Health insurance by stealth tax: towards a replacement for the NHS

It is almost unprecedented for a Conservative government to raise direct personal taxes. National Insurance (NI) “ sort of ” does not count, as this is paid into a fund that is ringfenced away from the general taxation that goes into the Consolidated Fund that pays for things like motorways, fighter jets and the Leader of the Opposition’s salary. NI is designed to be used to pay welfare benefits and little more. A small, but annually variable, proportion goes to the NHS.

However, this all changed last week. Paying for social care is the problem that would not go away. Theresa May, who by the time of the 2017 general election had been in frontline politics for two whole decades, made the catastrophic rookie-like error of bringing up social care, and her granny-evicting solution to it, in the middle of the campaign. The fact that she was up against Labour’s worst leader since George Lansbury in the 1930s, made the shearing of the majority she had inherited from the meticulous work of David Cameron’s team even worse.

The whole issue of social care seems to have been a pass-the-parcel game for successive governments, especially as they could all hear the parcel ticking. Something had to be done, but all previous prime ministers seemed to be quite happy for the problem to remain in the in-tray for their successor to address. The issue was always money, how much was needed and from where it would come.

It now seems that the parcel has stopped being passed and the solution that everyone hated was the only possible one: higher taxes. Labour wanted the “ biggest burden ” to fall on the “broadest shoulders”, by way of taxes on wealth or capital gains. Yup, good ol’ class war, again. The basic fault with this is that while the “shoulders” on the targets of Labour’s perpetual enmity may be “broad”, this tax base is also narrow, and already quite heavily taxed. The owners of these broad shoulders may be rather mobile as well and could be convinced to take their shoulders to somewhere where they would keep more of the money they earned and the assets they owned. While socialists might just say “good riddance”, the country would feel the loss financially, and also through the irreplaceable export of native wealth-creating talent. Such wealth taxes also discourage overseas high-achievers from settling here.

Just as only Nixon could go to China, it seems that only a Conservative Chancellor of the Exchequer these days could put up income taxes across the board, rather than just for high-earners, as his Labour counterpart says she would do. The hike in NI has the explicit aim of financing social care, but also something else.

It is also to be used to pay for the NHS. This means that, for the first time since the Second World War, employers and employees are contributing to a state-backed health insurance scheme. (Lloyd George had introduced a rather complex National Health Insurance Scheme in the 1910s, but this was replaced after 1945 by the NHS.)

This momentous policy shift is being all but ignored amid the cries of protest at yet another burden on economic activity. But health spending in the UK is a relatively light burden compared to other developed economies. The UK spends a smaller percentage of its economy on healthcare than the US, France, or Germany, but this is not a Good Thing. Our healthcare does not cost less and the consequence is that care is rationed by a tier of NHS management. General taxation is not as good at diverting cash to a health system as is a compulsory insurance scheme. Now we are seeing the start of what is, in effect, compulsory health insurance.

People really do not understand how the NHS is truly funded, hence all the veneration. They know the money comes from taxes, but since the money for the NHS derives from general taxation, the relationship between those that pay for the NHS and the services they receive is not direct. This is set to change.

The core of the problem with the NHS was always the absence of an exit strategy. This is why a service – set up at a time of low immigration when there was an incomplete understanding of human medicine and physiology (the DNA molecule had not even been determined, and the relationship between smoking and cancer not yet discovered) – has persisted for decades, with numerous wasteful and sometimes catastrophic reorganisations while other Attlee-era measures have been abolished or modernised. Under New Labour, it seems the NHS problems were so great that civil servants and advisers conspired to suppress stories of the worst failures. At least one Labour minister saw moving to Health as a punishment.

Now that people will be paying what is, in effect , compulsory health insurance contributions into a state-backed scheme, it is possible to build on this. Income tax could be reduced, while at the same time National Insurance could be proportionately increased to the point where almost all NHS funding came from NI. There could be NI allowances for people who opt out of the state scheme to fund privately their family’s healthcare. The state could also use the NI fund to buy more services from the private sector, fostering a growth in state-backed private provision, undoing the socialistic stranglehold on staffing levels and reward. It may then be a small step from there to a system that looks more like that used in most large EU economies, including additional contributory elements.

People who still oppose Brexit could hardly attack an EU-style high-quality system of health provision. Of course, many Labour politicians would hate this, and would come up with their usual lies ( “ 24 hours to save the NHS”, anyone?), but this rhetoric would be increasingly ineffectual. Our society is considerably richer and healthier than it was in the 1930s and any argument based on conditions in that decade would be provably obsolete.

While some people may see an unwelcome extra cash grab by the Treasury, what has actually happened is that a Conservative government has, even if it is unaware of this, given itself the opportunity to investigate, with increasing public support, an exit strategy from the NHS towards a more modern insurance-based replacement health system. This tax hike has at the very least provided it with new room to manoeuvre to do so.

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