It will cost serious money to give the NHS a decent birthday present

The NHS will be 70 in July and Theresa May would prefer that this birthday is a happy one celebrated with cake, not a miserable occasion that makes her government look bad. That means finding money; a serious amount of money.

A funding crisis is brewing. Many would contend that it is already upon us. More than half of trusts are thought to have finished the last financial year in deficit. Hospital bosses say that understaffing is an acute problem. The number of GPs relative to the size of the population is falling. Spending on primary care has gone down. Waiting times are rising and targets are being missed. This deterioration in performance is also showing up in declining public satisfaction ratings. The high achieved as a result of New Labour’s big spend on health during Tony Blair’s time in office has been followed by a slide downwards since 2010 that has recently got worse. The chief executive of NHS England, Simon Stevens, is openly campaigning for more money. So is Jeremy Hunt, who only has a few more weeks to survive in office before he becomes the longest-serving health secretary. They seem to be having some success with Mrs May, who recently acknowledged that the NHS cannot go on lurching from one financial emergency to the next and suggested that she wants to bring forward a long-term funding settlement. The fierce wrangling within her government is about how much, how soon and where the funds are going to come from.

A well-timed joint report by the non-partisan Institute for Fiscal Studies and the Health Foundation has examined the future demands of a growing and ageing population. It comes to the bracing conclusion that the NHS requires at least an extra £1,200 a year per household over the next 15 years. This is simply to sustain a “status quo” health service, delivering roughly the same levels of provision as now. If Britain has a more ambitious desire for a “modernised” NHS, then the bill comes in at around £2,000 a year per household.

The report’s authors haven’t snatched these big numbers from thin air. They come to this conclusion only after examining other means of enhancing health care. Improving productivity is sometimes touted as an answer. “Getting more from less” was a popular mantra in Whitehall in the early years of austerity. Productivity in the health service has been going up and faster than across the economy as a whole. Further efficiencies are possible, and smart technologies may help, but these will not be enough to bridge the gap between performance and public expectations.

Forget a Brexit dividend for the NHS. That never existed anywhere except in the imaginations of Boris Johnson and his fabulist friends. There’s no crock of gold at the end of that non-existent rainbow. In the government’s internal debates between ministers, the chancellor, Philip Hammond, has been particularly insistent that any extra cash that is found for health is not portrayed mendaciously as a Brexit windfall.

The government could find more money by adding to borrowing, but there are limits to that, especially for a country that is still accumulating debt. Relying on borrowing to take the strain is not a sustainable, long-term solution. The government could choose to spend less on other things in order to find more for health. In fact, for the past eight years, this is a choice that the Conservatives have made. Although health spending has been rising more slowly than at any time since 1948, it has fared better than other areas of government activity. The NHS has been “ringfenced” from the full blast of austerity that has been imposed on rival budgets. Every extra billion that is spent on health at the expense of other areas of public spending is a billion less to spend on education or housing or justice or transport or policing. As the report notes: “There is barely any defence or housing budget left to cut.” Reductions in other areas of spending – this is notably the case with the severe squeeze on local government – have blown back on to the NHS by displacing needs on to hospitals and GPs’ surgeries.

Even if it were desirable, cutting elsewhere to find extra cash for health simply doesn’t look viable. Ministers responsible for other departments have their own spending and electoral challenges to be anxious about. Sajid Javid, the new home secretary, survived his first encounter with the Police Federation by as good as telling them that there would be no further cuts to police numbers. The defence secretary is locked in a ferocious argument with the Treasury about the state of the armed forces. Tory MPs think that pressures on school budgets were one of the factors that hurt them at last year’s general election. Many are lobbying hard for more cash, not less, for education.

Having considered the alternatives, the report’s authors conclude: “If we want to even maintain health and social care provision at current levels, taxes will have to rise.” This is an argument that splits the government. The health secretary finds it persuasive; the chancellor does not. Mr Hammond has told colleagues that he recognises the case for more spending on health, but he doesn’t accept that it needs to be so much more that he ought to put up taxes to raise the money. He was badly burnt by his 2017 budget when he tried to increase taxes on the self-employed only to be forced into retreat by a backbench revolt.

Since then, the Tories have lost their parliamentary majority and the chancellor doesn’t trust opinion polls that suggest voters are willing to pay more in tax for the health service. The health secretary took that argument between them into the public domain when he recently contended that a tax rise for the NHS would be popular with the public, providing there was sufficient reassurance that the money will not be wasted. Some people in government have flirted with the idea of a special tax earmarked for health in the belief that this would be more palatable to voters. That doesn’t look like a runner. Hypothecated taxes have several disadvantages and are hated by the Treasury.

Another idea that has been floated is to copy what New Labour did. Gordon Brown part-financed the large increase in health spending announced in Tony Blair’s second term by increasing national insurance contributions by a penny in the pound. It is questionable whether doing that again would pass a fairness test.

National insurance contributions are levied on workers. They are not paid by the retired, who would feel the greatest benefit from increased spending on health and care. A member of the cabinet once bluntly, but accurately, remarked to me that the NHS budget is “spending on old people”. It is those of more advanced years who consume the bulk of NHS spending. The main source of future funding pressures is demographics: the population is getting older and care for those with chronic conditions is demanding an increasing proportion of resources. The old have the greater needs and also the greater means. As a group, they have accumulated wealth that the young as a group do not.

The idea that the retired ought to be asked to contribute more towards their care once had appeal to Theresa May. During last year’s general election, she argued that some social care costs should be met from the financial gains accumulated in the property owned by older voters. What she proposed was effectively a form of postmortem wealth tax. In principle, it was not unreasonable to ask pensioners to contribute to the costs of their care from their property equity. In campaign practice, this policy turned out to be calamitous for Mrs May. Labour damned it as a “dementia tax”. A lot of older voters were frightened and angered. Tory candidates reported that it went down like a bucket of cold sick on the doorstep. Mrs May suffered the ignominy of scuttling this manifesto flagship within days of launching it. I am not surprised to hear from her cabinet colleagues that this experience still haunts the prime minister and is never far from her calculations about how to deal with this combustible issue.

She wants the government to spend more on health. Colleagues believe that the prime minister has been persuaded that the funding gap needs a substantial answer, not a temporary fix that will be dismissed as no better than sticking plaster. She would like to be in a position to announce a significant new settlement in time for the NHS’s anniversary. What she still hasn’t resolved is how she is going to find the money to pay for a decent birthday present.

• Andrew Rawnsley is an Observer columnist