Governments 20bn NHS funding boost will mean higher borrowing and tax rises

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Published on Public Finances and the Economy

Ministers should reject a National Insurance rise and consult on a wider range of tax rises 

Restoring the path of NHS spending to its historical level of growth will require £20bn of extra borrowing and taxes by the end of the parliament, according to a new report published today (Tuesday) by the Resolution Foundation.

However, despite regularly topping the list of preferred funding options among voters, the Foundation warns against repeating the approach of the 2000s of boosting the NHS budget via a rise in National Insurance Contributions (NICs). Doing so would be difficult given the parliamentary arithmetic, less progressive than some other options, and would be deeply unfair across generations.

Healthy Finances? notes that the NHS is approaching its 70th anniversary next month in the middle of the tightest funding period in its history. On current plans, real terms per capita health spending is due to increase by just 0.4 per cent a year this decade (2010-11 to 2019-20), compared to a 5.9 per cent average annual increase in the preceding decade.

However, the government has signalled that it intends to tackle this funding challenge. The Prime Minster and the Health Secretary are reported to be in favour of a “significant” boost to the NHS budget, with the Health Secretary said to be aiming to restore historical rates of annual growth in spending. Such a commitment implies increases of between 3.5 per cent and 4 per cent a year, costing £17-23bn by the end of the parliament in 2022-23.

But while a consensus around the need for extra funding has been built, the Foundation says that delivering the kind of spending boost the NHS needs remains extremely challenging.

With the Chancellor having indicated earlier this year that he would be prepared spend a portion of any sustained improvement in the public finances, the Foundation believes that close to half of the £20bn could be filled through extra borrowing. This would still leave the need for substantial tax rises, and the government would have to get them through parliament with a wafer thin majority and manifesto constraints on both sides of the house.

Much attention has focused on the possibility of raising employee NICs by 1p, as was done in 2003. This could raise over £10bn a year if it extended to employers too. However the Foundation says that the government should rule out such a move, arguing that more progressive funding options such as income tax are available, and that it would not bring in any resources from those most likely to benefit from increased spending on the NHS. That’s because National Insurance is only paid by those below state pension age.

Instead, the Foundation says the government should consult on a wider range of tax options to give the NHS the £20bn boost it needs, with a final decision announced at the Autumn Budget. Healthy Finances? highlights a range of tax rises options, including:

  • Broadening Britain’s tax base. Extending NICs contributions to workers aged 65 and over would raise around £1bn by 2022-23, while extending it to some private pension income would raise a further £1.5bn. Such moves would be very progressive, with 80 per cent raised from the richest fifth of pensioners.
  • Freezing thresholds rather than raise rates. Freezing income tax and NICs thresholds once the Conservative manifesto targets of £12,500 (for the income tax personal allowance) and £50,000 (for the higher rate threshold) are hit would raise £3.7bn by the end of this parliament.
  • Cancelling tax cuts in the pipeline. Cancelling the planned cut in corporation tax from 19 per cent to 17 per cent later in the parliament could save £5.7bn by 2022-23. Such a move would also be able to pass through parliament relatively easily as it doesn’t conflict with any party manifesto pledges.
  • Taxing wealth rather than income or consumption. Resolution Foundation work for the Intergenerational Commission found that replacing Council Tax with a progressive property tax could raise an additional £5bn a year.

Matt Whittaker, Deputy Director at the Resolution Foundation, said:

“As the NHS approaches its 70th birthday, public concern about its condition is at its highest level since the turn of the millennium. This reflects the huge financial pressures it faces, a pressure that the government is rightly looking to address.

“But while there is widespread public and political support for more money for the NHS, there is far less agreement over who exactly will pay – particularly as finding something in the region of £20bn a year will require new tax rises.

“Crucially the government should not simply reach for another National Insurance rise. Instead it should consider a wider range of tax rises that are fair not only between rich and poor, but also between young and old.”

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