Healthy finances? Options for funding an NHS spending increase

Published on Public Finances and the Economy

The National Health Service will turn 70 on 5 July 2018, but public concern about its condition is at its highest since the early 2000s. This mirrors notable declines in many performance measures over recent years, which have taken place against a backdrop of historically low rises in NHS spending. And looking ahead, funding pressures will rise further as the population ages and health care costs rise. This paper looks at the scale of any additional NHS spending the government might announce in the near future and broad approaches that could be taken to meet those costs.

A return to real increases of 3-4 per cent a year from 2019-20 would require new funding of the order of £20 billion in 2022-23. The government will likely deliver this partly by utilising the headroom the Chancellor has against his fiscal targets to increase borrowing. But tax rises appear inevitable too if the government wishes to return to historically normal NHS spending increases. We recommend the government avoid a repeat of the 2003 funding of additional NHS spending via a National Insurance rise, and instead consult on wider tax rise options over the summer. This report assesses the main choices the Chancellor is likely to face.

  • While a National Insurance rise would be progressive across the income distribution, it would be unfair from a generational perspective as those over state pension age would not be asked to contribute.
  • A better approach in this area would be to extend National Insurance contributions to the earnings (and to some elements of occupational pension income) of those above the state pension age.
  • Putting health funding on a generationally fair footing should also involve major reform of the UK’s approach to wealth taxes – particularly council tax.
  • A 1p increase in all Income Tax rates could raise £7 billion in 2022-23 and would have the advantage of avoiding the significant generational unfairness of any move on National Insurance. Some opposition parties have also supported such an approach which might aid its passage through parliament. Should the government also meet its commitments to raise the personal tax allowance to £12,500 and higher rate threshold to £50,000 by 2020 then the net tax rise would fall to around £6 billion.
  • The government might alternatively look to freeze the personal tax allowance, higher rate threshold and National Insurance thresholds after those goals have been met, raising around £4 billion, though this would be less progressive than a rate increase.
  • With Corporation Tax scheduled to fall from 19 per cent to 17 per cent in 2020, and the projected cost of this tax cut having risen dramatically, the Chancellor may well look to cancel this to raise around £6 billion by 2022-23.
  • Increasing VAT is mildly regressive unlike all the other tax options discussed here and would face very significant opposition in parliament.