How not to reject a proposal

In last night’s Sky News “debate”, Theresa May was asked about social care. It was clear she had been given some new lines to try to convince the public that she hasn’t U-turned since the Conservative manifesto was published, but this is a difficult act to pull off.

The problem for the Tories is that their manifesto said that they were rejecting Andrew Dilnot’s 2011 proposals to put a cap on care costs, the Health Secretary went on Radio 4 and said that there wouldn’t be a cap on care costs, but now Theresa May is saying that there will after all be a cap on care costs. It looks on the face of it like the PM has changed her mind, but changing one’s mind is dangerously close to flip-flopping and has a whiff of weakness. So a decision has been made to try to convince us that no minds have been changed, that the current policy is what the manifesto always meant to propose and that to say otherwise is simply scare-mongering.

Here’s the most problematic passage of the manifesto for someone wishing to make this argument.

We believe this powerful combination maximises protection for pensioner households with modest assets, often invested in the family home, while remaining affordable for taxpayers. We consider it more equitable, within and across the generations, than the proposals following the Dilnot Report, which mostly benefited a small number of wealthier people.

It sounds an awful lot like the Tories are explicitly rejecting Dilnot’s proposals, which it is claimed “mostly benefited a small number of wealthier people” – a common (but inaccurate) criticism of the proposed cap on care costs.

But wait – this paragraph doesn’t explicitly say that they are rejecting the idea of a cap, just that they don’t like “the proposals following the Dilnot Report”. It is this chink of light that some bright spark in the Tory election campaign has tried to prise open with a new set of lines that hit our airwaves last night. In this version of events, it is not the idea of capping costs that has been rejected, but the version of a cap proposed by Andrew Dilnot. This has been fleshed out with two quite specific objections to the Dilnot proposals – so let’s see how they stack up.

1. It was going to be paid for out of general taxation

In some other countries, working age people pay into social insurance schemes so that they are protected against social care costs in their old age. In others, this transfer from our working life to our old age is made using general taxation. However, in both cases, the money is not really saved up. The current working age population pays in and the current population of older people takes out. If at some point coverage is significantly increased then there is a generation of people who are already retired and will take out more without paying in more. There is a widespread view in the UK that the current generation of retired people already have it too good and that it simply wouldn’t be fair to ask the working population to pay more to fund their social care. Whether you subscribe to this view or not, where the money comes from is an important issue to consider. So does the new Tory position on this represent a rejection of Dilnot’s proposals?

Here’s what the Dilnot Report said on how the reforms could be paid for.

The Commission believes that there are three possible ways for our recommendations to be paid for:

• The Government may decide it wishes to raise additional revenue through general taxation. This is the way in which the current system is funded.
• It may choose to reprioritise existing expenditure, because it places greater value on this than other spending.
• It may decide to introduce a specific tax increase and, if it did so, it would make sense for this to be paid at least in part by those who are benefitting directly from the reforms. In particular, it would seem sensible for at least a part of the burden to fall on those over state pension age. If the Government decides to raise additional revenue, we believe it would be sensible to do so through an existing tax, rather than creating a new tax.

In making its decision on how to pay for reform, we believe the Government needs to consider the impact of any funding mechanisms on different income and generational groups.

This is, to say the least, quite vague. This was presumably tactical, since the previous attempt at reform was scuppered by the political fallout from proposals to fund it through inheritance tax, but some people have criticised the Dilnot Report for not making a clear proposal. What is clear, however, is that it is not accurate to say that the Dilnot reforms were going to be funded through general taxation. The decision was left to government.

When the Coalition accepted Dilnot’s proposals, they did in fact tackle this issue – and they did not choose to fund them through general taxation. Instead they stated that the reforms would be funded by changes to the state pension and inheritance tax, so that intergenerational unfairness would be minimised.

So how are the Tories now planning to fund their proposals? It’s not possible to answer this question definitively, since unlike the Dilnot and Coalition proposals, the Tories have refused to say at what level they would set the cap, let alone what the proposals would cost. But a significant proportion of the cost will be met by changing the means-testing rules so that people have to use the value of their house to pay for care even if they are still living in it. Is this the change that sets the Tory proposals apart from the Dilnot reforms?

Alas, no. It was in fact Andrew Dilnot himself that proposed this policy.

At present, housing assets are treated differently across the social care means tests (domiciliary and residential) – the result is that different care settings are not on a level playing field. Individuals who may have a preference to receive care in their own homes have a financial incentive to do so; however, local authorities have an incentive to encourage movements into residential care to increase charge revenue. In the longer term, the Government may wish to rationalise these arrangements.

We know that making such a change would be difficult. Our public research reveals that using housing assets to pay for care is a very emotive issue. However, once a cap is in place, it may be easier for people to think about such a change. Our deliberative research indicates that people may be more willing to use some of their housing assets to pay for care if they know that will not have to spend the whole amount. To support changes of this kind a universal deferred payment scheme would need to be in place.

So where does that leave us on the PM’s first claim? The Dilnot Report did not specify that the change should be paid for out of general taxation, the Coalition policy was explicitly to fund the changes in a way that targeted the older population, and the new Tory proposal to fund the changes is lifted straight from the Dilnot Report. The claim made by Theresa May last night is untrue.

2. It protected wealthier pensioners but did nothing to protect pensioners on modest incomes

The first thing to say about this claim is that it demonstrates that Theresa May doesn’t really understand Dilnot’s proposals or her own. The main focus of the debate has been the treatment of assets, not incomes. The manifesto proposal to raise the means test floor means that people who have assets of £100k or less won’t have to pay for care from their assets – but they will still have to use their incomes.

But let’s gloss over that and charitably assume that she meant people with modest assets. Did Dilnot’s proposals do anything to help them? The answer is of course yes. Dilnot recommended that the means test threshold should be extended to £100k, but that it should be tapered so that the less wealth you have the more support you get. This system is actually pretty effective at protecting people with modest assets. Here’s Dilnot’s assessment of the protection that people get from the combination of a cap on care costs and his means-test changes.

The Conservative manifesto did propose something slightly different to this. The means test would be extended to £100k – borrowed straight from Dilnot – but it would no longer be tapered, so that everyone with less than £100k in assets gets the same level of support. This is more generous that what Dilnot proposed and gives more protection to people with low levels of assets, but it is a modification rather than a rejection of the original proposals. The claim made by Theresa May last night is clearly untrue.

Despite all the lying, the U-turn policy is not bad

So we can see that, rather than rejecting Dilnot’s proposals, the Conservatives are now adopting them whole-heartedly, while going even further than Dilnot recommended on extending the means test. But they have clearly calculated that the worst possible thing would be to admit that they have changed their minds and that it is better to try to trick us into thinking that they meant this all along. In doing this they are taking the public for fools, but it may be a line they can hold until the election. However, while all the lying is not a good look, the actual policy they have ended up with is not bad – even if there is a suspicion that they ended up here by accident.

The chart below compares the impact of the policy with the previous Coalition position, which was to implement a version of the core Dilnot proposals with a £75k cap. (This chart is a little different to the one from the Dilnot Report, since I have assumed that the person has £50k in savings.)

As the chart shows the U-turn policy (with a £75k cap) is better than the Coalition policy for people with housing wealth less than £100k or so. It is worse for people with more than this (including someone who owns a median-value property) because they will pay more if they need home care, but even in the worst case scenario they will only use just over 40% of their assets paying for care. It addresses the uneven incentives between home and residential care identified by Dilnot and the additional charges paid by home care users mean that it will probably be cheap or even cost-neutral. This is a perfectly reasonable policy proposal.

But as ever, the devil is in the detail, and we have precious little of that so far. Theresa May refuses to give us any indication of where the cap will be set, preferring instead to consult on it after the election. (Presumably she is not aware that the Coalition has already consulted on this funding model.) The level at which the cap is set is important: if it is set at £75k then the maximum amount of assets that someone will use to pay for social care is around 40%, but if the cap is £150k then this goes up to 60%.

The mechanism for allowing people to use their housing wealth while they are still living in their house is also going to be crucial to the success of the policy. If, as suggested by the Tory manifesto and the Dilnot Report, local authorities are going to pay up-front costs and claim the money back from people’s estates, this means a huge expansion of their role as debt collectors. When people inevitably try to hide their assets and get away without paying, are local authorities willing and able to chase their heirs through the courts? If, on the other hand, the intention is to work with the private sector to finance care through an expansion of expensive equity release products, the political fall-out a decade down the line when financial services companies start gobbling up people’s estates could be severe.

These are difficult policy issues, but they should be surmountable. Unfortunately, the Conservative approach to social care reform to date does not inspire confidence that they have the competence and commitment to do the surmounting.

When is a cap not a cap?

Following my recent post on social care reform, I’ve had some interesting discussions about the ins and outs of different options. In this short follow-up, I want to pick up on one argument that is a bit too complicated to go through properly on Twitter: whether the proposed “cap” can really be considered a cap.

James Lloyd makes the point that in the current system, local authorities have used their market power to push down the price they pay for care. This has meant that care providers charge people who pay privately a higher price to make up for the low profit margins (or perhaps even losses) that they make in their dealings with local authorities. Some people argue that this is a stealth tax levied by local authorities to keep their social care costs down, others characterise it more innocently as “price discrimination”. Either way, if a capped cost system were to be based on the local authority price then it could underestimate what people have actually spent, leaving them spending more than £75k before reaching a £75k cap.

Others have made related points. Sonia Sodha argues that the cap isn’t a cap, because people will still have to pay for their food and accommodation if they go into a care home.

Both James and Sonia are in a sense right: there are limits to what the Dilnot proposals will cover and some people may pay more than the theoretical cap. In fact, such limits apply to any system of social protection, for social care or anything else, and what people actually get in practice is never as simple as a one-line explanation of the offer. If there is too much distance between what a system sounds like to the public and what it means in practice then it risks being unpopular, so this is something worth considering before ploughing ahead with reform.

Given that all systems suffer from this problem to some extent, we want to know whether it is significantly worse under the Dilnot proposals than under other options – and as it happens, we have quite a few options to play with. A number of different reforms to social care have been recommended over the last two decades, most of which were serious and sensible and all of which have foundered due to a lack of political will. The table below takes each of these systems and tries to articulate what it sounds like to the public and what it would mean in reality (assuming local authorities continue to pretend social care costs less than it does).

	What it sounds like to the public	What it would mean in reality
Raise the means-test floor (Tory manifesto, 2017)	You will not be left with less than £x of assets	You have to pay top-ups after you hit the floor so you might be left with less than £x
Capped cost model (recommended by the Dilnot Commission, 2011)	You will not have to spend more than £x on social care	You pay the first £(x+ε) of your social care costs After that you have to pay a small top-up You will pay the part of your care home cost that is for food and accommodation
Shared cost model (recommended by the Wanless Review, 2006)	The government will pay x% of your social care costs	The government will pay (x-ε)% of your social care costs You will pay the part of your care home cost that is for food and accommodation
National Care Service (recommended by the Royal Commission, 1999)	Social care is free	Social care is mostly free but you have to pay a small top-up You will pay the part of your care home cost that is for food and accommodation
Current social care system (since 1948)	The state will pay if you can’t afford to from your income and assets	The state will pay most of it, but your family might have to pay a small top-up
National Health Service (since 1948)	Health care is free	An approved set of health care interventions are free You have to pay the full cost if you want things outside of this set

I really struggle to see how the Dilnot proposals are very different in this regard to the other plausible options. The cap tells people they will only spend £x, but in reality they have to spend more than £x; a National Care Service tells people social care will be free, but in reality it’s not free. Under a cap people still have to pay for their food and accommodation if they go into a care home; but they will also have to do this under a shared cost model, leaving them paying much more than the stated percentage of the care home fee.

I don’t mean to argue that a disjoint between how a system is described and reality is harmless. Take the NHS: people think that it means that all health care is free and are scandalised when they are told that the NHS won’t cover the expensive new cancer treatment they have heard about. This causes upset and eats away at trust in the institution, but it is to some degree unavoidable: the NHS can’t pay for high-cost, low-value treatments unless we raise lots more in taxes, but it’s never going to be possible to explain to everyone how NICE technology appraisals work.

It is reasonable to look for a system that minimises this issue, as one of a number of criteria for assessing policy options. It is reasonable to call for local authorities to pay a realistic price for social care, or to demand that government does more to explain the limits of the policies that it proposes. However, in this case, the gap between what a policy sounds like and what it is likely to be in reality does not seem to be a significant factor in deciding between social care funding systems. While debate about the merits of different options is to be welcomed, I do think there is an obligation on those who say “the cap is not a cap” to explain how this can be addressed or how the issue would be less significant under other options for reform. Otherwise it is hard to see this issue as anything but a distraction.

Three golden rules for discussing progressivity

What does it mean for a policy to be progressive? The way this question is addressed by the media (and often by government) can be infuriating. It’s got to the point where I am tempted to say the term should be banned, but instead I am going to make one last attempt to clarify it by proposing three golden rules.

I was reminded of this issue when reading Jo Maugham’s analysis* of the impact of the new “social care precept”. This is essentially a £2bn rise in council tax, a significant proportion of which will be paid by poorer households. Here are the figures that Jo gives:

So is this tax progressive or not? Well, rich people pay more, and for some that’s good enough. Fraser Nelson, for example, likes to point out that “the top 3,000 taxpayers in Britain stump up more income tax than the lowest-paid 9 million”. It is more common to look at how paying tax affects the living standards of different groups by comparing tax paid as a proportion of income. By this measure, council tax is regressive.

This is as far as the discussion usually goes. But both of these comparisons have no basis in reality – unless that reality involves collecting these taxes and throwing the money in the sea. The fact is that this money will show up somewhere else, either as increased spending or lower taxes. Which brings me to my first golden rule: the distributional effect of a policy change can’t be assessed without looking at both sides of the equation.

Since this is called the “social care precept”, we might think that it will lead to increased spending on social care. It’s not easy to find numbers on how social care spending is split between income groups, but modelling done in 2011 for the Dilnot Commission (see figure 11 here) made some estimates. Reading the numbers off the chart, I get something like this.

Social care spending is more heavily weighted towards poor people than council tax collection, so lower income groups make a net gain from this policy. That is, the introduction of this policy increases the total amount of redistribution that the government does, which is the only sensible definition I can think of for the word “progressive”, with reference to a change in policy.

But is higher spending on social care really the effect of this policy? That is, if it weren’t for the social care precept, would we see lower social care spending? You could argue that social care spending is going to rise either way, since we’ve got more old people than ever. If it’s not paid for by council tax rises it will be paid for by higher taxes elsewhere, higher borrowing, or cuts to other services.

So this is my second golden rule: identify a realistic counterfactual. We need to know whether the policy leads to more redistribution than what would otherwise have happened. That “what” can have a huge impact on how we view the distributional consequences.

Let’s say we believe that without the social care precept higher social care spending would have to be funded through an increase in income tax – or perhaps higher borrowing now, funded by future increases in council tax. As Jo points out, income tax is much more targeted on rich people than council tax. Here’s the net effect of raising £2bn through council tax instead of income tax.

This policy change would give money to the richest 20% at the expense of everyone else. I think we can all agree that’s regressive. So depending on the counterfactual, the social care precept is either highly progressive or highly regressive. Take your pick. We need to decide which counterfactual is more realistic. In this case, the first one is probably closer to the truth (raising income tax and borrowing more are not top of this government’s agenda) so I’d argue that the policy is probably progressive.

But there’s another more fundamental question here: how much redistribution do we want? Requiring all policy changes to be “progressive” implies that we think we don’t currently have enough. But at some point, if we were to go on increasing redistribution, we’d have too much. Views will differ wildly as to what the optimal level is, but in principle there must be one. I imagine few people think that there should be no redistribution and few think that redistribution should fully equalise living standards.

And even if we want more redistribution, we might not care if a policy is regressive if its effect on the overall level of redistribution is small and it achieves some other aims. The state does not exist solely for the purpose of moving money from the rich to the poor. My third golden rule is therefore this: the overall level of government redistribution is what matters. We need to know whether we want to increase or decrease it, and how much we care about small changes relative to other policy aims.

These rules really are essential. It is impossible to say anything about whether a policy change is progressive without considering both sides of the equation and being clear about what you think the alternative scenario is. It is impossible to know whether you actually want the policy to be progressive, or whether you care, without considering the overall level of redistribution.

These are not new insights and many organisations (the IFS, the OBR, sometimes even the Treasury) are quite diligent about doing distributional analysis properly. But much of the public discussion of “progressivity” fails to follow a single one of these rules, giving us a rather poor standard of debate on the state’s role in reducing inequalities.

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* I’m not picking on Jo’s analysis because it is a particularly egregious example. On the contrary, I am picking on it because is one of the better examples of someone tackling this question, so Jo has done most of my work for me.

The other referendum and the future of local democracy

So farewell then, Eric Pickles, one of the surprise casualties of the post-election cabinet reshuffle. His time in charge of the Department for Communities and Local Government (DCLG) was characterised by a combative approach towards local authorities, and nowhere is this more evident than in the squeeze that he put on their finances. So there was a certain irony in the fact that only a day before he was relieved of his duties he scored a significant victory in his battle with councils when the people of Bedfordshire voted against increasing council tax to pay for extra police officers.

To understand the significance of this, we need to back up a little and get our heads around how local government finance works in England. It’s a horrendously complicated system, so we’ll save the full story for another time, but here’s the short version.

Councils get some of their funding from council tax. They set the level of this tax, collect it from residents and spend it locally. This accounts for about 40% of their funding. Councils also collect business rates from commercial properties in their area, but they don’t set the level of this tax and they don’t get to keep the money, which goes instead to the Treasury [i]. The rest of their funding comes from central government in an ever-shifting range of grants, mostly paid by DCLG.

Over the last parliament, these grants were cut back severely. The IFS estimates that between 2009-10 and 2014-15, central government grants to local authorities were reduced by 36.3%. That means that the 60% of council funding that comes from central government fell by more than a third [ii]. In times past, councils could have raised council tax to offset these cuts. Of course, there were limits to this, since they would have to answer to their voters at the next local elections. That’s how local democracy works. Or rather, that’s how it used to work.

You see, Eric Pickles was determined that councils wouldn’t be able to raise council tax to compensate for his department’s cuts. Right or wrongly [iii], he viewed councils as wasteful, overly bureaucratic and in need of a bit of fiscal discipline. To make sure that this discipline was not undermined by council tax rises, he decided to neuter councils’ revenue-raising powers with a combination of carrot and stick.

The carrot was the council tax freeze grant. Councils that agreed to freeze council tax in nominal terms (i.e. a real terms cut) would receive a grant from DCLG to compensate them for some of the cost of doing this [iv]. The stick came in the form of council tax referendums. Any council that wanted to raise council tax by 2% or more (in nominal terms, so usually that would only just keep pace with inflation) is now legally required to hold a referendum. Pickles was presumably calculating that such a referendum – where a council asks its population whether they want taxes to rise – would be difficult to win. Voters understandably favour lower taxes and better public services, which is why politicians often pretend that they can deliver that heady combination by “eliminating waste”, “reducing bureaucracy” or even “cracking down on tax avoidance”. Few politicians dare to go to the polls on a platform of raising taxes, even if they know they will have to do so once they are in office.

Councils seem to agree with this calculation, since despite huge cuts to their budgets and pressures to deliver better social care and collect bins more often, not one council has triggered a referendum by trying to raise council tax by 2% or more [v] – until now.

All of which brings us, finally, back to this week’s referendum result from Bedfordshire. The referendum was triggered because Bedfordshire’s Police and Crime Commissioner Olly Martins wanted to raise £4.5 million to put an extra 100 police officers on the streets. This would have meant increasing the police’s council tax precept (not council tax as a whole, just the police bit of it) by 15.85%. When asked whether they wanted council tax to rise, the people of Bedfordshire said no. Naturally, they preferred for the extra police officers to be funded by eliminating waste, reducing bureaucracy and cracking down on (council) tax avoidance.

There may be other reasons why this rise was voted down. Kelvin Hopkins, MP for Luton North, blamed it on the wording of the ballot paper, which is set by DCLG. The ballot paper asked people about a 15.85% rise, but Mr. Hopkins thinks that “if it had said ‘would you be prepared to pay 18p a week extra for 100 extra police officers’ people might have said yes”. Whether or not that’s true, any other council that braves a referendum will face the same wording restrictions and the result in Bedfordshire will make them even less confident of victory. In effect, councils can no longer make decisions on levels of taxation and expenditure, reducing them to managers administering the budgets allocated to them by Whitehall.

This curtailing of council power seems perverse when viewed alongside this week’s third notable piece of local government news. In a speech on Thursday, the Chancellor outlined plans for greater devolution to cities that are willing to elect a mayor, starting with Manchester. This “radical devolution” will give local government the “levers to grow their economy”, including transport, planning, housing, policing and public health, but no new revenue-raising powers.

So even under these plans, while councils will be given additional managerial responsibilities, they will remain at the mercy of central government for their funding. As Mr. Pickles’ time in office demonstrates, central government can and will use this as a stick to beat them with. Devolution should be about a transfer of power (actual power that is, not just “powers”) from central government to the local level, but Whitehall is offering to give up precious little power here. Local government will remain relatively unimportant, and since voters recognise this, local democracy will remain weak and participation levels low.

The experience of other countries shows that it doesn’t have to be like this. US states have significant revenue-raising powers, although since the country is much larger than ours this may not be a fair comparison. European examples may be more relevant. In Germany, the sixteen Länder have significant powers; and Swedish municipalities – the lowest level of government – set and collect taxes on income.

Council tax is a poorly-designed and regressive tax that badly needs reforming (for example, it could be replaced with a progressive levy on property values). But control of a reformed council tax should be handed back to councils, without forcing them to undergo unwinnable referendums just to keep pace with inflation. Local governments should be elected for a period then allowed to do their jobs until they face the voters again at the next election – just like central government is. Along with devolution measures of the sort proposed by the Chancellor, this would help to create stronger local democracy that people actually care about and which makes a real difference to their lives.

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Notes

[i]
DCLG recently introduced a “business rates retention” scheme, which allows councils that increase their business rates take (by having more businesses in their area) to keep a bit of the money. But since the Treasury still controls the overall level of non-council tax money going to councils, this amounts to a zero sum game between different authorities. If you grow your business rates, but everyone else grows them by more, you actually lose money. Perhaps more on this another time, but for now it’s enough to note that this hardly counts as a revenue raising power.

[ii]
In fact, this proportion varies across the country. Councils that have a small council tax base (relative to their assessed funding need) get more than 60% of their revenue in central government grants. These councils (which tend to be in more deprived areas) feel the effects of grant reductions much more sharply. The IFS estimates that between 2009-10 and 2014-15, council spending per person fell by an average of 23.4% in real terms; but spending in Westminster fell by 46.3%, while spending in North East Lincolnshire fell by just 6.2%. This system is frankly nuts and in dire need of reform. Perhaps more on this another time.

[iii]
As always with local government issues, the answer is probably that some councils are wasteful and others are efficient. It is worth noting however, that central government has no way of identifying the wasteful councils, let alone targeting spending cuts on them.

[iv]
It seems to me that councils would be mad to take up this offer, since the grant is not recurring but the losses from freezing council tax are (unless they are willing to brave a council tax referendum to play catch-up). But in fact, a majority of councils took this offer up, at least in the early years.

[v]
A number of councils raised council tax by 1.99%, the maximum that would not trigger a referendum and just about keeping pace with inflation. Pickles branded these councils “democracy dodgers”. This tells us a couple of things about Pickles’ view of democracy. First, he is implying that traditional local democracy, where councils are elected and are accountable for their actions (and which mirrors national democracy), is not real democracy. Second, he is saying that voters should be consulted when council tax is raised, but not when it is cut. In fact, he is saying that voters should be consulted if council tax is raised in line with inflation – i.e. if it stays the same in real terms – but not if it is cut.