At the beginning of September, the government announced a National Insurance hike of 1.25% to pay for social care in England. In April 2022, this hike is set to turn into a new health and social care levy to act as “the biggest catch-up programme” in the history of the NHS. The 1.25% increase is expected to raise £12bn which, it has been suggested, will be used to reduce the NHS backlog caused by the Coronavirus pandemic. While the ideas of reducing the NHS backlog and raising funds for social care are both worthwhile endeavours, there is always more than meets the eye when the economy is concerned.
Paul Samuelson, the late Nobel Prize winning economist, claimed that “economics is a choice between alternatives all the time”. How true he was. In each and every economy in the world, there is no such thing as an independent economic policy. Every conceivable economic variable is intrinsically linked to another, and often in ways that even the world’s leading scholars do not yet understand. Through this haze of uncertainty however, economists have rescued some discernible wisdom. When presented with news of a tax increase, such as the new NI hike, you may safely bet that something is going on elsewhere in the economy. Rest assured, a significant economic announcement in the commons is the political equivalent of “hey, look over there!”. While everyone’s heads swivel, something else is going on.
To mention just a few related areas, we should keep a close eye on the current rate of inflation, interest rates, universal credit, and real wages. The current rate of inflation in the UK is 3%. Schemes like Eat Out to Help Out have been partially blamed for this increase, as discounted restaurant and café prices have created a base effect. Higher inflation, in turn, can potentially cause increases in the interest rate too. The reason for this is that the interest rate is one of the central mechanisms through which the central bank controls monetary policy. The central bank will endeavour to raise interest rates if inflation gets too high as these two variables have an inverse relationship and so higher interest rates should lead to lower inflation. All in all, this concoction produces a dual outcome. Firstly, higher inflation means that the purchasing power of your pound is decreased – you cannot afford as much for the same amount of money. Secondly, higher interest rates would mean that the cost of borrowing increases. You would be smart to keep your money in the bank and benefit from the higher rate of interest.
Now, while all that is going on, let us turn to universal credit. During the appropriately timed cabinet reshuffle this month, parliament was set to vote on reducing universal credit by £20 per week. Universal credit benefits roughly 6 million people in low-income jobs as well as the unemployed. Those people who are single and under 25 will be hit the hardest, as they have the lowest allowance at just £344 a month. Tot all that up, and the government will have saved roughly £6.24bn per year by cutting universal credit in this way.
At the same time, we can look at real wages, with specific reference to NHS workers. In July, the government backtracked on its previous suggestion of a meagre 1% pay increase for NHS staff. Having decided that the purse strings could stretch a little further, the government increased the pay of NHS staff by 3%. Unfortunately, our friend the economy does not really work like that. With an inflation rate of 3% and a new national insurance hike of 1.25%, the benefit of a 3% pay-rise for NHS workers was more than wiped out by the countervailing 4.25% combined force of these variables. In other words, the real wages of NHS workers went down, not up. The same is true for workers who were hit by the new NI hike, current rate of inflation, and whom did not have a pay increase to offset any of these effects. In addition to this, as the government’s furlough scheme enters its final weeks, these employees could see their income being eradicated altogether, as employers make decisions about redundancies.
Economic mumbo jumbo aside, the general public would not be blamed for having low expectations about what the future holds. With the funds created by the new NI hike and the reduction in universal credit, the government can hope to save around £18.24bn a year. While Boris Johnson has claimed that this money will go towards social care and dealing with the cost of government measures to deal with the pandemic, the numbers just do not add up. The current deficit created by the measures put in place to deal with COVID-19 is at £340bn. The £18bn that will be raised each year from these new policies will need about two decades to eradicate this deficit unless money comes from somewhere else. In post-Brexit Britain, it looks like that somewhere else does not exist. Regrettably, the UK sacrificed one of its most beneficial multilateral trading relationships when it left the EU. In 2019, 50% of all UK exported goods went to the EU, and jeopardising such a beneficial trading situation shortly before a global pandemic is retrospectively suicidal for the British economy.
All things considered, the new economic policies of the government, combined with the fallout created by Brexit and Coronavirus, mean that belts will be tightening across the UK. Real wages will fall, those on universal credit may find themselves going hungry, and the so-called solution to Britain’s economic and social care problems will be likely to fail.
Written by Isaac Knowles
Isaac Knowles is a columnist at DecipherGrey.