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

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.

Comments (5)

by BeShakey on November 13, 2014

The paragraph on preventative healthcare seems a bit weak. You rightly point out that preventative interventions don't always reduce long term costs. But it isn't hard to identify a large number that do(even if, as you suggest, their fundamental purpose is/should be improving quality of life), and many of them will reduce government outlay in non-health areas (e.g. through reduced numbers on benefits).

So the question is: is there a combination of preventative interventions that (along with the other meaures you mentioned) could result in a sustainable health system without increasing tax rates?

by Steve F on November 13, 2014
Steve F

"the purpose of healthcare is to improve the quality of life"

But not to extend the length of life.

The Dutch have worked it all out As this multi center study from The Netherlands will show

For those that haven't the time to digest this revelation I have cut and pasted the abstract here:


Obesity is a major cause of morbidity and mortality and is associated with high medical expenditures. It has been suggested that obesity prevention could result in cost savings. The objective of this study was to estimate the annual and lifetime medical costs attributable to obesity, to compare those to similar costs attributable to smoking, and to discuss the implications for prevention.

Methods and Findings

With a simulation model, lifetime health-care costs were estimated for a cohort of obese people aged 20 y at baseline. To assess the impact of obesity, comparisons were made with similar cohorts of smokers and “healthy-living” persons (defined as nonsmokers with a body mass index between 18.5 and 25). Except for relative risk values, all input parameters of the simulation model were based on data from The Netherlands. In sensitivity analyses the effects of epidemiologic parameters and cost definitions were assessed. Until age 56 y, annual health expenditure was highest for obese people. At older ages, smokers incurred higher costs. Because of differences in life expectancy, however, lifetime health expenditure was highest among healthy-living people and lowest for smokers. Obese individuals held an intermediate position. Alternative values of epidemiologic parameters and cost definitions did not alter these conclusions.


Although effective obesity prevention leads to a decrease in costs of obesity-related diseases, this decrease is offset by cost increases due to diseases unrelated to obesity in life-years gained. Obesity prevention may be an important and cost-effective way of improving public health, but it is not a cure for increasing health expenditures.

Overall by staying slim and not smoking I am probably going to save the healthcare dollars over time by 30% by not smoking and 20% by being skinny. I won't give up that other vice of a glass of red each night.



by Lesley Ford on November 14, 2014
Lesley Ford

@Steve F "But not to extend the length of life" is something that should be considered. Having watched my mother and mother-in-law who died after protracted illnesses aged 82 and 92 respectively, I have to question the medical decisions around extending the length of life when quality of life is no longer there. Both my mothers had hospitalisations, examinations, assessments for months and months when it was obvious they were at end of life. Surely there needs to be some rationalisation of treatments for the very elderly, so that they are comfortable, but not administered interventions that are ultimately futile.

by Brian Easton on November 14, 2014
Brian Easton

I assume BenShakey is referring to identification and early treatment as well as prevention. Certainly they should all be pursued as vigorously as we have in the past. We have had considerable success with breast cancer and cervical cancer. My impression – I am not a clinician – is there will be gains from better bowel cancer screening and there appears to be the promise of new testing procedures which will make the screening less onerous and cheaper.

But such potential gains are already factored into the Treasury projections, which assume that the past successes from new measures will be followed by newer ones. (Consequent costs from additional longevity are also factored in.)

It is possible, of course, that there will be some stunning breakthrough but none is on the horizon so it has not been included in the projections.

So, yes we should pursue prevention, identification and early treatment but unfortunately it wont relieve the spending pressures from aging nor from creeping demands for better quality health care and new expensive medical advances.


(There are a couple of subsequent comments on the issue of prolongation and quality of life. I think I should let the thread progress before I join in.)


by Brian Easton on November 28, 2014
Brian Easton

The promise in the last line of the previous comment got a bit out of hand and I have set it up as new item: Prolongation of Life and the Quality of Life.

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