The UK tax hike is a bitter pill but smart politics

Voters may not like it but it is important to address longstanding problems

Boris Johnson at Westport Care Home, before he unveiled his plan to fix the UK's broken social care system, on September 7, in London, England. Getty
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A new term has entered the British political lexicon: "assetocracy". The idea is that voters with houses and savings are unchallengeable and that addressing their concerns has obvious appeal for the ruling party.

After a summer of Covid-19 anxiety in the UK and despair at the turn of events in Afghanistan, it was back to the grindstone last week. British Prime Minister Boris Johnson decided to take on all-comers on his return to the fray.

By raising taxes substantially to pay for a post-pandemic solution to the issues of state-provided health care and care homes for the elderly, Mr Johnson has nailed his political legacy once and for all.

The manner of the tax hike – described as a levy, but is a permanent expansion of the state – triggered analysis about the division between those with assets and those whose wealth is dominated by income.

The ruthless change of tack from Mr Johnson shows that a post-pandemic shake-up is underway

The government slapped the extra 1.25 per cent on a payroll tax, National Insurance, and added the same percentage point increase on the dividend tax. The latter was a sop to defray criticism that the burden of the hike was trending too much for the young.

Boris Johnson visits Westport Care Home in London, before the unveiling of his plan to fix the broken social care system, on September 7, England. Getty

Even so, the charge stuck that working age people in the UK are now subsidising the elderly and those with substantial reserves of wealth. The marginal tax rate on recent graduates, when the state-backed student loan is taken into account, is more than 50 per cent of income.

By contrast, only a tiny percentage of pensioners – those older than 65 who are still in full time work – will pay the new National Insurance rates.

The UK is unique, absorbing in the state budget almost all the rising cost of health care for the ageing population. Other countries rely on insurance provision to a much greater degree. The country therefore faces an ever-growing bill as the last of the baby boomer generation reaches 65.

Tapping the wealth of this generation would seem to be the logical alternative. Personal wealth in the UK has risen from three times annual Gross Domestic Product in 1980 to a figure of seven times today.

But the potential backlash from the so-called "assetocracy" – said to be the key dividing line in politics in the UK and possibly elsewhere – does not allow this. Hence Mr Johnson was ready to make an era-defining leap in his politics.

In time this could be seen as the biggest shift since Tony Blair’s third way was voted into power in 1997, which itself was a shift from Margaret Thatcher’s monetarism in 1979.

Critics of the policy belong to the dry-as-dust Conservative right, who see the march to ever lower tax rates as the pilot light of capitalism, plus the hard left, which was parading its demands for wealth taxes all week.

Mr Johnson has divined the real motivation of voters. To view assets as the figure that can be put on property holdings plus savings is overly narrow. There is a bigger picture. People want politics to reflect their sense of what they have and how it should safeguarded by the state.

Getting the government to intervene to ensure that people won’t lose their home as a result of becoming frail is a raw demonstration that the state is working. Translating these new politics into economic success won’t be easy. The ruthless change of tack from Mr Johnson certainly recognises that a post-pandemic shake-up is underway.

The accountancy firm KPMG announced last week it would set a quota for recruits whose parents held routine and manual jobs. The target is three in 10 employees should come from this background by 2030.

As a goal, this is perfectly easy to achieve. The number of people from this background in all professional jobs was 39 per cent last year, up from 33 per cent in 2014. A direct conflict between aspiration and the "assetocracy" has been a faddish preoccupation of British commentators for decades.

In the meantime, the country has been overtaken by a variant of nationalism seen in the US and elsewhere. It is this new punchy approach – and not the agenda of equality – that is driving politics. KPMG is both virtue-signalling and leaning into a rising trend. In its own terms, it is acting smart.

Voters may not like the fact that taxes are going up but the deep dive figures are mixed. The Johnson government is coherent in flushing out how to respond to the shifting post-pandemic calculus.

It could be caught out by the failure of growth. But the structural signals from the bounce back show that people want state support as a safety net.

Workplaces in the service and retail sectors have already moved back to pre-pandemic levels. Where flexibility exists, many people are still working from home. The readjustment is still settling down. It looks like there won’t be a blight of unemployment.

Addressing long running sores in health and social resilience is therefore smart politics. And it is an approach that is here to stay.

Published: September 12, 2021, 5:00 AM