The government’s U-turn was the result of pressure from backbench Conservative MPs and the belated realisation that raising NICs would break a promise made in the Conservative Party’s manifesto at the 2015 general election. This promise committed the government to keep income tax, NICs and VAT unchanged in the event of a Conservative government being elected. It means that any increases in NHS funding, were the government inclined to find additional resources, would have to be found by redirecting resources from other areas of spending, raising other taxes, increasing user charges in the NHS or some combination of these.
None of these options looks attractive to a government with a wafer-thin majority in parliament. Public spending has now been constrained for seven years, with unprotected areas of spending having been cut back significantly and concerns being raised about the consequences, as in the case of local government and welfare benefits. Major areas of spending such as state pensions cannot be touched because of the government’s commitment to preserve the triple lock.
Raising other taxes is more feasible and will now be necessary, in any case, to fill the hole left by the U-turn on NICs. Reducing tax relief on pensions is being touted as one possible solution and has the potential to raise substantial sums. Changes to other tax rates might also contribute but would need to be significant in order to raise the resources likely to be needed by an NHS already struggling to balance the books and maintain standards of care.
Which leaves increases in user charges. Compared with health care systems in other high income countries, user charges in the NHS are few in number and raise a very small proportion of the overall budget: just over 1 per cent according to the latest figures, down from 5 per cent at their peak in 1960. The costs of collecting charges have to be offset against the income they raise, and exemptions for people on low incomes, pensioners and others further reduce the contribution they might make. Even with exemptions, charges risk deterring people who most need to access care from so doing, storing up even greater problems and costs for the future.
As with NICs, proposals to raise more money from user charges would risk a backlash from MPs, not least because they were not in the Conservatives’ election manifesto and would provide ammunition for opposition parties to attack the government. The only other option would be to find more resources for the NHS without raising taxes or user charges. This would mean increasing the deficit in the public finances, an option that is certainly feasible but is unlikely to be palatable to a government navigating its way through the uncertainties of Brexit and its impact on the economy.
The inescapable conclusion is that any prospect of increased NHS funding during this parliament is even more remote than before the Spring Budget and the U-turn it provoked. The Prime Minister and Chancellor will have to live with the consequences of promises made by their predecessors, and the likelihood of a continuing deterioration in the standards of care patients experience in the NHS. Paul Johnson of the Institute for Fiscal Studies has described the Conservatives’ manifesto commitment as ‘foolish’ because of the way it has tied the government’s hands – a view it is hard to disagree with.
There must be a better way of having a grown-up conversation about tax and spending.