Plucking the Taxpayer

Hypothecating taxes makes good politics but poor economics.  The public liked the idea of paying national insurance, when it actually did fund pensions, road fund tax, when it did fund roads, and heritage projects via the Lottery. The BBC licence fee is a form of hypothecated tax. The Times on April 12th reported that most of the public support paying more tax provided it goes to the NHS.  Hypothecation for popular causes is a fine example of plucking the goose to maximise the feathers while minimising the hissing.

Hypothecation prevents government from allocating funds to where the country most needs them.  Priorities will change even though that disrupts planning for the recipients.  But then hypothecated tax flows will vary just as income tax, VAT and any other form of tax does. 

The history of hypothecated taxes teaches us that the Treasury cheats.  The road fund tax, for example, was only used to fund roads until the government decided the hypothecated tax was too much or too little.  Then it was swept into the general pot and the Ministry of Transport had to compete with every other ministry.

The only way to keep the Treasury’s hands off hypothecated taxes is to make the NHS independent of government, i.e. a public corporation like the BBC or the Bank of England.  Jan Zeber and I have made a case, published by the Taxpayers Alliance, for that. Today’s NHS is unmanageable thanks to its size and constant meddling by its parent Department and the DHSC’s 19 quangos.  If the logic of hypothecation was carried through to independence, the DHSC could be immediately scrapped – a considerable saving in itself.  Would we miss it?  Almost certainly not. The DHSC was responsible for adult social care, and yet did nothing about it, for five years from 2012. The funding came from the Department responsible for Local Authorities. Then Downing Street noticed and added the SC to the DH.  It is hard to discern any difference since.

So hypothecation and independence for the NHS should go hand in hand.  That would not entirely prevent politicians trying to make capital out of whatever problems emerge but at least it would minimise their ability to worsen the situation.  We would still require a separate regulator to maintain quality standards (i.e. the Care Quality Commission) in the same way that the BBC enjoys the attention of OFCOM. 

The NHS needs a distant planning horizon, perhaps 10 years, to train nurses (five years) and doctors (10-12 years) and build facilities.  At the same time, 10 years is too long a financial commitment for any government.  The obvious compromise would be for the NHS to have a 10 year planning horizon with hypothecated taxes set for that period but a quinquennial strategic and financial review in case the situation goes awry in either direction.

The more difficult question is how a hypothecated tax should be collected. People have long looked for ways to integrate income tax and national insurance contributions to avoid having to make two separate and complex calculations.  Business would not welcome a third unless it was something really simple like a per capita tax.  After all, we all pay the same prices for what we buy and are equally entitled to NHS benefits, so why not pay equally for health insurance?   

The people reported by the Times as being keen to pay more to rescue the NHS might not like the bill.  Dividing the NHS England cost per capita would be £2,200 each for this year, rising steeply if NHS England’s demands are met.  Remember the Poll Tax.

UK National Insurance Contributions for 2016/7 totalled £124.93bn. It is expected to rise to £136.5bn in 2018/9. Since the income is treated in the same way as personal income tax, it should be scrapped in England and replaced by the “National Health and Care Contribution”  (NHCC) since it would need also to cover the integration of adult social services as is now widely seen to be essential.  The UK NIC total take would need to be reduced by about 16% to give a figure for England alone but that would be offset by removing the exemption for those above the state pension age.  If the elderly will continue to get medicines free at the till, at least they should contribute towards them through the tax system.

According to the Health and Social Care Information Centre, “in real terms [English] councils spent £15.9 billion on social service support for adults ten years ago [i.e. 2003-04]. This peaked at £18.2 billion in 2009-10 before falling to £17.2 billion in 2013-14.” Although some tweeking would be needed, the NIC and NHCC figures would not be wildly apart:

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In other words, the two could be swapped over without much cost to the taxpayer or HM Treasury.  Income tax would then cover what NICs now do and the NHCC would cover health and adult care.

As noted above, the NHS needs a 10 year planning horizon but any government would need a five year accountability framework.  For comparison the much smaller and more stable BBC secured fixed annual (licence fee) funding for 7 years in 2010 and in 2016 it was agreed that it should rise in line with inflation for five years from 1 April 2017.

The trade, in essence, for NHS and care independence and its own hypothecated tax should be a five yearly forensic audit by the National Audit Office to establish the extent to which the new English Health and Care Corporation (EHCC) could improve the value for money it gives to patients, the cared for and taxpayers. 

Merging NICs into general taxation implies removing the National Insurance Fund (NIF) and all the bureaucracy that goes with it.  A quinquennial NAO forensic audit of the EHCC would take the place of the five yearly actuarial review of the NIF which seems something of a farce.  In the last (October 2017), accurate forecasts were required through to the 2080s but it does not really matter what the numbers say as the Treasury tops them up to the required level anyway. It is a matter of indifference to the taxpayer from which pocket the Chancellor pays benefits.

If, per contra, NHS England is not given independence, then hypothecation would make no long-term sense.  It might alleviate immediate political difficulties but it would not be long before some future Chancellor is mixing and matching the tax streams.