John Appleby: A dedicated tax to fund the NHS—a zombie policy idea?

We don’t need a new tax to fund the NHS, but rather the political decision to spend more on the NHS

john-applebyThe idea of a dedicated—or hypothecated—tax to fund the NHS is back in the news. The Secretary of State for Health and social care has aired the idea (though he doesn’t necessarily support it). And in a letter to the Prime Minister signed by 98 MPs arguing for a cross-party commission on the NHS and social care, it was suggested that hypothecation was an option for future funding.

But if the problem—as Jeremy Hunt and many others argue—is the need for higher spending on health, is a dedicated tax the answer?

A year ago Richard Layard and I debated the pros and cons of a dedicated NHS tax in The BMJ. While a week may be a long time in politics, the economic arguments about hypothecation remain the same.

But what might a dedicated tax look like? One option would be to rebrand one or more existing taxes as an “NHS tax”. Layard has suggested national insurance contributions as a possible candidate. On its own, this will not cover planned NHS spend across the UK of around £150 billion—falling short by around £13 billion. This could be topped up of course by increased national insurance rates. Similarly, income tax (forecast to raise £189 billion in 2018/19) or VAT (£130 billion) could be, with modifications, rebadged.

So, we’ve relaunched an existing tax as a new NHS tax. Job done? Well, no. We’ve effectively moved the deckchairs around and little more. Taxpayers can perhaps see a bit more clearly that what the NHS spends comes from a specific tax. But so what? Is this materially any advance on knowing that the NHS is paid for from the taxes we pay HMRC?

As with income tax and national insurance, however, the amounts we pay as individuals would also be more transparent, as presumably the NHS tax would appear on pay slips. Whether this is a good thing or a bad thing depends. On the one hand, it reinforces a connection between taxes with NHS spending. On the other hand, could it also undermine the collective insurance idea underpinning the NHS that a person’s contribution to funding the NHS is not directly tied to that person’s consumption of healthcare? The central point of the NHS is that the link between payment and consumption is deliberately broken.

One thing we would probably want from an NHS tax is a degree of fairness. In particular that the tax is at least not regressive (the poor pay proportionately more of their income than the rich) and, more probably, progressive (the rich pay proportionately more). While income tax is progressive, VAT certainly is not and neither is national insurance.

Another characteristic of a dedicated tax—which we might deem desirable for funding a public service from which everyone benefits directly and indirectly—is a wide tax base. But almost by definition, a hypothecated tax would have a narrower base than funding the NHS out of general taxation (to which everyone, including businesses, contributes).

Of course, tying spending to any particular tax exposes the amount available to spend on health to broader economic conditions. The funds available for spending will increase as the economy (and income) increase, but reduce in times of economic slump.  

Some of these problems could be, in theory, dealt with. Variations in funds available due to wider economic conditions could be smoothed over through top ups and reductions from year to year. And making an existing tax such as national insurance more progressive could be achieved by restricting contributions in relation to earnings. But these are not trivial things to do and will make the link between tax and spend—a selling point of a dedicated tax—much less obvious.

Perhaps the most significant problem with an NHS tax is that it puts the (tax) cart before the (spending) horse. The key decision is how much we want to spend on the NHS; a secondary decision is then how we raise the funds to satisfy this decision. And in fact we already have a reasonably fair and efficient system for doing this through the current tax system.

In short, what’s required isn’t the bother and difficulty of creating a new tax, but rather the political decision to spend more on the NHS.

John Appleby is the Director of Research and Chief Economist, Nuffield Trust. He is a visiting professor at City University and Imperial College, London.

Competing interests: None declared.