Johnson to Set Out $14 Billion Tax Hike to Fund Social Care

(Bloomberg) — U.K. Prime Minister Boris Johnson will announce his long-awaited plan to reform social care on Tuesday, risking a major row with his own party over a potential tax rise that could hit young people hardest.

The government is likely to confirm plans to go ahead with a 10 billion-pound ($14 billion) tax increase — despite pledging not to in the Conservative Party’s 2019 election manifesto.

Johnson’s office has so far skirted around reports that national insurance, a payroll tax, could be raised by at least 1% to both reform social care and tackle the National Health Service backlog that built up during the Covid-19 pandemic. The prime minister will make a statement to the House of Commons Tuesday afternoon, followed by a joint press conference with Chancellor of the Exchequer Rishi Sunak and Health Secretary Sajid Javid.

“We have gone through an unprecedented shock to the economy,” Vaccines Minister Nadhim Zahawi said on Sky News on Tuesday, defending the prospect of the tax increase. “We’ve had to deal with it and make some really tough decisions.”

As he begins his third year in office, 57-year-old Johnson is looking to move beyond the Covid-19 pandemic by delivering on a policy promise that he set out in his first speech as prime minister. To fund the pledge on social care, he’ll have to break another vow on taxes cherished by many Conservatives and assert his authority over Sunak, who has been touted as a potential rival for the top job.

In an e-mailed statement on Monday night, Johnson said he would “not duck the tough decisions” needed to fix the NHS and a “broken” social care system. “The NHS is the pride of our United Kingdom, but it has been put under enormous strain by the pandemic,” he said. “We cannot expect it to recover alone.”

Read More: U.K. Health Service to Get Extra $7.5 Billion to Clear Backlogs

The government on Monday announced an extra 5.4 billion pounds ($7.5 billion) for the NHS in England over the next six months to help bring down waiting lists and bolster the Covid-19 response.

The plan being announced on Tuesday aims to come up with longer-term solutions to keep the NHS properly funded in the years to come, and to reform social care to help elderly and disabled people avoid what the prime minister described as “catastrophic” costs. 

Yet some Conservative lawmakers  — including Jacob Rees-Mogg, a member of Johnson’s cabinet — have expressed fears that breaking the party manifesto on taxes could have serious consequences at the ballot box.

Others have argued that the use of national insurance — which is neither paid by pensioners nor levied on investment income — will see the burden fall more on younger people and the low-paid. Jake Berry, an influential backbencher who leads a block of northern Conservatives, said ministers should instead be looking at rises in income tax or business tax. 

Johnson’s Cabinet approved the plan on Tuesday morning ahead of his statement to Parliament.

“There was agreement that this was an issue that needed to be tackled,” Johnson’s official spokesman Max Blain told reporters Tuesday. The mood of the Cabinet meeting was “positive,” he said.

The row will be a serious test of Johnson’s majority when he tries to steer the plans through the House of Commons, where about 40 Tory rebels would be enough to derail them. The main opposition Labour Party said it would not support a move to raise national insurance.

Social care has been a political hot potato in the U.K. for decades but calls for reform have been growing as people live longer with more complex health conditions.

Cap on Costs

The plan is likely to include a cap on lifetime care costs so that people don’t necessarily lose their homes to pay for them. A means-test threshold for savings could also be raised from the current level of 23,250 pounds, making more people eligible for state support.

The government will face questions over how revenue from a tax rise will be split between the NHS frontline and social care in practice, amid fears that funds designated for the latter could end up being absorbed by the former. 

The proposals are likely to be fiscally neutral, with new spending funded by the tax increase — a victory for Sunak, who is trying to repair the huge fiscal damage wrought by the pandemic. The focus will now shift to the review of departmental spending due in the autumn.

“The biggest question will be whether Sunak delivers on the near 15 billion pounds in departmental spending cuts penciled in over the next four years, alongside the conclusion of the various tax consultations finalised over summer,” said Sanjay Raja, U.K. economist at Deutsche Bank.

A 10 billion-pound boost to social care funding would require employees and employers each to pay an extra 1% in national insurance. Business groups say the extra burden could deter firms from hiring. A similar amount could be raised by adding just under 1.5 percentage points to the basic and higher rates of income tax.

(Updates with Johnson’s spokesman from 11th paragraph.)

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