What are the implications of earmarking taxation for the NHS? Photo: Getty
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Earmarking taxes for the NHS won’t guarantee more money for healthcare

By clearly linking a tax to overall spending on the NHS, it can help reconnect voters with the purpose of taxation, but makes healthcare spending vulnerable to macroeconomic shocks and cycles.

It is no secret that the NHS faces a huge funding shortfall. By 2020/21, the total health budget deficit could approach £30bn, up from £2bn in 2014/15. This has sparked a debate about how the funding gap could be narrowed, and renewed interest in the idea of hypothecating – or earmarking – taxation for the NHS.

Back in 2002, Gordon Brown increased National Insurance rates by 1p, and earmarked the revenues raised for increased NHS spending. Earlier this year, Labour MP Frank Field proposed repeating this policy, estimating that it would raise around £15bn by 2020/21 – or half of the predicted 2020 health budget deficit.

Nick Pearce, director of IPPR, also expressed support for the idea. He argues that an "NHS tax" or an increase in National Insurance could “play a significant – and immediate – role in reducing the funding gap”.

The thinking behind these proposals is that the public would be more likely to support a tax increase if they knew the additional funding was earmarked for the NHS. Indeed, a poll by Guardian/ICM found 48 per cent of respondents were in favour of tax-funded spending increases in the NHS.

But, as CentreForum reveals in a new report, earmarking taxes for the NHS won’t necessarily guarantee more money for healthcare.

In the report, we study the merits of what is known as "strong hypothecation", where a particular tax (and only that tax) funds an entire service, and "weak hypothecation", where revenues are notionally earmarked for an area of government spending. It is the latter that is proposed by Frank Field and IPPR. But we conclude that the former is the more viable of the two.

Whereas strong hypothecation promotes transparency, accountability and trust in government, weak hypothecation has significant disadvantages. Chief among them is that it would not guarantee that an increase in an earmarked tax rate led to higher spending on the NHS.

The government could "borrow" earmarked revenues for other programmes, or it could vary the designated service’s tax funding from other sources, leaving overall spending on the NHS unchanged.

Furthermore, even if the government could show that the tax rise led to increased spending on the health service in the first year, it is unlikely that subsequent spending reviews would treat the earmarked revenue as additional to the NHS budget. As the Barker Commission recently noted, weak hypothecation is “a soft form of the idea, and one that may rapidly become a lie”.

Strong hypothecation, on the other hand, has some merits. By clearly linking a tax to overall spending on a particular service, it can help to reconnect voters with the purpose of taxation, and gives the public a sense of what a particular service costs.

On the flipside, strong hypothecation would make health spending dependent on macroeconomic shocks and cycles, rather than need or demand for services. This risks insufficient funding during economic downturns, and wasteful spending during booms.

During a recession demand for healthcare is likely to increase, just when the money available for the NHS is falling, and so strong hypothecation would offer little wriggle room in providing a health service that meets the public’s expectations.

It is important to note as well that there are conflicting political motives among proponents of hypothecated taxation. While advocates on the left support earmarked tax increases as a means of raising revenue for the NHS, proponents on the right consider it an opportunity for a fundamental rethink on how the NHS should be paid for.

Conservative peer and Times columnist Danny Finkelstein, for example, has emphasised the role that strong hypothecation could play in deciding “how much healthcare we should offer people free at the point of use”, indicating that the right’s solution to the NHS funding gap may well be at odds with the left’s.

Although earmarking taxes is not inherently right or wrong, politicians must be clear about the objectives and implications of hypothecating taxation for the NHS. Or they will very quickly run into political difficulty.

India Keable-Elliott is an economic researcher at CentreForum and author of the CentreForum report "Hypothecated taxation and the NHS"

Ukip's Nigel Farage and Paul Nuttall. Photo: Getty
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Is the general election 2017 the end of Ukip?

Ukip led the way to Brexit, but now the party is on less than 10 per cent in the polls. 

Ukip could be finished. Ukip has only ever had two MPs, but it held an outside influence on politics: without it, we’d probably never have had the EU referendum. But Brexit has turned Ukip into a single-issue party without an issue. Ukip’s sole remaining MP, Douglas Carswell, left the party in March 2017, and told Sky News’ Adam Boulton that there was “no point” to the party anymore. 

Not everyone in Ukip has given up, though: Nigel Farage told Peston on Sunday that Ukip “will survive”, and current leader Paul Nuttall will be contesting a seat this year. But Ukip is standing in fewer constituencies than last time thanks to a shortage of both money and people. Who benefits if Ukip is finished? It’s likely to be the Tories. 

Is Ukip finished? 

What are Ukip's poll ratings?

Ukip’s poll ratings peaked in June 2016 at 16 per cent. Since the leave campaign’s success, that has steadily declined so that Ukip is going into the 2017 general election on 4 per cent, according to the latest polls. If the polls can be trusted, that’s a serious collapse.

Can Ukip get anymore MPs?

In the 2015 general election Ukip contested nearly every seat and got 13 per cent of the vote, making it the third biggest party (although is only returned one MP). Now Ukip is reportedly struggling to find candidates and could stand in as few as 100 seats. Ukip leader Paul Nuttall will stand in Boston and Skegness, but both ex-leader Nigel Farage and donor Arron Banks have ruled themselves out of running this time.

How many members does Ukip have?

Ukip’s membership declined from 45,994 at the 2015 general election to 39,000 in 2016. That’s a worrying sign for any political party, which relies on grassroots memberships to put in the campaigning legwork.

What does Ukip's decline mean for Labour and the Conservatives? 

The rise of Ukip took votes from both the Conservatives and Labour, with a nationalist message that appealed to disaffected voters from both right and left. But the decline of Ukip only seems to be helping the Conservatives. Stephen Bush has written about how in Wales voting Ukip seems to have been a gateway drug for traditional Labour voters who are now backing the mainstream right; so the voters Ukip took from the Conservatives are reverting to the Conservatives, and the ones they took from Labour are transferring to the Conservatives too.

Ukip might be finished as an electoral force, but its influence on the rest of British politics will be felt for many years yet. 

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