What are the pros and cons of a ring-fenced NHS tax?

The idea of a specific NHS tax has gained some notable backing in recent weeks as the health service struggles under the strain of another “winter crisis”.

Factoring in inflation, the NHS is suffering the longest budget squeeze in its history.

Since 1948, spending on the NHS has grown by 3.7% per year, on average. From 2010-11 to 2020-21, average growth is expected to be 0.9%. Healthcare spending as a share of GDP in 2014-15 was 7.3% and is projected to fall to 6.6% by 2021, according to The Economist.

Subscribe to The Week

Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.

SUBSCRIBE & SAVE

Sign up for The Week's Free Newsletters

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

Sign up

“With the public sceptical about the ability of politicians to act in their interest, but increasingly accepting of the need for more taxation to fund public services, politicians are keen to link revenues to specific items as a way to increase spending transparency and make tax increases more palatable,” says the Financial Times.

A ring-fenced - or hypothecated - tax for the NHS seemingly has public approval. A survey by the King’s Fund think tank in September found that two-thirds of the public were willing “to pay more taxes in order to maintain the level of spending needed” on the health service.

So what are the pros and cons behind a hypothecated NHS tax?

Pros

Those who support hypothecation argue that the paucity of other options, and the pressures on public spending over the coming decade, will be so severe that the time for ideological purity could be over.

The number of people aged over 85 in the UK is set to rise by two-thirds between 2010 and 2030, according to the Office for National Statistics, with most of that increase kicking in over the 2020s.

Sarah Wollaston, Tory chairwoman of the Commons Health Select Committee, is calling for taxes on the over-40s to “pay for reforms that would unite the NHS and a crumbling social care system”, says The Times.

“If you link taxes, people are happier to pay them,” Wollaston told the newspaper. “You have to factor in how you can fairly bring in money from those who are in retirement so you can spread this across the generations rather than have it fall all on younger people.”

Research by ITV News in 2016 suggested that 70% of people would happily pay an extra 1p in every pound if that money was guaranteed to go to the NHS.

And almost half would pay an extra 2p in the pound in order to bolster NHS funding, according to the survey of 1,000 people, conducted by Survation.

Cons

A ring-fenced tax for health and social care has been resisted in the past by the Treasury. Opponents believe it ties the hands of chancellors.

“Officials have traditionally seen hypothecation as either a lie — because the revenues from the tax are not in fact earmarked — or undesirable, because linking spending to uncertain revenue streams would flood services with money in good years but starve them of cash during a recession, arguably when they need it most,” says the Financial Times.

Another argument against the plan is the “idea that introducing such a tax would risk giving the impression that what matters for the quality of healthcare is the size of the budget”, says Andrew Haldenby, director of think tank Reform.

In a letter to the FT, Haldenby argues that the winter crisis of hospital overcrowdinghighlights “the organisational problems that bedevil the NHS”, rather than any monetary issues.

Former permanent secretary to the Treasury Nick Macpherson, who for a long time opposed hypothecation, says the political responses fail to address the public spending pressures that Britain will face in the next decade.

“No one in their right minds would want a hypothecated tax in its purist form, but this country has a lot of commitments that on current plans simply cannot be financed,” Macpherson said, according to the FT.

“I wouldn’t want to finance the NHS out of hypothecated taxes, but we can use some smoke and mirrors to get people to agree to a tax increase.”