Special NHS tax being examined by ministers

The Government is examining plans to raise an extra £4bn a year for the National Health Service by creating a special "NHS tax" under which a share of income tax would be earmarked for health spending.

The Government is examining plans to raise an extra £4bn a year for the National Health Service by creating a special "NHS tax" under which a share of income tax would be earmarked for health spending.

The proposal, for after the next general election, would involve channelling 1p or 2p in the pound of income tax directly to the NHS. The injection would come on top of the extra £13bn for health in the Government's three-year spending review announced last month.

Initially, the plan might mean a switch of spending priorities towards the NHS. But if it proved popular, some cabinet ministers might support an actual rise in income tax if they knew the money was ring-fenced for the health service.

In a little-noticed aside during a speech to the Institute for Public Policy Research last December, Alan Milburn, the Secretary of State for Health, said: "If hypothecation is desirable as a way of connecting spending with services, it is possible to do this through hypothecated taxation."

Mr Milburn's predecessor, Frank Dobson, called last month for the £13bn to be topped up through "a special NHS tax of 1p or 2p in the pound" a year. In this financial year, that would raise £2.06bn or £4.12bn.

Gordon Brown, the Chancellor, still needs convincing, but he has already ended the Treasury's long-standing hostility to hypothecation, by earmarking money from cigarette duties for the NHS and channelling revenue from above-inflation increases in fuel duty into public transport and roads.

Ministers believe health will need another boost after the three-year plan ends. The Treasury has begun a study on how medical advances and demographic change, including people are living much longer, will put pressure on the NHS.

Further pressure for an "NHS tax" is expected in October from a Commission on Taxation and Citizenship set up by the Fabian Society, a Labour think-tank which has already helped persuade the Government to change its stance on taxation. Tony Blair, who previously believed tax cuts were priority, has now said Labour's plans to boost public spending and the Tories' demands for tax cuts will be one of the key dividing lines at the next election.

The commission is likely to recommend a three-point plan to "reconnect" the people with the way their taxes are spent. Its proposals will include independent auditing of the Government's performance by anew watchdog, and a call for every citizen to be sent an annual statement giving a breakdown of their taxes.

Thirdly, the Fabians' commission is expected to propose earmarking income tax for the NHS. It is considering either a 2p tax or a more radical option under which the entire health budget would be financed by a highly visible "health tax". Income tax, which would fund the rest of public spending, could then be cut sharply. The commission is expected to reject cuts in income tax on top of the 1p reduction last April.