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.
For more than a year, we have been tracking the flow of sanctioned items out of the UK and towards Russia.
Electronic equipment, radar parts, components used to make aircraft and drones. These are all items that have been banned from going to Russia. For good reason: while Britain is far from a global manufacturing powerhouse, it nonetheless still makes certain prized components used to make machinery.
In some hands, these components could be used for peaceful purposes, but they could also be used to wage war. All of which is why they are among the items sanctioned by G7 nations and banned from entry to Russia.
A glance at the trade figures might lull you into thinking those sanctions have been extraordinarily successful. Look at the flows of these so-called “dual use” goods from the UK to Russia and they drop to zero shortly after the invasion of Ukraine and the imposition of those export bans. But that’s not the whole story – because over precisely the same period, exports of those same items to countries neighbouring Russia have risen sharply.
At this point, the data trail goes cold. As far as the statistics tell us, those components stay in the Caucasus and Central Asia. But there are two powerful pieces of evidence that suggest otherwise. The first is that we have travelled out to the border of Russia and filmed European-sanctioned goods (in this case cars, the hardest of all goods to disguise) passing across the border.
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Zelenskyy: Sanctions needed as countries supplying missile components to Russia
The second is that Ukrainian forces have repeatedly found weaponry and equipment containing European and British components inside them on the battlefield in their country. British technology has been used to kill Ukrainians – in spite of sanctions. That was one of the messages President Volodymyr Zelenskyy relayed in his interview with my colleague Mark Austin.
So, in the wake of that interview, we revisited the databases to see if those flows of goods to Russian neighbours had slowed in recent months.
But, far from slowing, they’ve accelerated. In the past nine months, the flow of dual-use goods to Russian neighbours has risen by an average of 9%, compared with the monthly average between the Russian invasion of Ukraine in 2022 and last June. Those flows are 111% higher than they were before the invasion.
Read more:
Analysis: Reasons for rhetoric from Russia
Western brands remain on Russian shelves
Putin says ‘Ukraine is ours’
Nor are the flows of British goods to Russian neighbours the only trend suggesting these components are being trans-shipped via third countries. Look at exports of sanctioned items to the United Arab Emirates and Turkey and they are up by a similar proportion.
In short: the evasion of sanctions continues much as it has done since the beginning of the war. For all the talk about the toughest sanctions regime in history, the reality on the ground is somewhat different.
Global oil costs have fallen back sharply amid hopes that a ceasefire between Israel and Iran will end the threat of disruption to crucial energy flows for the world economy.
The cost of a barrel of Brent crude, the international benchmark, was as high as $81 late on Sunday night as financial markets opened in Asia.
It was the first reaction to news of the US bombing of Iran’s nuclear facilities over the weekend and built on gains seen widely since Israel first began its strikes 10 days previously.
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But prices came down on Monday evening after it became clear that Iran’s retaliation, through missile attacks on a US base in Qatar, were a mere face-saving exercise due to the Americans being pre-warned by Tehran.
Drops of more than 7% in US trading were followed by a further 3% fall on Tuesday, with Brent currently standing just below $68.
It remains, however, $5 a barrel higher on where it started the month and reflects the continuing, possible, threat to shipping in the key Strait of Hormuz which handles 20% of global oil and 30% of natural gas supplies.
The main concerns in the energy market were over potential disruption to liquefied natural gas (LNG) deliveries as it remains in high demand.
Europe is yet to fully restock following the harsh end to last winter which drained storage levels.
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Trump not happy with Israel
As such prices had already been driven up by steep competition from Asia for Gulf supplies.
UK day-ahead natural gas prices were more than 25% up in the month, as of Monday, and have not fallen as sharply as oil costs.
Financial services specialists have pointed to upwards shifts in the risk premiums facing cargo, especially tankers, due to the conflict.
Analysts had warned last week that a sustained Middle East war with disruption to energy shipping risked a fresh cost of living crisis similar to that seen after Russia’s invasion of Ukraine in 2022.
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Timeline of recent Israel-Iran conflict so far
Only a sustained ceasefire is likely to bring the additional costs seen in wholesale prices down.
Stock markets have also reacted positively to the ceasefire development, with the FTSE 100 in London up by 0.3%.
The gains in London have lagged those seen across much of Europe.
Commenting on the moves Russ Mould, AJ Bell’s investment director, said: “The markets will be watching closely to see if the cessation in hostilities is maintained and for Iran’s next move – amid noises from that side that no such ceasefire has been agreed.
“Defensive stocks, oil producers and precious metals miners were all under pressure in early trading.
“Gold slipped back as its safe-haven attributes were less in demand. This rather clipped the wings of the FTSE 100 given its relatively heavy weightings in these areas and saw the index underperform its European counterparts.
“On the flipside, travel stocks moved higher, both on the implications for fuel costs but also as the potential hit to foreign travel appetite that might have resulted from any further escalation of Middle East tensions seems to have been swerved.”
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