On 11th September, Paul Johnson and David Phillips of the Institute for Fiscal Studies produced an “observation”, (their description), on the question of the funding of the NHS in Scotland. This was widely hailed in the media as an authoritative “report”, casting serious doubt on the claim that the future of the NHS in Scotland was at risk in the event of a “no” vote. It also added apparent credence to Gordon Brown’s “I’m going to nail the lie” speech on the NHS.

Remarkably, however, as we will see, the IFS observation makes no reference whatsoever to the central danger to the NHS in Scotland under continuation of the union: namely, that privatisation of health provision in England, would, via the Barnett formula, impose such severe financial constraints on the Scottish budget that a future Scottish government would be forced down a privatisation road. Since they do not deal with this central issue, the IFS document is actually completely irrelevant to the current debate. However, because of the uncritical coverage it received in the media, its flaws have to be exposed and its argument rebutted.

We need to clear up first of all different possible meanings of the word “privatisation”: confusion on this topic has bedevilled the debate. One form of privatisation is where provision of various aspects of health care moves over from the public sector to the private sector: but the funding of that provision is still via the public sector: i.e, the taxpayer still pays through the medium of public expenditure. But there is another form of privatisation: this occurs when, instead of being funded from public expenditure, the provision of health care is paid for directly by the individuals concerned, (either straight out of their pockets, or via insurance).

The key point is that, depending on which of these variants takes place in England, the budgetary effects in Scotland are quite different. If only the first variant of privatisation takes place in England, then this in itself will not adversely affect the size of the English health budget: so there will be no adverse Barnett consequentials for the Scottish government’s budget. However, if the second variant takes place in England, then this will potentially mean a marked reduction in the English public expenditure health budget. Through the Barnett formula, this would lead to a proportionate reduction in the budget of the Scottish government. Given that health accounts for over a third of the Scottish government’s budget, it is unlikely that the Scottish government could raise taxes to compensate for the losses it would suffer if there was widespread privatisation of the second type in England. It’s only option would be to institute NHS privatisation in Scotland.

It has been argued by some that, since what is happening in England just now is privatisation of the first type, then there is indeed no threat to Scotland’s NHS. But this is to ignore the wider context of the recent changes to health provision instituted under the Conservative/LibDem coalition’s Health and Social Care Act of 2012, (which applied only to England). It is extremely significant that this Act abolished the duty of the English Health Secretary to provide universal health care: (See Pollock and Price, reference below). Once this crucial step has been taken, then the following rolling process is virtually inevitable. Faced with queues and unsatisfactory service in the NHS, (inevitable in a climate of austerity, and with the increasing demands of an ageing population), people who can afford it will turn to purchase health care directly from the private sector health infrastructure which type 1 privatisation has nurtured: as the private health sector expands into  new areas of provision, the NHS, which no longer has to provide a universal service, will not keep up in the range and quality of its provision: which means that more people will turn to purchasing health care direct: and so on. In other words, type 1 privatisation, (which is already happening in England), plus abolition of the duty of universal public provision, (which has also happened in England), will lead inevitably to widespread type 2 privatisation. And that, as we have seen, has inevitable consequences for Scotland: this will involve a private service for those who can pay, and a Cinderella service for everyone else.

It is ironic, given Gordon Brown’s impassioned entry into the current debate, that another form of type 1 privatisation that he did so much to champion and expand, as Chancellor and Prime Minister, is facilitating the above process. This was the Private Finance Initiative. Although PFI was introduced by John Major, it was only under Gordon Brown that it took wings. Unfortunately, the excess costs, and reduced capacity, associated with PFI are now putting severe strain on the NHS, with the resulting pressures having an effect in degrading service provision.

Going back to the IFS note, what is incredible is that it completely fails to discuss the privatisation issue – even though this is the core issue as regards the risks to Scotland’s NHS. This means that the IFS note is actually irrelevant to this specific debate.

Finally, it is worth noting that there are further errors in the IFS note, as well as the glaring omission of any discussion of the implications of privatisation.  Briefly,

a) If expenditure growth in England is high compared with the rate of relative population growth between England and Scotland, then there will be a “Barnett squeeze” on the Scottish budget. That is, levels of expenditure per head in Scotland will be pushed down through time relative to expenditure on devolved services per head in England. On the Treasury’s current assumptions on growth, conditions for such a squeeze will resume as from 2018. In their discussion of the funding of Scottish government under continued devolution, the IFS completely fail to consider the implications of this.

b) In discussing the possibility that a devolved Scottish government could use income tax to protect health spending, the IFS fail to take into account the technical flaws with the Calman income tax arrangements which will mean that a Scottish government will probably have to raise its income tax rate anyway just to protect its revenues. For example, because the Scottish rate of tax will be the same number of pence in the £ in each tax band, Scottish tax will represent a lower proportion of the higher rate tax bands than the lower rate tax bands. With fiscal drag, as a greater proportion of income tax through time tends to come from the higher tax bands, this means that a given Scottish rate of tax will yield a progressively lower percentage of the overall Scottish income tax take. In order just to maintain their position, therefore, it is likely that any Scottish government will have to periodically increase the Scottish rate of tax.

c) It is a weakness in the IFS paper that they did not express the expenditure figures on a per capita basis. This led some commentators to conclude that, since overall spending on health in Scotland had been dropping, whereas it had been increasing in England, the real threat to the Scottish NHS was Scottish government priorities. In fact, since expenditure per head in Scotland is still 6.4% higher than that in England, it is perfectly reasonable, particularly in a time of austerity, that their priorities might be different.
Reference: Pollock, A.M., and Price, D., “Duty to Care: In defence of universal health care”, Centre for Labour and Social Studies, May, 2013.