16 February 2017

Here’s why an ‘NHS tax’ is a horrible idea


The NHS is widely perceived to be facing its gravest ever crisis. Whether or not this is in fact the case is difficult to tell. True, some indicators look pretty awful – A&E waiting times, for instance. But the truth about the NHS is that there is never enough money. In the 2000s, the NHS budget doubled in real terms – but there were still hundreds of stories warning of its imminent collapse.

Even if the worst comes to the worst, the NHS will of course not “collapse” in the same way that Lehman Brothers did, with doctors walking out of hospitals carrying cardboard boxes containing photos of their loved ones. Rationing will just become more acute.

Indeed, as Dr Kristian Niemietz of the Institute of Economic Affairs has pointed out, much of what NHS advocates cite as proof of the system’s great efficiency – namely lower spending on healthcare than other countries – is a result of the crude rationing that already takes place : a government bureaucracy deciding what treatment we can and can’t have.

If we are to fix the NHS, there is an apparent consensus about the need for a “serious discussion” about its funding model. But what those proposing we have one often want is no such thing. The health debate in Britain is incredibly parochial – with those who have the temerity to suggest we copy the more successful approach of our Continental cousins, by incorporating concepts like social insurance or top-up fees, being shouted down.

It seems, in other words, as though the current model is here to stay for the foreseeable future. So unless other departments have their budgets reduced (DfID, anybody?) that leaves tax increases and/or more borrowing as the only way of getting more money into the system.

On that front, there have been plenty of polls showing that a majority, or at least a sizeable minority would be willing to pay more tax provided it was dedicated to the NHS.

Writing on CapX earlier this week, Alex Massie proposed the idea of turning National Insurance an “NHS tax”, both to provide scope for more funding and to make clear the link between tax and spending.

It’s an idea that has some heavyweight support. Lord Macpherson, the former Permanent Secretary to the Treasury, has said that the idea is worthy of discussion – an extraordinary statement given that the department he spent 30 years at has historically been viscerally hostile to “hypothecation”, the idea of assigning specific tax revenue to specific purposes.

And there is a precedent in the form of Gordon Brown’s 2002 National Insurance hike, whose purpose was – inevitably – to fund the NHS.

The problem here is that hypothecated taxes have always been a bad idea. And the fact that the NHS is failing a bit more than usual doesn’t change that.

That’s because spending on a particular service should not be dictated by how much a particular tax rises – just as specific tax rates should not be determined by the spending requirements of a specific service.

Notionally, the UK already has a hypothecated tax: National Insurance itself. In theory, a percentage of the tax (18.7 per cent in 2016-17) is earmarked for the health service, with the remainder paying for contributory benefits like the state pension.

The problem is that this is a complete sham. In fact, there is no relationship whatsoever between the amount raised in NI and spending on the NHS, or the state pension. That’s because, when there isn’t enough money in the NI pot to pay for all the benefits, it’s topped up from general taxation. When there’s a surplus, the NI fund buys gilts. Either way, the Government just borrows money from itself.

The gradual erosion of the link between National Insurance and contributory benefits should serve as a warning to proponents of a new “NHS tax”. The truth is that such revenues are always raided for whatever is politically fashionable at the time.

Brown’s extra penny on National Insurance, for example, actually turned into an across-the-board spending increase. The money didn’t go to the NHS, any more than it went to the education budget.

The “problem” here is that tax revenues are perfectly fungible: a pound from VAT can be substituted with a pound from Landfill Tax. If an “NHS tax” raised £5 billion the amount the service receives from the Consolidated Fund could just be decreased by £5 billion, with the result being an overall increase in tax and spending.

This might sound cynical, but it’s precisely what has happened in Britain in the past – and what happens wherever politicians pull this trick. The Mercatus Centre at George Mason University provides some particularly egregious recent examples from the United States:

  • For each dollar of general sales tax revenue earmarked to education spending, no significant increase in education spending was observed. Instead, there was an increase of $0.55 in total government expenditure
  • Each dollar of corporate income tax revenue dedicated to education was associated with a decrease of roughly $2.72 in general spending on education, and a similar increase in spending on other programs
  • For each dollar of personal income tax revenue dedicated to local government, expenditures in other areas increased by roughly $0.84 and total spending by $0.94.

The natural response to that is to say that tax revenues shouldn’t be fungible. That the National Insurance money has to go to the NHS and only the NHS. Or, indeed, that council tax rises to pay for social care can only be devoted to social care.

But would that be any better? With some taxes, we have a pretty good idea of how much an increase will raise. But it’s impossible to be 100 per cent sure.

So what would happen if the government set an optimum level of NHS spending, and the “NHS tax” raised more than was forecast?

Either the money would be spent elsewhere, rendering the hypothecation worthles. Or it would be ploughed into the NHS when it could have been better spent elsewhere (yes, such a thing is possible), leading to inefficient allocation of resources – in just the same way as our commitment to spending 0.7 per cent of GNI on international aid has seen money shovelled out of the door to hit targets.

Of course, if the NHS tax didn’t raise as much as forecast – perhaps because of a recession or other financial shock – the health service wouldn’t have the resources to do what it had planned. Cue cancelled operations and layoffs.

This is not even an argument about the benefits of high taxes vs low taxes, it’s just about sensible and honest fiscal policy – the difference between predictable revenue streams and a famine-or-feast scenario.

Back in 1994, the Institute for Fiscal Studies argued that “any further hypothecated taxes would principally be an exercise in deceiving voters that their tax payments controlled government spending in a way which they simply will not”.

That was right then, and it’s right now. Please – let’s not go there.

Alex Wild is research director of the TaxPayers' Alliance