Select Committee on Treasury Appendices to the Minutes of Evidence


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. [1]

  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[2]. The increase in employer taxes comes in the wake of a plethora of labour market regulations over recent years[3]. The Government's actions will work together in a pincer movement, which will undermine future employment[4]. 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 business—of just under 0.5 per cent of GDP per annum—in 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[5] 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 projections—a 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 sums.

  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 borrowing

PBR 2001-SCB
PBR 2001-NB
FSBR 2002-NB
PBR 2001-SCB
PBR 2001-NB
FSBR 2002-NB

  Absolute figures are in £ billion. Cyclically adjusted figures are % of GDP. Source: 2002 Financial Statement & Budget report.

  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 annum—over the next three years—which 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 immigration—future 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 annum—around 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 more—1 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 possible outcomes[6]:

    —  Further tax increases.

    —  A softer interpretation of the Golden Rule—The 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[7] will have increased by 3.3 per cent of GDP—roughly £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 prices—compared 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 Rule—a 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 Rule—which requires balance in the current budget over the course of the economic cycle—should 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 2—Improving 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 March 2002).

  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 3—Social 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 be about.

  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 that,

  "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 Library calculations[8] (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.


  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 services—especially health but also education—without 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 Health Service".

  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 health—with an unchanged share for private expenditure—will 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[9].

  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 now—assuming 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 per cent.

  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 GDP—an 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 taxation.

  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.

Table 2

More private not public expenditure?

Measure of EU health average aimed for
Target % of GDP
Gap in 2002- % of GDP—UK total 7.7%, public 6.6%
Unweighted inc UK
Weighted inc UK
Unweighted exc UK
Weighted exc UK

  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, 1998 data.

  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 Permanente—the California based not for profit health maintenance organisation—is 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 and employees.

  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 2002).

  Since 1960 NHS spending—in real terms—has 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 of mismanagement.

    —  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 patient—though 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 significantly—although there has been an improvement in certain specialities.

    —  An Audit Commission Review has found that accident and emergency services have deteriorated since 1997.

Double whammy

  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 front—in 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 radical change".

  The President of the Royal College of Surgeons recently stated that,

  "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 belief—against all the evidence—that 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 healthcare—especially 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 health sector.

20 April 2002

1   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

2   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

3   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

4   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

5   Treated as negative taxation by HM Treasury. Back

6   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

7   Consistent with the new OECD classification. Back

8   21 February 2002. Back

9   This of course assumes a constant public expenditure share, in the EU, over the projected period. Back

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2002
Prepared 15 May 2002