The UK government’s announcement of a rise in national insurance contributions to pay for additional health and social care spending has been met with some criticism in the devolved nations. The practical implications of the decision to ring-fence the funding are limited, but it could remain a source of tension.
On 7 September 2021, the UK government announced £12 billion of additional spending for the Department of Health and Social Care for each year between 2022/23 and 2024/25. The increase is to be funded by a UK-wide levy of 1.25% on employee earnings and on employer wage costs (in total a 2.5% tax rate rise on earnings).
Much of the debate around social care has concentrated on the challenges facing health and social care provision across the UK, the sums of money involved and the form of taxation used to pay for these services.
But the way in which the policy has been introduced has sparked controversy in the devolved nations, as health and social care powers are their responsibility. The Scottish government has criticised the move as ‘an attack on devolution’. The UK government has countered that while health policy is devolved, ‘the broader challenge is a shared one’ and requires a ‘new approach’. So, who is right?
How does the tax system work in the devolved nations?
Under the devolution settlement, health and social care are devolved areas of spending. The NHS, for example, is effectively run independently in Scotland, Wales and Northern Ireland. It is up to their devolved governments to decide how much money to allocate to them each year from within their total budget pot.
This pot of money is a mix of a block grant from Westminster (via the Barnett formula) and ‘own-source’ taxes. In both Scotland and Wales, these taxes make up an increasing share of each country’s total budget. For example, the Scottish government has responsibility for all tax rates and bands on earned income tax, as well as responsibility for a range of smaller devolved taxes including council tax, business rates, land and buildings transaction tax (equivalent to stamp duty in England) and landfill tax.
But the block grant remains important. Under the Barnett formula, if the UK government chooses to increase spending on public services that are devolved to Edinburgh, Cardiff or Belfast, adjusted spending figures called ‘Barnett consequentials’ are generated. These automatically allocate additional funding (in the case of a spending increase) to devolved budgets.
How will the new health and social care levy affect the devolved nations?
Across the UK from next April, national insurance contributions will rise by 1.25% on employee earnings as well as on employer wage costs. This tax applies across the UK, so taxpayers in Scotland will be liable. For someone on an annual salary of £20,000, the increase will be around £130 per year.
It is predicted that this increase will fund an uplift in spending of around £12 billion per year. As outlined above, because health and social care is devolved, the increase in spending in England automatically generates Barnett consequentials for Scotland, Wales and Northern Ireland. Of the £12 billion increase, around £2.2 billion is due to flow to the devolved nations (with Scotland receiving around half of that increase).
In normal instances, that would be the end of the issue. It would be up to the devolved nations to choose how to spend this additional funding. But in this instance, the UK government is insisting that the money allocated to the devolved nations be spent on health and social care. This breaks convention that block grant funds are for the devolved administrations to spend as they choose. This caveat is the source of the claim that the UK government is breaching the principles of devolution.
This may seem a relatively small point: after all, isn’t all additional funding, particularly on health and social care, to be welcomed?
The challenge is that this decision to break convention comes on the back of recent disputes around the introduction of the UK Shared Prosperity Fund (including the decision to bypass the Scottish government and engage directly with local government), as well as controversies over the passing of the Internal Market Act (which some have argued erodes the effective powers of the devolved nations to set different policy choices). Tensions are high between the devolved nations and Westminster.
There are also important differences in the operation of social care in the devolved nations compared with England. One key difference is that personal care is free in Scotland both at home and in care homes, whereas in England it is means tested.
How much of this is an issue in practice?
In many ways, the practical implications of this decision to ring-fence the funding are limited, despite the political controversy.
First, the devolved nations are actually on track to receive more in spending than their taxpayers are putting in via higher national insurance contributions. In each of the three nations, taxes per head are lower than the UK average. This means the tax rise will be less than the per capita increase they will receive in spending. The UK government has estimated that this net benefit to the devolved nations is around £300 million. Indeed, it is possible to argue that English taxpayers might feel most aggrieved as some of their ‘hypothecated’ tax increase is being used to fund transfers to Scotland, Wales and Northern Ireland.
Second, it was always likely that – given their priorities – the devolved administrations would spend any such additional budget money on health and social care priorities anyway. Scotland, Wales and Northern Ireland face similar demographic challenges to England. Indeed, on the same day that the prime minister announced these plans for a health and social care levy, Scotland’s first minister was announcing that her government will introduce legislation to establish a new National Care Service (following the advice of the Feeley report).
Third, if they really wanted to the devolved nations could take other money away from health and social care and spend it on other priorities. The constraint isn’t binding.
Overall, the practical outcome of this decision by the UK government to direct the devolved nations into spending more on social care is effectively telling them to do something that they would want to do anyway.
It is the principle, however, that has caused the controversy. If the UK government is prepared to direct in this way – breaching convention in doing so – who is to say what will happen next or in what other areas of spending they will use such power?
With the Fiscal Framework for Scotland about to be reviewed, and renewed debates about a possible second independence referendum, intergovernmental relations on issues such as funding health and social care and the levelling-up agenda are likely to remain a source of tension.
Where can I find out more?
- An initial response to the Prime Minister’s announcement on health, social care and National Insurance from the Institute for Fiscal Studies
- Scotland's new financial powers: Operation of the Fiscal Framework 2018/19: Report from Audit Scotland
Who are experts on this question?
- David Bell
- David Phillips
- David Eiser
- Graeme Roy
- Gemma Tetlow