Ian King, business presenter

Spare a thought for Philip Hammond. As Britons prepare for their summer holiday, if they are not already on it, the chancellor is bracing himself for the inevitable barrage of requests from cabinet colleagues as he starts work on this autumn's budget.

His task has been made harder by Theresa May's promise of an extra £20bn a year, in real terms, for the National Health Service. In his Mansion House speech last month, the chancellor warned that, unfortunately, this means little extra money for other spending departments.

And he made clear most of this extra money for the NHS will have to come from tax increases, not from extra borrowing.

Image: A protester holds a placard in support of the NHS

Ruling out more borrowing was welcome. The national debt is now £1.8tn and interest payments on it, even at current ultra-low interest rates, will come to £41bn this year - more than we spend on law and order or transport and more than the entire council tax take.


So borrowing more is not an option because, in effect, it is stealing from our children and grandchildren by leaving them to pay ever-increasing sums of interest in the future.

In an ideal world, the extra money would come from stronger growth and increased productivity, both of which would generate more tax revenues. However, given the UK economy's anaemic growth prospects, that is not going to happen.

On that basis, Mr Hammond will have to raise taxes to pay for the extra NHS funding. But how?

This week, the Treasury select committee offered one solution.

It wants more cuts to tax relief on pension contributions. The relief, it argues, is poorly targeted because it overwhelmingly benefits better-off households.

So it suggests a flat rate of relief (because pension contributions are made from pre-tax income, higher rate taxpayers enjoy relief of 40% and lower rate taxpayers just 20%) and a reduction in the annual amount that can be saved in a pension each year, currently £40,000 for most workers.

Many in the Treasury would love to do this. Mr Hammond's predecessor, George Osborne, slashed pensions tax relief for those paying the top 45% rate of income tax and, accordingly, the cost of pensions tax relief to the Treasury has fallen from £48bn in 2014/15 to £41bn this year.

The problem with cutting tax relief further is that, as with raising borrowing, it would single out younger people for punishment.

Every pound less saved into a pension now raises the future risk of people having less to live on in retirement and the main victims of this would be today's workers in their 20s, 30s and 40s.

The baby boomers enjoyed tax relief as they accumulated the pensions they enjoy today. Hacking away further at tax relief now would deprive the millennial generation, in particular, of the chance to do the same.

Jeremy Corbyn's solution is to raise corporation tax and income tax for those earning more than £80,000 a year.

But this is a non-starter. The top 1% of earners currently already pay 27% of all income tax. There just aren't enough high earners to raise the sums needed and there isn't that much more that can be squeezed from those that there are. Similarly, as the independent Institute for Fiscal Studies has pointed out, raising corporation taxes would not raise as much as Mr Corbyn claims.

Image: Mr Hammond will have to raise taxes to pay for the extra NHS funding. But how?

So what are the other options?

Well, Mr Hammond has already shown himself to be a chancellor who likes to tidy up discrepancies and irregularities in the tax system. His attempt in March last year to bring into line the rates of National Insurance paid by self-employed people and those in employment was a good example.

The logic was impeccable - the new state pension means the differences in state pensions and welfare benefits received by the self-employed and those in employment, traditionally used to justify the differences in their National Insurance contributions, no longer exist.

Unfortunately, the measure technically broke David Cameron's 2015 manifesto commitment not to raise income tax, National Insurance or VAT. But that pledge was missing from last year's Conservative election manifesto and so it is perfectly possible Mr Hammond could revive the idea.

It would raise at least £2bn a year. There might also be an added benefit, if such a measure drove more self-employed people back into the world of paid employment, as this would have the knock-on effect of raising the Treasury's take from employer's National Insurance contributions.

We are all going to have to pay more in taxes to fund the NHS's 70th birthday present.

Another move Mr Hammond should definitely consider, which is long overdue, is to make the earnings of working pensioners subject to National Insurance.

Many people wrongly assume their National Insurance contributions pay their state pension when they are older, but that is not true. National Insurance is merely income tax by another name, as I explain here, with the money raised from it financing general government spending.

According to research by the Nuffield Trust for The Guardian newspaper, more than two-fifths of NHS spending is devoted to the over 65s, a group that makes up only 18% of the UK population.

It is therefore entirely fair and appropriate that they share the burden of extra money for the NHS. Imposing National Insurance on the earnings of those of pensionable age would raise £2bn a year and, again, it would be entirely logical.

It makes no sense at all that a 64-year old worker's earnings are subject to National Insurance but that those of a 66-year old worker are not.

Unfortunately, though, such measures will only go so far. We are all going to have to pay more in taxes to fund the NHS's 70th birthday present.

Sky Views is a series of comment pieces by Sky News editors and correspondents, published every morning.

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