How should we pay for the NHS?

Last month, a cross-party coalition floated the idea of a hypothecated tax, a tax devoted to a specific purpose, as a way of funding the NHS. People like the NHS and would be willing to pay more tax if the tax was devoted to that purpose, so the argument goes.

This proposal does the rounds from time to time. Often this special “NHS tax” is linked to National Insurance (NI), which after all already meets a proportion of health costs, and appears to be a tax that is already hypothecated towards benefits and health.

The coalition behind the current proposals is fronted by LibDem Norman Lamb, who told this Autumn’s LibDem conference: “let’s look at the case for a dedicated health and care tax, shown on your pay packet”. Lamb is joined by fellow former Coalition Health Minister, Tory Dr Dan Poulter. Completing the ‘cross-party’ coalition is Liz Kendall, former shadow health secretary and failed Blairite Labour leadership candidate.

The links between hypothecated taxes and National Insurance are deeply concerning. NI is now widely recognised as just another form of income tax levied on some but not all income, and thus, deeply regressive. In particular, unlike income tax, NI is not paid on pensions, payments from tenants, income from trusts, or income above a certain ceiling.

And there are other forms of less progressive taxation being explored by ‘cross-party’ groups including right wing Labourites. Only this week, former Blairite health minister Alan Milburn and his new employer, PWC, have suggested that local governments should have more powers to raise council tax to pay for healthcare – another deeply regressive tax.

Why do politicians flirt with regressive taxes to fund the NHS? It’s perhaps instructive to look at the history.

Where does the money currently come from to pay for the NHS in the UK?

The answer is from tax obviously but is it from National Insurance or general taxation?

In fact about 18% of the costs of the NHS are borne by National Insurance Contributions – some £21 billion of the £118 billion the NHS cost in 2015-16.

Why? After all, Nye Bevan recommended “general taxation” as the way to fund the NHS and specifically rejected the idea of an NHS paid for mostly through National Insurance. In ‘In Place of Fear’ Bevan wrote that using a “contributory” system like National Insurance to fund healthcare would prove too complicated and unfair, calling it a “peculiarly unsuitable” approach.

But despite that – and despite its markedly regressive character – governments of all colours have seen National Insurance Contributions as a useful tax source.

When sickness benefit was introduced by the Liberal government in 1912 it included a right to treatment by GPs for insured workers ‘on the panel’. Every insured worker was on the panel of a GP – the origin of our current GP system. The original motive for this was supposedly to get the worker back to health and back to work. Given the ineffectiveness of most curative interventions at that time its real benefit was being “signed off work” by the medical practitioner. That gave sick workers time to recover and get an income whilst doing so. In the interwar years, coverage was extended from the worker to the worker’s family. So when the NHS was established by the post-war Labour government in response to Beveridge’s proposals, part of the cost of the NHS was picked up by NI contributions.

But for most of the post-war period the primary purpose of the National Insurance scheme remained the funding of unemployment, sickness and especially retirement benefits. Originally workers paid a flat rate contribution in return for flat rate benefits, but from the 1960s time there was a shift towards earnings related contributions and earnings related benefits, though Thatcher scrapped the latter in favour of returning to flat rate benefits.

Like income tax, National Insurance is levied on those who earn incomes but not on other incomes – and thus, like income tax, it is easily avoided by the rich who can convert earned income into capital gains and so on. But it is far more regressive than income tax. People start paying National Insurance at a lower threshold of income than for income tax. And for many years it was not paid at all on earned income over a ceiling. It’s now levied at just 2% on income over a ceiling, as opposed to 12% up to that threshold.

Despite (or perhaps because) of its tendency to hit the poor harder than the rich, NI has been regarded as a useful ‘stealth tax’ since the 1960s. That old rogue Richard Crossman – in a lecture commemorating another rogue Herbert Morrison – suggested raising it since this was less controversial than raising income tax. His suggestion was published as a Fabian Pamphlet. Most recently this trick was played by Gordon Brown in 2002.

What’s a better answer?

The correct solution is to fold NI into general income tax. This would be politically difficult, given the impact this would have on affluent pensioners who not only do not pay NI on their pensions but do not even pay NI on earned income once they are over 65.

I am a prime example. I have a full USS pension and about a 0.3 professorial contract at work. Of course people like me should pay more tax.

Actually it would be easy to take a lot of pensioners out of this liability by raising the income threshold for income tax itself.

We need to redistribute. Whilst many of the elderly have relatively low incomes and started work at 15 or 16 so had long and arduous working lives, a lot of pensioners are relatively well off and should pay more.

And of course any tax policy ‘going forward’ has to get after tax avoidance and hit it very hard. There is one proper way to pay for the NHS (and indeed social care) and that is through a progressive tax system treating all taxes as part of that system, not through silly games with a very dodgy history.

This was first published by Our NHS

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3 Comments

  1. There is another reason why we shouldn’t be talking about a tax to fund the NHS. The post-Keynesian view is that State expenditure in countries with sovereignty over their money (like the UK, but not the Eurozone), is not funded by taxation. Instead the State spends money into existence and then destroys it through taxation. It takes a little getting used to! but the impication is profound. No need to worry about funding the NHS – just fund it and control any untoward consequences with that macroeconomic tool called tax.
    P Tcherneva gives a succinct explanation in this chapter (not on health funding but on social security in the forms of Basic Income and the Jobs Guarantee) see pp. 185-6:
    http://media.wix.com/ugd/f4c1a3_a17049fbd52140d1be31612a8f1e76a8.pdf

  2. Great article. Is it on Facebook so I can share it? It’s so interesting to read more of the history of the NHS, and I agree about pensioners of Generation Rent getting the best deal, out of our children and their mates’ growing poverty.

  3. Alan Rogers says:

    Dave, I agree entirely with your thesis that scrapping NI and increasing income tax would be a more progressive system. I too would pay a bit more from my USS pension. As an aside I think the Welsh Government should think carefully about what the tax-payer’s money provided for the NHS Wales should be spent on. Religious Care is not Health Care and it is not the State’s responsibility. Chaplains cost the NHS Wales £1.3 million each and every year. Chaplaincy should be funded by a Charitable Trust.

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