Who will pay for your care when you’re old?
Government would like individuals to finance as much of their own social care, in home and residential, as possible. But with care homes costing anything from £30,000 to £75,000 a year, few can cover that for long. It is widely agreed that having to sell family homes to meet care costs is unfair. The flawed 2011 Dilnot Commission’s first recommendation was “capping the lifetime contribution to adult social care costs that any individual needs to make at between £25,000 and £50,000. We think that £35,000 is an appropriate and fair figure.” But this excluded the “hotel” costs of residential care. The Dilnot recommendation 5 stated “People should contribute a standard amount to cover their general living costs, such as food and accommodation, in residential care. We believe a figure in the range of £7,000 to £10,000 a year is appropriate.” This was wholly unrealistic, being only about 10% of market rates. The government would pick up the tab thereafter. Their report makes no mention of international comparisons in general nor France in particular. Their report was first accepted and then rejected. No Green Paper or political consensus has since emerged.
Schools, the NHS, prisons and other public services claim to be underfunded but none lay as strong a claim as adult care. Between 2010 and 2013 adult care spending fell by 10% although by 2019 that shortfall had dropped by half (not allowing for inflation or increased demand, of course). Due to ring-fencing, the 34% of local authorities’ spending on public services in 2009/10 had risen to 41% in 2017/18, 40% of that on working-age adults, and 60% on the elderly.
Little, if any, thought has been given to how elderly care could be delivered more cost effectively. Home carers spend as much time (usually unpaid) driving between clients as they do with them. Even though dual worker households have increased, “the number of unpaid carers in England appears to have increased from 4.9 million in 2001 to 5.4 million in 2011” and probably more since. Yet informal carers’ allowances amounted (in 2018) to a maximum of £1.77 per hour. England spends more per capita on adult care than France and yet it has proportionately fewer aged over 80. The private and voluntary sector picks up 33% of the tab, more than France, Germany, Japan, Spain or Italy. [1]
“Germany’s long-term care system is delivered primarily through public health insurance. While mandatory for all working people, individuals can opt out of the government programme and take private health insurance instead. Germany’s long-term health insurance is designed to cover only basic needs and not the full cost of care. Users are expected to pay some of the costs – particularly for institutional accommodation – through private funds, private insurance schemes or, if required, means-tested welfare payments.” [2]
The French Allocation Personnalisée d’Autonomie (APA) mandatory state insurance “covers between 0 and 90% of the cost of a person’s home care package with residential care paid for from their own contributions (often using private insurance). The requirement for high levels of co-payment from those with the highest incomes has resulted in [France having] the largest private insurance market of [France, Germany, Japan, Italy, and Spain].” [3] According to the OECD, “in 2010, the equivalent of 15 per cent of the population aged over 40 years had private LTC [Long Term Care] coverage, compared to about 5 per cent in the United States…Indemnity policies are the prominent model of private coverage arrangements in France, under which an individual typically pays annual premiums in exchange for a determined future stream of income (rente) once the individuals is deemed to have become dependent.” Yet the UK has none at all beyond private health insurance covering post-hospital care as part of the treatment.
Clearly the whole UK population cannot afford private care insurance but the private option should be considered, just as in health insurance, for those who want security, prompt availability and premium care. One way or another, general provision has to come from taxes however they are labelled.
There have been talks about creating this market but the main concern is that the general population, being unaware of their financial risk, will not buy policies, i.e. there is no demand. But people often do not realise their demand for a product until it is actually put before them and they see it working. Research almost always concludes that there is “no demand” for any new category. There was no demand for television before there was television. We found no demand for cream liqueurs when my company researched it in the 1970s. We launched Baileys anyway and it is now the largest liqueur brand in the world.
That said, the Government should incentivise private insurance because individuals, or their families, should be responsible for themselves, and because it saves the state money when they are. What does the government need to do to help a UK version of the French model thrive? Corporate care home operators would obviously like to have more, if they can do so at a profit, and local authorities would like the corresponding reduction.
A few suggestions:
Insurers need to cap their risk. Those able and willing to do so, should be able to build insurance “pots” covering, say, 6 years of residential or home care or the cash equivalent (about £300,000). Thereafter the local authority would assess, with the individual’s consent, the appropriate care package and extent, if any, of co-payments. One would expect those to be graded according to affordability. In other countries, individuals are expected to cover their accommodation whilst government covers nursing and other care costs. In France “for home care, recipients in the highest income bracket are required to pay 90% co-payment, while those in the lowest bracket are not required to share costs.” [4]
One option would be to have individuals start paying the insurance premia when they reach state pension age, i.e. when they stop paying national insurance. Joining earlier or later should be possible but, obviously, at a lower or higher annual cost. Assuming residential care is not required until the pensioner is in his or her late 80s, the “pot” would build up over 20 years or so. With less than one third [5] of those aged 65 or more needing residential home care at some stage, premia should be widely affordable. According to the 2011 England and Wales census, the number of residents in care homes remained steady at about 290K over the previous ten years despite an 11% increase in that age-group’s population. This was probably due to finance cuts hiding pent-up demand.
Given the low level of need for residential care, home-care only packages should be available as an alternative up to, say, £100,000 (Dilnot + inflation).
The pots should be held by not-for-profit charity subsidiaries of the insurers to allay objections to privatisation. The insurers should accept this “doing something for nothing” as it would not cost them anything but would increase the numbers seeking entry to their care homes.
The premia by individuals would therefore be tax deductible charitable donations. HMRC would need to bend their rule against personally benefiting from charitable donations. This already applies to donations to hospice charities.
Finally, these policies (and health policies too come to that) should not pay Insurance Premium Tax which, in 2015, was doubled from 6% to 12%. It is daft to penalise people for acting responsibly and saving the state money. The tax on insurance is three times that on gambling.
In summary, I propose the same kind of two-tier, private and state, funding for care as exists already in France and for health and education in the UK. Private insurance reduces the cost of state provision and provides choice for those who can afford it. These proposals should not be confused with just having mandatory care “insurance” operated by the state. As HM Treasury would not agree to hypothecation, universal mandatory contributions would simply become general taxation as National Insurance is.
[1] Incisive Health, “An international comparison of long-term care funding and outcomes: insights for the social care green paper”, 2018, p.47
[2] Ibid, p.7.
[3] Ibid, p.39.
[4] Ibid, p.7.
[5] 291K (3%) of the 65+ population was in residential care at the last census. With life expectancy 85+ and average long term stay of 2 years, then those who make it to 65 have a 30% chance of needing residential care at some point.
Clearly we need to slash government back to 19th century levels
The logical action to take as a result of this finding is not what The Observer would have us conclude:
But what was the effect of Franklin D Roosevelt’s New Deal, which saw US federal spending rise from 4% of GDP in 1933, to more than 9% by the end of the decade? Most answers to that question focus on its impact on unemployment and the economy. But an imaginative study has examined its impact on Second World War patriotism.
It turns out that what your country was willing to do for you had a significant link to what you were willing to do for your country. People in the areas of the US that benefited most from the New Deal were much more likely to engage in “patriotic” acts, such as buying war bonds. They also put their lives, not just their cash, on the line, being more likely to volunteer to fight and to do the kind of brave/dangerous things in battle that get you a medal.
The paper is here:
The rise of mass armies coincided with the coming of the social welfare state. Since the late 19th century, governments have added old age pensions, health care, and education to their primary tasks. Some of this expansion took place during wartime: governments have often made lavish promises of creating "homes fit for heroes", by expanding the welfare state after victory. A recent theoretical literature argues that the need for motivated soldiers and more manpower led to the big expansion of the welfare state, together with massive attempts by governments to spread nationalist ideology…
OK, the squaddie is willing to storm the machine gun nest because he knows that Granny will still get her pension.
Given that we all do think that mass armies going to war is a bad idea the conclusion is obvious. We must slash the cost of national government back down to that 3% or so in order to remove the willingness of people to undertake the task. Perhaps a little hard on Granny’s pension but better that than her flesh and blood left on some foreign field.
Government so minarchist that it’s not possible to have a war seems a pleasing method of not having war no more.
Combining National Insurance and Income Tax is an excellent idea
Which is why we’ve recommended it more than once around here before. Of course, there will be problems with such a combination. The payment of national insurance - at those different rates dependent upon employment status - gives rise to different access to welfare benefits for example. We think all of those can be managed, or at least are worth it given one important effect:
The idea of combining national insurance, which dates back more than a century, with income tax has circulated for decades, prompting a succession of chancellors to toy with the prospect of a vast shake-up. Nigel Lawson considered a combination in the 1980s, and George Osborne launched a review in 2015. Four years ago the Office of Tax Simplification recommended closer alignment. The Treasury raises about £193 billion from income tax and £137 billion via national insurance contributions each year.
The grander point being if we combine employers’ and employees’ NI into income tax. This would not change the actual tax rate as all of those are incident upon wages - employers don’t carry any of that burden. It would though make clear what that burden on wages is - 40% and more from just over the personal allowance up to the mid 50s percent for top earners.
That is, Britain is not a low tax society. Further, it might well be one which should have a more progressive taxation system. We can’t - as we’re already at the Laffer Curve peak - increase top end taxation upon income as Diamond and Saez have shown. In a system with allowances, something that cannot be changed given that the ability to emigrate is just such an allowance, 54% or so is about tops. So, greater progressivity can only be achieved by lowering the tax burden on the lower paid.
We’re just fine with progressivity, as Smith himself was - that greater than in proportion part. That given our current tax system the only way to provide it is less taxation is to us just a bonus. And making this clear would be a significant benefit of that merger of national insurance and the income tax system.
So, yes, let’s do it.
We thought we were all in favour of devolving power these days?
Of course, we’ve always been in favour of devolving power. That’s what markets are, we as individuals deciding how we’re going to live our lives within the constraints reality imposes upon us. But putting that aside there’s a general agreement that power needs to be devolved downwards in Britain. From Whitehall to local areas, from national to regional and county/city, from the centre to the periphery.
At which point we get this complaint:
Since winning a majority of 80 in December’s snap election, Johnson has gone a little camera shy. When an Iranian general was assassinated, the prime minister sent his foreign secretary, Dominic Raab, to deal with the fallout while he finished his Caribbean break. When flooding hit areas across the country this month, rather than get out there with a mop as he had done during the general election campaign, Johnson chose to stay at one of his grace-and-favour residences and left the environment secretary, George Eustice, to take the lead instead.
The minister for dealing with Johnny Foreigner matters deals with a Johnny Foreigner matter, the minister for Hullo clouds, Hullo sky (chiz) matters deals with a Hullo clouds, Hullo sky matter. This seems appropriate to us, as with whoever deals with taxes doing so and so on. The idea that the one atop the pyramid must deal with - or at least emote over - everything strikes us as going against the very grain of the original insistence.
Of course this is politics so asking for either logic or consistency is a fool’s errand but then that’s why politics is such a bad way of dealing with things. And thus our original insistence that absolutely everything that can be be devolved down to the individual and thus escape politics altogether. The country where the Prime Minister has little to comment upon because the PM is responsible for little strikes us as a place which is at least heading toward being optimally free and liberal.
Yes, of course, this is purely electioneering, but still
Holding politicians to whatever they declaim at election time is an isometric exercise - a great effort and you get nowhere. After all, politicians don’t hold themselves to what they promise at election time and seem mystified that anyone else would take such declarations seriously.
Even given that this from Lisa Nandy appears somewhat confused:
This would mean that most people have some money in the bank in case something goes wrong, instead of corporations sitting on huge piles of cash.
What corporate cash piles? The more normal criticism is that companies take on debt in order to pay out dividends. That is, the corporate sector has net debt not net cash.
This means taxing wealth at the same rates as income and making sure gains from land, shares and property are properly and fairly taxed.
Wealth is to be taxed at 40 and 45%. Per year? That’s certainly a cat please meet pigeons sort of proposal.
And that so much of the wealth held in this country today is not earned, but gifted, whether through inheritance, house price rises or playing the market.
Playing the market is gifted, is it? Given that no one consistently outperforms that market this is a difficult contention to prove.
At which point there are really only two options. One is that Ms. Nandy just needs a better ghostwriter. The other that she actually believes these things. Neither are great advertisements for her competence.
Factory Tax number one issue holding back UK manufacturing: survey
The Factory Tax is the number one issue holding back industry in the UK according to a new survey of the country’s manufacturers.
The Factory Tax is the inability to fully expense investments in machinery and buildings. It holds back growth in parts of the country that are relatively more dependent on manufacturing, such as the North and Midlands.
Under the UK’s current tax arrangements, businesses can immediately deduct expenditures on the likes of salaries and stationary. But most investment in fixed capital can only be written off over time, which fails to account for inflation and a real return on capital. This means, in real terms, firms pay a tax — a Factory Tax — on investment in buildings and machinery.
The Adam Smith Institute's latest paper, Abolishing the Factory Tax: How to Boost Investment and Level Up Britain, argues that this is contributing to Britain’s woeful productivity. Over the last decade, productivity has grown by just 0.3% and the U.K. has had the lowest level of private investment in fixed capital as a share of GDP in the G7 for over two decades. This means lower incomes and lower quality of life for Brits.
The Factory Tax is the key issue raised by British manufactures. As it stands, they can only immediately write-off a small amount of investment under the ‘Annual Investment Allowance’. A survey commissioned by industry body Make UK found that 71% of companies want an increase in investment allowances. It was the number one issue cited, followed by energy costs and R&D tax credits. But as it stands the AIA, which is £1 million this year, will automatically decrease to £200,000 at the end of the year unless corrective action is taken.
Make UK has specifically referenced the Adam Smith Institute’s Factory Tax paper in their release about the survey.
“Low levels of private sector investment and poor productivity have been the achilles heel of the UK economy for decades,” Stephen Phipson, chief executive of Make UK has said. “One reason for this is the poor level of capital allowances compared to other countries, coupled with the inclusion of capital investment in the calculation of business rates.”
The ASI has called on the government to Abolish the Factory Tax by making the Annual Investment Allowance unlimited. This could have a huge economic impact: increasing investment by 8.1%, boosting labour productivity £2,214 per worker and moving the UK from 15th to 6th on the Tax Foundation’s International Tax Competitiveness Index. It would also help ‘level up’ the UK economy by removing the bias against industry that tends to be located in the North and Midlands — areas that the Conservatives have just won in large numbers for the first time in generations and will need to see growth in if they want to win the next General Election.
Abolishing the Factory Tax is a no-brainer for a Government that wants level up Britain and boost productivity and living standards.
Rates and land taxes - seriously folks, this is getting pathetic now
A land value tax would be better than the business rates system, yes. Simply because we would be taxing what we want to be taxing, rather than a proxy for it. However, the two are pretty good proxies for each other. There are, as we’ve been explaining, problems with the factory tax but this isn’t anything more than entirely marginal when considering retail property.
One thing to note about either system is that the tax is, in the end, incident upon the landlords, not the retail tenants. That final burden just does not depend upon who writes the cheque. Thus these complaints about changing from business rates to land value tax don’t work:
Retailers have blamed the tax for the growing number of high street closures as they struggle to see off online competition. The present system is based on shop rental values and is calculated every five years. The levy is paid by tenants, rather than landowners.
Who pays doesn’t matter, who suffers does - landlords.
There are also concerns that a land value tax would be passed immediately from landlords to retail tenants through higher rents. Ed Cooke, chief executive of Revo, which represents hundreds of retailers, high street landlords and consultants, said that the proposal “misses the point entirely that rates and rent are related and therefore the incidence of the tax is shared between owner and occupier”.
No, it isn’t. The rates bill, an LVT bill, will fall on the shoulders of the landlord. That claim that rents will rise is proof of that. Currently the tenant “pays” rates and then rent to the landlord. So, we go with an LVT and it’s the landlord paying the tax. At which point rents rise to be the same as what the rent and the rates bill were before. That is the claim, isn’t it?
That is, to the tenant the rent and rates bill is exactly the same as the rent bill in an LVT system. Thus it must be the landlord paying the tax both times, a change in the tax bill doesn’t change occupation costs, only the amount the landlord receives.
Rates, as with LVT, are therefore incident upon the landlord.
Or, as we should put it, business rates aren’t paid by tenants therefore alleviating business rates won’t help retail. The savings will just flow to landlords. And why would we want to alter the tax system to aid landlords?
It's not what you spend that matters, rather what you achieve
Leave aside whether the whole enterprise is worth undertaking for a moment and consider this complaint about climate change in isolation:
British companies are lagging far behind their European neighbours in low-carbon investment after contributing only 3% of the continent’s €124bn (£104.2bn) green spending last year.
A report has revealed that German-listed companies invested 11 times more in low-carbon investments such as electric vehicles, renewable energy and smart energy grids than UK firms.
London-listed companies spent €4bn on green research and technologies compared with €44.4bn from German groups, including the carmaker Volkswagen, which invested more than a third of Europe’s total low-carbon spending in 2019.
There’s the obvious point that a maker of cars shifting to making battery powered cars is going to invest quite a lot in the process. And also that the major manufacturers of cars in the UK (say, Nissan and Jaguar Land Rover) aren’t actually listed in London which is going to rather skew those figures.
Instead concentrate upon the complaint there. Those people over there are spending more than these here, isn’t that terrible? The answer being no, not at all. What is wanted is a reduction in emissions, not lots spent on attempting to reduce emissions. We’re interested in the effectiveness, the end result, not the effort put in.
And the thing is, the UK has reduced and is reducing emissions rather more than Germany. That it’s doing so at lower cost shows that it is reducing emissions rather better than Germany.
Thus neatly proving one of the points made in the Stern Review. Planning is less efficient than market processes suitably prompted. Therefore we should use market processes suitably adjusted to deal with this problem, as with near all others, rather than planning. Because less efficient means more expensive and humans tend to do less of more expensive things, more of cheaper. Using the more efficient market processes - suitably adjusted - means that more climate change mitigation will take place. Use the system that reduces emissions more cheaply and more emissions reduction will take place.
That the UK reduces emissions more at lower cost than Germany means that Germany should be adopting our methods, not we Germany’s spending.
But then logic is in short supply in this discussion, isn’t it?
How glorious is that lust for gelt and pilf
As and when the attributes of a population change it’s easy enough to see that the things desired by that population might change. Say, longer lifespans moving the seaside holiday market from something like Club 18-30 to Saga. Or, possibly, immigration over the decades changing the average melanin enhancement of said population.
The question then being, well, how is that change in desires to be assuaged?
The UK’s largest retailer Tesco is introducing a range of plasters to match different skin colours and better reflect racial and ethnic diversity.
In a supermarket first, its new own-brand fabric plasters, available in light, medium and dark shades, go on sale in all 741 Tesco stores nationwide and online from Monday.
Tesco developed the plasters after a member of staff spotted a now-viral tweet last year, when a black American man described his emotional response when he first used a plaster on his cut finger that matched his skin tone.
Tesco has done this because they expect to make money from it. If they don’t, ah well, no great harm done, plasters are going to be dyed one colour or another after all. The experiment will have been carried out. If it does make money then all other retailers will follow because capitalists are not only greedy but observant.
The same is - has been as well - true of hair care products, make up colours and so on. People have noted that they can make money out of catering to these previously non-extant desires among the British population. Thereby those desires get assuaged. Pretty neat system, eh? Something only comes into existence when people want it and does so when they do.
We might note that the NHS, that glorious and wholly planned system, is not providing such plasters - and, we’d assume, won’t be for some time.
Vespasian pointed out that pecunia non olet and it’s that same idea applying here. Money has no colour which is why capitalist and market systems cater so well - better than any other system - to the variability of the population and the variances in their desires.
Sure, it’s possible to complain that it should have happened already, these differently hued plasters, but do note that no planned or any other system did it before markets, fueled by the desire for other peoples’ cash, did so.
Action on NHS consultants’ and GPs’ Pension Tax Rules
Complying with today's pension tax rules is akin to playing rugby with only the referee being allowed to know where the ball is. HM Treasury provides pensions to attract and retain senior NHS medics and other public servants. They reduced the Annual (AA) and Lifetime (LTA) Allowances for personal pension savings from £255,000 and £1.8M in 2010 (thereafter to rise with inflation) to £40,000 AA (with no inflationary rises) and £1.055M LTA (inflation linked) today. Worse still, the “Tapered AA” shrinks the £40,000 to £10,000 for “adjusted income” over £150,000. [1] Exceeding the Allowances triggers unexpected tax demands, removes the incentive for senior medics to give their time and skills precisely when they are most needed and promotes early retirement. All disastrous for the NHS. The allowances are for the annual increase in pension values based on defined benefit (CARE [2] and final salary) pensions, not the amounts put into pension pots by NHS employers and employees.
Those increases in pension are obscure but HMRC have a formula. The Pension Administrators will provide a statement for the previous tax year if one does not mind waiting at least three months. The nub is that higher earners have no means of knowing when the ceilings are breached. Government has talked about the issue since April 2019, and even encouraged the NHS to break the law to get around it, but the policy error has yet to be corrected. The “sticking plaster” current fix and all the briefings the NHS has to provide its staff are costing millions of pounds. The January House of Commons Briefing Paper (HoCBP) sets out the problems, and in October last year the Office of Tax Simplification also made suggestions. This note suggests solutions, or at least ameliorations. The present system is too complex so the ideas of introducing more pension flexibility or different tax systems do not merit further consideration (7 February HoCBP).
Abolishing AAs and LTAs altogether would be the simplest solution but HMT would need to find the income elsewhere. The changes were aimed at the private sector with the argument that it was “unfair” to allow the well-off to make so much pension provision free of tax. This is nonsense because deducting pension contributions only defers tax; the pensions themselves are taxable in due course, albeit, perhaps, at lower rates. It would be complicated, but possible, to tax the future pensions at the levels at which the contributions were deducted, i.e. 45% for top earners. I doubt if HMRC could cope with that. Exceeding the Allowances is unfair in that those savings are taxed twice: on original earnings and then on the pensions themselves.
Alternatively, the AA and LTA should be returned to their 2010 levels. Failing that, raising them to £100,000 and £1.5M, say, would ameliorate the immediate problem. But the employee would still need to know when those ceilings are being reached. At present they are completely in the dark. The PAYE change proposed in paragraphs 4 and 6 below would apply irrespective of the levels of AA and LTA.
The Tapered AA should be abolished forthwith.
The levels at which AAs and LTAs are set pose less of a problem than the complexity and lack of understanding by pension savers, leading to large unexpected and incomprehensible tax bills. The main employer PAYE should track the individual’s annual pension gains against AAs and LTAs on monthly payslips and P60. Those for the month that either or both ceilings are breached should warn the employee that pensions tax deductions will cease for the rest of the year. Remaining in the scheme even without the tax benefit would usually be beneficial; it would not be practical to drop out of a scheme when the levels are breached and rejoin at the start of the next tax year. The net monthly payment for the rest of the tax year would be the usual PAYE amount less the tax on the employee pension contribution. The first month of breach should be called the “grace month” and HMRC should not recover the relatively trivial excess.
Legislation would also be required to allow the main taxpayer’s payroll department full transparency, with the employee’s consent, on his or her pension entitlements, e.g. from prior employment. At present this information is limited to the Pensions Administrator, e.g. NHS Pensions.
Paragraph 4 above does not deal with pension savings funded by income other than from the main employer. Tax relief on these only represent 1.3% of the total. Consultants, for example, often have private practice alongside the NHS. The simplest procedure here is not to allow any deduction for tax purposes during the year but for HMRC to refund the tax on any pensions savings where the total gain would be below the AA (if also within the LTA and given proof that the non-main employer pension savings at least cover that amount), as part of the annual tax calculation. Thus some taxpayers would receive welcome refunds rather than unexpected bills and HMRC cash flow would benefit.
Whenever these changes are introduced, a year should be allowed for programming changes to PAYE and payroll systems. This year, called perhaps the “grace year”, should be free of all forms of AA and LTA or, failing that, return to 2010 levels plus inflation since as originally envisaged.
The assistance of Mark Belchamber, Income for the Third Age Ltd, is gratefully acknowledged.
[1] Adjusted income is total gross earnings, plus employer contributions, dividends, property income, and interest on capital. The AA tapers by reducing by £1 for every £2 of Adjusted Income over £150,000 and reaches £10,000 after Adjusted Income exceeds £210,000.
[2] Career Average Revalued Earnings