Why do governments see economic expansion as their primary measure of performance? The short answer is that they believe it’s what voters want. The longer answer is that they fear that without growth, they won’t be able to pay for all the other things voters want too. Both arguments urgently demand some fresh thinking, if we are to pay for the healthcare an ageing society needs.

Ever since it was capable of being measured, economic growth has been seen by governments as essential to their chances of re-election. In particular, a rise in real personal disposable income - “money in people’s pockets” - showed a consistent (and unsurprising) correlation with voter support for incumbents.

But it’s an analysis whose limitations have become increasingly plain. Panicking at the first whiff of recession can lead policy-makers in self-defeating directions, as the UK Government has painfully relearnt. And even the concept of growth as a measure of success has taken a battering. The uncosted side-effects (or “externalities”) have become ever more obvious in terms of environmental effects and the pressure on scarce resources.

True, technology has brought some big shifts towards less energy-intensive growth, but economic expansion is still spewing out mountains of unrecyclable plastics, causing shortages of rare earths, despoiling landscapes and heating up the planet. So the so-called “anti-growth coalition” is no longer a lonely left-wing few but spread across a broad political spectrum.

Of course many protesters may shout about the environment but still “vote with their pockets”. Parliamentarians may vote against deregulation but still demand growth. But there’s a growing body of research demonstrating that happiness (or “subjective well-being’ - SWB) affects voter behaviour more than economic growth.

The seminal work on this question, by George Ward, was published in the American Journal of Political Science in 2019. It was based on an analysis of voting behaviour in 139 elections in 15 European countries between 1973 and 2014, and buttressed by an analysis of opinion polls in two of those countries (Germany and the UK). And it demonstrates convincingly that SWB explains the level of the voting support for incumbent governments far more powerfully than economic growth.

So it surely makes sense for politicians to broaden their ambitions from GDP to national well-being, and some have - at least in theory - begun to do so. But that quickly takes us back to the second argument for growth. For while some of the other factors that make people happy - a sense of community, social relationships, trust in institutions - mainly require care and thought by policy-makers, others - particularly the key factor, health - come with a big price tag attached. And that is especially true when the population is getting older.

An ageing society isn’t necessarily less happy (in fact, there’s a good deal of research demonstrating people are least happy in middle age), but it is more dependent on health care. All economies are wrestling with the growing burden, but it’s less and less clear that trying to bury the cost in general taxation provides an adequate answer.

The theory is that if you can keep the economy growing as fast as you need to raise health spending, neither taxes nor other public services will feel the squeeze. But relying on the growth treadmill to painlessly fund health and social care looks more and more unrealistic.

Take the (urgent) example of the UK. The trend rate of growth in spending on the National Health Service (NHS) between the mid-1950s and the mid-2010s was 4 per cent (in real terms). The trend rate of economic growth has slowed markedly over that period: for the 20 years before the pandemic it ran at only 1.8 per cent in real terms, and a Brexit brake on European immigration will have taken that down again, closer to the trend rate of growth in output per hour of only 1 per cent. At those combined rates of 4 per cent and 1 percent, the share of national income absorbed by the NHS rises from 12 per cent to 16 per cent in ten years, and to 21 per cent in twenty. Can we really go on funding it in the same old way?

In September the UK Government declared its ambition of raising the trend rate of economic growth to 2.5 per cent a year. Some of its prescription (less regulation, more investment) made long term sense. But it was soon forced to tear up the short-term fix. As the financial markets brutally pointed out, pumping more demand into an economy operating at full capacity (with unemployment lower that it’s been since 1974), was likely to do more to fuel inflation than to boost growth. And with vacancies in health and social care in the hundreds of thousands, the NHS needs an above-trend boost, while a tight labour market is driving up the wage rates needed to attract and retain those missing staff.

Health systems worldwide report staff burn-out and shortages, with increasing competition for recruits from feeder countries such as India and the Philippines. France is beset by staff protests and threats of industrial action in its healthcare system too. But in the UK, full employment and the government’s ambition for a “high-wage economy” have obvious consequences for healthcare costs. Government needs a fresh look not only at economic policy but at the funding of health and social care.

Its standard reaction to health cost pressures has been to clamp down on budgets in the hope of driving greater efficiency. And in terms of output per unit of cost, the UK system has performed pretty well. It is finding new ways to do things, done some old things better, and even begun to overcome its long-term failure to use digital technologies effectively to match demand with supply. But with waiting lists lengthening, A&E horror stories proliferating, dental services vanishing, hair-raising reports into maternity service weaknesses, the GP system crumbling, staff shortages even affecting the collection of blood donations, and the winter widening of the gap between demand and supply yet to come, the funding crisis is building. There’s no getting away from the simple fact that healthcare needs more money.

Since voters always put healthcare very high on their list of priorities, it might seem strange that governments don’t simply raise more tax to pay for it. The problem is that in the UK system, there is a complete disconnect between health demand and cost. So everyone has an incentive to maximise demand but minimise finance. Not only is (almost) everything free at the point of demand - a key principle at the NHS’s foundation, even though it was very soon broken by the introduction of prescription charges - but there is not even an identifiable element in tax bills for healthcare. So politicians complain about the UK becoming a “high tax economy” when the fundamental cause is that we are a “high healthcare demand society”. And while the NHS is used most by the elderly, the bill falls disproportionately on the young.

That compares starkly with private healthcare insurance systems, in which subscriptions rise sharply with age. Of course, no public healthcare system could morally follow that route. The NHS was born to take the fear of a sick and uncared-for impoverished old age away from all citizens. But more could be done to correct the extent to which the British system of paying for healthcare both disadvantages the young, and buries the real cost of healthcare in the murky depths of general taxation.

Even the elements of payment-for-use are distorted against the young. Free prescriptions for all of the elderly, however well off, is one example. And it’s revealing that when the last-but-one UK finance minister introduced a surcharge for health and social care, he slapped it on national insurance (paid by the young) rather than income tax (paid by all the better off). It’s also unconscionable that those better-off citizens over retirement age still in work should have the burden of national insurance taken off them.

I benefit from all of these (and a free bus pass!). And yes, I know that the backlash against change from my contemporaries would be intense. Their most frequent argument is that they have “paid for these benefits all their working lives” - a reflection of the deep misconception which governments have been happy to leave uncorrected, which is that Britain’s national insurance is, indeed, an insurance system designed to fund the NHS. Actually, it started life as a way to fund pensions and unemployment benefit, but since there was actually no real “fund” into which you were paying, it’s simply a way of getting your children to pick up the bill.

Moving from where the UK is now to a genuine insurance system with inbuilt protections for the poor, old or young, isn’t impossible. There are examples in major European countries that demonstrate ways of making such systems work. But they have their own disadvantages (some, believe it or not, have still higher administration costs than the NHS); while their industrial relations problems demonstrate they are no panacea. What’s more, such a wholesale change in funding would be a huge upheaval, with no doubt unintended consequences; and it would take long enough to require cross-party consensus before it was even worth thinking about.

So a simpler first step would be to move to an identified health tax, charged at a uniform percentage of income of all kinds. The Treasury hates hypothecated taxes, but this would at least allow governments to test voters’ appetite for health spending with a more transparent debate. It would make absolutely no difference to how the NHS delivers care; but in fairness, it would also make sense to revisit the pattern of user charges so see if they could be deployed more effectively and equably.

The UK’s current system is permanently vulnerable to underfunding at moments of fiscal crisis, and hence at risk of continuing to lose the trust that the NHS was created to provide. It’s too easy to blame the management of the health service, and demand yet another restructuring. That’s become self-defeating too. What government most urgently needs is to create a more visible connection between demand and cost, with a funding structure less dependent on year-by-year battles in Whitehall between competing public service claims.

Is it too much to hope that with (for now, at least) a Finance Minister who has done time as Health Secretary, the cupboard door may be open to the reset button?

Guest Author: Baroness Sarah Hogg, Former Frontier Economics Chairman