Brexit Made Conservatives the Party of Tax-and-Spend

(Bloomberg Opinion) -- U.K. Prime Minister Theresa May announced on Sunday that the country's crisis-ridden National Health Service will receive an additional 20 billion pounds ($26.5 billion at today’s exchange rate) by 2023.

In normal times, that sort of decision might have followed a public discussion of how much the nation should spend on health care and where the money should come from. But this is the age of Brexit.

Twenty billion pounds is roughly the annual windfall that the pro-Brexit side promised during the 2016 campaign to leave the European Union. Its claim was that leaving would free up required payments into the EU budget for national priorities like the crisis-ridden National Health Service. By that logic, improving U.K. health care would be virtually cost-free.

In truth, much of the new outlay will have to come from taxpayers. And a much-needed bigger debate over the future funding and structure of Britain's health-care service has been postponed.

The most eye-catching claim made by the Leave campaign during the 2016 Brexit referendum was the suggestion, famously plastered across the campaign's red battle buses, that the government health program would receive a 350 million pound weekly dividend after Britain leaves the European Union.

The U.K., as many noted at the time, never actually paid that amount; it received a rebate from the EU and funding from Brussels for other areas, such as agricultural support, some of which the U.K. government has pledged to replace. The idea of a Brexit dividend also sat awkwardly with projections that Brexit will cost the U.K. economy, not bolster it.

Still, the Brexit dividend was a highly effective ploy; it's no exaggeration to say it was instrumental in delivering the Brexit vote. The pledge seemed also to offer the country a way out of making a difficult choice about how best to save a perpetually under-resourced health service. As Institute for Fiscal Studies Director Paul Johnson put it recently:

We are finally coming face to face with one of the biggest choices in a generation. If we are to have a health and social care system which meets our needs and aspiration, we will have to pay a lot more for it over the next 15 years.

There is no question that the NHS needs the money. While Britain's health system is one of the world's best in terms of value-for-money (it spends less than half of the U.S. system per person each year) and equality of access, on many other metrics it falls far behind. There are famously long wait times for non-urgent treatment and even emergency-room waits are often longer than the four-hour limit. There are fewer doctors than in other EU countries, higher rates of infant mortality, lower rates of cancer survival and a poorer showing on other measures.

The problem for May is that even the funding she has authorized may not be enough to stem the bleeding, let alone deliver the improved service people expect. The independent IFS published a report in May, based on a forecasting model that looked at demographic change, population health and social data. It concluded that funding increases of nearly 4 percent a year were required in the medium term, and 5-percent increases were needed now to stabilize services. May's funding, a 3.4 percent increase from 2019, just makes a dent.

Any Brexit windfall is a long way off if it comes at all. Britain's economic growth is now the slowest it's been since the financial crisis. So instead of the promised new money coming from Brexit savings, it will come from spending cuts, tax increases and added borrowing.

And that poses a dilemma for a party that has always stood for fiscal prudence. Many Tories will be putting pressure on Chancellor of the Exchequer Philip Hammond to increase borrowing or find new spending cuts, rather than letting taxpayers bear the brunt of the costs. (He'll announce how the new spending is to be funded only in the autumn.) Polls suggest that Britons would accept modest tax increases to pay for the NHS, but for May's gambit to pay off, Britain will also need increased economic growth and a Brexit deal that minimizes disruption. Neither looks likely now.

May's sop to the Brexiters won't quell the deep animosity tearing at the party. Tory Remainers — the rebels who are still threatening to scupper May's key EU withdrawal legislation — are furious that May has given Leavers a way to claim that their predictions of a "Brexit dividend" have proven correct. The last time they checked, a dividend came from profits, not taxpayers.

Meanwhile, the opposition Labour Party argues that the new spending will be too little. Labour leader Jeremy Corbyn is always ready to outspend the Tories (and out-tax them), so if voters like what they see, there's more where that came from on the other side of the aisle.

The Tories might have led the debate over how to fund and structure the NHS; they might have been relied upon to balance the desire for universal service against the amount of taxation Britons are willing to accept. But they squandered that chance: The dividend promise that helped deliver the referendum result sold Britons a fiction that they could have it both ways, if only they would vote to leave Europe. Now the Tories are stuck with it.

The U.K. will get the NHS financing promised by Brexiters – it’ll just have to pay for it. As for a real discussion on how to fund the health service, that will have to wait.  

©2018 Bloomberg L.P.