Jeremy Hunt calls for increase in tax to pay for Trident….

NHS Funding

‘Where to find the money to pay for the NHS’ is a recurrent theme of successive governments. As if changes to our public services are simply a matter of practicality under adverse financial conditions rather than political choice.  

Jeremy Hunt appears to have added his voice to the calls for tax increases, which apparently is now ‘general consensus’ in parliament and being ‘backed’ by the public.

This blog looks at how those arguments are presented from different sources. Politicians and think tanks – yes, and campaigners too – limit the debate about funding to who will have to  pay the tax burden and which tax needs to be increased.  For some the answer is simply to tax corporations and stop tax evasion to raise the necessary funds. 

We think that the principles of funding and the relationship between funding and taxes must be better understood. If not then arguments will continue to reinforce the mistaken idea that the Government is trapped in a spiral of debt from which it can only escape by balancing its books. That balance, it insists, can only be maintained if government borrowing stops and public spending stays within its means – that is to say, its tax receipts. 

Should we stick to arguments that aren’t true, just because they are easy to understand? 

Questions about the economy have been conflated with questions around how the Government looks after its accounts and records its cashflows. Those questions need to be disentangled. Focusing on tax, deficits and debt masks political decisions to reduce and defund public services.  

It’s a terrible truth of politics that people are more swayed by appeals to the heart than by facts or evidence. It is also true that many people don’t want to know much about economics or are happy to accept simplified explanations about tax-and-spend or household budgets. You don’t need a degree in economics to understand how wrong those explanations are – but it’s very important to know how wrong they are.  

Implicit in the arguments about affordability is that those who use services most should pay most or that the government should focus on which section of the population that has the most assets and how those assets can be turned into a source of income. Whichever way the subject is approached, at its core is the message that if we, the public, will not tighten our belts, be less selfish and dig deeper into our own pockets then we are stuck as the government is too financially constrained to do more.  

This leads to debates about the best way to tax to raise the money – 1p in the £? Increase National Insurance? A Robin Hood Tax? Grow the economy? 

Public purpose first and foremost 

Calling for specific additional taxes is part of a simplified explanation of how the economy works. Running the economy is a complex interplay of different elements. The household budget analogy of the last 40 years is wrong but serves a political agenda to shrink the state. Trying to ‘put it right’ with 1p on income tax or an increase in NI supports that narrative, it doesn’t challenge it.  

Here are some simple facts that do challenge that narrative:

  1. Arguments about who gets taxed and at what levels are separate from discussions of policy and public purpose. 
  2. ‘Choosing’ which taxes the public will or won’t support isn’t a useful part of that discussion. 
  3. You can’t ‘cost’ a manifesto with tax unless your starting point is that the deficit and debt are the most pressing issues the government has to face rather than the level of services it needs to provide. 
  4. When a manifesto is ‘costed’ in this way the reality is that the government spends the money first anyway. Balancing it against tax receipts is a bookkeeping exercise. 
  5. Hypothecation doesn’t protect spending. It puts a self-imposed tax constraint on government’s ability to fund services. 
  6. Public sector employees are private citizens whose salaries are spent into the private sector which generates more tax (income tax, NI, VAT, etc). Their employment boosts both public sector service delivery and the private sector. 
  7. Public sector expenditure on buildings, plants, equipment, drugs and consumables fill the private sector’s order books and increases tax receipts. 

Resources not money are the true policy constraints governments face:  

  1. What kind of services does the government want to provide? Equality of access and standards for all or variable standards and access according to ability to pay? 
  2. Are the resources available for the services the government wants to provide?  
  3. Will providing the resources for one service reduce the availability of resources for another? How will those competing claims be settled? For example, building both houses and hospitals – are there enough bricks, wood, steel, plumbers, etc? 
  4. What will the impact be on the wider economy of using those resources? 
  5. Restricting the money available to put the resources to good productive use is a tool to achieve unpopular political ends by giving a false reason for its necessity. 

Is it true that we need a strong economy to provide our public services? 

Conservative Manifesto 2017: Without a strong economy, we cannot guarantee our security, our personal prosperity, our public services or contented and sustainable communities. 

Theresa May says, as David Cameron did before her, that we need a strong economy to pay for the NHS. There are many who share that belief from across the political spectrum. This includes both sides of the Brexit argument who either fear that the economy will shrink so much we won’t be able to afford the NHS or believe that reducing our obligations to the European Union will release the money to pay for it.  

But what constitutes a ‘strong economy’? And at what point does the strong economy become strong enough to fund our services properly? According to that same manifesto we have the fifth largest economy in the world, we are the biggest recipient of foreign investment in Europe and the fastest growing economy in the G7. According to the International Monetary Fund our National Debt is at least 10% lower than the average amongst advanced economies. There are 16 advanced economies which spend much more per head on their citizens for healthcare than the UK, yet 11 of them have larger National Debts. So why isn’t the UK strong enough to fund its health service if they are?  

The manifesto also says that the Conservatives are committed to low taxation and reducing taxes for families and corporations even more. Theresa May said in Parliament that the government has no money of its own and needs taxes to pay its bills but that she is committed to ensuring our services receive the funding they need by having a strong economy. But how can that happen if they rely on taxes and she would like to lower taxes?  

The answer clearly lies somewhere else. 

Is the answer simply to tax the rich? 

Jeremy Corbyn, twitter account 22 March 2018: ‘Over the last 8 years the Tories have cut councils’ budgets in half. In that same time the Tories have slashed corporation tax, cut the bank levy, abolished the top tax rate on high earners and cut capital gains tax for the very richest. Austerity is a political choice.’ 

It appears that the Leader of the Opposition agrees with the Prime Minister about where the problem lies in the government’s ability to spend but disagrees with her about tax regimes. Theresa May wants to cut corporation taxes and council business rates. Jeremy Corbyn thinks that this is where the problem lies and that our local councils and public services could have been funded if the government had not chosen to cut taxes instead.  

Between the Government and the Opposition the battle for public services is fought on the grounds of who is most ‘responsible with the economy’. This includes assurances for the necessary taxes to fund spending ambitions and who will best provide the conditions for the private sector to flourish. These arguments pervade the public consciousness so completely that rather than supporting calls for properly funded services many people ask: ‘has it been costed?’ And costing means being able to list which taxes will be raised in addition to those already being collected to fund any additional expense.  

It also means committing to ‘balancing the budget’ and reducing borrowing – which means reducing the sale of government bonds. 

This argument is being taken further with ‘additional’ funds for public services being allowed only if there are trade-offs elsewhere. Foundation Trusts get capital funding if they are prepared to sell-off land and staff get pay rises if they will give up their increments or holiday. 

Jeremy Hunt offloaded the responsibility for making these trade-offs onto the public, saying it is what they expect: “If you ask the public…they are very clear they would like to see more money going to the NHS and they would be prepared to see some of their own taxes going into the NHS but they are very clear they want to know that money is actually going into the health and social care system and they want to know the NHS is going to reform and tackle some of the inefficiencies.” 

We are not arguing against the raising and collection of appropriate taxes. Our argument is that tax forms part of a well-regulated economy. It is not a constraint on government spending. If the real-world resources are there, the money can be spent. The idea that the de-funding of our public services is the fault of tax evasion and can’t be put right until the money is collected does not bear examination. 

The Office of Budget Responsibility 

Health Service Journal  says: ‘Many will applaud the OBR’s de-politicisation of public finance forecasts, because it helps keep the government on track to meet its fundamental commitment to eradicating the deficit.’ “Clearly ministers are not bound completely by the OBR forecasts, but they do provide a solid defence when besieged by demands on the public purse.” “This reduces (the) power of the NHS, which because of its political importance has been a constant and effective battering ram against the Treasury doors throughout its 70year history. Will individual tragedies such as Mavis Skeet have the same power over government spending, when the chancellor can use the OBR’s cold and compelling logic as a political buffer?” 

There has been a very successful message repeated over the last few years that insists Labour’s public spending during its time in government created‘the deficit’ and has left the country in the grip of an unsustainable debt as a result. The Office of Budget Responsibility (OBR) was set up to make sure the government kept on track to eliminate the deficit. It is supposed to be an independent authority overseeing government spending. It is, of course, a government body ensuring that the government has an ‘external authority’ on whose shoulders it can place the responsibility for there being ‘no money’. 

De-politicisation is in name only. The Treasury is the ultimate arbiter of spending decisions. We do not need, nor should we want, those decisions to be moved elsewhere. Indeed, they cannot be. The Treasury owns the Bank of England and the Bank creates funds on the Treasury’s authority. That is the ultimate public spending decision-maker. 

The OBR is part of a movement that wishes economics to be seen as having hard and fast rules which apply regardless of which party is in government. This is despite the fact that its predictions are usually wrong. The reality is that economics is a political activity and reflects the government’s ideology. A government which believes in free trade and a small state will have a different set of public policy objectives from a statist one, or one which believes in devolving power from the centre.  

The idea of an independent judge of a country’s economic competence is also reflected in the use of two US accountancy firms, Moody’s and Standard & Poor’s, to give ‘credit ratings’ in a similar fashion to companies like Experian and Equifax who credit rate individuals. Economists across the spectrum agree that the idea of bankruptcy for a country that issues its own currency, like the £ sterling, is meaningless. The currency might temporarily lose some of its spending power relative to others but a government can never be unable to re-pay its debts in its own currency because it creates it when it needs it.  

Although modern economics involves complex analysis and modelling, it is still about the political governance of the country’s trade and productivity, distribution of wealth and income levels and how they relate to the law.  

Since 2010 all parties have signed up to the principle that there is an absolute obligation on the shoulders of government to balance its budget or create a surplus. The debate centres on how – or if – they will manage it, not whether they should. 

This is matched by an equal insistence that the private sector is responsible for the economic success of the country. In this scenario the government is wholly dependent on taxing the private sector in order to gain its income. Its spending on public services is therefore a drain which must be carefully balanced against the overriding need not to damage the private sector in the process. 

This is a damaging image which undermines the role of government and democracy. Government is responsible and must be held accountable for balancing the needs of all the different sectors of society. These are interdependent. The objective of public spending should be to provide a well-educated and healthy population. There is a serious problem when the budget itself becomes the objective. Restricting the money available to put public resources to good productive use is a tool to achieve unpopular political ends by giving a false reason for its necessity. And claiming that all spending must be equal to the tax take and that deficits are inherently bad is part of that false reasoning.  

What does fund government if it is not limited by tax? 

Conservative Manifesto 2017: “The greatest impact a government can have on future generations is the amount it chooses to borrow to pay for current spending. Borrowing always means spending money you don’t have; but government borrowing differs because the repayment falls to others – those who come later, including people not yet born. Conservatives believe in balancing the books and paying down debts – because it is wrong to pass to future generations a bill you cannot or will not pay yourself.”

At the beginning of the financial year each Department is given its budget by the Government. At this point of the year no tax receipts have been collected. But the departments and arm’s length government agencies have expenses that must be met right away. The Government is not able to calculate with any certainty what its total tax take is going to be by the year end. But that doesn’t stop it spending. 

In simple terms, the Government tells the Bank of England to credit its departmental accounts to pay for whatever it has decided needs to be paid for. It ensures that inflation is controlled and other policy objectives are met by a combination of taxation and issuing Treasury bonds. It has complete control over each of these actions – the creation of the reserves, the level of taxation (and who gets taxed) and whether or not to issue bonds. This does not mean that tax has no purpose or is not important nor does it mean that the Government can just spend at will on whatever takes its fancy.  

This is the point when Magic Money Trees are invoked or accusations of creating Zimbabwe/Weimar/Venezuela levels of inflation are thrown around. But stating the fact that the Government creates central bank reserves to meet its obligations is not outlandish. Nor is the idea that it will further create reserves to meet its own fiscal objectives. In the modern world no printing or minting of notes or coin is necessary. Keystrokes on a computer are all that is required. (Radio 4’s File on 4 went to the Bank of England and were shown exactly how it is done – link no longer available). 

The NHS is the only thing we are ever asked to ‘pay extra’ for. If taxes and spending really were linked in that order then surely every time the Government wanted to launch an additional project – HS2, Trident or even the bankers’ bailout – we would be called upon immediately to pay more tax. Especially in the case of the bank bailout. The bank bailout amounted to £435 billion. Compare that with the £4 billion a year extra for the NHS. 

But that’s not what happens. The Bank of England has been buying up the Treasury’s bonds from the market in an attempt to stimulate growth. In the case of the bank bailout these purchases were very large scale. A private company has also been set up, wholly owned by the Bank of England, to purchase private sector assets on its behalf. These are financed in the same way as the purchase of Treasury bonds, by the creation of central bank reserves under the instruction of the Treasury. Both the Treasury and the Bank of England form part of the Government. How these purchases were financed and what the intention was behind them gives a clear picture of why the Government is not reliant on taxes or NI to spend on public purpose. The picture below is an extract from the annual report of the Bank of England Asset Purchase Facility Fund Limited.  

Bank of England report

The last sentence says: “These actions were intended to boost the supply of money and credit in order to raise the rate of growth of nominal spending to a level consistent with meeting the inflation target in the medium term.”  

Politicians say we need a strong economy to pay for the NHS. They then go on to say that only a strong economy produces the level of taxes that the government needs in order to pay for its public services. They say that if there is not enough tax, they are forced to borrow and that borrowing puts future generations in debt for the spending of today. But the final sentence of the extract above gives the lie to that explanation.  

The economy cannot grow unless it has sufficient money in it and there will not be sufficient money unless the government creates the central bank reserves necessary for that to happen.    

But what about the warning that spending today causes the payment to fall on others in the future – even those not yet born? Since 1948 the NHS has been there for all who need it. In that time the National Debt has dropped from two-and-a-half times our national income to less than 90%. It has fluctuated in between despite huge investment in public infrastructure and equally huge revenue spending. The generations in between have not found themselves being taxed at higher and higher rates to ‘pay for it’. Tax rates have changed, indirect taxes like VAT have increased, but income tax and National Insurance have fallen. And the Debt – in the form of assets for things like keeping our pensions safe – is simply renewed. Each time a limited bond expires a new one is issued to take its place. This might be the height of irresponsibility for an individual whose life span is measured in decades, but not for countries which measure theirs in centuries. 

Funding the NHS  

The greatest obstacle to overcome when talking about funding the NHS (or any public service) is how to counter the debt and deficit myth which has taken such hold on public discourse. Deficits are connected to the activity that is taking place in other parts of the economy. If tax is increased to ‘pay’ for more services that action is reducing the spending power of the whole population. At a time when levels of personal debt are precariously high and increasing numbers of people are in precarious employment, removing people’s spending power simply increases poverty. The reality of an austerity agenda is that it both decreases the availability of public services while simultaneously reducing people’s ability to pay for their day-to-day needs.    

The proper responsibility of Government is to match its spending with the real needs of the population and the resources available to provide for those needs. At any point this may involve running a deficit. Most of the last 300 hundred years has involved running a deficit. It isn’t new, it isn’t dangerous and it is not ruining the lives of people in the present or in the future. What is dangerous and what is ruining lives right now is a determination to balance the books or to run a surplus based on the false notion that taxes are the only legitimate funds it has to spend.   

Our real danger is that with the closure and sell-off of NHS land and buildings, the loss of staff (from early retirement, demoralisation, emigration and failure to train) and the loss of planning skills through privatisation and fragmentation we may no longer have the resources needed even if the funds were forthcoming. And those are the things the Treasury cannot create with a few keystrokes on a computer. 

For more on this subject see our blog: Post Crash Economics and Professor George Osborne  

This first appeared on the Public Matters blog