Steve Richards: Don't believe the myth that all the extra money made no difference to the NHS

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One of the earliest recruits to Gordon Brown's big tent is flapping the sides of the canvas and causing a degree of turbulence. The senior banker, Derek Wanless, was the author of a pivotal report early in Labour's second term that argued for tax increases to pay for improvements in the NHS. Not known as an old Labour socialist, Mr Wanless cleared the way for Mr Brown to put up taxes.

This week, he reports back on how the cash was spent. On several levels, his conclusions are politically explosive. It is almost as if Mr Wanless wants to remind Mr Brown that, although his tent might now be bulging with glitteringly respectable new names from outside the Labour party, he is still there.

I should make clear that he is not out to cause mayhem. His review of what happened to the additional cash is balanced. There is plenty of good news as well as bad. But the many one-sided summaries of his report, emphasising the gloomier judgements, will give ammunition to the delusional opponents of public spending, the fantasists who assume that services can be delivered for next to nothing as long as they are "reformed". After all, most voters will not read the full report. They will read the summaries and some will join those that argue investment in public services is a waste of money.

Evidently, Mr Wanless wants voters to reach the opposite conclusion. He declares without qualification that the amount of money required for the NHS will be much higher in the future, significantly more than the Government plans to spend. His report causes something of a conundrum. With good cause, Mr Wanless makes a case for increased investment in the coming years. His analysis as to what happened to the cash since the famous tax increase in 2002 makes the chances of securing a consensus for sustained high levels of investment even less likely.

The political context in which he delivers his judgement makes the chances more remote still. In the immediate future, no political party is committed to spending the amount of cash deemed necessary by Mr Wanless. The Health Secretary, Alan Johnson, is rarely out of the Treasury finalising the amount of cash the NHS will receive. He will do better than most cabinet ministers in this extremely tight public spending round, but the final amount will be nowhere near as high as Wanless recommends.

The longer-term prospects are even gloomier because of the broader position of the three parties in relation to "tax and spend", a policy area that remains stranded in the 1980s. No wonder Margaret Thatcher hovers still over British politics. I am told that Gordon Brown has decided that at the next election he will pledge once more not to raise the basic rates of income tax. He will also rule out the introduction of a top rate of tax for the highest earners.

David Cameron has stated that he would share the proceeds of growth on spending and tax cuts. Mr Cameron will struggle to show how such an approach will allow him to reach Labour's projected spending levels on the NHS, although he is committed to do so. For sure, he will not be able to get close to the level that is actually required to sustain a modern NHS.

Mr Brown will make much of the dividing line between his commitment to invest and Tory tax cuts, but the dividing line that matters more is between his projected spending level and the much higher amount needed for the NHS. There is a gaping gap. For those of us who support the tax rise in Labour's second term, there is an obligation to acknowledge the two colossal errors that followed. As is now well known, the GPs took ministers for the biggest of rides when they negotiated their new contracts.

The history of those contracts casts much light on the torrid tensions within the government at the time. Most cabinet ministers did not realise what was going on in relation to pay until they noticed that their GP friends were taking longer and more lavish holidays. Perhaps if cabinet government had been functioning more effectively, a brave minister might have dared to question whether the Government was getting a good deal.

While the GP contracts were being negotiated, other reforms were rushed through. The frenzy stemmed partly from fears in the Blairite entourage that a tax increase would be fatally unpopular. On the eve of the announcement, one of Mr Blair's closest allies told me he was sure tax would cost Labour the next election. Mr Blair wanted to assure the doubters that sweeping reforms would accompany the additional cash.

This was during a dangerous period when Mr Blair became convinced of his own boldness and when superficial displays of apparent political courage were an end in themselves.

As Mr Wanless notes this week, the consequences of each reform were not fully thought through in terms of their impact on other parts of the NHS. Mr Brown battled for a more coherent approach. Mr Blair strode on. While they fought it out over the reform agenda, the GPs were making hay over pay.

The case for public spending will be lost altogether if that was the end of the matter. Thankfully, it was not. Apart from the much talked about cock-ups, there was cause for celebration. The planning and implementation of what became a popular tax increase was a considerable achievement, a rare attempt by a cautious government to challenge the British desire for European standards of public services and US levels of taxation.

Spending on the NHS is close to the EU average, but the other equivalent countries have been at the top of this particular mountain for years. For poor old battered Britain, reaching that level will not mean a complete transformation overnight. Nonetheless, Wanless stresses there have been many improvements as Britain climbs the mountain. Do not believe the myth that money has made no difference.

But, as matters stand, the myth is spreading fast. In the field of foreign affairs, the catastrophe in Iraq has made it almost impossible for Britain to take military action in the future, even for a genuinely legitimate cause. Similarly, it is possible that the wasted spending in recent years on the NHS, combined with the misguided assumption that even more cash was blown, will mean no government will dare to spend adequately again.

Political leaders say they want an NHS free at the point of use. Yet they will not raise the necessary level of taxation to pay for it. That means a terminally declining NHS or alternative policies to meet the shortfall, either from co-payments for some services or European-style insurance policies that complement the already higher levels of state spending in other EU countries. The issue cannot be avoided much longer, but I bet it will be in the run-up to the next election.