Why not use Helicopter Money to fix the NHS?
It's time to defy convention and show what governments can do
In a previous post, I ventured a short way down the economic rabbit hole of money and how it is created. I mentioned that the late economic thinker James Robertson had, after decades of research, concluded that the most equitable and economically- incentivising way to create money would be for the government to spend it into use.
That is to say, all government expenditure would be financed by money created by the central bank specifically for the purpose, and would then enter circulation. Teachers’ salaries and payments to contractors for building new hospitals are just two examples of how this newly created money would be spent into existence.
But let’s leave this rather mind-blowing thought there for the time being.
Where does Money come from?
When we talk about money, most of us think in terms of notes and coins, notwithstanding the fact that hardly any of us use cash these days. In the UK, the amount of physical currency in circulation is around £92 billion. But by the standard measure of the quantity of money, known as M2, the total amount in the UK economy is currently estimated at £3.2 trillion1. Total money exceeds the value of notes and coins by a factor of 35. Or to put it another way, just 3 per cent of the money in circulation is physical.
So what is the rest, and where does it come from? It’s known as electronic or digital money. In the UK it’s denominated in sterling (it’s not cryptocurrency) and it is created each time a bank makes a loan. It also ceases to exist each time a loan is repaid, otherwise the quantity of money would spiral out of control. Given the way most of it is created, the quantity of money in the economy is constantly fluctuating.
At school, I was taught that banks operated under a system called fractional reserve banking, which meant their ability to make loans was limited by the amount of savings deposits they held for their customers. In Britain, this reserve ratio was 12.5 per cent until 1971 (the end of the dollar standard) when it was reduced to 1.5 per cent (though no longer mandatory) before being abolished in 2009 (following the financial crisis). Under the 12.5 per cent ratio, a bank could only lend money up to eight times the value of its savers’ deposits.
On the one hand this seems quite a sensible way of keeping the quantity of money under control. On the other, it places a limit on the funds available for investment, which is the lifeblood of a dynamic economy.
Most of this electronic money is created by privately-owned commercial banks, which, in deciding when to lend, make a calculation based on the level of risk involved, and the likely return. These commercial banks (Lloyds, Barclays, HSBC etc) are primarily motivated by the need to make a profit so they can pay dividends to their shareholders.
This arrangement, whereby money creation is left in the hands of profit-making commercial banks is regarded by many economists and politicians as the natural order.
Beyond issuing cash, central banks - which, regardless of any so-called independent status, are part of the government - are not supposed to create new money. Except in emergencies, such as when the commercial banks needed bailing out after the financial crisis (because they hadn’t been properly regulated). But under normal economic conditions, convention dictates that central banks are not allowed to create new money in the way commercial banks do thousands of times each day.
This has always struck me as odd, because the distinction between the central bank and commercial banks, when it comes to money creation is entirely arbitrary. But let’s get back to the NHS and the possibilities for helicopter money.
The NHS is in Dire Straits
This excellent post by The Bear on the state of the National Health Service makes for rather depressing reading, but also reminds us of the need for urgent action.
There are many reasons why the NHS is struggling: it’s an enormous organisation with two million staff; it operates in hundreds of different locations; it is required to do many different things; and many of its users probably have unrealistic expectations. Successive governments have tried and failed to make it more efficient (and less costly) by reorganising it, and every time they have failed.
Nonetheless, its current travails derive almost entirely from the fact that it has been systematically starved of funds, and suffered chronic under-investment, at a time when the UK has a growing and ageing population, and the cost of potential treatments is increasing because of scientific advances. There is no solution to the problems of the NHS without considerable additional funding as a first step.
But the government can’t afford additional funding because the economy is moribund and tax revenues are lower than they would like, and borrowing from the bond market is problematic. And in any case, the average British voter has an irrational aversion to paying more tax, even though they expect a properly functioning health service.
So let’s find the money somewhere else. Let’s create the money the NHS needs to plug the gap in funding and investment.
So what is Helicopter Money?
It was the Chicago School economist Milton Friedman who coined the phrase ‘helicopter money’ back in 1969. Friedman was conducting an economic thought experiment: what would happen to demand in the economy if a helicopter flew across the sky dropping cash to be collected by people on the ground. He wanted to illustrate the importance of monetary policy as a tool of economic management, at a time when it had fallen out of favour.
In more recent times, the idea has drawn support from a broad range of economists and commentators, precisely because, as Friedman argued, conventional economic policy sometimes doesn’t work. If the conventional approach is to raise enough money through taxation to adequately fund the National Health Service, an institution supported by an overwhelming majority of people, and that money cannot be raised, then perhaps it’s time for a different approach.
Just to be clear, I’m not talking pure helicopter money here. I’m not advocating a deposit into the bank accounts of each citizen, or literally dropping cash from a helicopter. I’m suggesting the government direct the Bank of England to create new money, which it would transfer into the bank accounts of the Department for Health and Social Care, and it’s equivalents in Scotland, Wales and Northern Ireland, for onward distribution to the various organs of the NHS.
How much money are we talking about?
Over the last five decades, NHS funding has increased more than four times in real terms. This reflects a growing and ageing population, and also the costs of new treatments as they have become available. It has also increased as a share of GDP, from 4 per cent in 1972 to just over 8 per cent today2.
The average annual increase in spending on the NHS since 1955 is 3.9 per cent. From 1997 to 2010, when New Labour succeeded brilliantly in reducing waiting times, the average annual increase was 5.9 per cent, but from 2010 to 2015 it was just 1 per cent, and from 2016 to 2024 it was 3.1 per cent, still well below the long-term average.3
Now you could adopt the attitude that the NHS is a bottomless pit and will always require more money, and that this is unsustainable. Or, you could accept that providing universal healthcare is a costly business, but a price worth paying for keeping working-age people healthy so they can contribute to the economy, and also keeping older people fit and well, so they can enjoy retirement having already made their contribution.
An annual increase of 4 per cent per year for the next five years, pretty much in line with the historic average, would put the NHS back on track. The government is currently committed to a 2.8 per cent increase over the next four years, which is not enough.
4 per cent per year would enable the NHS to meet The Health Foundation’s sustained improvement scenario4 and would cost about £8 billion a year, or £133 for each adult in the UK.
What are the risks?
The main reason economists and politicians oppose allowing central banks to create money is the risk of inflation. And it’s true, hyperinflation can destroy economies if governments print too much money. Look at Germany in the 1920s, or Zimbabwe in the early part of this century. But hyperinflation is not a risk in this scenario; nor is ordinary inflation.
Plugging the NHS funding gap to the tune of an additional £8 billion of new money each year would require an increase in the amount of money in circulation of just 0.4 per cent. And not all of this money would be spent on things that impact the prices paid by consumers. Some of it will, but one of the reasons for low levels of investment in the UK is poor demand; extra spending will help improve demand.
As long as the government is careful to not use such central-bank-created money as a panacea; and as long as it doesn’t allow things to get out of hand, there is no reason why this kind of funding could not help return the NHS to good health, and give a boost to the economy, without any negative side-effects.
Among many potential improvements, the additional money would enable NHS trusts to start filling the more than 100,000 current vacancies. When services are so stretched, it’s a crime that so many NHS trusts have had to implement recruitment freezes. And, as some of this newly created money will be used to improve wages, or fill vacancies, part of it will be returned to the Treasury via income tax and VAT, in the process bolstering conventional government revenues.
Some will argue that any money so-created will, at some point, have to be paid back to the Bank of England by the government from tax revenues. This is rubbish. The Bank is part of the government. All they have to do is agree to suspend their usual accounting procedures.
The bond markets will doubtless have a hissy fit. But they can’t have it both ways. Either they can lend to the government at affordable rates of interest to fund the NHS, or they can find other investment opportunities for their clients’ cash.
We currently allow privately-owned commercial banks to create money whenever they see a profit to be made. Yet we resist the notion that the central bank should, under special circumstances, be able to create money to spend on a service that has overwhelming public support, is an integral part of the UK economy, and, through its efforts, improves the quality of life for millions of people every year.
It’s a no-brainer, surely?
There is a whole other article to be written about the cost to the NHS of treating avoidable illnesses. Billions are spent treating so-called lifestyle diseases each year, vastly outstripping the amount spent on preventative medicine. It’s crazy that the public health grant to local authorities has been cut by more than a quarter over the last decade5.
But let’s sort out the immediate funding issue first. A fully-staffed, properly-funded NHS will be far more able to adapt to the opportunities offered by preventative medicine. Fewer people getting ill in the first place will mean less money having to be spent on expensive treatments, and a happier, healthier, and more productive population.
Britain is currently in 16th place in the table of per capita spending on health care6. The increases suggested above, funded by ‘helicopter money’, would push us into the top 10, but still leave us behind the USA, Switzerland, Norway, Germany and the Netherlands. A government that refuses to take this option when so many people are having to wait so long for treatment, and Britain’s cancer survival rates lag behind comparable countries,7 really isn’t a government worth having.
King’s has a rooftop helipad you know.
Fractional reserve banking is utter nonsense. Loans create deposits, this is why the Global Financial Crisis (2008) happened.
The Bank of England has admitted this:
https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy
Orthodox economics is a religion rather than a science so the practitioners ignore all evidence.