Published by Danail Vasilev on 13 March 2017
- Our Work
- The Reformer Blog
27 July 2017
Last week, HMRC ruled that social care providers should compensate workers who slept at their patients’ home by up to six years’ worth of back pay. This week, the Government waived fines, and suspended HMRC enforcement activity until October. The move could save many firms from bankruptcy, but the need to compensate care workers fairly requires a new funding model.
Progress towards a new arrangement, however, is not being made. This is in spite of a vast quantity of research exploring new funding models – Reform work included. This issue is not endemic to the UK. In the past 20 years only one OECD country – South Korea – had introduced a major reform to its long-term care.
Many are puzzled by the Government’s inability to overhaul the care system. One simple explanation for this phenomenon is fiscal tightness. When the economy is not rapidly expanding, governments have less money to experiment with novel approaches to social care, or any other public service for that matter. This view gains support when one takes a look at the increase in expenditure that the Korean reforms induced (see Figure 1).
A similar scale of spending increase in the UK would mean an extra £10 billion from the Treasury. This carries a lot of risk, especially with low growth rates. The amount of unmet care need and lack of private insurance options, however, mean that the Government will have to commit more resources to care at some point.
Radical action should not wait for the next economic boom. Government has one option to finance a new model without increasing income taxes or debt – at least in the short run. This alternative resource is the housing wealth of the older population.
Housing equity in Britain has gained a sacred status. With a 40 per cent inheritance tax, it is hard to convince the older population that more taxes on their estate would improve their welfare. The current threshold on inheritance tax, however, means that 60 per cent of over 65s are exempt.* A simple calculation based on the English Longitudinal Study of Ageing (ELSA) suggests that the housing stock of those exempts is worth £566 billion.
Tapping into this resource could deliver the funding that social care needs without putting a significant strain on the economy. Reform has suggested deferred payment agreements as a way to liquidate housing equity and use it to pay for care. Alternative models, however, such as lowering the inheritance tax threshold to £100,000 and earmarking the proceeds for care could be the step forward that government has been so reluctant to take.
Using the housing equity of older people may give authorities the needed fiscal space in order to pass a more radical, long-term reform such as a pre-funded model. In brief, the system would work by requiring the working-age population to save in a pooled fund for the future care needs. While these savings mature, taxing housing wealth will provide for the care of the current old. Reform has argued that such a model provides more intergenerational fairness, as well as value for money.
It is often the case that quick solutions to the care problem are dismissed because they ignore the long-term picture. The opposite happens too – suggestions for fundamental changes to the care sector are unpopular as they offer nothing today. In contrast, using housing equity can provide funding now, and support bolder action towards a long-term solution.
*Reform calculations based on the English Longitudinal Study of Ageing
Danail Vasilev, Researcher, Reform