A tax earmarked for the NHS is an option worth exploringby George Magnus / February 20, 2018 / Leave a comment
Is the National Health Service suffering a “permanent winter”?, asked the Financial Times in a recent assessment of how the NHS is coping with not just seasonal pressures but eight years of restricted funding. It is an important question, but the NHS winter health-check is the tip of an iceberg that incorporates the whole array of age-related spending, including also social care and pensions. In short, Britain’s ageing society is becoming expensive—fast.
It is high time we had a grown-up debate about the entitlement rights and obligations of ourselves as citizens, and the state, to which we look as a provider of infinite resources. Solutions are going to be controversial and challenge vested interests—but so be it.
One potential solution that should be debated is the “hypothecated NHS tax” proposal, recently advocated by a former Permanent Secretary to the Treasury, Nick Macpherson, amongst others. A hypothecated tax is simply a tax earmarked for a specific purpose. It’s not often been done because the Treasury and many economists elsewhere have historically disliked this idea as too cyclical—revenue shortfalls in bad economic times when they’re needed, and surges in good times—and too deceptive, because the government could still siphon revenues off to other programmes. Better, it is said, for the Treasury to receive all revenues and allocate, switch and replenish funding as necessary.
Yet, there are important reasons for a re-think in view of the unique circumstances of the financial burden of ageing. First, an NHS tax would probably be popular as taxes go, as everyone would be funding an organisation held in the highest esteem. Second, the cyclicality risk might be unavoidable, but could be mitigated by a parliamentary agreement that if revenues fell woefully short, the Treasury would have to make good. This would hopefully be infrequent.
“The Office for National Statistics expects the number of over 65s to increase by 7m by 2046”
Third, as a general tax, it would convey the essential message that healthcare in an ageing society is an expensive business, and will fall short unless we all pay. The technologies that are delivering better preventative and clinical care are costly.
So how would it work? If levied via National Insurance (NI), for example, the tax should apply to working retirees at a reduced rate. Older workers who have not yet retired, aged 40-65, and top income earners could pay an additional charge as a sort of pay-down on future age-related benefits. Younger workers would not be burdened, satisfying an important intergenerational issue.
Neither of the major political parties is attempting to answer the question of “who will pay?” for Britain’s ageing society. Chancellor Philip Hammond is giving a bit of funding to the NHS here and there, but in the context of restraints which have seen NHS spending actually slip as a share of GDP. This is unsustainable (and arguably a lot worse). Labour Shadow Chancellor John McDonnell has plans to tax the better off and companies more but this is a different agenda altogether. No amount of revenues from the rich alone is going to make a difference to the demands of an ageing society. Moreover, his election promises in 2017 included protecting pensioner benefits, such as the expensive triple lock, and both parties insist that universal benefits are sacrosanct, even though more than 40 per cent of pensioners are now in the top half of the income distribution and many retirees simply don’t need the full range of cash benefits available. This has to change.
What has to happen, though, to change the blinkered mindsets of our politicians? Ageing isn’t only—or even mainly—about the celebration of old age and longer periods of active retirement. It is a major economic dislocation in which the dependency of older citizens on the working age population rises sharply. The Office for National Statistics expects the number of over 65s to increase by 7m by 2046, with the number of working age persons rising by under 3m. The dependency ratio of the over 65s on the working age population, therefore, rises from 28 to 43 per cent. Put another way, the number of working age people supporting each retiree will fall by a third, from 3.5 to 2.3. We have to develop mechanisms to mitigate this shift, and figure out how to afford to tend to an ageing population.
According to an answer to a recent House of Lords written question (HL4939), government pension and healthcare spending rose from just over a fifth of Total Managed Expenditure in 1996/97 to over 30 per cent in 2016/17, then amounting to over £236bn. Nothing is going to stop this upward trajectory.
In future years, the affordability of pensions won’t be the main issue. The cross-hairs are firmly on health and social care. The Office for Budget Responsibility’s latest Fiscal Sustainability report predicted that, as things stand, spending on health and social care will rise from about 8 per cent of GDP currently to 14.6 per cent of GDP over the next 50 years. The OECD’s figure is slightly larger.
Children can’t understand this, the young don’t care especially, and for anyone over 40 it’s too far off. Look at it this way, though: if the government had to write a cheque today and annually until then, it equates to £138bn a year in today’s money.
So who will pay? It’s time to have a grown-up debate.