Consent and public spending

Andrew Harrop

Exploring new models of taxation

After the financial crisis, when tax revenues collapsed and public deficits soared, social democrats sought new ways of pursuing social justice which were less reliant on public spending. They rightly focused on the reform of markets, on tax justice and on expanding collectivist, non-market spaces outside the confines of the state. Meanwhile, the left’s debates on public spending centred only on questions of preservation: where should the previous path of expenditure growth be defended, in the face of a presumption of cuts, or of spending increases far below the trend rate of economic growth?

This turn away from public spending was understandable, but social democrats now have to stop being defensive about expenditure. Other strategies for social justice are still important, but to achieve stronger, fairer societies we need public expenditure to be sustained as a share of national economic output, and to rise in some instances. The case was well made by the 2013 Fabian Society commission on future spending choices. It accepted the need for efficiency savings and deficit reduction, but it also looked ahead over a 15 or 20 year timeframe to examine options for spending as a share of national income. It made two points about the evolution of public spending in the UK, both of which apply equally to other rich nations.

First, spending on health and care needs to rise as a share of national income, in response to cost pressures, demographics and public preferences. If this expansion does not take place through extra public expenditure, it will happen via private spending in a manner which will be more arbitrary, expensive and socially inequitable.

Second, social security policies are leading to a steady reduction in the share of national income redistributed to children and adults of working age. This will result in the living standards of households in the bottom half of the income distribution rising less quickly than those of people who are better off.

Subsequent Fabian research has illustrated this second point in more detail. Current plans for UK social security will see spending on non-pensioners fall sharply as a share of GDP, which will in turn lead to long term stagnation in living standards, greater income inequality and rising child poverty. Higher minimum wages, full employment and tax reforms are insufficient to counter these effects. They can only be avoided by reforming social security policies, so that the default is for spending to rise at about the same pace as national prosperity.

Public consent for extra spending

But if social justice necessitates spending more on both health and social security than current policy assumes, the strategic challenge for the left is to win public acceptance for these increases. Stagnant living standards, political alienation and a more individualistic culture present a hostile attitudinal backdrop. As a result, people will be less and less likely to accept the case for tax rises, unless there are much stronger institutional links between revenue and expenditure. The answer is for social democrats to call for the greater use and higher visibility of earmarked taxes and contribution based entitlements.

Earmarked (or hypothecated) taxes can secure public acceptance for extra revenue raising, in cases where the associated government expenditure is highly valued. They create a link between (unpopular) payments and (popular) public provision, at a population-wide level. Contributory entitlements perform the same function, working at the level of each individual. This makes sense where there is a need to establish the case for the expenditure, rather than the associated revenue alone: earned entitlements linked to a contribution generate public support for spending on things which might be treated with suspicion otherwise.

In the UK context, spending on health and care is popular, but spending on social security for children and working age adults is not. So the former should be the top candidate for earmarked taxation and the latter should be the priority for extra contributory entitlements.

Health taxes

16 years ago a different Fabian Society commission examined the case for a hypothecated tax for the NHS. The commission’s majority supported the proposal, but there was a dissenting minority. At that time, and perhaps reflecting this split, the group’s work resulted in a halfway house: an earmarked rise in national insurance for the health service, but not the creation of fully hypothecated NHS revenue. Now there are good reasons to revive the idea of earmarked, ringfenced health taxes – although these days most observers would wish any fund to cover the interdependent fields of healthcare, adult social care and public health.

First, earmarked ‘health taxes’ would result in spending on health rising automatically in line with tax revenues, which should in turn be reasonably reflective of the nation’s increasing prosperity. Linking health spending to a (growing) tax base would therefore combine revenue buoyancy with affordability for taxpayers. There is always some uncertainty in predicting tax revenues, so the income would have to smoothed out a bit from year to year, but a significant topup from other funds would only be needed in the most exceptional cases, such as the collapse in tax revenues after the 2007/2008 crisis.

Second, health taxes would provide a mechanism for raising extra cash beyond what would arise from ordinary growth in revenues. Health spending could be increased by raising the rates of the associated taxes (thus preventing the crowding out of other desirable public expenditure). Following a process of public education and consent building, a future chancellor might raise the tax rates to resolve existing underspending, for example with respect of adult social care or mental health, or to make gradual, staged increases to reflect rising need over time.

The exact design of new ‘health taxes’ would be subject to debate, as would the arrangements with respect to Scotland, Wales and Northern Ireland. To secure a broad, buoyant and progressive tax base, the best option would probably be to use a portion of income tax, either on its own or in combination with VAT. Existing ‘sin’ taxes on tobacco and alcohol could also be used, although they would reflect a small share of the total fund. And the existing NHS element to national insurance contributions (NICs) could be scrapped and rolled into the new system.

New health taxes should be designed to be visible. They would appear on payslips and till receipts alongside income tax and VAT. As an illustration, a set of health taxes that would roughly match existing health spending could comprise: all tobacco and alcohol duties; the first 10 per cent of VAT; the first 10 pence in the pound of basic rate income tax; and the first 20 pence of higher rate income tax. Such standalone taxation for health would be very controversial within the Treasury, but this plan is unremarkable when compared to other European countries, where healthcare is often funded by social insurance or local taxes. And it could be compatible with either a nationally controlled or a more devolved health and care system.

Contributory entitlements during working life

Creating standalone health taxes would also serve to increase the simplicity and transparency of national insurance, which mainly funds social security but today makes a small contribution to the NHS too. In future NICs should be explicitly restricted to the financing of contributory entitlements, and this should be clearly communicated to the public to help relegitimise social security. One option, discussed in the recent Fabian report, For Us All, would be to convert the existing National Insurance Fund into a ringfenced membership based scheme which would issue regular statements to contributors and recipients.

Increasing the connection between NICs and entitlements should be part of a broader strategy to rehabilitate social security for children and working age adults, by creating a system that provides support to more people, on a more inclusive basis, and therefore secures more public backing. As things stand, the vast majority of the National Insurance Fund is spent on the state pension. Social democrats should develop plans to expand the national insurance entitlements available in working life.

In For Us All, three directions for new entitlements are proposed. First, existing support for temporary periods without work – for maternity, unemployment and illness – could be made much more generous. The report argues that earned, non-means-tested national insurance benefits should be set to match the new state pension, which is worth around twice as much as contributory jobseeker’s allowance today.

The second idea is that people should have much more flexibility in accessing the lifetime national insurance entitlements they build up. Once people have a good contribution record, they should be able to take a year of their state pension early in order to take time out of work to care or study. The quid pro quo would be drawing the rest of their pension one year later.

The third and most novel proposal is to turn the contributory system into a regime for investing in people, as well as insuring them. For Us All suggests that funding for post-19 education could work like the state pension in reverse. People would draw down funding to pay for university or technical education. The money would begin as a debt, but would be gradually written off as people make national insurance contributions over their working lives, so that anyone living in the UK for most of their adult life would end up receiving a free education. This plan would start to transform the historic post-1945 model of social ‘security’ into a system that would also offer social ‘investment’ on an open, demand led but contribution dependent basis.

Social insurance versus private contribution

One of the main reasons why this third reform is attractive is because of the glaring inadequacies of the the post-2012 debt based system of student funding in England. When university repayments are taken into account, middle income graduates can now expect a marginal tax rate of 41 pence in the pound, stretching over 30 years, and even then most will still not repay all their debt. Tuition loans are testing the concept of individualised, account based contribution to destruction. The new system is proving that public provision that is as costly as higher education simply cannot be recouped on a fair basis through personal repayments. national insurance offers a collectivist, affordable alternative.

This is just one example of where social insurance trumps personal account models that do not allow for redistribution or risk pooling. It is also the case when it comes to insurance for loss of work, which rightwing commentators often say should be privatised in one way or another. When you look into the numbers, however, no scheme without redistributive risk pooling can be designed that provides low and middle earners with affordable income protection.

This is not to say there should be no place for private sector welfare institutions. There is a case for employers to provide more protection and support for their employees, on either a compulsory or incentivised basis; decent maternity pay is a case in point. And the new system for second pensions based on personal accounts is bedding in well. It is opt-out for employees but compulsory for employers, and based on a tripartite deal where individual, employer and government all contribute. For Us All suggests that a similar scheme could be introduced to help people save their first thousand pounds. But private pensions only work to provide a decent income for everyone in retirement because they sit alongside a strong, contribution based, state pension. It is exactly the same in the USA, which is certainly not the home of the ‘small state’ when it comes to supporting older people. Private schemes can only be a supplement to state support and never a substitute.

National insurance, security and investment

In the UK, national insurance will always be firstly a vehicle for funding the state pension. But by providing investment early in adulthood, for those who wish to take up the opportunity, it presents an affordable and publicly acceptable middle way between tax funded and debt funded education. And by providing people with meaningful, earned entitlements during working life it can help relegitimise public spending on social security. This is not to say that contributory entitlements should provide that bulk of support to non-pensioners. Any affordable and equitable social security system needs to have means tested and universal components too. But a generous and visible tier of earned entitlement can create more confidence in the system overall, creating the conditions in which future governments can make all the tiers of social security for children and working age households more generous and ensure that spending can rise in line with British living standards.

This chapter was originally published in Claudia Chwalisz, Renaud Thillaye and Emma Kinloch (eds), New Routes To Social Justice (2017), published by Policy Network. 

1 comment:

  1. Derek Emery

    Why not use critical thinking?
    Why start from taxation?
    The real problem is UK low economic growth.
    UK productivity is around 16% less than the average for G7 countries. This means lower economic growth year on year (compound interest effects). This means less money to spend on services against a background of rising unfunded liabilities from ageing demographics.
    You cannot tax your way out of this problem.
    The UK has a very poor record on infrastructure spend to boost the economy (except in and for London).
    HS2 is a vanity project with no measurable positive effect on growth until the late 2030s (i.e. after 15+ years of unfunded liabilities outstripping economic growth)
    By this time all new road vehicles will be electric and driverless – the most disruptive technology ever in the history of mankind. It will displace around 500,000 driving jobs in the UK just for starters. See ‘Google’s Driverless Cars Will Just Kill High Speed Rail Like HS2′
    Underfunding roads creates downsides for the economy. see ‘Traffic delays will cost the UK economy more than £300 billion by 2030′ That.s greater than the cost of HS2.

    Neither the National Grid, nor local distribution networks will be capable of coping with the extra load as the UK moves to electric vehicles and Generating capacity will need to be increased (doubled maybe?).
    The OECD reckons Britain decision to leave the EU would cause a severe negative shock to the economy and weaken GDP growth for many years, equivalent to a cost per household of GBP 3200 per year by 2030.
    2030 is only 13 years away.
    Where are the policies to address future growth?

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