Social care must be funded – your generation will need it next

So there is a plan, or rather two plans: one for funding social care, the other for public spending more generally. Do they make sense?

Let’s start with social care. We will have to wait and see whether this rise in national insurance contributions is the most politically acceptable way of stopping people having to sell their homes when they need to be looked after in old age. We will also have to wait and see whether this new levy will be enough, or whether some future government will come back and call for another increase. Anyone with a long memory may recall that Gordon Brown added 1p on national insurance to fund the NHS in his budget of April 2002. It was billed as the biggest ever increase in NHS funding, and was not nearly enough, as we now know.

But at least the problem, and this government’s solution to it, is out in the open. That’s a start.

Stand back a moment. All developed countries and many developing ones have the same problem: how do you fund social care for rising numbers of elderly people, when the size of the workforce is at best climbing more slowly than retirees, and at worst is actually shrinking?

Rapidly ageing countries, where fertility rates are low and many young people emigrate, face a more serious problem than those with more favourable demographics. The UK and the US are better placed than most in that their populations are projected to carry on climbing through to the second half of this century. A study published in The Lancet in July last year suggested that the UK population, currently 67 million, would rise to 75 million by 2063. It would still be more than 71 million at the end of this century. By contrast, Italy’s population, now 61 million, would halve to 31 million by 2100.

If it sounds a bit strange to be worrying about what happens in the 2060s, remember that is when the 30-somethings paying this extra NIC levy now will need another generation of workers to pay their pensions, health care and perhaps social care too.

There are many ways in which the burden can be lightened, including encouraging older workers to carry on earning, improving incentives for people to save more for their pensions, and more formally, raising the retirement age more swiftly than currently planned. But ultimately it will be the workers of 2050 that will be paying the health and social care costs for the 30-year-olds of today.

And public spending more generally? Rishi Sunak has announced that the new spending review will finish on 27 October and be published alongside the autumn Budget. Meanwhile, he has set the “envelope” for spending for the next three years, which he said will go up by nearly 4 per cent in real terms. As with all politicians’ statements, what will matter will be the numbers, not the words, so let’s wait and see what comes out next month before making any judgements.

But some context might help. On present plans, in a couple of years’ time, tax will be running at about 35 per cent of GDP, with other government revenues bringing the total up to 37-38 per cent. That is the highest for 40 years. Paul Johnson, director of the Institute for Fiscal Studies, has just calculated that the increases announced will push up that number by 0.5 per cent of GDP. So even if growth surprises, as I think it may, Generation Z will be paying more of their income in tax than the millennials or Generation X, and much more than the baby boomers.

This is huge. We do not know the social or political consequences of this. The tax burden is not as high as that levied on the silent generation, people born between 1928 and 1945 – a classification I squeak into at the bottom end. But it is high.

So, the tough question is whether this is what people want to do with their money – buy collective services from the government, or buy individual services from other suppliers. No one can easily answer that, but at least the question is now out in the open. How much tax do you really, deep down, want to pay?