Health and social care levy could lead to lower wages, warns watchdog

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Boris Johnson – Liam McBurney/PA Wire

Boris Johnson's health and social care levy could lead to lower wages as employers are forced to absorb the increase in their tax contributions, the independent fiscal watchdog has suggested.

Earlier this year, Mr Johnson announced that national insurance contributions would increase by 1.25 per cent in order to raise billions of pounds to clear NHS backlogs and fund social care reforms.

However, the Office for Budget Responsibility (OBR) said the impact of the tax hike, which will become a separate levy in 2023, may lead to employers depressing wages.

This is because employers, who also pay national insurance contributions, would face “additional payroll costs”, which could be “passed through into lower wages”.

That would also have an impact on income tax receipts, with the OBR suggesting that, by 2026/27, the impact could see a £2.9 billion reduction in the total tax take from both income tax and national insurance contributions.

The Treasury's own documents also suggest this, saying the impact of the levy could lead to a reduction in yield due to “passthrough to wages by employers”.

Government sources suggested some employers would absorb the costs through their profits rather than depressing wages.

Meanwhile, an OBR analysis also revealed that health spending as a share of GDP has more than doubled since the 1970s. The watchdog's figures show that, by 2024/25, 8.4 per cent of spending will be devoted to health and care. In 1978/79, the figure was 3.9 per cent.

On Wednesday, Rishi Sunak confirmed that the NHS will receive an extra £5.9 billion in funding, increasing its budget by £44 billion to more than £177 billion by the end of the parliament.

Describing it as the “highest real-terms core capital budget for health since 2010”, the Chancellor promised a “step change” in quality and efficiency of care, with £2.3 billion for increased diagnostic capacity and £2.1 billion to support the use of digital technology.

Much of the rise will come from the health and social care levy of 1.25 per cent on employees, employers and the self-employed. That funding boost will contribute towards the heaviest tax burden seen since the 1950s, the OBR said.

Mr Sunak promised £2.3 billion for at least 100 community diagnostic centres in England. The one-stop shops will see cancer tests offered in shopping centres and football stadiums in a bid to detect the disease sooner, amid fears that hundreds of thousands of diagnoses have been missed during the pandemic.

He also confirmed funding of £4.2 billion over the next three years for 40 new hospitals and more than 70 hospital upgrades and reiterated pledges to recruit 50,000 new nurses and provide 50 million more appointments in primary care.

On Wednesday, NHS leaders expressed concern that there was no specific commitment to funding for education and training in order to tackle staff shortages in the long-term. The latest figures show 93,000 vacancies across the health service.

NHS Providers, which represents NHS trusts, said workforce shortages are “the health service's biggest problem”. Saffron Cordery, its deputy chief executive, said: “NHS trust leaders will welcome the confirmed extra £5.9 billion capital spending on NHS buildings, equipment and digital technology over the next three years.

“Trust leaders will be disappointed and frustrated that there is no confirmed, multi-year increase in Health Education England's NHS education and training budget. Workforce shortages and the resulting unsustainable workload for existing NHS staff are currently the health service's biggest problem.”

Andrew Goddard, the president of the Royal College of Physicians, said: “It's no good having new equipment if there aren't enough skilled staff to make use of it.”

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