New Health and Social Care Levy needed to help repair the public finances after Covid

12 November 2020

The Government should introduce a new Health and Social Care Levy, alongside a Pandemic Profits Levy and the biggest reform of wealth taxation in a generation, as part of a £40 billion plan to repair the public finances post-Covid and meet the wider challenges facing Britain over the next decade, according to a major new Resolution Foundation report published today (Thursday).

Unhealthy finances – published in partnership with the Standard Life Foundation – examines the optimal timing, pace and strategy for repairing the public finances in the wake of the pandemic, and the scale and range of tax rises needed for a credible fiscal consolidation plan.

It recommends that with interest rates stuck near zero, the task of repairing the public finances must start later, proceed more carefully, but ultimately go further than in past recessions. Crucially, consolidation should only start once the economy has returned to its sustainable level, which looks set to be 2023 at the earliest.

However, with the pandemic likely to have a lasting impact on the economy, credibly putting the UK’s public finances on a sustainable footing is likely to require at least £40 billion of fiscal consolidation in the middle of this decade.

Unhealthy finances notes that any post-pandemic consolidation will need to be driven by tax rises, rather than further spending cuts, given that it follows an unprecedented decade of austerity for public services. While raising taxes by £40 billion will be difficult, it is not without precedent – with the two 1993 Budgets raising taxes by £48 billion.

The report argues the Chancellor should combine tried and tested revenue raisers with the biggest reform of wealth taxation in a generation, and a bold new Health and Social Care Levy. Its proposals would help the country address some of the major post-pandemic challenges, from funding social care to tackling insecure work, rather than simply improving the public finances.

Starting with tried and tested tax measures, the report shows that freezing various tax thresholds could collectively raise £7 billion. Alongside freezing the Inheritance Tax and VAT thresholds, this includes keeping the Personal Allowance at £12,500 and Higher Rate Threshold at £50,000 for the next four years – raising £5 billion and £1 billion respectively. Even after this freeze, the Personal Allowance would remain 50 per cent above its 2010 level in real terms.

The Government should also raise Corporation Tax from 19 to 22 per cent – raising £10 billion while maintaining a Corporation Tax rate below the OECD average.

Turning to wealth taxation, the report sets out around £9 billion of measures, which rationalise various tax allowances and restrict widespread exemptions. Measures include restricting capital gains and inheritance tax reliefs (together raising several billion), and adding a Council Tax Supplement of 1 per cent on properties worth over £2 million (raising over £1 billion).

The Foundation says that a post-Covid consolidation plan should also focus on addressing big national challenges, such as properly funding our social care system whose weaknesses have been brought into tragic focus during this pandemic.

In order to meet this objective, the report proposes a new Health and Social Care Levy. This would consist of a 4 per cent annual flat rate tax on all incomes (including capital gains) over £12,500, offset by a 3 per cent cut in employee National Insurance and the abolition of Class 2 National Insurance contributions for the self-employed.

These offsets would leave employees earning £19,500 and below better off, as well as self-employed workers earning less than £17,000 (the majority of self-employed workers earn less than this).

The levy would raise £17 billion – £6 billion of which should help address social care funding shortfalls. It would also deliver on the Chancellor’s commitment to close tax gaps between employees and the self-employed that have encouraged the insecure self-employment which has left many low earners highly exposed to income falls in recent months.

A successful consolidation will also need to have fairness at its heart, and the public will expect those that have financially suffered least during the crisis to contribute. The report recommends a Pandemic Profits Levy of 10 per cent on supra-normal profits of the small minority of firms that have done better than normal in 2020 (raising a one-off £130 million).

James Smith, Research Director at the Resolution Foundation, said:

“The Government is rightly focused on fighting Covid-19, and will then need to turn to securing the recovery for several years to come. But the daunting task of repairing the public finances lies ahead, with tax rises of £40 billion likely to be required.

“As well as repairing the public finances, the Chancellor’s consolidation plan should help the country address many of the non-Covid challenges Britain faces – from tackling insecure work to properly funding our social care system, whose weaknesses have been tragically exposed during this crisis.

“To do this, the Chancellor should combine tried-and-tested revenue raisers with major reform of wealth taxation and a new Health and Social Care Levy. This would ensure that post-Covid tax rises reflect the very uneven nature of this crisis, but also play a part in building a better country after it.”

Mubin Haq, Chief Executive at the Standard Life Foundation, said:

“When we come out the other side of the pandemic public finances will need to be repaired. However, there is no appetite for a return to austerity which would increase already deep divides. Moreover these inequalities have grown during the pandemic. Tax rises are the obvious and fairest route, ensuring essential services remain in place and helping to build social care provision we can be proud of.

“We know there is significant public support for tax rises once the time is right. Such rises need to be proportional with those with the deepest pockets contributing the most. Government needs to take a long-term view, building a fairer society and ensuring public finances are in a good position once the next economic shock comes along.”

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