Support 100 years of independent journalism.

  1. Politics
  2. Health
24 December 2014

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.

By India Keable-Elliott India Keable-Elliott

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.

Sign up for The New Statesman’s newsletters Tick the boxes of the newsletters you would like to receive. Quick and essential guide to domestic and global politics from the New Statesman's politics team. The best of the New Statesman, delivered to your inbox every weekday morning. The New Statesman’s global affairs newsletter, every Monday and Friday. A handy, three-minute glance at the week ahead in companies, markets, regulation and investment, landing in your inbox every Monday morning. Our weekly culture newsletter – from books and art to pop culture and memes – sent every Friday. A weekly round-up of some of the best articles featured in the most recent issue of the New Statesman, sent each Saturday. A weekly dig into the New Statesman’s archive of over 100 years of stellar and influential journalism, sent each Wednesday. Sign up to receive information regarding NS events, subscription offers & product updates.
I consent to New Statesman Media Group collecting my details provided via this form in accordance with the Privacy Policy

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”