Why Labour shouldn’t raise National Insurance to pay for the NHS

Labour is on the brink of pledging to raise National Insurance to invest in the NHS, according to rumours swirling round Westminster. It’s a ploy that famously worked for Gordon Brown in 2002, when as Chancellor he adapted recommendations from a Fabian Society commission and accepted the case for a hypothecated tax rise. And yesterday in the Queen’s Speech debate Ed Miliband careful refused to rule the idea out, despite pressure from David Cameron.

But this time round raising National Insurance is a terrible idea, which will deepen mistrust in politicians and undermine public confidence in the welfare state. Labour must rule it out, both because hypothecated taxes are dishonest in an era of cuts and because National Insurance is now the worst possible tax to fund the NHS.

When the Fabian Society proposed hypothecated taxes to pay for healthcare, we lived in an era of plenty. The idea then was to find a formula to earn public consent for taxing people more for a big improvement in public services.

But in an age of cuts Labour would be deceiving the British people if it made this case again. After the next election taxes will need to rise, but sadly it won’t be for new spending. Every penny of extra revenue will be needed just to reduce the pain of cuts. A promise of hypothecated tax increases to pay for new NHS spending is a sham that would simply spell more cuts elsewhere.

The evidence is depressing. Last year, a fresh Fabian commission on public spending concluded that even if the next government spends £20 billion pounds more than the coalition plans by 2017, cuts to public services will still be necessary. The extra money would make a big difference, but only by turning unfeasible cuts of 8% over two years into a manageable reduction of 2%. The purported Labour plan, to raise National Insurance on employees and employers, would raise £9 billion, still under half the figure mooted by the Fabian commission.

If all that revenue was earmarked for new NHS spending, with no extra money from other sources, then Labour would end up implementing the coalition’s cuts plans across the rest of the public sector. That would mean slashing the budgets of many services by more than a quarter in the two years after 2015. And this would come on top of all the cuts in this parliament. Labour cannot claim to be the saviour of the NHS if that is the price.

But even if you buy the case for a hypothecated tax rise, National Insurance is the wrong choice for new funding for the NHS, because it is a tax paid by people aged under 65 and by employers.  By contrast close to half of NHS spending is devoted to older people, the principle users of the NHS. Older people might benefit from 45 pence in every pound of the promised new NHS spending, but they would not pay a penny of the cost.

What’s more, since the economic crisis began, pensioners have seen their incomes rise faster than other age-groups and have been affected least by austerity measures. Looking forward, if National Insurance were increased, the tax burden on working age households would rise by £5 billion. This would augment an existing unfairness in the tax system, which sees retired households already paying £7 billion less in tax each year than they would if they contributed the same proportion of their income as younger age groups.

So if more is to be spent on the NHS, then older people must pay their fair share. This is not an argument for intergenerational warfare: the Labour Party must be the champion of the NHS and of excellent public services for all retired people. The welfare state rightly incorporates large intergenerational transfers, so you pay in when you can afford it and receive support when you need it.

But that bargain has to be based on ability to pay, not people’s age or the source of their income. Exempting older people with middle and high incomes from making any sort of contribution will undermine the social contract that binds all age-groups into the welfare state. It will undermine support for investment in the NHS.

To prevent the burden of new taxes falling only on people of working-age, the straightforward answer would be to increase income tax. People of all ages would pay more according to their income, but those earning less than the new £10,000 tax threshold would be protected.

But before an election, planning to raise income tax is a non-starter. So instead the answer is to design a combination of tax rises that together bring fairness between generations. If Labour really believes National Insurance must rise, then that party must offset this with taxes on older age-groups too. That would mean requiring workers over 65 to pay National Insurance for the first time and an increase in taxation on wealth and property not just earnings.

‘A penny on National Insurance for the NHS’ may be a nice strapline. But replaying tunes from the early 2000s won’t cut it. Labour must find better ways to raise taxes which neither deceive the electorate nor unravel the precious intergenerational settlement on which the welfare state depends.

 Andrew Harrop is General Secretary of the Fabian Society