Stephen King: Will Brown's 'great leap forward' work for the NHS

Prudence has been overtaken by expediency, leaving the Chancellor vulnerable

What have Gordon Brown and Chairman Mao got in common? Not a lot, you might think. Both, though, have had grand ideas about a "Great Leap Forward". In Mao's case, the ideas came to fruition in the late 1950s and fell apart in the early 1960s. For the Chancellor, the ideas have been there for a long time and finally fell into place in this year's Budget. Whether they stay intact is another matter altogether.

In both cases, the aim was to raise output. For Chairman Mao, the ambition was particularly large. He wanted to lead the whole Chinese economy forward, hoping that individual workers would get together in communes to raise levels of activity even without massive investment in heavy-duty capital. The idea was to focus on people power: far better to have a blast furnace in every garden than build huge industrial infrastructures.

For Mr Brown, his ambitions relate only to the Health Service. Yet the themes are similar. He wants to raise health output. He will do this by increasing worker inputs (more doctors, more nurses, more current rather than capital spending). He cannot be sure, however, that the additional output will be the right thing in the right place at the right time. Of course, we now have all sorts of independent audit arrangements. But knowing that funds have not been frittered away is not the same thing as being sure that they have been spent in a wise and sensible fashion that satisfies the demands of the end-users.

The Chinese Great Leap Forward ultimately was not successful. An increase in inputs – trees being chopped down to fuel the blast furnaces – certainly resulted in an increase in output. But, in the absence of proper incentives and adequate measures of consumer and producer preferences, the ultimate result was a chronic waste of national resources, the destruction of trees in exchange for steel that no one really wanted or knew what to do with.

In the UK's case, national resources are, again, in danger of being wasted. Health spending may well be too low and it may well be the case that we want a better health service. Yet, unless we can be sure that we have a system where there are attempts to measure both health productivity and, importantly, whether consumers have satisfactory choices, it is difficult to know whether the extra funds are being spent wisely.

In one sense, the funding issue – tax, social insurance, private insurance – is secondary. It's not a question of where the inputs come from: rather, it's an issue about whether the money is spent to satisfy consumer preferences. At the moment, the only real choice for consumers - or, at least, those that can afford it - is whether to go for swanky private health provision or for waiting lists on the NHS. So far, the Government has not made a convincing case that it is able to measure the value of the outputs – revealed through consumer choice – rather than simply the quantity of the inputs.

Why should anyone worry about this? The simple answer is that the Chancellor has started to raise revenue in a major way, above and beyond the spirit, if not the letter, of Labour's last election manifesto. And, if he is doing so, he needs to make a convincing case that the revenues are to be used wisely. By focusing on the funding issue, the Chancellor has not answered those of his critics who are more concerned about the quality of outputs rather than the number of inputs.

This matters, particularly given his sources of additional revenue. The increase in employers' national insurance contributions might seem innocuous enough but, like it or not, this is a direct tax on employment. Regardless of their level of profits – or losses – many companies will see a significant increase in costs. It will take time to see whether this change has any lasting effect but there are three obvious dangers. First, companies are forced to compress wages, effectively passing the tax increase onto their employees. Second, companies either hire fewer people or, instead, move towards greater part-time employment in order to undershoot the NI threshold. Third, at the margin, companies that might have chosen to invest in Britain might choose to go elsewhere. High non-wage labour costs are hardly a magnet for capital inflows from abroad.

The changes to employees' NI contributions are also problematic. The overall increase of 1 per cent is all very well but, because it is applied at all income levels above the lower threshold, it simply boils down to an increase in both the standard and upper rate of income tax – but only for income from employment. If you depend more on unearned income – if you happen to be a plutocrat with your penthouse apartment, your fat cigars and your large holdings of stocks and bonds – you can shrug your shoulders and help yourself to another glass of vintage claret. Moreover, you can watch with amused detachment as the masses head off to work fearful of further increases in NI: for them, the effective upper tax rate may rise even further but, for you, the manifesto promise guarantees that your marginal rate of tax won't rise beyond 40 per cent.

The Chancellor gives the impression that he is simply desperate for additional revenues. National insurance was an obvious choice if only because of the manifesto commitment to rule out increases in income tax rates. But he has also raised revenues through a Lawsonian sleight of hand. Although he spent many pages attempting to justify pulling a revenue rabbit out of his Budget hat, his decision to raise his assumption for the trend rate of economic growth is a flag of convenience that may ultimately mask a deterioration in the public finances. The Chancellor argues that he is tightening the fiscal purse strings but, based on his earlier, more prudent, growth assumptions, he would actually be loosening fiscal policy.

Of course, the revision to his assumption for economic growth only amounts to 0.25 per cent per year and that doesn't amount to very much. The key point, however, is that he has chosen to go down this route in a year when he has substantial spending ambitions: prudence has been overtaken by expediency, leaving the Chancellor more vulnerable in later years.

There is nothing wrong with Mr Brown's ambition. There is nothing specifically wrong with his desire to meet that ambition through higher taxation. What is less clear, however, is whether the limits of higher taxation have been reached, whether the revenues will be spent wisely and with due allowance for individual choice, and whether the Chancellor is able to launch public sector reforms that will better reveal the quality and value of outputs rather than the size of inputs.

The Chancellor's Great Leap Forward will, hopefully, be more successful than Chairman Mao's. Yet, whether it really passes Mr Brown's tests for enterprise and fairness is another matter altogether. Enterprise is not happy and, as the wealthy plutocrat looks on, the middle classes might think that fairness is a newly tarnished word.

Stephen King is managing director of economics at HSBC.