Tax furore as Brown tears up political bible

The chancellor's decision to launch a great debate on the future funding of the health service has created a political ferment at Westminster. Gordon Brown has torn up the New Labour political bible by arguing that the electorate is willing to pay more tax for better public services. It runs against everything Phillip Gould and every focus group told Labour throughout the 1990s.

Mr Brown has already said the reversal of this orthodoxy was the great achievement of Labour's 2001 election campaign. For the first time in 20 years, Labour had won a mandate with a commitment to put public services before tax cuts.

Mr Brown has now taken the electorate at its word with his dramatic insistance that the public will have to pay more in tax if they want a decent NHS.

However, this masks a growing internal debate within the Labour party over the best way to raise these extra billions needed to create a world class NHS.

Mr Brown's intention may have been to pre-empt the debate, by his strict interpretation of the Treasury commissioned report by Derek Wanless supporting an NHS funded from general taxation.

One minister complained: "Gordon's idea of a debate is Gordon and a mirror. But this is a debate that is too big to be opened and closed in one day."

Liz Kendall, health researcher at the Institute of Public Policy Research, also believes the debate is badly needed: "We need to get some clarity into what other country systems do and do not deliver, and what role the funding mechanism has. But is also raises big issues about the role of the individual and the state."

And already, the politicians, think tankers and commentariat on left and right have been unleashed. The shadow health secretary, Liam Fox, at a seminar yesterday expressed his admiration for continental social insurance schemes, and a bigger role for the private sector.

The Liberal Democrats will produce an interim report in the spring on the future funding of public services under a commission chaired by Chris Huhne MEP.

But there is also a ferment of debate within the Labour party. Alan Milburn, the health secretary, is open to a form of hypothecated or earmarked health tax, an idea heavily promoted with his limited encouragement over the past year by the Fabian Society. Mr Milburn is treading carefully just trying to keep the issue on the agenda. Taxation systems is the preserve of the Treasury, and Mr Milburn recognises the downsides of earmarked taxes.

At a private seminar conducted by the Institute of Public Policy on Wednesday night, Labour advocates of continental social insurance schemes were also prominent, including Stephen Pollard and Chris Powell, the chairman of the IPPR and a NHS trust.

Mr Powell started his campaign on the day after the general election in an article in the Guardian. "There now needs to be some bold thinking to find new sources of income that are more acceptable to the electorate than general taxation".

The best way out of the British low tax trap, he argued, was some form of French social health insurance. "The French approach provides care free to those who can't afford it and rebates only a proportion of the cost to those who can," he wrote.

The debate Mr Powell hoped to launch hardly took off, but thanks to Mr Brown, he is back in the game.

Mr Brown himself is not an absolutist, even though he is convinced funding from general taxes brings equity and efficiency.

He can at the same time see the presentational virtues in a form of earmarked tax, helping connect specific tax increases with specific public services.

But this week, he put the traditional Treasury view that a specific tax to fund the entire health service would be vulnerable to fluctuations in different parts of the economy. Nevertheless, he did not close the door entirely.

He also pointed out his Treasury has allowed forms of earmarked taxes, such as the ring-fencing of tobacco tax on cancer. He also agreed that cash raised from congestion taxes could be ploughed back into transport.

"An absolute form of hypothecation is really not something that on balance people would want to produce," he said.

The word absolute has given hope to advocates such as Michael Jacobs, the Fabian general secretary. One possibility being floated is that Mr Brown might earmark future increases in health spending. It would be a politically useful tool in winning public support for taking British spending up to EU average.

The supporters of social insurance lack a promiment cabinet advocate although Mr Powell is thought to have some influence over his brother Jonathan, the Downing Street chief of staff.

At the IPPR seminar the compulsory social insurers argued that the the continental spending on health is so high precisely because social insurance connects people with their taxes and so levers more money into the system.

At the IPPR seminar, in a debate likely to be replicated over the next few months, others argued that the continent either had a tradition of paying extra taxes, or decentralised government inapplic able to Britain. In cantonised Switzerland, for instance 12% of GDP is spent on health.

But some modernisers fear the new emphasis on extra taxes and spending, rather than public sector reform, will not resonate with the public. One Labour researcher said yesterday: "I would not want to be quoted with this, but all this double and triple counting in the past has made people pretty cynical about whether the solution to the public services lies in more money".

· Sir Steven Robson, a former Treasury mandarin, yesterday told the Commons public administration com mittee that the public sector ethos was a "fantasy". He called for the privatisation of the NHS and the police force and denounced Gordon Brown's plans to pump billions into the NHS.

Different ways to pay for health

· Status quo At present the Treasury dishes out to the NHS money it gets from taxes and borrowing, adjusting budgets according to political priorities and the economic climate. The NHS gets a small amount of income from charges (for example, prescriptions and car insurers). Employers and employees pay national insurance, a notional 10% of which is allocated to health - but effectively the Treasury treats this payroll tax as just another general source of money.

· Special NHS tax A certain portion of income or other taxes could be earmarked for the NHS - "hypothecation". But this could mean that in years of recession when tax revenues fall, health spending would be cut. People might start to insist other elements of the tax burden (eg, defence) were also separately identified. It is not clear who would be left to pay for "public health" projects such as the current drive to get people to stop smoking.

· Compulsory insurance The government might force people to join not-for-profit or private insurance schemes which pay out when you consult a doctor, say. One variation is "health maintenance contracts" - people in a given area paying into a common scheme which also employs doctors and nurses. This could imply the end of the NHS as we know it. The government would have to use taxes to pay the contributions of people on welfare benefits who otherwise could not afford health care.

· Private insurance People are left to pay for their health care but encouraged to take out insurance plans to cover costs. Even in the US the government still has to pay (out of taxes) for public hospitals for the poor and veterans. The Tories are tempted by a scheme where the government "tops up" private insurance premiums. Under such a scheme the NHS might still exist as a tax-funded health provider for the less well off.

· Out-of-pocket payments People pay cash for private health care on occasions when they choose not to be treated by the NHS.
David Walker