Jill Stephenson
Pay more tax and feel the pain

If ever there was a term that was a misnomer, it is 'national insurance'. A government website tells us: 'You pay National Insurance contributions to build up your entitlement to certain social security benefits, including the State Pension. The type and level of National Insurance contributions you pay depends on how much you earn and whether you're employed or self employed. You stop paying National Insurance contributions in the year you reach State Pension age'. This all makes it sound as if, by paying NI contributions, we build up a fund that can be drawn upon in time of need, adversity and old age. We are insured, and the insurance fund pays for our benefits when we need them.
     In Britain, we pride ourselves on our welfare state and have generally persuaded ourselves that we were pioneers in this field. In fact, social insurance began in the 1880s in Imperial Germany when Otto von Bismarck, as chancellor, introduced very basic schemes to insure industrial workers against the consequences of ill health (1883) and accidents (1884).
     In 1889, he introduced invalidity benefit and old-age pensions. These schemes were compulsory for industrial workers, and were in the following decades extended to cover further groups of employees. Bismarck's purpose was at least partly political. As Knut Borchardt put it, 'Bismarck introduced social insurance to inoculate the working class against socialism'. This was at a time when Bismarck's anti-socialist laws of 1879 had made the Social Democratic Party illegal and driven it underground. But Bismarck also regarded social insurance as an essential component of a modern industrial society, which is what parts of Germany had become by the 1880s.
     Before 1914, fairly similar schemes were introduced in a variety of European countries, including France, Austria, Italy, Denmark, Switzerland and, in 1913, Tsarist Russia. Britain was a relative latecomer, with pensions, sickness and unemployment insurance introduced by the great reforming Liberal ministry of 1906. From 1909, pensions were paid, at the rate of five shillings (now 25 pence) per week to those aged 70 and over, as long as their annual income did not exceed 31 pounds and 10 shillings. Pension rates were doubled in 1919, and, remarkably, the present pension ages of 65 for men and 60 for women were introduced as early as 1926.
     In 1911, the National Insurance Act provided insurance against sickness and unemployment, to be paid for by contributions from the employee, the employer and the state. The name of the chancellor of the exchequer who introduced the reforms became synonymous with them, so that a worker on sick pay would say 'I'm on the Lloyd George'. The state's contribution to the new welfare system was paid for by the first genuinely redistributive budget, introduced by Lloyd George in 1909.
     Britain was, to be fair, ahead of the game in one respect, in introducing unemployment insurance – at first restricted to industries where unemployment was common – before the first world war.
     The German unemployment insurance scheme was introduced in 1927, just before the great depression. The funds at its disposal were therefore utterly insufficient to support the millions who were without work in the early 1930s, and could offer full benefit to each individual for six months only, at a time when people were out of work for years. In France, there was no unemployment insurance scheme at all at this time.
     
The present system of social insurance was introduced by the Attlee government after the second world war. Its reforms gave substance to the recommendations of the Beveridge report of 1942, which had been prepared at the behest of Churchill's coalition government. A National Health Service was introduced in 1946, and in the same year a National Insurance Act established a comprehensive system of social welfare.
     Beveridge's optimistic view was that, with universal and free health care provision, there would be less illness and that the cost of the health service would diminish. Given that the development of drug therapies in the last 60 years could not have been predicted, and that the health service was built on the assumption of there being plentiful cheap (mainly female) nursing and ancillary labour, this was perhaps not as daft a prediction as it now seems. His assumption was that the national insurance scheme would be actuarially sound – that the fund would be able to pay out what was necessary from the accumulated contributions.
     What has happened since, a trend that has accelerated in recent decades, is that NI has ceased to be a genuine insurance fund and has become an adjunct of the tax system. This has been acknowledged in recent days by senior politicians who have explicitly referred to it as 'a tax'. Speaking of the Tories' plan to halt the proposed rise in NI contributions, Ed Balls has told Tribune magazine: 'A tax freeze on this scale can only be paid for by drastic cuts to frontline services or by unfair rises in other taxes like VAT'. Many years ago, probably in the 1980s, Roy Jenkins proposed that the income tax and NI systems be unified and rationalised so that we no longer had an overt tax system (income tax) and a stealth tax (NI), as it was not then called, to augment it. This was too rational a project for leading politicians of either major party. The result is that NI is now routinely treated as a major option in the tax-raising stakes.
     I am completely bemused by the politicians' – of all parties – insistence that raising taxation is a matter of choosing between NI and VAT, both of which are in their own ways highly damaging. Employers' NI is indeed a tax on jobs. VAT is a tax on consumption. At a time when maintaining employment levels and encouraging consumption are priorities, neither of these taxes should be raised. I am so bemused that I am about to shoot myself in the foot. I have not paid NI since 2004, but I cannot see why proposed tax increases focus on NI and VAT while there is complete silence about income tax.
     I belong to a generation that became resigned to governments with budget problems seeking to solve them by raising the standard rate as well as higher rates of income tax. I seem to recall a standard rate of income tax of 33p in the pound for a time during the 1970s; perhaps I'm wrong. But it's not so many years since the rate stood at 27 pence. I enjoy the current regime of relatively low rates of income tax and would not wish to pay more.
     But if the government, or the government-in-waiting, were really serious about making inroads into the deficit, it would raise income tax rates, and raise them painfully for all of us. I don't look forward to that, and it does not appear to be on the horizon anyway, given that politicians of all colours are treating income tax with what Arthur Daley called his 'complete ignoral'. They regard income tax rises as toxic for the political party recommending or implementing them – look at what happened to Labour in the 1992 election. This level of opportunism and dishonesty is particularly damaging in the current crisis.
     
What we are offered by the Tories is 'efficiency savings' instead of the NI increase proposed by Alistair Darling. This is a 'quis custodiet' question. In public services, which are said by greedy businessmen to be 'bloated' (takes one to know one), any 'efficiency savings' would be identified and implemented by the senior managers. These are the people who, like businessmen and bankers, have been rewarding themselves royally – whether they are health service managers or university vice-chancellors. Senior managers have all sorts of pet projects that they regard as prestigious. Are they likely to give up these in order to prevent damage to the chalk face, front line, sharp end? The question answers itself. In any case, they have a vested interest in demonstrating that cuts are doing damage where it really matters.
     The only area I know much about is universities. Real 'efficiency savings' could be made by savagely trimming the whole, bloated 'quality assurance/audit' incubus that does nothing to promote quality in teaching or research but consumes vast amounts of resources – money, time, energy. I'd be surprised if this were not also the case in other public services. But politicians have a touching faith in 'quality assurance' as the promoter of 'accountability', and they will, I'm afraid, argue for more rather than less of it at a time of economic stringency.
     So we are left with the tax that dare not speak its name. On reflection, I shall be amazed if the next government – of whatever colour – does not eventually introduce a rise in the standard rate of income tax.

Jill Stephenson is former professor of modern German history at the University of Edinburgh