under pressure from Trump to charge US consumers the same as those in Europe, and to invest in US production and research – say the opposite is the case.
They argue the British market is becoming unviable to pharmaceutical investors, at a cost to patients, jobs, and the economy.
Data from the Association of British Pharmaceutical Industries bear this out; R&D investment growth has fallen below the global average and foreign inward investment has declined almost 60% since 2020.
Why the corporate backlash?
To understand why an industry long regarded as a domestic strength has turned against the UK, it is necessary to understand the complexities of medicines pricing.
The NHS is one of the largest “single buyers” of medicines in the world, a position that has long given it clout when it comes to negotiating prices. In the last two decades, however, strict conditions on what drugs are approved for use, and at what price, have brought down the price of the medicines but eroded the value of the UK to the companies that provide them.
Simply put, the industry believes the NHS has been getting too good a deal for too long and argues the terms are no longer sustainable.
In the last decade, the proportion of the NHS budget spent on medicines has fallen to just 9%, below the EU average of 13%. Meanwhile, the amount of revenue returned by companies to the government under complex “clawback” arrangements has jumped to more than 23%, more than three times the EU average.
Under these complex rules, a form of price control that offers a uniform discount to the health service, manufacturers return revenue equal to the value of any overspend by the NHS on its total medicines budget.
The figure has risen rapidly in the UK in the last five years as the NHS has exceeded its medicines budget faster than it has risen. This year it was supposed to be 15%, already double the EU average, but has already risen to 23.5%.
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Trump visit: Vanity trip or power play?
Can this all be resolved?
The industry is demanding a commitment to return to single figures by the end of this parliament. Emergency talks with the health department broke up in the summer, and it is unclear when they will resume.
It also wants the threshold at which new drugs are admitted to the NHS marketplace, currently £20,000-£30,000 and unchanged since 1999, increased. Had it risen in line with inflation, it would be £40,000-£60,000 today.
As a consequence of these downward pressures on price, the industry says the number of new and innovative medicines offered to patients has fallen, with only 37% of available drugs accessed by the NHS, compared to 90% in Germany.
Why so much is in the gift of the chancellor
Paying higher prices to hugely profitable pharmaceutical giants was not part of Labour’s electoral promises for the NHS, and Health Secretary Wes Streeting says he is committed to getting the best deal for patients, but the UK discount may no longer be sustainable.
The issue also highlights a tension between the government’s desire for economic growth and greater efficiency in its key public service.
As one executive put it, as the UK accounts for only 2.5% of the global medicines market, which meant for a long time the lower margins doing business in Britain could be swallowed. With Trump demanding price parity for the US, which accounts for 40%, that is no longer the case.
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Life sciences are at the heart of the government’s new industrial strategy and the UK still has much to commend it, with world-leading research and skills and a track record of spinning biotech innovation into the private sector. But the withdrawal of big pharma investment tells a different story.
Johan Kahlstrom, country president of Novartis UK and Ireland, said: “The UK is fast becoming uninvestable for life sciences companies.
“High clawback taxes that take almost a quarter of revenues, combined with outdated cost-effectiveness thresholds that haven’t changed in over 25 years, are eroding the UK’s position as a global life sciences hub.”
Resolving the pricing row will require compromise and money, with the health secretary’s room for manoeuvre ultimately resting on the Treasury, and the balance between losing jobs and investment from a growth industry, and a drugs budget the NHS has long taken for granted.
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