NI rise 'will cost public sector £1.2bn'

The hidden costs of pay, inflation and tax will slice billions of pounds from Gordon Brown's programme of investment in the NHS, a think-tank claimed yesterday.

Forty per cent of the £40bn increase in NHS spending over the next five years could be swallowed up by pay claims and the galloping cost of price rises, the King's Fund warned.

The forecast came as Downing Street admitted that the public sector, including the NHS, faced a £1.2bn bill from the higher cost of national insurance contributions imposed on employers. The NHS, with a workforce of more than one million, will have to pay at least £200m in contributions.

John Appleby, director of health systems for the King's Fund, told members of the Treasury Select Committee that the 43 per cent real-term increase in health spending would be cut to 35 per cent when the historically high rate of inflation within the NHS was taken into account. He also said the rises in health spending would draw pay claims from health unions.

An even higher bill is faced by local councils, whose employees include police, teachers and social workers.

The Government departments of Work and Pensions and Defence will also have to bear considerable extra costs.

Tony Blair's official spokesman said: "I don't think anyone has ever suggested public services should be exempt from taxation. The public services, just as as business and others, use the health service." But Michael Howard, the shadow Chancellor, said: "This admission shows the Budget was a spectacular own goal.

"With one hand, Gordon Brown promised more money for health and other public services. With the other, he claws money back through employers' taxes and higher taxes on income."

Ministers have been taken aback by the hostile response to the Budget move on NI contributions from employers' organisations, led by the Confederation of British Industry.

In a speech to the British Chambers of Commerce annual conference, Patricia Hewitt, the Secretary of State for Trade and Industry, admitted the rise had been "an unwelcome surprise to some".

But she insisted: "I think almost everyone in Britain agrees as a country we need to put more investment ­ and reform ­ into health care."