Memorandum submitted by the Institute
of Directors (IoD) evidence for 2002 Budget Inquiry
The IoD's 2002 Budget submission to the Chancellor
(Tax and spend: gambling on better public services, R Lea, R Baron
& G Leach, March 2002) expressed serious reservations as to
the economic wisdom of further raising taxation in order to pay
for higher public expenditure. 
Following the 2002 Financial Statement &
Budget Report (FSBR) these concerns have, if anything, been intensified.
The economy is nourished and strengthened by a low tax burden.
Take away that nourishment and it will get progressively weaker.
One could argue that the National Health Service
is the only surviving planned economy in Europe and that what
the Government currently proposes is little more than "perestroika",
trying to make a fundamentally flawed state system operate as
efficiently as a market economy. It needs also to be remembered
that the formerly planned economies invested in large quantities,
but the resulting quality of those investments was awful.
As the response to the Budget has shown, the
increase in employer national insurance contributions is clearly
recognised as a tax on employment, pure and simple.
The increase in employer taxes comes in the wake of a plethora
of labour market regulations over recent years.
The Government's actions will work together in a pincer movement,
which will undermine future employment.
It is very likely that the negative impact will be felt even before
the rise is introduced in April 2003. The UK's international competitiveness
and attraction for foreign direct investment is being progressively
undermined. Just as the rest of Europe is trying to reduce its
tax burden the UK is attempting to push it up.
Both the Prime Minister and Chancellor have
criticised European social insurance schemes for health, on the
grounds that they would impose significant extra costs on business.
They have then proceeded to introduce an extra tax on businessof
just under 0.5 per cent of GDP per annumin order to pump
money into the state run NHS.
Similar contradiction can be seen in the decision
to increase employee's national insurance contributions. The Government
ruled out any increase in income tax rates in its General Election
manifesto. They have then proceeded to introduce a rise in national
insurance rates, which in effect, is almost indistinguishable
from raising the marginal rate of income tax.
The increase in employee national insurance
contributions, together with the freezing of personal allowances,
reduces economic incentives and threatens to weaken economic performance.
More and more people are now being drawn into the higher tax band.
The political and economic impact of a rising
tax burden was cleverly disguised during the Government's first
term. The political impact was disguised by the use of so-called
stealth taxes. The economic impact was disguised by the use of
tax credits, which reduced the measured tax to GDP ratio.
In his first Budget of the second term, the
Chancellor has made a bold daylight raid on taxation. Between
the Pre-Budget Report and the Budget, net taxes and social security
contributions have increased by around 1 per cent of GDP per annum,
from 2003-04 onwards.
We would argue that the 2002 Budget represents a
very big macroeconomic and microeconomic gamble:
A macroeconomic gamble because it
is dependent on (1) Optimistic GDP growth assumptions. (2) It
ignores the negative economic impact of a high and rising tax
burden, exemplified in higher national insurance contributions.
A microeconomic gamble because it
involves huge increases in public expenditure without (1) First
significantly reforming the provision of those services. (2) Creating
far greater incentives for private sector contributions.
When New labour came to power in 1997 they inherited
a large deficit, with public sector net borrowing of 3.7 per cent
of GDP in 1996-97. They also voluntarily inherited Conservative
expenditure plans up until 1998-99. From the outset, the Chancellor
began to raise the tax burden through the use of stealth taxes.
However, the simultaneous use of tax credits
reduced the measured tax-GDP share.
In making revenue projections, HM Treasury used
a deliberately cautious GDP growth assumption which when combined
with a higher outturn for GDP growth, provided extra tax revenue
for the Government, over and above projected revenues. This meant
that from 1999-2000 onwards each Pre-Budget Report and Financial
Statement & Budget Report resulted in the Chancellor pulling
extra expenditure "out-of-the-hat" for health and education.
Following the second General Election victory
in 2001, it was clear that the Government wanted to further increase
public expenditure growth, but it was also clear that the traditional
stealth approach would soon be limited to the margin. If the Chancellor
wanted to maintain expenditure growth and satisfy the Golden Rule,
he would have to look elsewhere for funding.
In his search, the Chancellor has been helped
in the latest FSBR by an upward revision to estimates of the UK's
trend growth rate. This has allowed the Chancellor to edge up
GDP growth projectionsa bigger cake then provides more
revenue. There are obvious limits to credibility with this approach.
HM Treasury can't simply insert a very strong GDP growth projection
and then wait for the revenue to materialise.
As a result, the Chancellor's only option was
a daylight raid on taxation. The commitment to the NHS was so
great, that serious money needed to be raised. The manifesto income
tax pledge ruled out an increase in the headline rate and this
left national insurance as the only serious option to raise significant
The Chancellor had run out of options and traditional
tax and spend was all that was left.
A gamble on growth
The Government would challenge the notion that
the latest Budget represented a macroeconomic gamble. The 2002
Budget yet again revealed the presentational skills of the Chancellor.
The Chancellor announced a £40 billion increase in NHS spending
over the next five years whilst simultaneously announcing a tightening
in the fiscal stance. The Chancellor has taken up with wanton
Wanless whilst still claiming to be committed to poor Prudence.
Table 1 shows that over the 2002-03 to 2004-05
period the FSBR projection of the surplus on the current budget
is higher than that projected in the Pre-Budget Report. The same
story, of a marginally tighter fiscal stance, is repeated for
net borrowing and for both measures in cyclically adjusted terms,
as a proportion of GDP.
Even in the out years, to 2006-07, there is
only a very small easing in the fiscal stance, as measured by
net borrowing, compared with the Pre-Budget Report projections.
The out-year projections of the surplus on the current budget
are almost identical.
Pre-Budget and Budget Report Comparison
SCB = Surplus on current budget NB = Net
Absolute figures are in £ billion. Cyclically adjusted
figures are % of GDP. Source: 2002 Financial Statement & Budget
The Chancellor has announced enormous increases in public
expenditure (see below) and is gambling on higher economic growth
to pay for them. Compared with previous plans, the increase in
spending totals £28 billion per annum by the end of the forecast
period. However, in order to finance this fiscal largesse the
net tax increase (£11 billion gross, less the offset from
the new £3 billion tax credits) amounts to only £8 billion
by 2004-05. Moreover, the projected path for public borrowing
is broadly the same as that in the November 2001 Pre-Budget Report
(see Table)in fact the fiscal position is marginally tighter.
The obvious question is how? The answer is that the Chancellor
has raised his forecasts of future tax receipts (in addition to
the extra revenue from tax rises) owing to an increased estimate
of trend growth. Trend GDP growth is now assumed to be 0.25 per
cent per annum higher, resulting in the level of GDP being 1.25
per cent higher at the end of the forecast period. The effect
of the forecasting change is to provide an extra £4 billion
per annumover the next three yearswhich otherwise
would have had to be raised through higher taxation.
The explanation for the increase in the underlying rate of
growth to 2.75 per cent is puzzling, given that trend growth over
the past five years has been 2.6 per cent. The main explanation
is not an increase in productivity, but instead a pick-up in net
immigrationfuture strong GDP growth would seem to rest
on keeping the Channel Tunnel open!
The Government has created a set of economic conditions likely
to induce a persistent rise in the tax burden. If spending on
health care continues to grow as a proportion of GDP, then the
Government will need to find additional funds when the Chancellor's
current tax plans stop.
The IFS have estimated (reported in The Independent, 19 April
2002) that in the next Parliament, if overall public expenditure
growth is maintained at 4 per cent per annum, then taxation will
need to be increased by £6 billion per annumaround
0.6 per cent of GDP. Over the coming years the upward pressures
on social security and debt service payments are expected to be
weak. If the economy was to significantly undershoot current GDP
projections the upward pressures on taxation might be £10
billion or more1 per cent of GDP.
Future fiscal policy
A fundamental issue for the future is what happens to fiscal
policy if the expected GDP growth rates do not materialise? We
would argue that it is very unlikely that the spending pledges
will be abandoned, so in the future, we are likely to see two
A softer interpretation of the Golden RuleThe
Golden Rule states that over the economic cycle, the Government
will borrow only to invest and not to fund current spending. At
present the Golden Rule is adhered to in hard terms. FSBR projections
show the current budget in surplus in absolute terms throughout
the forecast period. A less firm approach might see the Golden
Rule adhered to in some years but not all, on the basis that there
could be an average surplus over the entire forecast period. The
softest interpretation might see the Golden Rule analysed only
in cyclically adjusted terms.
It is too simplistic to assume that upward pressures on public
expenditure beyond 2006-07 will ease, because the backlog of under
investment in health, education and transport will have been addressed.
Surely the lesson of history is that public expenditure is very
sticky in a downward direction.
Gambling with a higher tax burden
According to the 2002 FSBR (Table C10, page 219) net taxes
and social security contributions will rise from 37 per cent of
GDP in 2001-02 to 38.3 per cent of GDP in 2005-06. Over the period
1996-97 to 2006-07 the tax to GDP ratio
will have increased by 3.3 per cent of GDProughly £33
billion per annum.
The IoD's concern is that the real underlying increase in
the tax burden over recent years may have been considerably more
than suggested by the headline data. David Smith (Public Spending
and Economic Performance, D Smith, William de Broe, February 2002)
has highlighted the discontinuities in the national accounts following
the phased introduction of the new-1995 based European System
of Accounts (ESA95) in two stages in the autumns of 1998 and 2001.
Smith states that,
"It is clear, from the debates between the Prime
Minister and the then Leader of the Opposition before the 2001
election, that even the most senior politicians are unaware that
the post-ESA95 data are so different from their predecessors,
that it is meaningless to compare the tax and spending burdens
projected in the last Conservative Budget Report, for example,
with today's figures".
Smith's calculations suggest that if one looks at the overlap
year of 1997-98, the net effects of the changes to the tax share
numerator and denominator was to reduce the tax share by around
1.5 per cent.
This suggests that between the beginning of Labour's first
term in office and the end of their second term, the true tax
share in GDP will have risen by almost 5 per cent of GDP£50
billion per annum in current pricescompared with the 3.3
per cent increase shown in the 2002 FSBR.
The IoD argues that the tax burden should fall, not rise
as a proportion of GDP. The IoD has consistently argued for the
introduction of a Third Fiscal Rulea medium/long term commitment
to reduce the tax burden as a proportion of GDP. The IoD believes
that the Chancellor's two fiscal rules are insufficient to restrain
growth in public expenditure in the long term. It is possible
to argue that satisfaction of the Golden Rulewhich requires
balance in the current budget over the course of the economic
cycleshould alleviate this upward pressure, but the IoD
is less confident.
As the Budget measures show, satisfying the Golden Rule still
means that taxation and public expenditure rise significantly.
This propensity for tax and spend is a matter of great concern.
There needs to be a more binding constraint on expenditure if
upward pressures on taxation are to be avoided.
The Third Fiscal Rule can still be reconciled with improved
public services, by providing people with the incentive to make
a greater private contribution towards the cost of health &
education. Box 2 illustrates how such a policy could reduce the
share of public expenditure and taxation in GDP.
Box 2Improving public services and lowering public expenditure
One possible way forward might be long-term adoption of the
so-called Clark-Keynes objective as set out by Professor Tim Congdon
(Towards a low-tax welfare state, Politeia, 2002). By stabilising
public expenditure on health and education, in real terms, and
simultaneously introducing voucher models, Congdon's simple estimates
show that it is possible to envisage this policy switch reducing
the public expenditure (and by implication the tax to GDP ratio)
to GDP ratio to 25 per cent of GDP by 2023. Alternative optimistic/pessimistic
assumptions produce a ratio of 25 per cent of GDP by 2015, or
by the late 2020s. The model works on the principle that any rise
in expenditure beyond inflation indexation, needs to be met by
the individual not the state.
Tax and economic performance
It is ironic that on the day HM Treasury announce an increase
in the future tax burden, they simultaneously announce an improvement
in potential economic growth. The IoD would argue that one should
normally expect, ceteris paribus, a negative relationship between
these two economic variables.
Not all agree. The Director of the Institute for Fiscal Studies,
Andrew Dilnot, has recently re-stated the IFS position that, "no
reputable cross-country studies have found a link between tax
burdens and economic performance" (Sunday Times, 3
However, the IoD would question this conclusion. We would
argue that "static" models, such as the IFS model, fail
to capture the "dynamic" impact of tax increases. The
increase in national insurance contributions threatens to reduce
employment, GDP growth and tax revenues, compared with what otherwise
would have been the case. This negative effect of the hike in
taxes is not explicitly acknowledged by HM Treasury.
One recent comprehensive study of the literature by the OECD,
concluded that there was a negative relationship between the tax
burden and economic performance (Taxation and economic performance,
W Leibfritz, J Thornton & A Bibbee, OECD Working Paper GD97/107).
There are sceptics at the IMF as well. A number of IMF studies
have addressed the issue of what is the optimal size for the state.
Tanzi and Schuknecht (The Growth of Government and the Reform
of the State in Industrial Countries, IMF Working paper 95/130,
V Tanzi and L Schuknecht, 1995) argue that social indicators
improved over the 1870-1960 period when the welfare state was
in its infancy. Over recent decades they state that,
"The expansion of public expenditure and of the welfare
state during the last three decades has yielded limited gains
in terms of social objectives while possibly damaging the countries
economic performance. Today, countries with small governments
and the newly industrialising countries show similar levels of
social indicators but these are achieved with lower expenditure,
lower taxes and higher growth than countries with big governments".
As a result, the IMF paper asserts that drastically lower
levels of public spending could be achieved, with the possibility
that it need not account for more than 30 per cent of GDP.
Box 3Social engineering and the rising dependency culture
Since 1997 the FSBR has, more and more, become a tool of
social engineering. The end result has been greater complexity
and meddling in the tax system. This is not what the Budget should
A very crude indicator of the increase in complexity and
meddling is given by the number of pages in each Budget Red Book.
In recent years the size of the Budget Red Book has been on a
steep upward trend. The Red Book is roughly 100 pages longer than
five years ago.
The new Child Tax credit will be available to families with
an income up to £58,000. As a result, the dependency culture
will be pushed up the income scale. Also, from 2003, the incomes
of half of all pensioner households will be increased by the pension
credit, which is projected to eventually cost around 1 per cent
of GDP (John Hawksworth, PriceWaterhouseCoopers calculations,
published in The Economist, 20 April 2002).
The Daily Telegraph has reported that (19 April 2002),
"Gordon Brown's tax credits are turning Britain into
a nation of benefit claimants, with nearly one in three adults
soon to receive state handouts of one kind or another. He has
tripled the number of families receiving benefits to nearly 6.5
million [according to research from the IFS]. He has also nearly
tripled the number of pensioners receiving special help . . .
the explosion in numbers means Mr Brown is presiding over a massive
increase in the social security budget".
The growing cost of tax credits on the welfare budget has
been hidden by:
The classification of credits as negative taxation,
instead of welfare expenditure.
Falls in unemployment and the cost of cyclical
benefits, such as jobseeker's allowance, which have reduced the
total welfare budget below what it otherwise would have been.
Before the 1997 general Election the Prime Minister stated
"I vow that we will have reduced the proportion [of
national income] we spend on the welfare bills of social failure
. . . this is my covenant with British people. Judge me upon it".
The Prime Minister also promised that the money saved on
welfare would be used to improve health and education.
The reality has been somewhat different. House of Commons
(published in Tax Credits: Do they add up?, D Willetts
& N Hillman, Politeia, 2002) show that over the 1996-97 to
2002-03 period benefits expenditure rose by £25 billion to
more than 10 per cent of GDP.
2. MICROECONOMIC GAMBLE
The Government has committed itself to a 43 per cent real
increase in health expenditure by 2007. Given the political priority
of health funding, we focus on the microeconomic gamble, that
is the NHS.
The IoD questions the wisdom of raising taxes and public
expenditure in order to improve public servicesespecially
health but also educationwithout first reforming the provision
of those services. There is also a strong case for incentivising
private sector contributions.
We recommend a voucher scheme for both health and education
services which also, by introducing choice, improves competition
and producer responsiveness to the consumer. Increased expenditure
for public sector monopoly provision is not the best way to deliver
improved public services
In his November 2001 Pre-Budget Report, the Chancellor of
the Exchequer stated that "it will be right to devote
a significantly higher share of national income to the National
The increase in health expenditure announced in the Budget
will mean that by 2007-08 public expenditure on health will reach
8.2 per cent of GDP. Total expenditure on healthwith an
unchanged share for private expenditurewill reach 9.4 per
cent of GDP. This means that by 2007-08 the UK is likely to have
the highest share of public health expenditure in GDP, in the
EU. This calculation is based on latest OECD health data which
shows the highest current level of public health expenditure,
is in Germany, where it accounts for 7.8 per cent of GDP.
The final Wanless Report (Securing our future health:
Taking a Long View, HM Treasury, April 2002) sets out the
Review's projections of future health expenditure. Recognising
a range of possibilities, it projects health expenditure rising
to between 10.6 per cent to 12.5 per cent of GDP two decades from
nowassuming private health expenditure remains constant
as a proportion of GDP. The average annual real growth rate in
UK NHS spending is projected at between 4.2 per cent and 5.1 per
cent over the 20-year period.
The Wanless Report also notes that the projections are very
sensitive to productivity (and GDP growth) and that it is possible
under a weak growth scenario the GDP share could rise to 13.1
Much of the growth in expenditure is front loaded with average
real growth around 7.4 per cent per annum over the first five-year
period to 2007-08. The Wanless Report states that,
"In the current year total NHS spending in the UK
is expected to be around £68 billion "the Review projects
that this will rise to between £154 billion and £184
billion [in 2002-03 prices, by 2022] "
The projected growth rates imply an increase in health expenditure
of between 3 per cent and 5 per cent of GDPan increase
of £30 billion to £50 billion per annum in today's prices.
These are huge numbers and one must surely question why the entire
increase in health expenditure needs to be funded through direct
Raising the tax burden by 3 per cent to 5 per cent of GDP
over the coming decades will have hugely detrimental effects on
the whole economy.
It doesn't have to be this way
The IoD agrees that as a country we need to spend more on
health care, but sharply disagrees with the Government that the
NHS should be the focus of all the additional expenditure. Half
the health divide with the rest of the EU is because these countries
have a much larger contribution from private sector health care.
If the UK private sector in health, was as large as its EU counterparts,
the total health expenditure divide would close tomorrow.
More private not public expenditure?
|Measure of EU health average aimed for
||Target % of GDP
||Gap in 2002- % of GDPUK total 7.7%, public 6.6%
|Unweighted inc UK||7.9
|Weighted inc UK||8.5
|Unweighted exc UK||8.0
|Weighted exc UK||8.9
IFS estimates, updated by IoD to incorporate 2002 FSBR. The
EU average for private health care (exc UK) is 2.2 per cent of
GDP compared with 1.1 per cent of GDP in the UK. Based on OECD,
The IoD does not believe that significant tax rises are necessary
in order to improve the nation's health care, quite the opposite.
Britain is the only major country in the world that tries to fund
health care through the tax system to this degree. The Government
has used the Wanless Report to close the debate down, just when
the general public needed to see it opened up. The IoD disagrees
with the "open & shut case" state funding approach
taken by the Wanless Report.
Resources and results
Resources will not necessarily bring results. The Government
is to establish two new "super regulators" to monitor
the use of health and care expenditure. It has also announced
that Kaiser Permanentethe California based not for profit
health maintenance organisationis to be invited in to partner
NHS purchasers. The long term aim is to create a situation whereby
the patient can choose which hospital waiting list they wish to
be put on. Words, however, are cheap. The current system has hugely
powerful vested interests who will resist any such changes.
The fundamental question is what will be the most effective
and efficient way of improving health outcomes in the UK? The
IoD is deeply sceptical that pouring money into the National Health
Service is a sensible use of the hard earned income of employers
Are we seeing value for money? Over the past five years the
health budget has increased by almost 30 per cent in real terms.
This has not been mirrored by an equally dramatic improvement
in the NHS. Hardly any extra patients have been treated and waiting
lists remain above one million. Over the past year, despite an
extra £5 billion in health expenditure, only 2,000 extra
patients on the waiting list were treated! The Financial Times
has reported that "we are putting a lot more money in,
and appointing a lot more consultants, but we are not getting
any productivity increase" (The Financial Times, 16 February
Since 1960 NHS spendingin real termshas doubled
as a proportion of GDP, over a period when GDP has more than doubled
as well. Can we really claim there has been a fourfold improvement
in the NHS? The WHO ranks the UK 18th in the world on health system
performance. Crude indicators of life expectancy show the UK was
ranked 5th and 8th in terms of life expectancy for females and
males in 1960, but by 1997 its rank had slipped to 16 and 11.
OECD health outcomes data show the years lost to heart and respiratory
disease in the UK are far higher than in other advanced economies.
More specific indicators, such as the new NHS Trust league tables,
highlight huge differences in performance between the best and
worst hospitals. The tables explode the myth that social deprivation
excuses poor performance, when hospitals with similar catchment
areas produce vastly different scores.
The public policy campaign group, REFORM, has catalogued
(various REFORM Weekly Bulletins in 2002) a long list of failure
in public sector health care. REFORM has reported that:
The Department of Health has estimated that 16
to 20 per cent of the NHS budget is lost as a result of poor management,
fraud, blocked beds, hospital related infections and other areas
Scotland already spends at the EU average of health
expenditure, and yet it has even longer waiting lists and poorer
standards of health than England. NHS expenditure per head is
20 per cent higher in Scotland, yet health outcomes are poorer.
Over the past four years the average wait for an operation has
risen from 44-57 days.
The tax cost of the NHS to the average family
has more than doubled in 10 years. Public expenditure on the NHS
will soon reach £3,000 per household per annum. This is more
than the Government's highest estimate of the cost to a family
of insuring themselves.
An article in the British Medical Journal, shows
that the NHS delivers far lower standards than an American health
provider, Kaiser Permanente, does with the same cost per patientthough
care must be taken in comparing figures. Patients have access
to between two and three times as many specialists and spend far
less time waiting for treatment. A man diagnosed with lung cancer
under Kaiser Permanente is twice as likely to live another five
years than if he were treated under the NHS.
The Adam Smith Institute has estimated that only
17 per cent of any new resources for the NHS end up in front-line
services. This order of magnitude has been supported by a recent
report from the NHS Director of Finance.
Despite increased funding, NHS waiting lists were
rising in the last quarter of 2001. In an October 2001 report
the Audit Commission reported that waiting times have been increasing
since first measured by the Commission in 1996, and that the deterioration
has increased since 1998. The report pointed out that despite
extra investment and more doctors, waiting times are growing quite
significantlyalthough there has been an improvement in
An Audit Commission Review has found that accident
and emergency services have deteriorated since 1997.
Where, in this dismal NHS performance, is the justification
for raising taxation by tens of billions of pounds? Why should
taxpayers have to suffer the double whammy of higher taxation
followed by higher personal health care costs, as the NHS fails
to deliver and they have to seek alternative private treatment?
The Secretary of State for Health, Alan Milburn, has described
the NHS as "the last great nationalised industry".
Despite this, to use a military analogy, Government policy remains
set on sending "more men over the top", instead of opening
up a new frontin the private sector. Both strategies require
additional resources, but in a different way and with potentially
very different outcomes.
The Chairman of the BMA has recently stated that,
"the NHS in its current state cannot survive without
The President of the Royal College of Surgeons recently stated
"things are in such a mess, much worse than I would
have imagined possible . . . the NHS is in a desperate state .
. . the Government's claim that the NHS is already improving is
at best premature, at worst a product of wishful thinking. It
is based on the profoundly mistaken beliefagainst all the
evidencethat huge increases in spending are themselves
bound to improve services. A genuine debate on health reform is
necessary, beginning with the recognition that, in spite of more
resources, the existing structure of the NHS is failing to deliver
the improvements and standards of care that patients and staff
deserve and expect".
There is an alternative
In the USA around 13 per cent of GDP is devoted to health
care. This figure may/may not be excessive, but it does illustrate
an important point that in the UK, because of the overwhelming
dominance of the public sector, a rising share of health expenditure
in GDP is seen as a burden. This is paradoxical, because generally
speaking, if we see one economic sector's GDP share rising, it
is perceived as a dynamic fast growing success story. If one looks
across the globe, dynamic fast growing sectors tend not to be
associated with the public sector. This is another argument for
liberating the private sector.
In two recent reports (Choice, Choice, Choice, Graeme
Leach, IoD Policy Paper, December 1999 and Healthcare in the
UK: the need for reform, Ruth Lea, IoD Policy Paper, February
2000) the IoD has examined the funding and provision of health
care and education in the UK. The central message of these two
reports is that whilst there is a case for spending more of our
national GDP on health and education, any increase would be best
funded by the private and not the public sector.
The IoD argues that radical reform is required to improve
healthcareespecially in improving management and autonomy
in NHS Trusts.
The IoD's health passport model would overcome the "all
or nothing" choice people face at present. If the Government
provided as a credit the equivalent cost of providing these services
in the public sector, then people would be far better able to
afford the necessary top-up. Importantly, the cost of privately
insuring for the top-up would be less than that for meeting the
full cost. This could increase the share of health expenditure
in GDP, improve the quality of service and cap public expenditure
at the same time. Comprehensive health care would remain free
at the point of use, for those who wanted to continue to receive
treatment through the NHS.
Whilst the dead-weight cost to the public sector, in the
short term, of providing the top-up to people already using the
private sector, needs to be acknowledged, we feel strongly that
such sums would be outweighed in the medium and long term by the
dynamic economic benefits attained by liberalising the private
20 April 2002
The Oxford University historian, Correlli Barnett, has argued
that the 2002 Budget will be judged by history as the defining
moment when new Labour turned back to old Labour socialism (Daily
Mail, 19 April). Correlli argues that the NHS is the one single
remaining structure of socialism built by the Attlee government
of 1945-51 and that this might explain the Chancellor's willingness
to commit vast public funds. Back
The increase in employee and employer national insurance contributions
is likely to push more economic activity into the "shadow
economy" (See: Tax and spend: gambling on better public
services, R Lea, R Baron & G Leach, IoD, March 2002). Back
The BCC has estimated that a slew of new regulations has cost
business £15 billion over the past five years (The Economist,
20 April 2002). Back
It is easier to foresee the negative consequences if one thinks
in cash terms and not rates. If a hypothetical company pays £10
million in NI contributions, then if the £100,000 increase
announced by the Chancellor is to be absorbed without raising
costs, total employee numbers are likely to fall by 4-5 or more,
depending on the nature of employment. Back
Treated as negative taxation by HM Treasury. Back
The 2002 FSBR (page 40) reports that under the so-called "stress
test", where the fiscal effect of a 1 per cent per annum
reduction in GDP growth below the central case is tested, the
cyclically adjusted current budget remains in surplus. Back
Consistent with the new OECD classification. Back
21 February 2002. Back
This of course assumes a constant public expenditure share, in
the EU, over the projected period. Back