Tax: How should the NHS be funded?

Donald-Drysdale By Donald Drysdale for ICAS

2 July 2018

Once the envy of the world, the NHS is increasingly failing to meet demands for its services. Donald Drysdale highlights some of the issues involved in creating a new ‘NHS tax'.

The NHS in poor shape

Britain’s National Health Service (NHS), 70 years old this month, is in dire straits. Most of its services are failing to cope with demand, and there is much speculation about new measures that might be required to raise additional funding for the organisation.

General medical practice is no longer attracting enough newly-qualified doctors, many of whom prefer to seek their careers abroad. Shortcomings in primary health care are placing excessive demands on accident and emergency departments. Staff shortages are crippling hospitals. Health Boards are facing financial collapse.

People have come to expect a lot from the NHS, and new burdens are being added. Traditional ailments from misuse of alcohol and tobacco are now accompanied by growing obesity and drug dependency. With an ageing population, increasing numbers of people are suffering from multiple long-term chronic conditions. Arrangements for social care, particularly for the elderly, fall partly on the NHS and are in disarray.

Government action proposed

In June the Prime Minister acknowledged that taxes would need to rise “in a fair and balanced way” to provide additional funding for the NHS. The Chancellor of the Exchequer has hinted that he would increase taxes on the better off, while also resorting to extra borrowing – though scope for the latter is limited by his deficit reduction plans.

In evaluating ways of raising additional tax to help fund the NHS, the Chancellor will have a range of possible options. For example, he might add (say) 1p or more to the basic rate of income tax, perhaps with greater increments to the higher and additional rates. He might also cut back the rate of relief which taxpayers can claim on pension contributions if they pay income tax at more than the basic rate.

Increases in the standard and/or reduced rates of VAT might be another option, with the extra VAT revenues being used to help fund the NHS.

Alternatively, the Chancellor might increase rates of national insurance contributions (NICs) on employers, employees or the self-employed – or on all three. He might seek to equalise NICs rates by increasing those for the self-employed. He might even raise the upper earnings limit on NICs, or extend employee and self-employed contributions by removing the exemption currently enjoyed by all workers over state pension age.

Another possibility would be a completely new tax – or perhaps the re-launch of NICs – as a hypothecated ‘NHS tax’. The receipts from such a tax would be ring-fenced or earmarked specifically for use against NHS expenditure, rather than the NHS being funded from general tax revenues.

Hypothecation

Hypothecation could be applied in different ways. It could be ‘hard’, with revenues from the NHS tax placing a strict limit on NHS spending, or a ‘softer’ method might be taken with a looser relationship between the two.

Hard hypothecation would be very difficult to apply, while a softer approach would likely be obfuscated by party political smoke and mirrors. An article by Paul Johnson of the IFS, published in The Times on 22 January 2018, set out some of the difficulties which hypothecation would bring.

Any attempt to tie NHS spending rigidly to revenues from a particular tax would be doomed to failure. For example, if NICs were hypothecated to NHS spending, expenditure on the NHS would have to be cut in a recession, or NICs – which are effectively a tax on jobs – would have to be raised. Either course would almost certainly be sheer folly.

Devolution

NHS funding can’t be addressed without considering complications arising from devolution.

The UK Government is responsible for the NHS in England. However, responsibility for NHS services in Scotland and Wales rests with their respective devolved administrations, and the same would be true for Northern Ireland were its Assembly not currently suspended.

If the Chancellor were to increase income tax rates, these would apply to all income of taxpayers in England and Northern Ireland. In Scotland where the Scottish income tax applies, and in Wales where the Welsh rates of income tax will apply from April 2019, Westminster’s increased income tax rates would not be levied on earnings, pensions or property income – but would apply to savings and dividend income.

These regional variations would make income tax a blunt instrument for raising additional NHS funding. While adjustments would be made to the block grants paid by Westminster to fund public spending in Scotland and Wales, the Scottish Parliament and the Welsh Assembly might, or might not, choose to follow Westminster and increase their income tax rates.

If VAT rates were raised, devolution would also impact on the end result. From April 2019 receipts from the first 10p of standard rate VAT and the first 2.5p of reduced rate VAT in Scotland will be assigned to the Scottish Government, with an appropriate adjustment to the Scottish block grant.

If the Chancellor were to increase rates of NICs, which are reserved to Westminster and apply to all UK employers and earners, and perhaps extend these to workers over state pension age, the burden would be spread across all UK employers and the entire working population in what might arguably be an equitable way. However, this ‘NHS tax’ would have a knock-on effect in boosting the block grants by sums which the devolved administrations would not be obliged to spend on the NHS, but could spend in any way they chose.

Social care would need to be addressed separately. England, Scotland, Wales and Northern Ireland have their own specific systems of private and publicly funded social care, with differing policies and priorities, funded in varying degrees by the NHS and by local authorities.

Generally, as a result of devolution, there would be an absence of clarity. Taxpayers would not necessarily understand which NHS services they were funding, and the resulting lack of accountability would be undesirable.

Weighing up the options

If a long-term cure for the NHS finances could be found, it would likely involve substantial increases in funding, painful cost-cutting, or swingeing reorganisation measures – and very possibly a mixture of all three.

Votes matter to minority governments. Voters don’t like tax rises but might be persuaded that the NHS is a particularly worthy cause, so politicians could be tempted to dress up a tax hike as a hypothecated NHS tax. For the reasons I’ve outlined above, it is unlikely to prove a satisfactory solution.

We may not learn more until the Chancellor’s annual Budget in November, when uncertainties around the terms of Brexit are more likely to be top of the Westminster agenda, so perhaps the ailing NHS will get no more than a sticking plaster at that stage.

Article supplied by Taxing Words Ltd

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  • Tax

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