As times goes on the government will spend more on healthcare. That means higher taxes. Is there an alternative?

Pundit: 10 November, 2014.

Keywords: Health;

I was on the Treasury external panel which advised on its last Long Term Fiscal Projections. The great challenges arise from rising demand for government funded services and the aging population.

The rising demand for government funded services is best illustrated with health spending – by far the largest expenditure component, although others, including the provision of environmental, cultural and heritage services, will increase their share of government spending over time too.

To give you a sense of the challenge, the Treasury reports that government’s spending on health care was 6.8 percent of nominal GDP in the base year of 2010; by 2060 it expects it to be 10.8 percent. Four percentage points is big shift. Part of the rise is due to the aging population; oldies need more healthcare. But the rest of the rise is due to our expecting a better quality of care and the application of the new medical technologies.

I have no quarrel with the public wanting to spend more on healthcare as they become more affluent. That is their choice; it is sensible one if better health improves the quality of life more than acquiring additional material things.

The difficulty arises because the best way to provide healthcare is by a unified public agency funded from general taxation. There are variations like compulsory health insurance, but that is a form of taxation too. If a society collectively wants more apples, individuals can buy more apples. However healthcare is much more complicated and private purchase decisions do not provide good healthcare. I regret this. I would support a system of private purchases if it produced a good healthcare system. But it does not. So the government has to be intimately involved in the provision of good quality healthcare including, especially, its funding.

The rising demand for publicly provided healthcare means that there is an increased demand on the taxpayer to fund it and consequently higher tax rates. While we may appreciate the additional taxes providing us with more healthcare, there are various difficulties over raising tax rates, not least because of the high international mobility of capital and skilled labour which may migrate if our tax rates get out of line with other attractive destinations. It is some comfort that these jurisdictions will also be struggling with rising health care costs, and have similar upward pressures on the public tax-take.

It is easy to suggest alternatives which offer some relief such as greater efficiency in the delivery of government services. They are already built into the fiscal projections and we should seek them anyway.

It is sometimes argued that better preventative healthcare will reduce the demand for health spending in the future. It does not always. For instance, discouraging smoking increases government spending in the long run, because people live longer and spend more time in the high outlay older ages. (The economically efficient cigarette would be one which exploded on the day the smoker retired.) It is well to remember the purpose of preventative (and early intervention) healthcare is not to reduce costs or promote economic growth or such narrow economic objectives The purpose of healthcare is to improve the quality of life. Same as the purpose of the economy – it is not an end in itself.

The tax increase to pay for the extra healthcare need not come all from income tax and GST. Improvements in our tax system include a capital gains tax, a financial transactions tax, attention to the loopholes which make avoidance by trusts and private firms easier, the leakage which occurs by purchasing overseas without paying GST and excise duties and a comprehensive international tax regime. They should be done to get a better tax system but they will also moderate the upward pressure on the income tax rate; we should do them anyway.

Even so, I do not see an alternative in the long run to a choice between a rising level of tax or an inadequate healthcare system.

This is the first part of a presentation to the Fabian Society, 10 November, 2014.