Matthew Sinclair: Taxpayers aren't the right people to pay for improved public services

Matthew Sinclair, a TaxPayers'Alliance policy analyst, worries that the Conservative health proposals will increase the size of the state and points to university fees as a model for how the NHS should develop.

Andrew Lansley’s new healthcare proposals contain some interesting ideas but from a taxpayers’ perspective it is worrying that they do not encourage funding of healthcare from any other means than general taxation. If we wish to avoid a substantially higher burden on taxpayers in the future the use of personal funds will need to be encouraged in healthcare and other services.

Patricia Hewitt recently spoke to an audience at the LSE on the subject “The NHS: the next ten years”. Media coverage focussed on her attack on the idea of an independent NHS board. However, an under-reported but probably more important part of her speech came at the beginning where she argued that the current slowdown in healthcare spending was likely to prove transient. Sooner rather than later public demand would build for another major increase in expenditure on health. This assertion is both correct and vitally important to the debate over the future of the public services as it is true not just in healthcare.

Some context: Over the nineteenth and twentieth centuries there was a steady move towards increased consumption of manufactured goods instead of food as a share of income as incomes rose, tariffs fell and food got cheaper. People only wanted so much food and rising incomes quickly sated demand for more food and increased quality. The same has been happening for manufactured goods. People only want so many TVs, cars or dishwashers. Demand is moving to services including those services currently provided largely by government.

Two factors drive an increased demand for healthcare. First, older people require more healthcare and the population is ageing. Second, technology is vastly increasing the potential of medical science. There is huge demand for new treatments which promise incredible results but are very expensive. This effect is massively outweighing technological advances that cut costs.

The same is true in education. Rising demand for education is driven partly by people wanting to be on the right side of a growing skilled-unskilled divide created by the entry to the world market of cheap labour, particularly from India and China. Another major factor is the growth of a ‘knowledge economy’ where the kinds of analytical skills taught in higher level education are becoming increasingly important.

Healthcare and education are representative of a broad trend. Services which are currently largely the responsibility of the State are seeing increased demand across the developed world. In healthcare, Britain has doubled spending, to roughly the EU average, and health costs in America are also rising. Germany’s social insurance based healthcare system has been under huge financial strain.

The prospect of this new demand being satisfied solely with taxpayers’ money should horrify the Right. Such an expansion of government would require a massive increase in taxation which would cripple our economy and take more money from hard up taxpayers.

George Osborne is right to say that the State should not grow as a share of national income over the economic cycle, but the policy announced today risks causing that to happen. By not allow ‘topping-up’ from personal funds for operations in the private sector, an expansion in spending on healthcare and education would be paid for by taxpayers and only taxpayers. This will increasingly undermine attempts by Osborne to ensure the state takes a smaller proportion of national income over time, needed in order to deliver tax reductions.

A solution is to encourage the use of personal funds. That way demand for increased spending on items like healthcare and education will not have to translate into higher taxes and bigger government. The prototype for this can be found in the university sector. Tuition and top-up fees now mean that as demand for university education increases, the funding will also rise as more students pay fees. If the cost of university education rises there will be the option of lifting, or abolishing, the cap on fees. In the NHS, and under Andrew Lansley’s proposals, such an option does not exist and any requirement for more funding becomes a call for higher government spending.

If the sacred cow of healthcare, education and other services being funded purely from taxation cannot be challenged, a crucial battle with the Left will have been lost and the struggle to stop the State expanding will become increasingly hopeless.