17 July 2018

May should fund her NHS pledge with savings, not tax rises


In both the 2010 and 2015 General Elections, the Conservative Party pledged to abolish the deficit and deal with the national debt. It was one of the key distinctions between them and the Labour Party.

In fact, it was the core message of the 2015 General Election campaign: the choice between the “long term economic plan” of deficit and debt reduction, or higher spending and borrowing under Labour.

It was an effective tactic which clearly struck a chord with the public as the Tories gained a majority in the House of Commons for the first time since 1992. It was also the first time since 1900 that any incumbent party had increased its national vote share.

Long, painful progress has been made on cutting the deficit — but all that could be swept away by Theresa May’s promise to splash the cash on the NHS.

According to the Office for Budget Responsibility, who publish their Fiscal sustainability report today, the outlook for the public finances has become “less favourable” since they last reported in January 2017, in part because of May’s promise of £20bn extra for the NHS. In the longer term, the public finances are “likely to come under significant pressure” as we deal with an ageing population.

The OBR has warned that the Government will have to impose tax rises or spending cuts to avoid a sharp rise in state borrowing in the middle of the next decade. It has also warned against relying on a “Brexit dividend” to fund increased spending.

The OBR is right. There is no magic money tree, and any increase in spending on the NHS will have to come from somewhere.

Although I am someone who believes that in the long run the UK can be better off outside the EU, it depends on a number of factors, including being free of onerous regulations and free to forge free trade deals with the rest of the world.

Given the increasingly shambolic nature of the negotiations and the Government’s capitulation on many key issues, this looks far from certain. It would be imprudent, to say the least, to rely on Brexit to fund increased public spending.

The unavoidable fact is that the Government faces a choice between increasing taxes, increasing borrowing, or cutting spending.

Increasing taxes would be the wrong thing to do. The Treasury has floated the idea of raising beer and fuel duty. As I have previously pointed out, this would not only hit the poorest hardest, but would be counter-productive in the long run. An increase in taxes across the board would add to the already heavy burden felt by many households around the country and would also be politically unpopular.

Increasing borrowing would be dangerous too. Although things have been moving in the right direction, the deficit has not been eliminated and the national debt is still too high. In fact, it is rising and is projected to reach 234 per cent of GDP by 2067. A high national debt endangers the UK’s economic resilience and places a burden on the next generation who will be forced to pick up the tab for the Government’s profligacy. Moreover, excessive government spending and debt crowds out the private sector and hampers economic growth.

This leaves one remaining option: cutting public spending. There is a great deal of evidence which shows that high levels of public spending are bad for economies. A study by the OECD, for example, found that countries tend to experience low economic growth as a result of very high public spending. Research from the University of Michigan got very similar results, as did a paper published by economist Gareth D Myles.

There is so much wasteful spending which could be eliminated. The HS2 vanity project should be scrapped. It is both deeply unpopular and costs a fortune.

Then there is the foreign aid budget. The UK is a generous country, but in light of recent scandals concerning the abuse of some of the most vulnerable people on the planet by charities such as Oxfam, which have received money from the government, taxpayers are rightly wondering whether their money is being spent correctly.

Instead of spending an arbitrary 0.7 per cent of GDP on international aid, we should reduce the budget and focus our efforts on countries who desperately need help, while steering clear of schemes such as anti-smoking programmes in China and helping the Ethiopian Spice Girls in their bid for stardom.

HS2 and the aid budget are just two areas where money could be saved. Ministers can also reduce costs by accelerating the use of automation in the public sector. As as much as £17 billion a year in staff costs could be saved by 2030 if the public sector adopted readily available technology.

If the Government wants to increase spending on the NHS then it will have to make a decision. They should avoid the easy but economically damaging fixes of more borrowing and spending and get back to reining in spending. Wasn’t that the long-term economic plan in the first place?

Ben Ramanauskas is a Researcher at The Taxpayers' Alliance.