I had a piece in The Times this week confronting the ongoing tension between deficit reduction and our most beloved public services, like the NHS. There’s only one way to sustain the NHS and reduce the deficit — and the answer isn’t more ringfencing.

Until now there has been no great NHS crisis of the kind we saw in the 1990s but that might change soon — especially if coming winters are severe. Although the coalition has just about kept its promise to maintain the NHS budget in real terms, the service is used to annual increases of 4 per cent, and for good reasons. The cost of caring for our ageing population, the spread of chronic conditions and expensive new treatments mean that flat budgets are unprecedented. Unless the NHS gets a cash injection soon, few voters will really think it has been ‘protected’ at all.

Realistically, the chancellor won’t be able to find extra funds by cutting other Whitehall budgets even more deeply. George Osborne’s decision to ringfence the NHS, schools and aid budgets means that annual cuts to unprotected departments are already set to be an untenable 7 per cent. There is only one way that deficit reduction and a stable NHS will be maintained: tax rises.

Both Labour and the Lib Dems have promised some kind of mansion tax but at most it will raise £2 billion a year and each wants to give that revenue away in tax cuts elsewhere.

A more certain way of boosting revenue would be a dedicated NHS tax or national insurance increase. A 1 per cent increase in one of the NI rates could bring in about £4 billion each year and if the proceeds were dedicated to the NHS it could be popular. This funding could be uprated every decade, to meet the predicted pressures on the NHS.

That is the view of the Labour backbencher Frank Field, who has urged his party’s policy review to embrace the idea. Ed Miliband will be wary of promising any tax increases for ordinary voters whose living standards are still being squeezed. But if the public is sceptical about tax increases in general, it is supportive of those used to finance the NHS.

Any ‘NHS tax’ should be introduced alongside the increased integration of local health and social care service budgets. It makes little sense to protect headline NHS spending while squeezing local government budgets that fund care of the elderly. Nor can the NHS expect immunity from further productivity drives. But an NHS tax plus community-based services that prevent more elderly people needing hospital care might be one of the big ideas that the next election needs.

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The chancellor has today committed himself to the goal of full employment. That’s a very good thing. But what does it mean in practice? Continue reading

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Most discussion on what’s happening to the housing market focuses on whether it is overheating again, as the government’s Help to Buy scheme helps to inflate another housing bubble. A less-noticed problem, however, is what the housing market does to the resilience (or conversely, vulnerability) of the public finances. Continue reading

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Thomas Piketty’s book, Capital in the 21st Century, is attracting considerable attention, on both sides of the Atlantic. It has a striking central thesis, namely that historically the rate of return on assets has been consistently higher than the rate of the growth, thus generating and reproducing substantial inequality. Continue reading

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The Coalition’s child poverty strategy has been derailed by an argument about definitions and measurement, which offers no practical help for the millions of families struggling on a low income. Despite the difficult fiscal context, the Coalition could have set out a much more ambitious plan for tackling child poverty, with long-term reforms to help families sustain higher incomes through work and prioritising support for younger children. Continue reading

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Published alongside the good unemployment figures today were less welcome new statistics showing another big increase in the number of sanctions applied to people in receipt of jobseekers’ allowance (JSA). In the 12 months to September 2013, a total of 874,850 sanctions were applied to JSA claimants, up from 751,943 in the previous year – an increase of 16 per cent. Over the last five years, the number of JSA sanctions has more than doubled, rising from 401,664 in the 12 months to September to their current level. Continue reading

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While economic debate in the UK continues to be dominated by government borrowing and living standards, policymakers are paying insufficient attention to Britain’s position in the global economy. Here, we really are living beyond our means – and have been for the last three decades. Continue reading

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Last night I gave a lecture at Warwick University on political leadership in a ‘post-democratic’ age. I take Max Weber’s famous lecture, Politik als Beruf, as a starting point for discussing how we should think about political leadership in contemporary democracies, against a background of declining participation in representative democracy, increased concentrations of economic and political power, and challenges to public bureaucracies.

Download the full text of my lecture, or read on below. I hope you find it stimulating and relevant to the state of current debates. Continue reading

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The Labour leadership is evidently never going to accept that pre-crash overspending was responsible for the deficit, and with good reason. Under Labour, the UK entered the recession with a structural current deficit of only 0.6 per cent of GDP. With hindsight – and few people were calling for this at the time – it clearly would have been prudent to run a small surplus in the years leading up to the crash. But Labour’s real fiscal mistake was consistently to overestimate the growth in tax revenues during this period.

It mistook the buoyancy of revenues from the housing market and the City for a secure and sustainable tax base. When the accumulated asset and debt bubbles finally burst, revenues from these sectors collapsed. Fully a quarter of all corporation tax came from financial services before the crash – this revenue fell from £10.3 billion in 2007/08 to £4.5 billion in 2009/10, while stamp and share duties fell from £14.1 billion to £7.9 billion. In contrast, consumption taxes and duties remained relatively stable, as did the corporation tax paid by manufacturing companies, which recovered quickly to its pre-recession level of around £4.5 billion by 2009/10.

The UK’s volatile tax base explains the size of its deficit relative to other countries that experienced a similar loss of economic output in the first phase of the financial crisis. In Germany, the general government deficit only reached 4.3 per cent of GDP, whereas in Britain it rose to 11 per cent at its peak, even though Germany’s fiscal stimulus was larger than the UK’s. A focus on government spending – while important in understanding long-term deficit bias in the UK economy and its cyclical vulnerability – cannot begin to explain differences in its fiscal position compared to the rest of the world. (Indeed, analysing the debt-to-GDP ratios or annual deficits of countries as they went into the recession is a poor guide to their subsequent fiscal trajectories; a far better place to start is with real housing market valuations, bank lending and current account balances.)

Accepting that the deficit rose sharply because of a collapse of tax revenues from volatile sources related to the structure of the economy would also connect an account of the past with a prospectus for the future. Ed Miliband has made reform of British capitalism a central theme of his leadership and he has criticised the unbalanced nature of the recovery. A good argument for a different kind of economy, with broader-based growth, is that it would endow us with a more resilient tax base and so leave us better prepared for when the next crisis strikes.

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I’ve co-signed a letter to George Osborne and Vince Cable, published in today’s Financial Times, which calls for the collection and publication of UK land market prices, which ceased in 2011, to be resumed. Its absence makes it much harder for the government to understand the consequences of current policy interventions, and to assess the case for future reform. Continue reading

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