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It is time to convert National Insurance into 'a separate, progressive health & social care tax'

3 min read

Lord Taverne writes ahead of his Lords question today on: 'Measures to convert National Insurance contributions into a special tax for funding health and social care'.

The NHS, one of our most cherished institutions, faces an existential crisis.

Hospitals are running up huge deficits and their financial situation is deteriorating rapidly. Morale among junior doctors is so low that they not only went on strike but many now feel they have to emigrate. Different estimates on whether the NHS will need an extra £8 or 16 billion extra funding in the next 5 years, depend on huge, almost certainly undeliverable, efficiency savings.  In any case health and social care must be treated together. Social care is has already suffered severe cuts and is scheduled for more.

Lack of cash lies at the heart of the NHS crisis and the fundamental reason is ignored by the government: its costs rise much faster than the growth of GDP. We live longer and the older we get, the more medical care we need.  New expensive drugs and surgical procedures cure diseases that were incurable before. At the same time, because of Osborne’s declared aim to shrink the state, according to the Office of Budget Responsibility spending on health and social care, instead of increasing as a proportion of GDP, is planned to decline, from 6.1 per cent in 2014/2015 to 5.4 per cent in 2020/2021,

What can we do to save the NHS? Norman Lamb MP, the former Liberal Democrat Health Minister, with strong cross party support, has proposed an independent commission on the future of health and social care – a kind of modern Beveridge Commission.

Unfortunately, a commission will take years to report.  But one crucially important part of his proposal could be implemented by next year: to convert National Insurance Contributions (NICs) into a separate, progressive, hypothecated health and social care tax.

NICs no longer serve a useful purpose. Originally they were introduced to pay for the cost of health and pensions. Instead, they have become part of general revenue, but are financed as a separate, inefficient, regressive tax on jobs, which increases business costs and unemployment.  Whatever happens they should be scrapped.

The government opposes hypothecated taxes. General taxation, it is argued, involves fewer transaction costs, is collected from the largest possible base and enables the most efficient allocation of public funds to where they are most needed or give best value for money.  

These arguments are vastly outweighed by the special regard people have for the NHS. Some years ago, Gordon Brown’s proposal for a 1p increase in NICs to pay for the NHS and surprisingly, he found, had strong popular support. But when it was discovered that almost half the money went into in general taxation it was strongly opposed. We are more willing, or much less unwilling, to pay for what we greatly value.

The great American judge Oliver Wendell Holmes once said: “Taxes are the price we pay for a civilised society”. A special health and social care tax could not be a better example.

The Lord Taverne QC is a Liberal Democrat peer

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Read the most recent article written by Lord Taverne QC - We should look to Germany for inspiration for constitutional reform