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"

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Will the collapse of the EU/Canada trade deal speed the demise of Jean-Claude Juncker?

The embattled European Comission President has already survived the migrant crisis and Brexit.

Jean-Claude Juncker, the embattled President of the European Commission, is likely to come under renewed pressure to resign later this week now that the Belgian region of Wallonia has likely scuppered the EU’s flagship trade deal with Canada.

The rebellious Walloons on Friday blocked the Comprehensive Economic and Trade Agreement (CETA). The deal for 500 million Europeans was at the final hurdle when it fell, struck down by an administration representing 3.2 million people.

As Canada’s trade minister, Chrystia Freeland, walked out of talks in tears and declared the deal dead, fingers were pointed at Juncker. Under pressure from EU governments, he had agreed that CETA would be a “mixed agreement”. He overruled the executive’s legal advice that finalising the deal was in the Commission’s power.

CETA now had to be ratified by each member state. In the case of Belgium, it means it had to be approved by each of its seven parliaments, giving the Walloons an effective veto.

Wallonia’s charismatic socialist Minister-President Paul Magnette needed a cause celebre to head off gains made by the rival Marxist PTB party. He found it in opposition to an investor protection clause that will allow multinationals to sue governments, just a month after the news that plant closures by the world’s leading heavy machinery maker Caterpillar would cost Wallonia 2,200 jobs.

Juncker was furious. Nobody spoke up when the EU signed a deal with Vietnam, “known the world over for applying all democratic principles”, he sarcastically told reporters.

“But when it comes to signing an agreement with Canada, an accomplished dictatorship as we all know, the whole world wants to say we don’t respect human right or social and economic rights,” he added.  

The Canadian Prime Minister Justin Trudeau was due to arrive in Brussels on Thursday to sign CETA, which is backed by all EU leaders.

European Council President, Donald Tusk, has today spoken to Trudeau and his visit is currently scheduled to go ahead. This morning, the Walloons said they would not be held to ransom by the “EU ultimatum”.

If signed, CETA will remove customs duties, open up markets, and encourage investment, the Commission has said. Losing it will cost jobs and billions in lost trade to Europe’s stagnant economy.

“The credibility of Europe is at stake”, Tusk has warned.

Failure to deliver CETA will be a serious blow to the European Union and call into question the European Commission’s exclusive mandate to strike trade deals on behalf of EU nations.

It will jeopardise a similar trade agreement with the USA, the Transatlantic Trade and Investment Partnership (TTIP). The Commission claims that an “ambitious” TTIP could increase the size of the EU economy by €120 billion (or 0.5% of GDP).

The Commission has already missed its end of year deadline to conclude trade talks with the US. It will now have to continue negotiations with whoever succeeds Obama as US President.

And if the EU cannot, after seven years of painstaking negotiations, get a deal with Canada done, how will it manage if the time comes to strike a similar pact with a "hard Brexit" Britain?

Juncker has faced criticism before.  After the Brexit referendum, the Czechs and the Poles wanted him gone. Hungary’s Prime Minister Viktor Orban muttered darkly about “personnel issues” at the Commission.

In July, it was reported that Angela Merkel, the most powerful politician in Europe, was plotting to oust Juncker. Merkel stayed her hand, and with German elections looming next year is unlikely to pull the trigger now.

When he took office in November 2014, Juncker promised that his administration would be a “political Commission”. But there has never been any sign he would be willing to bear the political consequences of his failures.

Asked if Juncker would quit after Brexit, the Commission’s chief spokesman said, “the answer has two letters and the first one is ‘N’”.

Just days into his administration, Juncker was embroiled in the LuxLeaks scandal. When he was Luxembourg’s prime minister and finance minister, the country had struck sweetheart tax deals with multinational companies.  

Despite official denials, rumours about his drinking and health continue to swirl around Brussels. They are exacerbated by bizarre behaviour such as kissing Belgium’s Charles Michel on his bald head and greeting Orban with a cheery “Hello dictator”!

On Juncker’s watch, border controls have been reintroduced in the once-sacrosanct Schengen passport-free zone, as the EU struggles to handle the migration crisis.

Member states promised to relocate 160,000 refugees in Italy and Greece across the bloc by September 2017. One year on, just 6,651 asylum seekers have been re-homed.

All this would be enough to claim the scalp of a normal politician but Juncker remains bulletproof.

The European Commission President can, in theory, only be forced out by the European Parliament, as happened to Jacques Santer in 1999.

The European Parliament President is Martin Schulz, a German socialist. His term is up for renewal next year and Juncker, a centre-right politician, has already endorsed its renewal in a joint interview.

There is little chance that Juncker will be replaced with a leader more sympathetic to the British before the Brexit negotiations begin next year.

James Crisp is the news editor at EurActiv, an online EU news service.