Search Result for hypothecation nhs — 9 articles

It’s time centre ground politicians stopped peddling dangerous economics that could crush the NHS

Posted on

Following the publication by the Institute for Fiscal Studies of its fundamentally economically flawed analysis of the NHS's finances this week debate continues on how to pay for healthcare.

The sad reality is that the centre ground of UK politics continues to reveal its economic illiteracy whilst demanding a new settlement for the NHS. Frank Field MP led the charge in the Guardian, saying:

Nobody now disputes the need for a significant and sustained increase in revenue for the NHS and social care. Rather, there are two political battles to be settled: how significant an increase the country feels it can afford, and from whom it wishes the additional revenue to be raised.

Oh dear. How to get the only two questions he can ask wrong.

The actual questions are, has the country the capacity to supply the healthcare the country wants in the future? And if it has, what is the consequence of the state delivering it?

The first question does not require a  “strategic welfare review” as Field suggests. It demands that bigger macroeconomic questions be answered, including what the cost of not supplying this care might be. But I already know the answer: it will be politically impossible for any elected government not to supply the healthcare people in this country want and need. In that case the resources to ensure that they can be delivered must be found - and the slack we now have in the UK economy, the capacity we have to train people and the advantages automation brings in ensuring people will be seeking these jobs all stack together to say that this is simply not an issue of concern if we put our minds to it.

So what of the second question? Field says:

The public have made clear that their preferred means of financing an increase in revenue is through the national insurance system.

Oh yes? Where? And how can this be reconciled with this comment that comes next?

Crucially, the extra revenue should be collected on progressive lines so that those who earn most will pay most. This would lay the basis for an alternative longer-term model that gradually moves all health and social care funding to a new national insurance base, reformed along progressive lines.

As I have long argued, neither national insurance or hypothecated taxes should be used to fund the NHS. I suggest reading the linked argument. But in the case of national insurance, the reasoning is simple. This is, and will always be, a regressive tax even if the cap on tax earners is removed precisely because it does not tax those who live off wealth and they also use the NHS. I have suggested how to address this, but Field makes no hint of taxing wealth to solve this issue.

Nor does Field show the slightest comprehension that tax does not, in fact, fund the NHS. The essence of that argument is simple.

First, spending has always to come before taxation, and not the other way round. If it did not the money to pay tax would simply not be available. To, therefore, ask where the tax comes from before doing more spending is to ask the wrong question as to funding.

Second, spending creates the capacity to pay more tax. The reasons should be obvious and yet apparently they are not. New government spending is, of course, someone's income. It is not poured into a black hole to be lost forever more. That means that some comes straight back in tax. And yet more comes back because the recipient of the extra income also spends, and so tax is paid, and so on. It is quite likely that over time new spending pays for itself. Field should learn some basic economics.

Just as he should learn why to link an income stream to a spending commitment is dangerous. That’s because in that case the ability to spend is artificially constrained by what happens to that income stream. However, it’s rare that there is any relationship between the demand for health spending and the economic activity that results in tax paid. The danger is, then, rationing by the back door, which many on the right would love.

Hypothecation is bad in principle. It's especially dangerous for the NHS where the ability to treat people should not be artificially constrained by bad economics.

We can have the NHS we want. But not when politicians like Frank Field (and Sarah Wollaston, Norman Lamb and Liz Kendall) continue to feed the myth that the NHS can only be funded on the whim of the wealthy to pay tax, or not, which false narrative simply feeds into the neoliberal agenda that wishes to crush the NHS in favour of vastly more expensive private alternatives.

If PWC are going to discuss tax they really do have a duty to understand what they’re talking about

Posted on

I readily confess that like most who work in tax justice I think that Covi, which describes itself as a think tank, is rather more akin to a PR agency for the Big 4 firms of accountants' tax policy. This was very apparent in the organisations first year, when it was heavily funded by KPMG. Now PWC are in on the act. Covi has recently announced that:

The concept of hypothecation, where revenues from specific taxes would be ringfenced for a particular expenditure purpose – and publicly communicated in this way – has traditionally been unpopular with many. This is because of the notable challenges, relating to complexity, transparency, and public perceptions, with which it is associated. However, there is growing interest in how hypothecation could help engage with tax policy and increase public trust in the system.

A new workstream from the Responsible Tax Lab, sponsored and supported by PwC, will explore the practicalities and implications of hypothecation. In this article, Kevin Nicholson from PwC discusses why the time is right for this conversation.

In fairness the article by Kevin Nicholson in the HuffPost says:

[H]ypothecated taxation [has] never got a huge amount of traction, for a whole host of reasons.

For a start, by ring-fencing revenue, governments are locking down what they can spend. What if circumstances and priorities change? Moreover, once you start hypothecating particular taxes, where do you stop? Perhaps education should have its own fund, or defence. And then there’s a risk of people demanding a ‘pick n’ mix’ approach to which taxes they pay.

And it adds:

Hypothecation would undoubtedly complicate an already complex tax system, and this in turn brings an economic cost, as well as an administrative one.

Before saying:

Then there are issues around how the actual hypothecated tax would work. In a number of countries social insurance is effectively a hypothecated tax to fund certain benefits such as healthcare and pensions, but there are lots of differences between how these taxes work in practice.

Despite which Kevin Nicholson says:

I think this time the debate has merit. Despite the drawbacks, there is an overriding reason why hypothecation needs serious consideration - it increases transparency and arguably trust.

And he continues:

Our research suggests people want to know how their tax is spent, and when they do, they mind paying it less. Sure, not everyone would be happy about paying an NHS tax, but it would quickly flush out how much of a priority the NHS is for politicians and voters - forcing them to put their money where their mouth is.

There’s never been a more important time to reconnect people to the purpose of tax. Brexit demands a rethink of a number of our taxes. Combined with developments such as robotics and the rise of self employment, there’s an increasingly pressing need to reboot the tax system.Given tax changes are fraught with difficulty, we only have a chance if people accept it has to be done and engage on the options. A debate on hypothecation could kickstart this wider and hugely important review.

Where does one begin to address that?

First, PWC really do need to learn that tax does not pay for any government spending: the spend comes first and the recovery comes afterwards. The six reasons for tax are:

  1. Reclaiming the money the government spent into the economy to control inflation;
  2. Ratifying the value of money;
  3. Reorganising the economy;
  4. Redistributing income and wealth;
  5. Repricing goods and services;
  6. Raising representation.

There is more on this here. Telling people that tax pays for anything when it is instead an instrument for control the macroeconomy would be a big mistake.

Second, pretending that in that case any particular tax pays for any particular service would be an outright lie. This is not the case. All tax goes into one pot. If one tax is supposedly constrained for use on one type of government activity all that actually happens is that a constraint if put on the funding of that service where none is needed. That is because an artificial limit is put on spending on it. But in practice the total tax pot is unaffected: all remaining tax is still spent in a discretionary fashion and because hypothecated sums can be changed at will even the supposed link is nothing more than a sham. The credibility of the tax system is, therefore, undermined by hypothecation.

And nor do people know any more about how their taxes are spent: they have been conned that a small part of their taxes are spent in a particular way. The con trick lasts about as long as it takes for a press release to hit the bin.

In that case it has to be asked why PWC are keen on this. The answer must be because they see benefit from doing so. The obvious benefit will be that given that inheritance tax, capital gains tax and corporation tax will not be hypothecated to the NHS their clients will pay least of any increase. Forgive my cynicism. And then there is the second benefit that a constrained NHS is ripe for privatisation, from which their clients might gain. Their reasons for involvement are all too apparent.

I am all for discussion. I would take part. But at least I would (and have) put my cards face up on the table. And unless the discussion is to be about what is really happening in tax, and to be based on how tax actually works, this whole exercise would be a con trick on the public.

The message is a simple one: if you're going to talk about tax you do have to understand how it works, and why. Right now it's not clear that either Covi or PWC do that.

The FT has a lot to learn about tax

Posted on

I have already referred to an FT editorial published this morning that made welcome comment on the need for NHS reform. Unfortunately it was not so insightful on NHS funding, on which it said:

Opinion polls indicate voters would applaud the extra cash. They are less enthusiastic when asked a general question about revenue increases. Hence Mr Hunt’s suggestion that some part of the government’s tax revenues could be hypothecated to pay for the new spending. A one percentage point increase in the rate of national insurance contributions, for example, is a lot more politically palatable if it is earmarked for health.

They added:

Economic purists claim that such hypothecation is an exercise in smoke and mirrors. In theory, they may be right. This should not discourage ministers from pressing ahead. Politics is the art of the possible, and the NHS needs the money.

I do wonder for how long we will have to deal with at least four issues that this raises?

The first is that the government can have all the money it desires: it simply has to make it. The idea that a government with its own currency can be short of money is ludicrous, and the FT should know it.

Second, spending on the NHS creates income for people that will provide a great deal of the funding required to pay for the additional services given that we are living in an economy that is a long way from operating at full capacity. There is an economic multiplier.

Third, national insurance is a deeply regressive tax. Why should the NHS be funded regressively and so unfairly?

Fourth, lying to people about tax, as such a supposed hypothecated tax would require, really is not good politics when the whole basis on which tax should work is honesty  and trust.

If this is the best the FT can do on tax it has a  lot to learn.

Hypothecated taxes are designed to undermine the NHS

Posted on

I have written before on why we do not need hypothecated taxes to fund the NHS.

A slightly theoretical version of the argument is here.

A more accessible one, addressing why national insurance should not be raised to fund the NHS, is here.

The essence of the argument is threefold.

First, spending comes before taxation, and not the other way round. To, therefore, ask where the tax comes from before doing more spending is to ask the wrong question as to funding.

Second, spending creates the capacity to pay more tax. The reasons should be obvious and yet apparently they are not. New government spending is, of course, someone's income. It is not poured into a black hole to be lost forever more. That means that some comes straight back in tax. And yet more comes back because the recipient of the extra income also spends, and so tax is paid, and so on. It is quite likely that over time new spending pays for itself.

Third, to link an income stream to a spending commitment is dangerous. That’s  because in that case the ability to spend is artificially constrained by what happens to that income stream. However, it’s rare that there is any relationship between the demand for health spending and the economic activity that results in tax paid. The danger is, then, rationing by the back door, which many on the right would love.

Hypothecation is bad in principle. It's especially dangerous for the NHS where the ability to treat people should not be artificially constrained by bad economics.

It really is time that this idea was seen as economic nonsense designed to undermine the NHS, because that is what it is.

The last thing the NHS needs is a hypothecated tax: Labour please note

Posted on

The New Statesman published a feature on Jon Ashworth, the shadow health secretary this week. It included this comment:

Conservative MPs such as Sarah Wollaston, the chair of the health select committee, former minister Nick Boles and backbencher Johnny Mercer have recently supported a dedicated NHS tax. “It’s an interesting debate and it’s a debate that we should engage in,” Ashworth told me. “The country needs to have a discussion about the future financing of the NHS for the 2020s and the 2030s.”

It's very hard to describe the degree to which that makes me shudder in horror, both at the danger for the NHS and the lack of understanding of the role of tax in the economy that such a comment reveals. Hypothecation is the last thing Labour needs to do for the NHS. I wrote the following post on hypothecation and the NHS in 2014. I did another this month, but for variety I repeat this old one, because it's vital that Labour understand this:

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 by then paying 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 that 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.

The NHS does not require a hypothecated tax: it needs additional spending

Posted on

The FT says this morning that:

The latest winter crisis to hit the NHS — and the knowledge that an ageing population will only intensify such pressures — is prompting revolutionary thinking by tax policy experts, who are re-examining the discredited idea of earmarking increases for specific public spending priorities.

Known as hypothecation, it has already received the grudging backing of a former top Treasury official. Other former critics of the concept remain dubious about the idea but admit its time may have come.

With the public sceptical about the ability of politicians to act in their interest, but increasingly accepting of the need for more taxation to fund public services, politicians are keen to link revenues to specific items as a way to increase spending transparency and make tax increases more palatable.

I regret to say that my reaction was threefold. The first was to think that of these ‘tax experts’ don’t understand how tax works. That is because they clearly seem to think tax pays for government expenditure when that is not true. To be a tax expert and not understand what tax does is pretty worrying.

Second, I thought that these people also do not understand macro economics in which the funding of government spending can be formally summarised as:

G = T + ∆B + ∆M

Where:

G = Government spending

T = Net tax receipts

B = Borrowing (and so ∆B is the change in borrowing in a period)

M = Government created money (and so ∆M is the change in that sum during a period, which covers QE).

As is obvious from this expression, there is a relationship between tax and spend, but it is not direct.

And third, I felt that these experts would be doing real harm if they carried on with their misconception that tax precedes spend when that is not true, and will both constrain the NHS and harm the economy whilst doing so.

Let me explain. As I argued in my White Paper on Scottish Taxation, but in a fashion that has general application:

It is in fact the way in which all government spending is initially incurred. It is always true that the government has to spend before tax can be paid. That is because unless the government did spend the money that it wants to be the legal tender of a state into existence then there is no way in which that currency would then be available to make payment of the tax that it demands, liability for which is only ever stated in its own currency. This, incidentally, also explains how the promise printed on a bank note – that the central bank promises to pay the bearer on demand the value of the note – is fulfilled in the modern economy. The promise is fulfilled when tax is paid.

As I then explained:

So why the reference to ‘magic’ that so money politicians like to make of what happens in the economies for which they are responsible? There are three reasons. First, this system of government control of the tax and monetary system is relatively new, and is not always believed as a result. It only really came into common use when the USA left the gold standard, which backed up the value of money via a fixed rate of exchange to gold, in 1971. Second, it took a long time for people to realise the implications of this change, an understanding of which is only really becoming commonplace now. And thirdly, since 1979 in the UK and 1980 in the USA there has been a dominant political culture that has suggested that government spending must be constrained. If it was widely known that this spending could be funded without the use of tax (the hatred of which was simultaneously fuelled by this culture) then the whole myth on which neoliberal economic thinking is based – which says that states can’t afford too much government spending – may have been shattered. No wonder it was said that there was no such thing as a ‘Magic Money Tree’: the bigger the lie the more likely it is to be believed.

And added:

All that being said, the reality is, of course, that no government would want to pay for all government services out of new money being continually pumped, without limit, into the economy. That is because doing so would undoubtedly result in rampant inflation. This fact does not, however, change the principle: that principle is that all government services can be paid for without taxation. This, then, also answers the proverbial 'chicken and egg' question of which comes first: is it ‘tax and spend’, or ‘spend and tax’? By now it should be obvious that the correct answer is that there can be no such thing as tax and spend; the only obvious answer to this question is that there is always spend and tax. In other words, governments can always spend to create the public services they think appropriate using new money created for the purpose and it is the role of tax to reclaim that money from the economy to prevent inflation. The answer to the question of ‘how are you going to find the tax to pay for the spending you plan’, so often posed to politicians, is a simple one: it is to say that it is the spending that creates the capacity to pay the tax in the economy. To put it another way, the spend pays for itself. Appreciation of this fact demands a whole reappraisal of the role of tax in the economy, just as the Bank of England revelation in 2014 that it was lending that created bank deposits and not savings that permitted lending demanded a whole reappraisal of the role of money in the economy.

So, the reality is:

1) Spend comes before tax, always.

2) This has to be true: if it wasn’t there would be no money to pay the tax with.

3) Government spending does, then, create the capacity to tax.

4) But tax is only required if macro economic conditions, and most especially inflation, demands it. Otherwise the spend should be covered by borrowing or money creation.

It really is time some tax experts, and the FT, learned this. The safety of the NHS might require that they do.

Labour has to avoid hypothecated taxes for the NHS

Posted on

John McDonnell discussed the possibility of hypothecating national insurance charges to cover increasing NHS charges yesterday. Labour last discussed doing so in 2014. I said it was a mistake then and it still is now. This is what I wrote at the time and part from a few numerical details not a lot will have changed now:

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 logic 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 it could do. It should not raise NIC.

Thanks heavens: no hypothecation

Posted on

Sometimes it is hard to remember to say thank you.

When there are other issues on your mind it's even hard to note small victories.

But I should note that, thankfully, Labour backed away from hypothecated taxes for the NHS yesterday. They would have been a disaster for all the reasons I noted here.

That's, I hope, one problem off the agenda.

 

Hypothecation is no answer for the NHS

Posted on

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.