by Dr Patrick Nolan, Chief Economist, Reform
A widely anticipated Government green paper is planned for release next week on funding long-term care such as medical and non-medical services for people with chronic illnesses or disability. This issue of funding long-term care is only going to grow in importance. By 2050 there will be twice as many people aged over 85 and the overall costs of long term care will increase fourfold. Some estimates are that in 20 years there will be a £6 billion funding shortfall for these services.
A number of concerns have been expressed over the current system of long-term care funding. It has been argued that without change older people will have to pay more from their own pockets. There is also a boundary between medical treatments provided ‘free’ to the elderly in the NHS – although, of course, at a cost to taxpayers – and social care which is not.
It is sometimes suggested that long-term care should be free and universally available – as has been the case in Scotland since early 2001. Audit Scotland reviewed this policy in early 2008 and noted that the cost to taxpayers of long-term care was a third higher than if universal provision had not been introduced. This was reflected in a sizeable shortfall in central funding which is only going to get worse over time. In an era where there are already serious questions over funding other health and pension commitments, introducing free and universal long-term care across the United Kingdom is clearly unaffordable.
It has been suggested that next week’s green paper may suggest an inheritance levy be introduced that people could pay in return for free long-term care in their old age. But this raises the question of whether a further tax is really the solution. As Reform noted earlier this year the course of increasing taxes to deal with hole in the budget is the wrong approach (especially when the economy is weak). Rather than new taxes focus should be on reducing government spending and/or encouraging individuals to make their own provision for their future.
But what does this mean for the future funding of long-term care?
The first point is that the ability to afford future long term care services depends on the wealth of the country (the national income available to pay for these services) and the degree to which people make provision for their future needs. These points are often overlooked in debates of this nature – which treat funding options as if they are a zero sum game and fail to recognise the importance of economic growth – increasing resources available to pay for services rather than simply redistributing costs.
The second point is that demand for long term care needs to be managed. In particular, people need to have a clear idea of what services they can expect taxpayers to fund, and what services they need to start making their own provision for.
This raises the third point, which is that individuals should be encouraged to make their own provision for the future. This could include greater use of private insurance and savings schemes, products to draw down the equity in their homes and measures (such as leading a healthy lifestyle) to ensure good health. In this context, systems where individual contributions are matched by taxpayer contributions are sometimes promoted as a way to encourage people to make their own provision for their future needs.
It is, however, important to be cautious about the use of these subsidies. Although subsidies may encourage a wider group of people to make provision for their future, they come at significant cost to taxpayers and these taxpayer funds are not free. It has been estimated that taxpayer funds have a deadweight cost of 20 percent, so a £1.00 subsidy requires a £1.20 increase in private provision to cover its true cost. International evidence shows subsidies are largely transfers from public to private savings and lead to little increase in funds available to offset future costs.
These points highlight that in any debate on funding long-term care we should not lose sight of the importance of families taking responsibility for preparing for their own futures. Government cannot do everything.
