How to Pay for Health & the Just Transition?

Response to a System Change reader's question: Where will the money come from?

Britt - AIG’s endless govcernment

How to pay for the Nation’s Health?

A British reader has asked “Where will the money come from - for the NHS, university education, for the green revolution?” Here, as promised, is a brief explainer.

We begin by referencing the governor of the US Federal Reserve - Ben Bernanke’s - interview with CBS’s 60 minutes show back in 2009. He was responding to the question of whether money to bail out AIG at the height of the Great Financial Crisis (GFC), was ‘printed’ - or paid for from tax dollars? He muddies the issue somewhat with his answer, (7.54 minutes into the interview, dubbed ‘The Chairman’ on YouTube) but the really crucial point was explained when the interviewer asked where he had got about $1 trillion to bail out AIG during the GFC.

The journalist asks: “Is that tax money that the Fed is spending?” Bernanke replied:

It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It’s much more akin – although not exactly the same – to printing money than it is to borrowing.

Like any applicant for a mortgage, AIG had to offer collateral, sign a contract for repayment over a period of time; and agree a rate of interest on the US$85 billion bailout it received in September 2008. Once that agreement was reached, the Fed simply entered the number and all those zeros into a computer - and transferred it to the recipient financial institution.

That is how central banks raise finance for their clients (governments, banks and big financial institutions), and as Bernanke says in the interview, that is how commercial banks raise the finance for their clients, that e.g. need a loan with which to purchase a new property.

The tricky part is managing the accounts of money in, and money repaid - over different time periods. But we will not go there today.

What the Fed or the Bank of England or the ECB are not doing is acting as intermediaries between patient savers and impatient borrowers, by using existing savings deposited with the bank, or with the Fed - or in the form of tax revenues with the Internal Revenue Service - to lend on. (Tragically, many economists and policy-makers still believe that banks act as intermediaries between savers and borrowers. See this from the IMF. No wonder the public are confused!)

Nor are these central banks just ‘printing money’. For a start, most new money is transferred to accounts digitally. But ‘printing money’ implies its just dished out - and that its not an obligation.

Money is a promise to pay

Money originates everywhere and every time as a promise to pay - an obligation, a credit or debt. Hence the need for a contract that helps to uphold the promise; a fixed period for repayment, and a rate of interest - a measure of the risk associated with the money. (Dodgy borrowers/clients are charged higher rates than sound borrowers. OECD governments are amongst the safest borrowers.)

The key point is this: all money is a human, social construct or social technology. It is not a commodity, like gold or silver or bitcoin or my debit card. Money was invented, designed to help humans transact - buy and sell - without bartering.

Commodities - like notes, coins, bank cards and bank statements - act as symbols/accounts representing that promise. When I wave a card at a machine in a coffee shop, the message communicated is that I promise to pay - to transfer digitally from my account to theirs. After it registers, the card goes back in my pocket. It is not exchanged for the coffee.

The real issue for the Fed in 2009 was: will AIG be able to repay? Or will that loan leave a big hole/deficit in the Fed’s accounts? In the event, AIG sold off assets, raised the cash, and repaid in full. Notice the repayment was made to the US Treasury. The Fed made a profit on the loans to AIG, profits transferred to the US government’s account.

A government’s extraordinary power to raise finance

The government of a relatively prosperous economy, armed with a central bank, and with the regulated institutions of a sound monetary system (including a criminal justice system for enforcing contracts, and a well-run tax collection system) has enormous power to raise finance - even after grave financial failure - as with the GFC and COVID crises. Researchers at the House of Commons Library revealed that:

The Covid-19 pandemic resulted in very high levels of public spending. Current estimates of the total cost of (UK) government Covid-19 measures range from about £310 billion to £410 billion. This is the equivalent of about £4,600 to £6,100 per person in the UK.

During COVID the economy - and capitalism - was placed in the deep freeze. Incomes and employment plummeted, and so did “general taxation”…. And still the government was able to generate finance…and to spend money to keep the NHS functioning.

Like Ben Bernanke in 2009, they did not have to wait to collect savings from “general taxation” - before raising the finance and spending. We can thank a well developed monetary system for that power.

The Bank of England is the Government’s Bank

To invest in higher pay for NHS staff, the British Treasury, on behalf of the government, applies for financing from the Bank of England. It does this by the way, not once in a blue moon, but every day - that is, if charged to do so by the government.

Once the money is spent on pay for employment in particular, some of it is clawed back in the form of taxation of the individuals concerned. Even more is clawed back when the beneficiaries of the pay rise spend that income into the economy and are charged VAT and other tariffs - with retailers, landlords or university fee collection departments. And if profits or capital gains are made by those same retailers, landlords etc - then that too is taxed and returned to the government’s coffers. (Sadly, some potential taxable income is squirrelled away across borders by companies like Amazon.) For many future years, if the NHS staff remain on the payroll, more of the spending is clawed back in the form of tax revenues.

The term for the process of generating new tax revenues from public spending or investment, is termed ‘the multiplier’ by economists. In other words, the spending/investment multiplies tax revenues - depending on whether the investment is spent initially on employment or on the creation of new assets - e.g. wind farms or a new railway line. (The question Keynesian economists argue over is this: by exactly how much does government investment multiply tax revenues? Many orthodox economists, however deny the existence of the multiplier - and decry government spending altogether).

The multiplier helps generate the income (tax revenues) needed to balance the government’s books - and repay the finance raised from the Bank of England and/or other sources.

To conclude: taxes do not finance the spending. Taxes are a consequence of both private and public spending/investment - and after collection can be used to repay the financing.

The investment of say, £5-7 billion in one year’s pay of nurses, doctors and consultants, will reap dividends for the government in the form of a) regular tax revenues - not for just one year, but for their many years of employment in the NHS to come; b) improved health provision for the people, workers and entrepreneurs of Britain; and c) the improved morale, commitment and well-being of NHS staff.

Above all, as health workers return healthy workers into the workforce; and as they use their capabilities to teach kids, build houses, manage the financial system, maintain the sanitation system, innovate for the green economy, dispense coffee and other economic activities - that spending/investment helps create new assets (tangible and intangible, physical and social) to build the UK economy and make life worthwhile in this country.

Of course those pay rises would raise the annual NHS bill for future years. But as I will show below, that bill is already too low relative to the nation’s income - GDP - and needs to be raised in any case - in order to attract skilled NHS staff; increase the health service’s and the nation’s productivity; finance the green transition; and above all, maintain the health of the British people.

A shrinking economy leads to falling tax revenues

Conservative governments love to argue that unemployment is necessary because the budget is in deficit, and to balance the budget means public sector workers have to endure real pay cuts and sackings. This poisonous economic medicine is called ‘austerity’. When government uses austerity at a time, like the GFC, of private economic weakness, to deliberately cut public spending and investment (which in turn shrinks private investment); to raise unemployment and hold down pay - then invariably tax revenues from economic inactivity collapse.

The result is predictable: the budget deficit rises, and ‘the government’s books won’t balance’.

The British government has endured unbalanced budgets ever since, and largely because of the GFC. Rather than correct the imbalance caused by private sector failure by increasing investment, Conservative governments since 2010 have chosen to cut investment. As the OECD reminds us in this tweet, British levels of public and private investment (gross capital formation) - are shamefully low.

Low levels of public and private investment results in diminishing tax revenues - as night follows day. (Not to mention its impact on innovation, the social and physical infrastructure, employment and output.) Cutting investment further, cuts revenues further. The government’s budget deficit rises, debt piles up - and the economy shifts into reverse.

Britain’s NHS: Back to Square One

Let us begin by valuing the NHS and the nation’s health. We do that at a time the British people are scandalised by the sight of a long queue of toothache sufferers - all hoping to get an NHS dental appointment. A scene that is a national disgrace and an international embarrassment.

We cannot overestimate the value of a healthy population to a well-functioning economy. When workers are taken out of the economy by ill-health that represents a loss to the economy as a whole. But there is also a loss for the Treasury - with higher unemployment resulting in lower tax revenues - worsening the government’s deficit. “Look after employment” Keynes famously argued “and the Budget will look after itself.”

As someone who has worked in countries with high levels of toothlessness, maternal mortality, childhood stunting, uncontrolled mental illness and rampant diseases - I can assure you that having a population of individuals with good teeth, functioning hearts, sound minds and disease-and drug-free bodies - is an invaluable foundation for a sound economy.

Investment in the health of the British people is low

Next, let’s examine NHS spending as a share of the nation’s income (GDP). In Britain it is about 10% - just under £3,000 per person per annum. According to the Office for National Statistics (ONS)

of the G7 group of large, developed economies, UK healthcare spending per person was the second-lowest, with the highest spenders being France (£3,737), Germany (£4,432) and the United States (£7,736).

Of course that share of income spent on health rose during and after the pandemic.

The share of GDP attributed to healthcare rose to around 12.8% in 2020, from 10.2% in 2019.

Compared to the US, the UK’s spending on health is modest.

In the OECD, spending was lowest in Mexico at £837 per person and highest in the United States at £7,736 per person. The United States spend per person is considerably more than any other OECD country and more than two and a half times what is spent per person in the UK.

As a result of this investment in health, life expectancy in Britain is high, and almost everyone is vaccinated, relative to many other countries:

Life expectancy at birth in the UK in 2020 to 2022 was 78.6 years for males and 82.6 years for females; compared with 2017 to 2019, life expectancy has fallen by 38 weeks from 79.3 years for males and by 23 weeks from 83.0 years for females.

Let’s compare these numbers to a country suffering from the epidemic of HIV Aids, poverty, high levels of unemployment - and that had to tackle the pandemic by using limited supplies of hard currency (US dollars) to buy in expensive vaccines.

That country is middle-income South Africa. There, life expectancy is 63 according to the WHO - a shocking eighteen years lower than the OECD average of 81 years. SA’s health spending as a share of GDP is 8.1%. Per Capita spend on health is $421. Of that, $230 is public spending on health. (Many well-off white South Africans have private health insurance).

Financing the NHS will pay for itself

First, NHS spending at about £190bn is only about 10% of the £1,147 billion the government raises every year. It is terrific value for money.

The pay settlement for NHS frontline staff cost, according to media reports, £4bn. And as reported by the Guardian the Government would recover 81% of cost of pay rise for NHS England staff:

Setting out the economic case for raising the wages of England’s 1 million nurses, midwives, health professionals and NHS support staff, researchers from the London Economics consultancy said 81% of the cost of a 5% or 10% pay rise would be recovered by the government.

The study argues that if pay was increased, the Treasury would receive more in taxes paid by these workers and their employers, and staff would spend more in local businesses, helping Britain’s economy to escape the deepest recession in 300 years and bringing in still more taxes. Ministers would also, it found, save money on future recruitment and retention costs.

However, the nurses accepted a lousy deal - and had their pay cut, in real terms, as this Nuffield Trust report shows:

In effect, compared to the start of the pandemic, nurses’ average earnings as at March 2024 will have likely fallen about 5 percentage points in real terms, whereas consultants’ earnings would have – over this period at least – caught up with inflation (see chart below). Consultants are the green line, nurses the blue.

Average nurse and consultant earnings since March 2020, adjusting for inflation

Chart

08/12/2023

The net cost of a 35% pay rise for doctors would be £1bn - according to the BMA. As the website Full Fact explains:

The BMA’s estimate is for the net cost of pay restoration—which tries to take into account how much income tax and National Insurance  the Treasury would receive from the rise, and gives an indication of what the overall impact on public finances would be.

The investment pays for itself in part, when those nurses, doctors and consultants that get pay rises, then pay their taxes. Tax revenues - deducted from their wages and salaries.

And the more they are paid, the more is deducted. And the bigger the multiplier.

Not just every month, but for many years following.

Addendum

I have written extensively on this already, and on money, and would recommend the Greenpeace podcast with Carl Schylter - which you will find here. Resilience have helpfully published several of my pieces on money on their website here. Plus they have reproduced a piece I wrote for Red Pepper on the admittedly crazy fantasy of what I would do, were I governor of the Bank of England. And for my views on austerity, the Prospect interview with Lord Nick Macpherson, ex-Permanent Secretary of the UK Treasury, might be helpful - and is I believe outside the paywall.