The NHS’s ‘70th birthday present’ and the public finances

Yesterday, the Prime Minister announced a ‘70^th birthday present’ for the NHS, pledging average real annual increases of 3.4% per year for the next five years. One challenge for the Government is where the money to pay for this will come from. After social security spending, the NHS is the single biggest element of government spending, so a large increase in NHS funding has significant implications for the public finances.

How much money will need to be found?

The government has not yet set out department-by-department spending plans beyond 2019–20. In the Spring Statement, the path for total departmental spending implied continuing tight settlements over the next few years. Between 2018–19 and 2022–23 (the last year of the current forecast period), day-to-day spending by government departments is due to fall by £5 billion in today’s prices.[1] Yesterday’s announcement implies that day-to-day spending by NHS England will increase by £16 billion in real terms between now and 2022–23 (with a further £4 billion in 2023–24).

If the Government wanted to avoid further real cuts to day-to-day departmental spending excluding the NHS (including to spending on health and social care not covered by NHS England), it would need to find £21 billion (£16 billion plus £5 billion) from somewhere.  

One option is to allow forecast borrowing to rise. But a significant increase in forecast borrowing would mean that the government was not taking its stated commitment to eliminate the deficit by the mid-2020s seriously. The deficit is already forecast to be £21 billion in 2022–23, implying further consolidation measures – in the form of tax rises or spending cuts –would need to be implemented.  The Government could decide to abandon its fiscal objective, as its predecessors have frequently done in the past. Or it could decide to raise taxes, make further social security cuts or cut capital spending to cover the shortfall.

Potential tax rises

One option for the Government would be to raise taxes. Three tax rises have been mooted as possible options:

1. An increase of 1ppt in all rates of employee, self-employed and employer National Insurance Contributions (NICs) could raise around £8.5 billion (with about £5½ billion coming from the rise in employee and self-employed rates, and about £3 billion from the rise in the employer rate).[2] This would predominantly affect those of working age, as NICs are not levied on unearned income (such as that from pensions) and employee NICs are not levied on the earnings of those over the State Pension age. Given current concerns with the intergenerational distribution of income and wealth, and the fact that on average older individuals would particularly benefit from any improvement in the NHS, this targeting might be seen as undesirable;

2. Freezing the personal allowance at £12,500 and the higher-rate threshold at £50,000 from 2020 until April 2022 could raise around £3½ billion relative to the policy path implied by the last year’s Conservative general election manifesto (whereby these levels would be reached by April 2020 and subsequently uprated in line with inflation). This would mean higher income tax bills for everyone with an income of more than £12,500 a year. Such a policy would effectively reverse a decade of policy increasing the personal allowance, and would not be particularly progressive relative to other changes that could be made within the income tax system, but would have the merit of broadening the tax base;

3. Not implementing planned cuts to corporation tax (from 19% to 17%) would raise a little over £5 billion per year in the near-term, though would be likely to raise somewhat less in the longer run as it impacted on investment and economic growth. This would also mean breaking a manifesto commitment.

There are obviously innumerable other tax policy options. For example, one pence on each of the main rates of income tax, or 1% on the main rate of VAT, would both raise around £6 billion a year.

What about the ‘Brexit dividend’?

The Prime Minister stated that the increase in NHS spending would be partly funded by a ‘Brexit dividend’.

First, and most importantly, according to the official forecasts (accepted by the government), Brexit worsens rather than improves the public finances. In November 2016, the Office for Budget Responsibility (OBR, the government’s official forecaster) estimated that, due to economic growth being forecast to be lower than it would otherwise have been, the Brexit vote reduced tax forecast tax revenues to the tune of £15 billion in 2020–21.[3] This outweighs the UK’s net contribution to the EU by a substantial margin, and means less, rather than more money for the NHS and other services.

Second, the OBR assesses that in the short- to medium-term the UK will continue to make large payments as a result of the ‘divorce settlement’. After taking this into account, the amount left over for spending elsewhere is relatively small (calculated to be £5.8 billion in 2022–23).[4]

Third, even this overstates the extra amount to spend on the NHS, because part of this may be used to replace EU spending that would otherwise no longer take place in the UK, with agriculture the largest single element of spending currently amounting to around £3 billion per year alone.

Conclusions

There are no easy options for the government to fund this NHS spending commitment. Either other day-to-day departmental spending will be cut by even more (which won’t be easy after 8 years of austerity), further social security cuts will be found, capital spending will be cut, taxes will be increased or the commitment to eliminate the deficit by the mid-2020s will effectively be abandoned. The Chancellor will have the opportunity to lay out his plans in more detail in the Autumn Budget.

Notes

[1] Based on Table 2.17 in Office for Budget Responsibility Economic and Fiscal Outlook, March 2018 (http://obr.uk/efo/economic-fiscal-outlook-march-2018/). Consistent series for PSCE in RDEL.

[2] The costing for an increase in Employer NICs assumes that it is incident on employees (i.e. that wages will fall in response).

[3] Table B.1 in Office for Budget Responsibility, Economic and Fiscal Outlook, November 2016 (http://obr.uk/efo/economic-and-fiscal-outlook-november-2016/).

[4] Table B.7 in Office for Budget Responsibility, Economic and Fiscal Outlook, March 2018 (http://obr.uk/efo/economic-fiscal-outlook-march-2018/).