Why putting VAT on private healthcare would be bad news for the NHS
Adding 20 per cent to the cost of private healthcare will only lengthen NHS waiting lists
Whether she must find £41 billion or £50bn, whatever the figure is, no one in the Labour cabinet is denying Chancellor Rachel Reeves is in more of a bind than when they took office.
Being the fastest growing economy in the G7 butters no parsnips, certainly not with the average taxpayer, if a niggardly 0.7 per cent improvement is at the same time as public spending outstrips revenue and government borrowing soars as a result ─ £20.7bn in June, up £6.6bn on June 2024, according to the Office for National Statistics. The Office for Budget Responsibility forecasts the UK government will need to spend £111.2bn in 2025-26 just to repay the interest on borrowing, a staggering 8.3 per cent of total public spending. Something must give.
No senior government figures have dared to explicitly rule out more tax rises when Ms Reeves presents her Budget this autumn, and all her boss Sir Keir Starmer could say on Wednesday was that “some figures” were “not figures that I recognise”, which could just as easily mean the black hole in his government’s finances is much, much bigger than that claimed by the National Institute of Economic and Social Research (NIESR) this week.
Gambling tax
There’s no shortage of advice, the latest being ex-Prime Minister Gordon Brown’s plan to whack the gambling industry with taxes he claims would raise £3.2bn to fund the end of the two-child benefit cap. It’s all a far cry from the heady days of New Labour, when as Chancellor in 2001 he scrapped betting tax and replaced it with a levy on bookies’ profits. Maybe it was a bad idea to scrap Tony Blair’s plans for a proliferation of Vegas-style super casinos.
Popular with Labour MPs, and hard to oppose in political terms, it now looks very likely that some sort of raid on punters and bookies will make Ms Reeves’ final cut. But that does not come without consequences, as the betting and gaming sector estimates it generates around £7bn for the UK economy (£6.8bn according to a 2023 economic impact study) and supports around 45,000 full-time equivalent jobs. The presumption must be that punters will go on punting no matter what.
The hunt for stuff to tax, while clinging to the hollow mantra of going for growth, is a symptom of the collective nervous breakdown Labour is suffering as the full implications of its own profligacy, rash promises and lack of a plan become clear.
And there was no better example than the proposal promoted by former leader Neil Kinnock that the crisis in the NHS could be tackled by imposing VAT on private health fees. Far from being a lightbulb moment, it did more to suggest that ideas are running out at the same speed as the gap between spending and revenue is widening.
Wealth taxes counterproductive
But in such an increasingly febrile atmosphere, as the polls continue to show Labour’s position weakening and its unpopularity growing among target voters in Red Wall seats, the problem is that what seems like a mad idea when first mooted might actually become more attractive as options evaporate, and the temptation to raise an estimated £2bn a year would be too great to resist.
Where wealth taxes have been introduced in other countries, they have been repeatedly shown to be ineffectual at best and counterproductive at worst, yet they still have their supporters, including Lord Kinnock, and we won’t know for sure if they are in or out until Ms Reeves reads out her Budget speech at the end of October.
VAT on private education was once a no-no on the principle that education of any sort was clearly a public benefit and should therefore not be taxed, but that was before the envy-driven Bridget Phillipson was handed the education brief and suddenly it became the goose that would lay golden eggs for state education.
No surprise then, that HMRC is now scrambling to retrospectively claw back some £500 million from parents who paid years of private school fees in advance to beat the start of the new VAT regime.
A nasty surprise
There is no reason the blunt argument favoured by Ms Phillipson, that if you can afford private school fees you can afford the VAT, can’t be applied to private health, so as it stands the proposal should be taken seriously.
Most people accessing private medicine fund their treatment through insurance policies ─ nearly 4.7 million of them, according to private healthcare analyst LaingBuisson ─ or receive cover as a company benefit in kind, so it could be argued that the VAT will just be spread out in the policy payments, and the patients won’t really notice, at least not until the inevitable nasty surprise when it comes to renewal. And polling by the Good Growth Foundation, the left-wing think tank which backs the plan, indicates 43 per cent of people are supportive.
But the obvious problem, and the reason it should have been immediately ruled out, is the growth of private health is a symptom of failure in the NHS because more people in extreme pain are prepared to bypass months and years on a waiting list for help. Stick 20 per cent on the cost and NHS waiting lists will only lengthen. It would be punishing the sick for government failure, and any revenue frittered away on a service utterly resistant to reform.
The failure extends to dentistry where whole districts now have no access to an NHS dentist. VAT would surely apply there too as it would to private physiotherapy. Set aside the political implications of hitting millions with a health tax, it would be the best way to break what’s left of the NHS.
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