Part Three: How are we going to pay for the NHS?

In this series of blogs, John Endacott, partner and head of tax at PKF Francis Clark, considers how the UK economy that emerges from the coronavirus crisis will look different and how taxes on individuals and businesses are likely to rise in the years ahead.

The issue of social care has been on the ‘too difficult’ list for governments for a very long time.

Various solutions have been suggested designed to appeal to an asset rich elderly voter base.  The pretence has been that somehow more social care can be provided without users having to pay for it.  This is hard to reconcile with the approach on university funding, where the financial cost has been directly passed on to younger and less wealthy users through student loans.

There is still no solution in sight and the current crisis is bringing social care ever closer to the fore and making a solution more urgent.  Increased asset taxation seems the most likely outcome – probably through some kind of loan and probate tax approach.

NHS funding

The cost of healthcare has been growing faster than the tax revenue can support it.  Theresa May tried to deal with this by making a large financial settlement to the NHS so increasing the share it takes of our annual tax income.  As is now very clear though, it’s nothing like enough.

Whilst a one-off crisis deficit can be funded by increasing the national debt, it is hard to see how the government can justify a year in, year out funding deficit on annual spending.  So an increase in tax revenue seems necessary.  I’d suggest that this is likely to take the form of a surcharge – probably an NHS surcharge – on all tax rates of perhaps 5% (it could be more).  I think this will be described as “temporary” but then remember that income tax is still a temporary tax (after two centuries).

Models for such an approach include a surcharge on tax rates used by Germany to help meet the cost of reunification in 1990 or the surtax that we had in place from 1929 to 1973 until it was merged into income tax.  For most of us it is hard to remember such surtax assessments other than from Monopoly, but we may get to know how it feels in real life.

Other approaches to raising money for the NHS could include a wealth tax (especially if it was levied as a one-off charge), an increase in VAT, inheritance tax or perhaps the digital services tax on the grounds that online businesses have profited substantially from the change to the UK economy and the lockdown period and so should pay a higher proportionate share to fund the recovery.

Rebalancing the economy

In his Budget on March 11, Rishi Sunak announced a big increase in borrowing to fund infrastructure spending.  We do not yet know to what extent the government will wish to revisit that approach but spending on capital projects is likely to be very beneficial for the UK economy as long as we have the trades and skills required (which it isn’t clear that we have).

The choice of projects needs some more thought now and, on current performance, the ability of government ministers to decide on the right projects seems doubtful.  Surely better to leave it to the market to provide?  That said, leadership is required by the government as to how they see the economy being re-balanced, and tariffs and industrial policy need to be set on this basis (once again it all sounds like a re-run of the 1960s).

The white heat of technology sounds like the model but this time perhaps it will be big data and artificial intelligence.  From our new perspective, the idea that all the capital projects need to be for roads and railways doesn’t seem that appropriate given the current levels of traffic on both.

We would also need to see the rebuilding of some of our UK manufacturing base as domestic control of key supply chains (as opposed to globalisation) is back in vogue – think PPE, reagents and vaccines and ventilators.  It has certainly been interesting to see how quickly clients have looked to re-focus their businesses to help meet these urgent needs as a country, and they are very able to achieve what is required with the right political leadership. That means a clear, and consistent, vision of the future that we are trying to build as a country.

We have learnt something about Rishi Sunak in his short time in office from the measures that he has introduced to date.  His approach seems to be to bring in changes that are big in scope, relatively simplistic and accepting that there will be some losers and that the losers just have to live with it.  He does also seem to have a clear vision as to what he is trying to achieve.  This government is strong on its vision – the recent criticisms are much more about the ability of ministers to deliver on achieving the visions that have been set.

In summary, higher taxes on the income of both individuals and corporates are likely going forward to help increase government revenues, but I suspect governments will need to go further than that and look to tax wealth more as well.

How they do that remains to be seen, but I think it will be required against the backdrop of trying to increase investment in UK domestic businesses as we see a re-focusing of our economy as it re-builds itself coming out of the lockdown. I expect there to be less of a focus on consumption and a move back towards a way that we probably last saw in this country in the late 1940s and early 1950s.

The problem then was that we did not seem able to build those businesses into internationally competitive global players – will we be able to this time?

To read the other articles in this series ‘The outlook for the UK economy and taxation after coronavirus: an expert’s view, click the links below: 

Part one: Coronavirus – a catalyst for change

Part two: The post-coronavirus economy