Will National Insurance hike result in a meaningful improvement in health outcomes?

Today’s big parliamentary announcements might not have looked or felt like a budget.

There was no red box. There was no big speech from the chancellor. There was no update on the state of the economy or the public finances.

Yet don’t be fooled, for what we heard from the prime minister (and I’ll leave it to those better-versed at reading the political runes what to read into the fact that he big-footed the chancellor on this) represents a budget-proportioned policy.

This stuff is really, really big, with consequences we will all feel in our wallets.

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On the basis of the sums laid out by the government (and one of the frustrations about this not coming alongside a formal budget is that we more or less have to take their word for it), the new levy is one of the single biggest tax measures in recent history.

Indeed, flick back through the budgets of yore and there are not all that many individual measures that have raised much more tax than this one, which will bring in a whopping £12bn a year over the coming three fiscal years.

There was the abolition of pension tax credits in 1997, which raised the annual equivalent of £13bn; there was Gordon Brown’s 2002 National Insurance increase, which – all told – raised about £16bn a year; there was George Osborne’s 2010 VAT increase (£18bn) and Norman Lamont’s 1992 VAT increase (£18bn).

But that’s about it. And note that these are some of the most significant (and least popular) tax increases in modern history; today’s measures are, in scale at least, up among them.

In fact, combine the corporation tax rise from this year’s budget (£15bn a year) with today’s measure, and it is fast becoming clear that 2021 will go down as one of the biggest tax-raising years in modern history.

It will also go down as one of the biggest manifesto-breaking moments, since the government confirmed, separately, that it would not be following the letter of the pensions triple lock, which would have implied far bigger increases in the state pension (around 8%) than for many years.

Now, there are legitimate questions about where the money from the levy will be spent.

From what we heard today, the vast majority of this cash will be spent not on social care, but on the NHS. Only a small amount – around a billion pounds a year, will go into the social care system, which many will reason is nowhere near enough.

Nonetheless, this does represent something of a watershed. For years, this and previous governments pledged to resolve the social care system without actually putting much money into it.

Today’s measures won’t resolve the system’s long-standing issues, but perhaps they might represent a start. Perhaps the best analogy is the last time a government significantly increased National Insurance: Gordon Brown’s 2002 hike. In the following years, more money was poured into public services than in many previous years.

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The question is whether we will see a meaningful improvement in health outcomes this time around, or whether this money is simply damage limitation following COVID and a decade of austerity.

There are further questions. One is why National Insurance was used as the tax here rather than income tax. The government’s argument is that NI is charged on businesses as well as households – though in reality the cost will just be passed on to employees in the form of lower wages.

The cynical explanation is that even though working pensioners will have to pay the 1.25% extra levy on their earnings, NI is nonetheless far less onerous for older, traditionally Tory voters than income tax.

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Regardless, it leaves us in an odd situation: in recent years the basic rate of income tax has come down significantly and the main rate of NI has gone up significantly, to the extent that those rates are getting ever closer – as is the amount of money each tax raises.

It is an odd state of affairs: do we really need two enormous forms of payroll tax? Shouldn’t they be combined?

The final question is why on earth these measures had to be announced today rather than in the budget. The chancellor confirmed today that there will be a budget on 27 October, but we now effectively know what the main budget measure will be.

The only problem is we will have to wait a month and a half to get the full figures and analysis that we normally get on budget day.

Today may have been a positive step in terms of redressing the funding of the health system, but it was a step back for transparency.

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