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Hypothecated funding for health and social care

How might it work?

Authors

Hypothecation – the earmarking of a tax to be spent on a specific area of public expenditure – is back on the political agenda. All the major parties seem agreed that a longer-term and sustainable settlement for NHS expenditure – and quite possibly one for social care as well – is now desirable. Hypothecation is being debated, across the political parties and by other think tanks, as one of the routes by which the money for that could be found.

There are strong advocates and equally strong opponents of hypothecation. This short paper examines both sides of the argument. It seeks to set out the problems hypothecation is meant to solve, and the conditions under which it might do so, and provides a brief history of hypothecation in the UK.

Key messages

  • Evidence suggests strong public support for raising taxes to increase funding for the NHS as long as the money is spent as promised. Hypothecation therefore offers a potential way to increase funding for the health service.

  • There are two key objectives for hypothecation in relation to health and social care spending: first, to help overcome the current funding crisis and second, to end the cycle of boom and bust in funding that has been such a recurrent problem over decades.

  • Hypothecation is complex and the difference between partial and full hypothecation is critical. The former only looks to top up current levels of spending, whereas the latter looks to set the budget as a whole.

  • The challenge to using partial hypothecation is that it does not provide a long-term solution to the boom and bust in health and care spending. Full hypothecation may be part of the answer, but on its own it is unlikely to be enough to guarantee stable funding.

  • If full hypothecation is used there needs to be a way to break the link between one year’s tax revenues and spending, possibly through the creation of a ’fund’ that can move money between years. Full hypothecation also needs to be supplemented by a degree of independence in setting health and care spending and the tax rates needed to finance it.

  • Getting full hypothecation to work would be a complex task and should not be undertaken lightly. Its advocates need to demonstrate how it will be an improvement on current funding arrangements – an attractive idea could end up back-firing unless the risks we have identified are tackled.

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