Reports suggest that Labour is considering hypothecated national insurance increases to pay for additional NHS spending during the next parliament. I have to admit I am disappointed. Hypothecation makes no sense to me. Hypothecating national insurance makes even less sense. I need to explain why.
First, and very obviously, there is a problem with NHS funding. The Institute for Fiscal Studies suggest that in real terms NHS spending per head of population may fall 10% this decade, and when age weighted it might be even more extreme. The idea that NHS spending is, as a consequence, being ring fenced and protected is, just wrong and a complete political misrepresentation of the truth. It is important to note this in the context of what follows: I do not think this cut in spending appropriate, and I would wish the NHS to be protected from such cuts, as I would wish other areas of government spending to be protected because I believe they all represent social need. As a consequence, please do not think that in writing this I am saying that I support cuts: far from it.
That said, the proposal to increase National Insurance for the purpose of paying for the NHS is another wholly misleading political message representation that plays on the belief that many people have that National Insurance either pays for pensions, or the NHS, or both, when in fact none of these things is true. National Insurance is, for all intents and purposes, just another tax. According to this year's budget National Insurance will raise about £110 billion this year whereas the cost of the NHS will be £140 billion and the state pension over £100 billion. Quite clearly NIC can't cover all this.
But there is something more important to realise about National Insurance, which is that it is a deeply regressive tax for two reasons. The first is that National Insurance charge on employees falls from a rate of 13.8% to just 2% when earnings exceed £41,865 a year. This means that as earnings rise above this point the overall percentage rate of contribution paid by a higher earning employee falls as a part of income.
Secondly, National Insurance is regressive because it only applies to earned income. That means that if a person can live off investment earnings, or they can recategorise their earnings as investment income, as many self-employed people do by recording their income through a company and then pay themselves dividends, then national insurance is not paid and this has the result of making this particular tax in some part in voluntary, and in another part a tax only on labour, and not on capital. Both factors suggest that that the tax is already deeply unfair when every member of society benefits from the tax paid. If, therefore, any tax was to be hypothecated, National Insurance is definitely not the one to use.
That said though, I have a real problem with hypothecation in any event. There are, as is usually the case with me, a number of reasons for this but the most important one by far is that, as a matter of fact, governments do not raise tax for its own sake. They have only ever, throughout history, raised tax because they wish to spend. It makes no sense to raise tax for its own sake: that process would simply take money out of the economy for which a government was responsible to make everyone worse off (which is also why running budget surpluses is also quite illogical). Given that running a tax system always gives any government grief, no one would do it just to make their population worse off, and so it is only the act of spending that justifies taxation.
The supposed philosophy of a hypothecated tax is, however, that a government cannot spend until it can raise money, but in fact this is the wrong ordering of events. Again, throughout history, governments have proved that they can spend without raising taxation. They can borrow, of course (and the present government has turned this into an artform) and they can print money, as the UK government did from 2009 to 2012, during which period it issued debt of £426 billion and repurchased about £375 billion of debt, meaning that in net terms it borrow just £51 billion, and effectively printed money to cover the rest. Hypothecation, then, denies this fundamental truth that the ability to raise money is not a precondition of government spending it. It is therefore premised on a falsehood, and that's never a good basis for taxation.
But the problems only get worse the longer one thinks about hypothecation. If we can agree that in the chicken and egg scenario of tax and spend then it was always spend that came first, and tax was the way in which once upon a time kings tried to reclaim the cost of their wars, and now governments try to reclaim the cost of their commitments to their electorates, then to pretend that spending on the NHS is dependent upon raising tax is simply wrong. The spend comes first. The tax comes second. Hypothecation gets this completely the wrong way round. It's as fundamental a mistake as most people and politicians make about the way money is created, and has to be put right.
What is more though, to pretend that this particular spend on the NHS is dependent upon raising tax from a particular group in society — who are are those who by and large earn less than average, and those who by and large have lower savings, and who are, therefore, in the main, those to whom wealth and income should be redistributed - is little short of absurd. If it is spending that has the priority in any government's agenda (and that must be true) then because no one raises tax without there being a spending priority, then it is ridiculous to raise a tax in a way that contradicts the spending priority inherent in the commitment to the NHS.
And, as a matter of fact, that spending commitment to the NHS is about redistribution; it is about the creation of equality; it is about overcoming disadvantage; it is about equal access for all, and it is about making available to all what would otherwise only be available to some (as the USA proves). And yet, the form of hypothecation that is being chosen achieves the exact opposite result. Those who can already afford healthcare, come what may, will not suffer any significant burden as a result of this additional hypothecated tax and yet those to whom income and wealth should be redistributed will bear additional costs right down to, and including, those who might not even pay income tax. Nothing about that makes micro economic sense, or sense in the context of any form of social justice.
Nor however does this make any sense in macroeconomic terms. If spending comes first, as I believe has always been the case with regard to government, then tax has never been about raising revenue, as such. Tax is, instead, about re-claiming the cost expended by government for a number of reasons. The first, and very straightforward reason for reclaiming that expenditure by tax is to make sure that the government's currency is used as the medium for exchange in the economy which it regulates, and this happens because it demands settlement of tax liability in that currency, thereby making sure that it is the primary medium for exchange in use in the economy, which then, vitally, lets it spend using that currency as the way i can undertake is own spending. Without tax its currency might have no use in the economy, which may decide to use another currency instead e.g. US dollars, and the government could not then spend as it wishes.
Second, the decision as to how much to spend is key to fiscal policy. Deficits have been vital for two purposes. One is economic stimulus and the second is keeping inflation going - which is, again, vital to prevention of recession. So tax is not decided upon to cover spend, it is only reclaimed to the extent considered necessary to keep the macroeconomy going in the right direction.
And third, tax is used to reinforce the social policy inherent in spending decisions. So, it is used to reprice goods and services that the market gets wrong, and it is used to redistribute income and wealth. These are vital roles and in the process tax represents the choice that is available in a democracy, which is perhaps its greatest merit.
Hypothecation, in contrast, puts forward the pretence that we are in the market and that we can only have what we can pay for. This has, quite simply, never been true of government, and never need be true of government, precisely because it can print money, and precisely because it has to run deficits to keep the economy moving in a direction where recession is avoided, full employment is the aim, and sustainability is aimed for in a way consistent with both. The very logical of hypothecation is, in that case, in contrast with the principle of universality on which the NHS was founded.
The Labour Party is making a mistake if it backs hypothecation. It's making an even bigger mistake using NIC for that purpose.
Labour does need to reclaim more of the spending it will make in the economy: that much may be true. But if it is then it is the tax gap it needs to tackle. This is could do. It should not raise NIC.
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This is what passes for policy these days? Red ed foot should just explain to the lowest paid members of his electorate that they can forget about restoring a national health service and just get on with paying for a life support mechanism for deadbeat,tax exile ‘providers’.
Roll on Friday morning.
Agreed
This is a very good piece-Richard and is a useful challenge to the fallacy of composition that all the main parties subscribe too. Reads like you are rehearsing a part of your forthcoming book. It also sounds close to Modern Money Theory by emphasising that, logically spending has to come first.
It is worth remembering that national debts aren’t and don’t need to be paid off (in the case of sovereign currencies).
Look forward to the rest of the book!
You may be right re the book
But I strongly believe this
And excellent blog, Richard, but I’d like to pick up on one aspect of it. You say:
‘And, as a matter of fact, that spending commitment to the NHS is about redistribution; it is about the creation of equality; it is about overcoming disadvantage; it is about equal access for all, and it is about making available to all what would otherwise only be available to some (as the USA proves).’
Indeed, that’s what you, me and many, many others would want it to be about. But what it’s really about for New Labour 2.0, is ACTUALLY what you spell out in the next part of this paragraph…
‘And yet, the form of hypothecation that is being chosen achieves the exact opposite result. Those who can already afford healthcare, come what may, will not suffer any significant burden as a result of this additional hypothecated tax and yet those to whom income and wealth should be redistributed will bear additional costs right down to, and including, those who might not even pay income tax. Nothing about that makes micro economic sense, or sense in the context of any form of social justice.’
But it does make absolute sense if you want – as I believe New Labour 2.0 intend (and I’m sure all their elections advisors and strategists are recommending they do) – to continue with the Tory policy of punishing the poor and less well off members of society. That’s been a very popular approach for the Tories, aided by the fact that it plays well with the Tory dominated press. However, New Labour 2.0 have to put some daylight between themselves and the Tories, so we have this kind of policy proposal – one that is less obviously about punishment, and slightly less cruel, but ultimately maintains the essence and outcomes of the Tory neoliberal project in this particular policy domain.
Depressing, isn’t it?
The failure of all the parties on this issue and the convergence on neoliberalism is an exercise in abrogating responsibility to the people of this country
It is deeply depressing, Richard, and all the more so, I suppose, because given our political system I find myself desperately wanting to believe that Milliband and co are capable – both intellectually and morally – of coming up with policies that challenge and attempt to reverse the growth in inequality that the Tories and Lib Dems have revelled in promoting these past few years. But of course, as a realist, I know that apart from some tinkering at the edges that’s unlikely to happen. Indeed, even if they form the next government any pre-election proposals and promises that may have a tinge of fairness and equity about them are likely to evaporate once the vast array of corporate interests that the Tories and Lib Dems have allowed to populate every mechanism, institution and process of government get to work on Labour ministers. Hence the reality is that we are locked into the neoliberal project for a very long time to come.
Yes
But that will not stop me shouting about it
I am reminded here of an article that Nicholas Shaxson wrote in the Guardian a few years ago.
It explains ten reasons why corporations should pay more tax, he explains this:
“Corporate profits depend on tax-financed public goods: healthy and educated workforces; good infrastructure; publicly enforced respect for contracts and property rights, and so on. When corporations avoid or evade tax, legally or illegally, they free ride on the backs of the rest of us. Stop taxing them, and you savagely undermine political community”.
Inbedded in this is the word “healthy workforces.” This explains how business benefits from the NHS, as people work for them to make profits and they do not have to pay higher wages for healthcare.
This implies that even if NI was used to pay for the NHS, it should surely come from higher contributions from big business, especially banks and global corporations.
http://www.theguardian.com/commentisfree/2011/mar/15/tax-corporations-treasury-large-companies
It is silly of a Party that claims to be socialist to put the burden on the workforce, especially the lower paid.
I cannot see why they should want a surplus either. Perhaps they think it sounds like good house keeping to the ignorant who do not understand that government can tax afterwards and create the money it needs. The whole idea of Keynes was creating money through deficit spending in a recession and then taxing in the good years after.
We agree
¨Although the numbers suggest that here too Osborne plans to pay for this additional spending by cutting the size of government, he has indicated that he hopes to reduce this increase in welfare payments by some, as yet undeclared, means¨
http://mainlymacro.blogspot.co.uk/2014/09/shrinking-state.html
Although the NHS is short of funds, pretty much every other government department and public service has been cut by more – and in many cases, MUCH more – in percentage terms. So doesn’t this show a weird sense of priorities for Labour? Isn’t it at least as important – probably more important – to reverse the huge cuts to schools, social security, environmental protection, legal aid, social care, etc. etc. rather than just focusing on the NHS? I agree with you that a NICs increase isn’t the best way to do this – although in New Labour’s defence their NICs increases on employees and the self-employed were an extra 2p all the way up the earnings distribution – i.e. above the UEL as well as below it. And employer NICs is paid all the way up the earnings distribution anyway. Would still be better to have a bigger % increase for high earners though. Why not a wealth tax?
Why not a wealth tax?
We do need to make progress on that
Minor point: NI at 13.8% is the secondary (employer’s) contribution, which stays at 13.8% however high the employee’s earnings are.
The primary contribution rate is 12%, and this is what falls to 2% on earnings over the upper earnings limit.
There’s no impact on your main points, but you are quoting the wrong rate.
Apologies
You are right
Too much haste
Good points as ever Richard but I wonder what your view is on a mechanism to fund a large increase in public housing using a re-introduction of Schedule A on capital gains to housing. Possibly aligned to a regional distribution mechanism from richer to poorer regions by using the revenue streams to underwrite regional bond market for this purpose based on the French Caisse de Depot model. I accept government should spend now on public housing but give all parties are inflicted by austerity disease but post-Thursday under the guise of a new constitutional settlement a number of proposals may be possible.
I think a capital gains charge on housing desirable – it is an obvious reason why housing is over-priced
But I can’t see any party backing it