A new tax to fund the NHS and Care
The NHS currently costs about £130Billion. Every sensible politician agrees that the amount needed will keep on going up, year after year. New drugs and treatment and diagnosis techniques increase the cost pressures of an ageing society. But there is no consensus on how to find the extra money and safeguard it when government finances remain tight. My former parliamentary colleague Norman Lamb, the excellent health spokesperson for the Liberal Democrats, has revived the idea of a tax dedicated to the NHS. At the party’s conference he announced he was setting up a “New Beveridge Group” to consider how a new tax could work. He also confirmed that the Lib Dems want to see an integrated NHS & Care Service.
Details are sketchy at the moment and the names announced so far as members of the group are health practitioners rather than tax experts or economists. It’s also not entirely clear whether they will be looking at options for increasing existing taxes with the proceeds of the increases hypothecated for the NHS or whether they will go further, creating a new tax, with the entirety of its yield dedicated to the NHS. Gordon Brown did the former in his 2002 Budget, raising national insurance contributions by 1% across all incomes. A repeat of such a move would be an easy recommendation but it could only fund a one off uplift in the NHS budget. It would not be sufficient to cover future health cost rises. It would also fail to deliver Norman’s desire to make it plain on everyone’s payslip how much they are paying for the NHS. So I think a new tax would be a better option.
New taxes don’t come around that often and in recent times they have been tiddlers in terms of the revenue raised, just a few billion here and there from the likes of air passenger duty or landfill tax. To raise in excess of £130billion a year requires a behemoth of a new tax, not seen since the introduction of VAT when Britain joined the EEC in 1973. VAT currently raises £115.4Billion making it the second largest source of revenue after income tax on £168.5Billion. The third largest is national insurance (NIC) at £113.7Billion. Setting up a new NHS tax would necessitate a major disturbance to one of these three big existing taxes. The obvious candidate is NIC.
My Liberal hero Lloyd George created national insurance in 1911. It paid for two of the foundation stones of the welfare state, sick pay and unemployment benefit. Later it also became linked to the financing of an earlier Liberal creation, the old age pension. Despite popular myth that it funds the NHS, this has never been the case. When another great Welshman created the NHS in 1948 it was decided that it should be funded from the general range of all taxes. Aneurin Bevan rejected William Beveridge’s attachment to insurance. Now might be the time to convert NIC into the NHS tax that many people already believe exists.
Several obstacles would need to be overcome. First, NIC would have to be shorn of the remaining links to entitlement to the state pension and non means tested Job Seekers Allowance. NHS and social care are both devolved issues and the budgets of the Cardiff, Edinburgh and Belfast governments are adjusted by the now antiquated Barnett Formula. If a dedicated NHS and Care tax is to be introduced, why not devolve the setting of the rate to the devolved governments with the Chancellor being responsible for the rate solely for England? Social care is currently funded via local government (the Coalition started a limited pooling of council and NHS local budgets in 2015 with the Better Care Fund) so a fiscal change would be needed in the local government settlement too. The December 2015 Spending Review announced an optional 2% rise in council tax specifically for social care. But council tax is a regressive tax and it would be better to fund social care from a broad based tax on income.
Making NIC the funder of the NHS & Care Service would enable us to kill two birds with one stone. NIC has for many years effectively been a second form of income tax. But its rules make its operation more complicated and less progressive than income tax. Thanks to the Liberal Democrats the Coalition raised the starting point for income tax to £11,000. The starting point for employee NICs is just over £8,000 – an unfair tax on the lowest paid. Worse, the charging rate of 13.8% drops to just 2% on incomes over £43,000, the same point where income tax doubles to its 40% rate. While income tax is levied on all forms of remuneration, several perks such as company cars escape an NIC charge. Employers also pay NIC and the rules are different here, with different rules again for the self-employed.
Setting up a new NHS tax would enable the charging thresholds and rules to be aligned with income tax, with quieter squeals of anguish from higher earners than if the reform was done as part of a normal Budget. The rates of tax would depend on the amount needed to be raised. The National Audit Office’s latest report on adult social care in England says that current spending is £19Billion. So with an increased NHS budget the target revenue for a combined service would be in the region of £155Billion. HMRC officials would need to work out the tax rate needed to raise this amount. I would want to see a small reduction in the current main 13.8% rate and a rise in the 2% rate on higher incomes. The new tax could be called National Health and Care Contributions, NHCs.
I wish Norman Lamb well with his New Beveridge Group. If they take on board some of my ideas they could at a stroke bring clarity and stability to NHS finances and make our tax system more progressive. Whatever path they choose, I hope they are bold in their recommendations, like the great Liberal himself William Beveridge.