The cost of the NHS will rise and rise. How are we going to pay for it?

·4-min read

The last two weeks have seen big announcements on National Insurance, the NHS, Social Care and the state pension “Triple Lock”. Each of these is dramatic in their own right, with far-reaching implications, but like London buses they’ve all come along together because of a deadline: the October Spending Review. Chancellor Rishi Sunak has set himself the difficult task of paying for the aftermath of the pandemic while simultaneously confronting one of the greatest policy challenges of our times: how to manage longer lives and an ageing population.

Before we dive into the details, the bottom line for Londoners is that we are a net contributor to the national budget with a young population. And as a hub for global investment, London is particularly exposed to international competition when it comes to the cost of doing business. Of course it’s not all a one-way street — many Londoners will benefit from a well-funded NHS and a cap on social care costs, and an ageing population will also provide some commercial opportunities — but the public policy implications of the ageing challenge are particularly acute here in the capital.

The prospect of longer lives should be something to cheer, so why is ageing such a challenge for policy, and why does it pose some particular problems for public spending here in the UK? The answer begins with a strong and simple pattern: as countries get older and richer they spend a bigger proportion of their resources on health and care. This is partly because they want to — as you find it easier to meet your basic needs, you allocate more money and time to your health — and partly because they have to — science has extended our lives but at the cost of more expensive treatments and more time in need of care and support.

At the same time as these costs are rising, in most countries the slow-moving maths of demographics means there will be a smaller proportion of working age people to pay the taxes required. As far as these demographics go the UK is in better shape than many other European countries, and we have also done more than most to bite the bullet on extending working lives by increasing official retirement ages. But the way we have chosen to pay for healthcare, and now increasingly social care, creates a particular challenge for public spending and the tax burden.

Most people in the UK take it for granted that the NHS is free at the point of use and funded exclusively through general taxation, but it is in fact very unusual. Most countries use some kind of social insurance system, often together with co-payments for specific services. Compared to this the UK’s approach is much more progressive — the richest pay the most for the system through their taxes, even as a share of their income, and irrespective of how much they use it. But it also means that the upwards pressure on health spending feeds into upwards pressure on the overall tax burden and squeezes out other priorities for public spending.

So is there anything we can do to prevent the tax burden gradually rising ever higher, with all the knock on consequences for growth and competitiveness? A tax funded NHS is a fixed point across the political spectrum. That means an ever-stronger focus on value for money and productivity across the public sector, something that has been put rather on pause during the pandemic, but which will return front and centre in the Spending Review next month. And it means thinking about how to tax without undermining key engines of growth like London.

And what about the opportunities for London from an ageing population that I mentioned? Another major challenge is ensuring a decent standard of living in retirement. The huge growth in private pension savings driven by auto-enrolment has been one of the stand-out policy successes of the last decade. Many more people are saving into a pension, but most are still not saving enough to deliver the retirement incomes they expect. The Government needs to find ways to increase contribution rates, and the City is the world leader at channelling those savings into investments that will both drive growth and deliver better returns for savers. As London has always discovered, every crisis can be turned into an opportunity with a bit of innovation.

Rupert Harrison is a former chair of the Council of Economic Advisers and a multi-asset portfolio manager at BlackRock

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