The Long-term Sustainability of the NHS and Adult Social Care

Lord Layard Excerpts

Thursday 26th April 2018 Lords Chamber

[Lord Layard (Lab)]

My Lords, I, too, congratulate the committee and, like many earlier speakers, think that something more radical is needed on funding. The fundamental problem with the present system is the complete disconnect between the Government’s funding decisions and, on the other hand, what the public want and are willing to pay for. For example, in a recent MORI poll, people were asked to pick out their preferred option for the NHS, and no less than 66% of the public picked out the following option:

“I would be willing to pay more taxes in order to maintain the … spending needed”,


in the NHS. However, the problem is that under the present system there is no mechanism by which they could implement their wish. Taxation and spending are totally separate issues in the way the system operates, and the public will get what they want only if we can find a way to bring the two together—and that is of course a hypothecated tax.

If you have a hypothecated tax and the public vote for a manifesto, they are voting simultaneously for the end and for the means. You have to bring the end and the means together into a single decision. So I am happy that our colleague, the noble Lord, Lord Macpherson, formerly of the Treasury, has asked me to say that he now favours hypothecation. The Treasury is the main obstacle to this proposal; it wants to make the spending decisions and thinks that it is best placed to do the trade-offs. But it is the Treasury that got us into the mess we are in now.

One obvious objection to hypothecation is that the health service needs certainty about its funding, while taxes are uncertain and depend on the business cycle. I discussed this issue in my evidence to the committee, and the following arrangement would work well. At the beginning of each Parliament, the Government would present a 10-year plan for the NHS, including services, workforce and expenditure. The second five years would be indicative, but the first five years would be a commitment. Associated with that commitment would be a preannounced rate for the health tax such that the forecast proceeds would equal the committed expenditure over the Parliament. If in the upshot because of the cycle there was some difference, year by year or even overall, between the proceeds of the tax and the committed expenditure, the Treasury would make up the deficit or collect the surplus.

As many people have said, we want a funding system that simultaneously covers health and the part of social care that is paid for by public funds. As some other noble Lords suggested, we would have to extend the insurance tax base to include all income at all ages. However, once this was put in place and we had converted the national insurance system into national health insurance and raised enough extra money for the health and social care system, which would be needed, to some extent we could cut other taxes which currently finance health and social care.

I will end on the issue of what scale of expenditure would be likely to emerge if we had such a system. First, over the last 40 years health expenditure has steadily risen as a share of the national income, except in the last decade, and that has been so in every advanced country, including in our own. We ought to expect that pattern to be ongoing, because it reflects people’s preferences on how they want to spend their additional income. But in addition to that we need a rapid one-off upward adjustment to get us back on track, because we are off track. That is what people say they want, as I quoted, and I will also give your Lordships another research-based reason for a one-off adjustment.

This comes from happiness research—something I practise—which shows that physical health and, even more, mental health, have very large impacts on human happiness. These impacts are also very large when compared with the effect of variations in household disposable income after tax. In spite of the huge importance of health, health spending is now rationed by the NICE regulations, which require that you have to have at least one extra—this is jargon—quality-adjusted year of life for every £30,000 spent. It will not allow you to spend the £30,000 unless you have one extra quality-adjusted year of life as a result. But from happiness research we know that, when households collectively give up £30,000 in taxes, they lose only one-thirtieth of a quality-adjusted year of life. So spending more on health gives you a benefit-cost ratio of 30, which is a pretty good argument for spending more money.

So we need a hypothecated tax, and I see no reason why the British public would want to spend less than the average percentage of GDP that is spent on health in northern Europe. That would require an extra £40 billion a year as of now. That is the direction in which we should move, and we should move as fast as possible.