Johnson Looks to Head Off Rebellion Over $17 Billion Tax Hike
(Bloomberg) -- U.K. Prime Minister Boris Johnson appeared to see off a Conservative Party rebellion over a 12-billion pound ($17 billion) annual tax hike after announcing that pensioners and shareholders would also take a hit to help fund the National Health Service and reform social care.
The government will hold a House of Commons vote on its new tax package on Wednesday, after several previously skeptical Members of Parliament welcomed the plan.
National insurance, a payroll tax, will rise by 1.25 percentage points from next year -- breaking the Conservative Party’s key manifesto pledge not to increase any of the main rates of tax. All working adults, including those of state pension age, will be included in the rise -- which will change to a separate “health and social care” levy from April 2023.
“This new levy will break our manifesto commitment,” Johnson said at a news conference. “But a global pandemic wasn’t in our manifesto either.”
A tax on dividends will also be raised by 1.25 percentage points to ensure high earners pay their share, Johnson told the House of Commons on Tuesday. The increases are expected to generate 36 billion pounds ($50 billion) over the next three years to help rescue the NHS from soaring backlogs that built up during the Covid-19 pandemic and reform the “broken” social care system.
Johnson had been warned by some of his own backbenchers that hiking NICs could hit younger people and the low-paid hardest. But his broad-brush approach appeared to satisfy most critics.
Mel Stride, the Conservative chair of the cross-party Treasury Committee, said he was pleased this was a “much broader-based levy” that included working pensioners and those receiving dividends. “The broadest shoulders will pay the most,” Stride told the Commons.
Conservative lawmaker Robert Halfon, chair of the Commons education committee, had said he had “huge worries” about raising NICs due to the impact on lower-paid people. But he said on Twitter on Tuesday he would support the tax package because “50% of the levy will be paid by the wealthiest 14%” and those earning less than 9,500 pounds won’t pay more.
Former health secretary, Jeremy Hunt, told the BBC the government had “listened” to concerns about a disproportionate impact on younger people, and he expected the measures to be approved by MPs.
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 “fix the crisis in social care once and for all” -- as well as ensure the NHS can keep functioning under extreme pressure.
But by attempting to meet this pledge, he is tearing up another one: the Conservatives vowed in their manifesto not to raise income tax, national insurance or VAT. He’s gambling that voters will reward him for finding a solution to social care, a problem that eluded his predecessors.
The government broke another pledge on Tuesday, saying it will scrap its “triple lock” commitment to pensioners, albeit for one year only. Pensions will now rise by the greater of inflation or 2.5%, Work and Pensions Secretary Therese Coffey said. Suspended from the formula is an average earnings component after distortions caused by the pandemic caused wages to soar almost 9% over the past year.
The Institute for Fiscal Studies said taxes are on course to reach their highest sustained level ever but broadly welcomed “much-needed” reforms.
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.
The new plan includes a cap on lifetime care costs of 86,000 pounds -- roughly equivalent to three years of care -- so that people don’t necessarily lose their homes. A means-test threshold for savings is being raised from the current level of 23,250 pounds to 100,000 pounds, making more people eligible for state support.
The health-care overhaul is expected 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 now shifts to a review of departmental spending on Oct 27, when the chancellor will confirm whether he intends go ahead with a near 15 billion-pound cut penciled in over the next four years.
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