13 / 01 / 2015
Hypothecated taxation and the NHS
CentreForum, December 2014
This paper, by the think tank CentreForum, explores the concept of hypothecating taxation for the NHS. It looks at the case for and against, in the context of political agreement on the need for additional health spending. It finds merits in a strong hypothecated tax, in which it is clear to citizens which tax revenues fund the service and what the tax revenue is being spent on. This is compared to weak hypothecation where the tax is less explicit, for example the National Insurance Fund.
The paper considers a number of factors used in support of hypothecation. It identifies probably the strongest argument in favour, which is to increase transparency. This is because it could enable a closer connection between voters and the purpose of taxation, so the former makes more informed decisions about the balance of tax burden and spending on a service. The paper shows how a hypothecated tax could improve accountability and trust, by reducing flexibility in government spending and restricting the power of government relative to the power of its citizens. This could allow the electorate’s resistance to a tax rise to be reduced or even generate public support for increased taxation for a popular service, such as health. Finally, the report identifies how hypothecation can be a way of ring-fencing tax revenue for a specific purpose, protecting resources from competing political interests.
The report then explores the arguments against hypothecation and, in doing so, distinguishes between strong (explicit) and weak hypothecation. The first counter-argument identified is the extent to which health spending should be determined by need, or whether it is better that it be dependent on macroeconomic performance. The latter could expose health spending more to macroeconomic shocks and tax revenues could fluctuate over the economic cycle. The report offers solutions to resolving this issue, including a stabilisation fund or an independent body to assess need and set health budgets. Other arguments against are outlined, many of which focus on tax policy, for example the implications of hypothecating national insurance, which is more socially regressive than income tax.
When looking at weak hypothecation specifically, the report concludes that this would not protect budgets and does not guarantee that additional revenue increases spending. It argues that all the benefits identified earlier are in fact negated with weak hypothecation, with the possible exception of public support for tax increases. Overall, the report concludes that weak hypothecation has few advantages and that the merits of strong hypothecation are worthy of further consideration.