Chancellor Gambles for Re-election with the People’s Money

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Chancellor Gambles for Re-election with the People’s Money

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The Wanless Report

It cannot be said that the main aspect of yesterday’s Budget is the extra funding for the National Health Service. The Chancellor was playing for high stakes, and trying to convince the electorate that the government has public services at heart, trying to convince the people that "investment with reform" is in the long-term interests of their needs and of social programmes. In essence, the main thrust of the Budget was a political gamble for a third Labour term in office, funded by the taxpayers’ money.

The Chancellor has increased the National Insurance contributions from workers' pay packets for the first time in a generation because of the need to convince the working class and people that their overriding concerns about health care and the evidence before their eyes of the attacks on the National Health Service are not justified.

The Chancellor is raising revenue by £22 billion from now to 2006 with the 1 percentage point increase in NI contributions starting next year and a separate levy on North Sea oil.

Gordon Brown is trying to persuade voters that tax increases will provide them with better health care, schools and transport. The government raised its forecast for economic growth next year to as much as 3.5 percent from a previous estimate of 3.25 percent. In his budget statement, the Chancellor predicted Britain’s economy, as Europe's second-largest, would expand between 2 percent and 2.5 percent this year, unchanged from his November prediction. However, these predictions have fuelled expectations the Bank of England will reverse last year's seven interest rate cuts.

"It's likely rates will go up in June," said Michael Taylor, an economist at Merrill Lynch & Co. "A big increase in taxes could hit the consumer, though, and delay higher rates."

Gordon Brown has used this year’s Budget to attempt to confuse the people as to the direction of the economy and social programmes, enhance Labour’s chances for re-election and bring in new arrangements to consolidate the status quo of plundering the state treasury to pay the rich. He has done this on the backs of the fruits of the labour of the working people, and under the hoax that this is a "prudent" way of handling the nation’s finances, while ensuring that the monopolies will benefit.

What is deliberately covered over in this equation by the government is what is happening to the total social product. Only a fraction of this total social product is under the scope of the government’s budget. Mostly, the fruits of modern production goes straight into the coffers of the monopolies because of their private ownership of the means of production on a huge scale. Even the fraction that finds its way into the state treasury is subject to the fraud that it is being applied to the people’s benefit. In reality, the tax revenue, a cut of the wealth produced by working people in the first place, finds it way largely back into the hands and pockets of the rich through a plethora of means, some open and some deliberately obscured, as the government disburses state funds. Government interest, PFI deals, tax breaks (as were announced a couple of weeks before the budget), are just some of the ways the government simply hands over social funds for the monopolies’ private use. It goes without saying that, despite all the hype about the significance of the Budget, which this year has been higher than ever, the fundamental problem of how to ensure uninterrupted extended reproduction in a modern economy is not even mentioned.

Gordon Brown has not only gambled his reputation as a shrewd political operator on tax increases to fund an injection of funds into the National Health Service, but he is gambling on returning Labour to power, as the champion of the "Third Way Programme", which translates into "investment with reform" in terms of social programmes, with stake money derived from the sweat of the workers themselves.

This is what he called rising to the "challenge of renewing public services" and declared his intention to build a "consensus" around improvements in health provision.

His sleight of hand was further calculated to deceive by the publication of the Wanless report earlier in the day, which set out the enormity of the task – predicting that spending on the health service would have to rise by seven per cent a year in real terms over the next five years.

And many of the tax-breaks for business had already been set out by the Chancellor, effectively clearing the decks for a single-issue budget. Nevertheless, Gordon Brown said he would reduce the burden of tax on business to "help create a culture of entrepreneurship in every community". He announced that the basic rate of corporation tax will fall from 20 pence to 19 pence with immediate effect. The 10 pence starting rate of corporation tax is to be abolished – a move which means the first £10,000 in a firm's profit is tax free – billed as a step up for new business starts.

Over recent months the Chancellor has stressed that creating the right environment for enterprise is "central to everything" the government does. This will be achieved by delivering a series of tax reliefs on the acquisition of assets, reducing corporation tax on the sale of shareholdings and setting a rate for the new Research and Development tax credit which is specifically directed at large enterprises.

Having tried to make the claim of being the party of "economic competence" stick, combined with the claim of having always been the party of "social justice", Tony Blair and Gordon Brown are now increasing the burden of taxation on working people. New Labour is trying to convince the people that this is to satisfy their claims on society and invest in social programmes, particularly the health service. However, the working people should beware. The direction that the government has been taking the economy and social programmes is to deliver increasing funds to finance capital, including putting social programmes under their control. The blame for opposing this direction and by implication the state of the health and education services has been put on the health and educational workers themselves. If profit-taking is increasingly to be the aim of these programmes, will blame be further heaped on public service workers, as well as a mutinous public, as these services fail to improve?

The Wanless report has called for a greater percentage of national income to be spent on healthcare over the next two decades. The report had been presented to the Prime Minister, Chancellor and Health Secretary on Monday

"Securing our future health: Taking a long term view", calls for a seven per cent boost in health spending each year over the next five years, with slower rates of growth in subsequent years.

But Derek Wanless, the former chief executive of the NatWest Bank, warned that in return for extra funding, the NHS needs to modernise further. "Resources and reform must go hand in hand, both are vital. Neither will deliver without the other," he said.

Downing Street said the report was the first time an evidence-based assessment of the requirements of the NHS had been made and described it as "a heavyweight piece of work". But the Conservatives said the review had been set up in such a way that it could "draw only one possible conclusion".

Derek Wanless suggests a maximum waiting time of two weeks by the end of the review period in 2022. The report calls for higher capacity in the health service – employing 25,000 more doctors than currently envisaged by ministers – but warns that attempts to ramp up growth too quickly in the short term could hit capacity constraints. There is also a significant emphasis on improvements in productivity, particularly those driven by better use of information and communications technology (ICT).

The report sets out three future scenarios for "catching up" with best healthcare practice and then matching the performance of other countries.

Solid progress

The "solid progress" scenario, described by Wanless as representing "a good performance", envisages the public doing more to look after their own health, with life expectancy rising and the health service making extensive use of technology to spend resources efficiently.

The percentage of GDP spent on health, including private healthcare, would rise from an estimated 7.7 per cent in the current financial year to 9.4 per cent in 2007/08 and eventually reach 11.1 per cent in 2022/23.

This would represent a rise in total NHS spending of £93 billion over the next 20 years.

The scenario would see rapid initial rises in annual NHS budgets of 6.8 per cent in 2002/03 and 7.1 per cent in 2007/08.

Fully engaged

In the most radical "fully engaged" scenario, the public do more to look after their own health, health status improves dramatically, and the health service makes the best use of resources and new technology.

As with the solid progress scenario, there is a rapid expansion of funding, but as resources are used more efficiently, the need for higher spending reduces and by 2012/13 marginally less cash is needed to meet healthcare commitments.

By 2022/23 total NHS spending is projected at £154 billion, around £7 billion lower than in the solid progress scenario.

Slow uptake

The "slow uptake" scenario – the most pessimistic of the three – envisages no change in public engagement with their healthcare, constant or deteriorating levels of health across the population and NHS productivity remaining low.

With public health failing to improve, total healthcare spending would need to reach 12.5 per cent of GDP by 2022/23, and NHS spending could hit £184 billion by the same financial year – substantially more than in the other scenarios.

By 2007/08 the need for more cash to compensate for poor performance would become apparent, with average annual real growth needed to hit 7.3 per cent, compared with 7.1 per cent in both other scenarios.

Derek Wanless says that a failure to respond to the challenge of increased productivity and increased awareness about personal health could mean that the taxpayer has to pay an additional £30 billion a year to get the NHS into shape by 2022.

He said that ministers might decide that the slow uptake model would be "unfinancable". But he defended the conclusion that large spending increases are needed in the current parliament.

"I believe that it is right that there should be substantial investment quickly," he said. "There is an unacceptable gap in performance between the reality of the NHS today and what will be expected and needed in the future. But this investment must not be more than can be sensibly spent. My projections reflect this balance, but represent a very considerable management challenge."

Derek Wanless said the initial remit set by the Treasury had neglected the importance of linking health care with social care. "No review of healthcare resources would be complete without considering the link between them," he wrote. He said an immediate review would need to be carried out. "It would be a good idea for someone to start it now," Wanless suggested.

The report indicated that spending on personal social services for the elderly and adults with physical and learning disabilities would rise from £6.4 billion in 2002/03 to between £10 billion and £11 billion in 2022/23.

Derek Wanless said the review had taken the starting point as a given. "All countries have a mix of funding," said Wanless. "Other systems have advantages...but don't expect them to add up to a cheaper health service overall." He said that with the NHS now engaged in a wide-ranging modernisation process, it was important to avoid any further "disruptive change". Arguments against more radical reform plans were "persuasive", he said.

But within the existing plans, he said there was a need for more decentralisation and freedom to innovate. "There is no reason why the pace of decentralisation should be uniform," he said. And he warned ministers against setting too many targets, saying this could create the danger of "resource misallocation" as cash is spent meeting targets to the exclusion of other important issues. It is much better to audit NHS performance "in the round", he said. "The danger is you set to many targets in complex systems and resources get misallocated," he added.

The PFI is one of a range of government policies designed to increase private sector involvement in the provision of public services.

The Private Finance Initiative (PFI) was announced in the 1992 Autumn Statement with the aim of achieving closer partnerships between the public and private sectors. It was one of a range of policies introduced by the Conservative Government to increase the involvement of the private sector in the provision of public services. Following two reviews of the PFI by Sir Malcolm Bates, the present Government has continued to pursue the delivery of some public services through this means.

As at 1 September 2001 there had been almost 450 PFI deals signed with a total capital value of £20 billion. The increased level of activity must be paid for by higher public expenditure in the future, as the stream of payments to the private sector grows. PFI projects signed to date have committed the Government to a stream of revenue payments to private sector contractors between 2000/01 and 2025/26 of almost £100 billion.

Private Finance Initiative (PFI) was announced by the then Chancellor, Norman Lamont, in the 1992 Autumn Statement with the aim of increasing the involvement of the private sector in the provision of public services. The PFI is a form of public private partnership (PPP) that marries a public procurement programme, where the public sector purchases capital items from the private sector, to an extension of contracting-out, where public services are contracted from the private sector. PFI differs from privatisation in that the public sector retains a substantial role in PFI projects, either as the main purchaser of services or as an essential enabler of the project. It differs from contracting out in that the private sector provides the capital asset as well as the services. The PFI differs from other PPPs in that the private sector contractor also arranges finance for the project.

Under the most common form of PFI, the private sector designs, builds, finances and operates (DBFO) facilities based on ‘output’ specifications decided by public sector managers and their departments. Under the PFI, the public sector does not own an asset, such as a hospital or school but pays the PFI contractor a stream of committed revenue payments for the use of the facilities over the contract period. Once the contract has expired, ownership of the asset either remains with the private sector contractor, or is returned to the public sector, depending on the terms of the original contract.

The scope of PFI projects

By 1 September 2001 there had been almost 450 PFI project contracts signed with a total value of just over £20 billion, 40% of which has been accounted for by the Department of Transport, Local Government and the Regions (DTLR). The Department of Health has signed the most PFI deals, 105, with a total value of just over £2.5 billion. The largest of these, in monetary terms, is the University College London Hospitals NHS Trust PFI project. The £404 million project includes a development in Euston Road, London to house the University College Hospitals (UCHs), the Middlesex Hospital and the Hospital for Tropical Diseases all on one site.

PFI deals have ranged from small projects, such as the £100,000 Littlehampton Community School ITC facilities project in West Sussex, to Europe’s largest construction project; the £4 billion deal for the Channel Tunnel Rail Link (CTRL).

The government’s economic motivation is that PFI keeps the public spending balance sheet clear, which is why capital spending by the government is well underspent. This goes hand in hand with the pressure exerted by private finance on the government.

On PFI projects the construction companies get an expected guaranteed 18% return for 30 - 60 years.

The high cost of PFI means that money is being channelled from patient care into the coffers of business. It substitutes for the inequitable "internal market" the forces of the real market.

The European Commission wants all bidders for PFI contracts to negotiate on the contracts until they are awarded, rather than the government selecting a preferring bidder and hammering out final details of a scheme on an exclusive basis. The Construction Confederation has pointed out that it can cost about £1 million to put in a bid up to the point where a preferred bidder is selected, but thereafter the chosen company can spend anything from £2 million to £5 million more in drawing up a detailed design.

Under PFI hospital projects contracts are guaranteed for 30 and some even for 45 years. Payments were guaranteed and index linked increasing the capital costs of the hospitals from around 6% to around 20% of their income.

It is only after the "preferred bidder" is chosen in a PFI contract that the contracts are fully costed. Then they are compared with a public investment build. In Carlisle, between 1993 and 1997, the cost of the PFI project rose from £41 million to £88 million. Of the extra costs, £17 million are attributable purely to PFI, or around 20% of the total cost. In Durham, between 1994 and 1998, the PFI project went up in cost from £60 million to £86 million. The costs paid for legal and consultancy fees alone were £2.5 million, not including the PFI partners' costs. The PFI project at Worcester had risen from £49 million to £108 million. In Durham the rate of return to the private contractors is 18.5%.

Types of PFI projects

Under the PFI three broad types of projects can be identified: free-standing projects, joint ventures and services sold to the public sector:

According to the 2001 Pre-Budget Report, public sector capital expenditure is projected to rise from £19.0bn in 2000/01 to £33.2bn in 2003/04. As a proportion of GDP, public sector capital expenditure will rise from 2.0% of GDP to 3.0% over this period. It is expected that the rise in public sector capital expenditure will be supplemented by capital expenditure under the PFI, raising total publicly sponsored capital expenditure from £22.9bn in 2000/01 to £35.6bn in 2003/04.

These figures suggest that PFI capital spending may be additional to public sector capital expenditure as both public sector capital expenditure and total publicly sponsored capital expenditure are set to rise over the period.

In a 1996 report, the Treasury Committee made clear its concern about the absence of any systematic recording of PFI commitments in the public accounts. Sir Christopher Bland of the Private Finance Panel (PFP), when giving evidence to the Committee, noted:

[…] the Treasury do not centrally total those forward commitments for every government department, and it is the case that not all government departments themselves total those forward commitments [...] and if you ask some departments "What are the revenue implications of the PFI contracts they have signed in the year say, 2005?", they would not readily be able to give you an answer, and if you asked the Treasury "What is the sum total of the PFI commitments in the year 2005?", they would not readily be able to give you a total, but the information is there and it needs to be codified, organised and assembled fairly speedily in our view.

In response to a recommendation from the Treasury Committee in 1996 the Treasury now publishes forecasts of the committed expenditure for public services flowing from private sector investments signed under the PFI. However, as more PFI deals are signed the size of payments to the private sector will increase further.

Sources:

RESEARCH PAPER 01/117, 18 DECEMBER 2001, Grahame Allen, ECONOMIC POLICY AND STATISTICS SECTION, HOUSE OF COMMONS LIBRARY

Conference: Setting Our Own Agenda for a National Health Service, February 2, 2002, South Shields, Tyne and Wear.

(and others)