After all the debunking it has had, including the admission from prominent ‘leave’ supporters that it was phoney, the continuing hold on British public debate of the claim of £350 million per week for the NHS is an abiding mystery. In this blog, Iain Begg (LSE) explains that there is no such thing as a Brexit dividend.
Few doubt the need for increased funding for the NHS and the government plans to boost its budget by some £20 billion a year by 2023 will be widely welcomed. Yet to portray it as somehow connected to Brexit is, simply, dishonest, the more so when it is being spun as enabling pro-Brexit ministers to deliver on a referendum promise.
It has been explained endlessly, but apparently has to be reiterated yet again, that the true UK gross contribution to the EU has to be measured after deducting the rebate received since 1985. Admittedly, the way this is presented in official statistics can be confusing, but the principle could not be more straightforward.
Rather than £350 million a week, what the UK ‘sends to Brussels’ is more like £280 million, fluctuating from year to year. Some EU spending also flows back to the UK, mainly for subsidies to farming and fisheries, economic development projects in poorer regions and to pay for research.
Once these flows are taken into account the net contribution of the UK to the EU falls to around £10 billion a year, equivalent to a little under £200 million per week. The latter figure is still substantial and would be enough to pay for plenty of nurses and doctors, but plainly is not £350 million.
For there to be a public spending dividend from Brexit – even one attaining the true gross figure of £280 million, a week two conditions have to be met. First, the UK has to reduce the amount of money it ‘sends to Brussels’ or uses instead to pay for policies currently funded by the EU; and, second, the tax base of the economy has to be stable. As things stand, neither condition will be fulfilled sufficiently and definitely not in time to pay for what is proposed over the next five years.
Image by Julian Tysoe, Attribution 2.0 Generic (CC BY 2.0).
In the short-term, the government has already committed to maintaining subsidies for the farm and fisheries sectors up to the end of 2020, as well as honouring economic development and research contracts which could stretch to 2023. Then there is the Brexit divorce bill of some £35 to 40 billion, to be paid in instalments over a number of years and equivalent to around 4 years’ worth of the UK net contribution to the EU. These are sizeable – if transitional payments – which effectively negate any plausible Brexit dividend before 2023.
Beyond the current budgetary round, it is likely that new subsidies to farming and fishing will have to be introduced, and at least some support provided for economically disadvantaged communities. It is also conceivable that the UK will want to remain in certain EU programmes, such as research, and these will not come free.
Realistically, therefore, at least some of what is currently ‘sent to Brussels’ will remain a cost to British tax-payers indefinitely and, by extension, cannot be ‘sent to the NHS’. A future UK government may well decide to abandon subsidies for farmers, but don’t hold your breath.
However, the indirect budgetary effects of Brexit are the real problem. To state the blindingly obvious, the public services an economy can afford depend on the success of the economy through building up the tax base.
Over the next five years, public sector receipts (the bulk of which come from the combination of VAT, income tax and national insurance) are projected by the Office for Budget Responsibility (OBR) to be on average 36.7% of GDP. If GDP is lower than previously expected, as has been the case since the referendum, these receipts will fall proportionally.
Although the actual calculation is somewhat more complex, a simple back of the envelope summary provides a pretty robust indication of the magnitude of the amounts at stake. Thus, in the fiscal year 2017-18 (just ended), UK GDP at current prices was a little over £2000 billion, and the tax take projected by the OBR was £750 billion.
Had nominal GDP been one percentage point higher, taking it to £2020 billion, the tax take would have been some £7.5 billion higher. It is important to stress, too, that these figures cumulate: growth one percentage point below expectations for each of the five years of the proposed new health settlement will (assuming no change in the tax regime) mean public receipts five times £7.5 billion lower (£37.5 billion) by 2023 than expected.
It does not need rocket science to show how this greatly exceeds the potential cut in payments to the EU: it is approximately double the infamous £350 million per week. Even half a percentage point per year shortfall would more than negate the potential gains from ceasing to pay into the EU.
The impact of Brexit on the UK’s prospects for economic growth ought, therefore, to be at the heart of any discussion of spending more on the NHS or, indeed, any other changes in the public finances. Yet we remain stuck with seeing this through the lens of the fictitious £350 million per week.
Certainly, some of the blame for this state of affairs has to be levelled at the proponents of ‘project fear’, who portrayed Brexit as an inevitable and immediate economic calamity. This allowed the relative resilience of the economy in the months after the referendum to be interpreted by Brexiteers as a reason to reject any and all economic projections.
But after five quarters of disappointing growth figures since the beginning of 2017 and with growing evidence of an adverse Brexit effect on the economy, the risks to the UK public finances have to be recognised. This is why the new NHS promise has elicited such critical comment and even allowed John McDonnell (the Labour Shadow Chancellor) to look fiscally responsible.
More funding for the NHS can be generated by raising taxes or by allowing the public sector debt to increase. But to quote George Bush the 1st, ‘read my lips’: a Brexit dividend will not be the solution.
This article gives the views of the author, not the position of LSE Brexit or the London School of Economics.
Iain Begg is Professorial Research Fellow at the European Institute and Co-Director of the Dahrendorf Forum, London School of Economics and Political Science.
Any forecasts of economic activity are suspect and, while a consensus over a trend may give an idea of what is most likely to happen, once you start arguing that a 1% reduction here or there will have a detrimental effect you have lost the argument immediately. What if it’s a 1% improvement – or even 2%? What is more I totally disagree with the contention the the NHS needs more money – what it needs is less but excellent managing. My experience, which has been extensive in recent years, is that most staff are amazing but their working conditions, operating structures and systems of work are created by idiots. Where information is still sent by mail, mail is then physically scanned into a computer before it is read and auctioned, test results are not automatically passed from one dept. to follow the patient, massive hours being worked -not doctoring- by ticking boxes and filling in forms. The amount of waste in our medical establishments is criminally insane – and you don’t even need to be a qualified manager. Just go and stand in a hospital for half a day and watch what everyone does. I guarantee you will see lots of activity but not actually doing anything useful. And that’s just the NGS which many of us can see – I am quite sure it’s worse in those areas of government where the public never get to see!
Totally agree with you, the amount of money wastage in the NHS is criminal. Its IT systems (and yes, there is more than one) are a mess, mostly outsourced to great expense. Its procurement systems are unbelievable and would be laughable if it wasn’t so tragic.
There is also a “we are not here to worry about money” attitude which gives rise to an enormous amount of wastage as well as a “come one, come all” approach to providing very expensive treatments to people who are not British citizens and are not entitled to receive them.
Why does nobody mention what else the UK gets for its money? How much of the net figure goes towards EU-wide standards agencies that the UK will now have to completely fund itself (medicines, aerospace, vehicles, consumer products, etc…)
Because the EU does not do implementation and checking. The EU defines the standards, National Govt’s put them into law and the national standards agency ensures they are implemented. Hence every country has its own Food Standards, Aviation, Nuclear etc agencies, stuffed full of people and in most cases it is people from these agencies that all meet in Brussels to set the standards.
It is one of the reasons the EU says it is very efficient it only employees 30,000 staff. It uses the leverage of the millions of National Govt staff and all of those costs are on the national taxpayer.
The £350m figure was a masterful piece of political judo really: throwing the Remain side into quibbling about “actually it’s only about £280m” was both an admission the EU is poor value for money as well as an amplification of their core message.
“What do we get for the £10billion a year?”
“Well, it avoids us paying a few billion a year in tariffs, but also means Brussels collects our external tariff revenue instead of us keeping it, and a bit of the £10b gets spent on stuff we actually want anyway” – it’s really not a convincing sales pitch, is it?
I suspect any fallout may also backfire on the EU/Remain side: having demanded a lot of money without offering anything in return, almost any new impediment to trade will now look like spite from Brussels. It seems telling that in two years, the latest opinion poll shows precisely the same 52-48 split it showed the day of the Referendum itself: not a single net percentile shift in either direction, despite the disappointing economic figures and dour emanations from Brussels. 2-3 years from now, will “we coughed up your £40bn protection money, now where’s that protection we paid for?” have dented overall EU support further, rather than changing people’s minds about it?