Rachel Reeves will tax businesses to plug £9bn black hole in NHS

The chancellor is set to announce a revenue-raising budget designed to reset Britain’s public finances
Michael Savage Policy EditorSat 19 Oct 2024 15.00 EDTLast modified on Sat 19 Oct 2024 15.03 EDTShareRachel Reeves is set to use one of the most pivotal budgets of recent times to call on businesses to pay more tax to help restore the NHS, amid warnings that the health service has been left with a £9bn hole in its finances.
The chancellor is expected to stake her reputation on a tax-­raising budget designed as a reset of the public finances. She has already had to deal with cabinet skirmishes over funding unveiled alongside the statement. However, Reeves is understood to believe that the public will accept a multibillion-pound hike in business taxes if it is linked to repairing the health system’s finances.
The Observer has seen new research, commissioned in the run-up to the budget by an influential thinktank with close links to the Treasury and No 10, that suggests overwhelming support for using an increase in national insurance contributions (NICs) for employers to fund extra resources for the NHS.
Seven in 10 voters said they would approve of the move if the money raised was used to increase spending on the health service, according to a poll of more than 6,000 people commissioned by Labour Together.
Only 18% said they would disapprove. The measure was particularly popular with a crucial group who switched from the Conservatives to Labour at the last election. About 82% of the group said they approved of it.
View image in fullscreenUK health secretary Wes Streeting has agreed about £4bn in health service wage rises with the chancellor. Photograph: Andy Rain/EPAThe news comes with sources warning that the NHS needs an additional £9bn this financial year just to stand still, compared with the settlement it was left by the previous government.
The figure includes about £4bn in increased wages agreed by Reeves and the health secretary, Wes Streeting, after a recommendation by the independent public sector pay body. The remainder comes from the 2.9% rise needed simply for the NHS to maintain its current performance because demand is growing.
Sources across Whitehall said Reeves was putting the NHS front and centre of what is shaping up to be one of the most consequential budgets of recent decades.
“The Conservatives crashed the economy and then they ran away, leaving the NHS with spending plans that were total fiscal fiction,” said a Treasury source.
Reeves has had to unveil the budget alongside agreeing the immediate spending plans for government departments, a process that led to huge fallout among several cabinet ministers last week.
Some MPs remain fearful about what may happen to unprotected departments, with concerns that a Treasury desperate to find savings could opt to reduce the taxpayer subsidy applied to rail fares. That would see ticket prices go up and undermine Labour’s argument that it wants to tackle the cost of living crisis.
Government figures said it was now important to show people that tax rises were needed to reset the public finances and rebuild the health service. “We have to clear the decks,” said a source. “This is about revealing the real state of the public finances and how we begin to fix them.”
While Reeves appears increasingly likely to sell an increase to employer NICs as a significant element in restoring the health service, she is already facing accusations of breaching Labour manifesto commitments as she uses a series of tax rises to bolster the public finances.
The Tories state that a multibillion-pound increase in employer NICs, as well as a proposed £7bn two-year freeze on income tax thresholds, would both breach the Labour election manifesto.
However, government sources argue that the two measures meet the party’s pledge not to increase VAT, income tax or national insurance on “working people”. A Treasury source said: “We don’t comment on tax speculation.”
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The flurry of potential tax rises, including cuts to inheritance tax allowances and higher capital gains tax on share sales, comes amid signs that Labour is losing its grip as the party seen as best placed to handle the economy.
Budget 2024: what taxes could Rachel Reeves raise?Read moreThe latest Opinium poll for the Observer shows Labour has narrowly lost its lead on improving voters’ financial situations. It led the Tories by 6 percentage points on the issue in July, but now trails the party by a point. It also lags behind the Conservatives by 1 point on “running the economy”, having led by 9 points after the election.
Yet it still retains a lead on improving public services, spending government money efficiently and bringing down the national debt and deficit.
“Labour’s honeymoon ended a long time ago, but the chances of the budget turning things around look slim unless there’s a mighty rabbit to pull out of the hat,” said James Crouch, head of policy and public affairs at Opinium. “The government should expect a turbulent couple of weeks.”
There has been speculation that the NHS will receive real-terms increases of between 3% and 4%, though officials would not be drawn on the figure.
Siva Anandaciva, chief analyst and an interim director of policy at the King’s Fund, said it was crucial that higher funding came alongside serious reform. “It is unlikely that any government would be able to give the NHS ‘enough’ right now to tackle all the serious funding pressures that have built up over the previous years,” he said.
“A funding increase of 4% above inflation would be a significant increase compared with the years of austerity the NHS endured during parts of the last decade.
“Many agree that the NHS needs to reform and modernise how it works. So even if the funding on the table is unlikely to be ‘enough’, the government will need to show that the extra investment it is providing – at no small political cost if this funding comes in part from higher taxes – is being used to support reforms to how the NHS works, rather than just paying for more of the same.”