Hypothecation, hypothetically speaking

This won’t be the last question about hypothecated taxes in this general election, nor in elections for the rest of time.

Hypothecation is the process of assigning tax revenues to specific areas. The debate about it has a long history in the UK – see this House of Commons Library research paper (pdf).

In health, a little nugget to consider is that National Insurance raises roughly how much the health service costs. NI receipts in 2016/17 were £126bn and the NHS budget for 2016/17 was £120bn. But if you follow where those NI receipts go, I’d be surprised if they go directly to the NHS.

There’s a nice paper from the World Health Organisation (pdf) that I’d recommend reading on this thorny topic. I like it because it digs behind the economics of hypothecation and examines the reasons for and against it. The reasons given for hypothecation include:

  • Trust
  • Transparency
  • Public support
  • Protecting resources.

You can therefore see why @NHSMillion would be keen on hypothecation – particularly looking at that last point: the lack of trust that appears to exist is exactly why people want to protect NHS resources.

This said, I’ve never been a fan of hypothecation. Whilst it would be foolish to argue against trust and transparency in particular, I’m not sure you need hypothecation to ensure trust and transparency. The other cons of hypothecation also point to my reluctance to embrace it. They include:

  • Undermining solidarity
  • Exemption from review
  • Inappropriate funding levels
  • Tying the hands of government.

It’s coincidence that funding levels and NI receipts are roughly similar in health. But controlling for this,  my worry with hypothecation is that we quickly undermine solidarity for tax revenues and public services. Hypothecation opens the possibility of people saying “yes, I’ll pay tax for x” and so potentially “no, I won’t pay tax for y.” I fear it would exacerbate what we already see in areas like welfare support and social care.

Whilst hypothecation isn’t an answer, I think it at least helps us pose the right sorts of questions: how do we ensure transparency in how public money is spent, how do we debate the right balance between different types of services, and how do we build trust between those who make these decisions on a day-to-day basis on behalf of the electorate.