As a general rule, public revenues in the United Kingdom are not hypothecated to particular purposes. One historically important exception, the Road Fund, was raided by Chancellor of the Exchequer Winston Churchill in 1925 in the context of a budget crisis. A partial exception is the National Insurance Fund, though the link between national insurance contributions and benefits has long been attenuated by the grant in aid from general tax revenues. The 1 per cent increase in both employers’ and employees’ national insurance contributions in the 2002 Budget, stated to be for the purposes of increased National Health Service (NHS) spending, necessitated legislation to authorise this diversion1. In the 1990s, there was much more discussion of hypothecating, or earmarking, (increases in) particular taxes to particular purposes, most notably in the context of the NHS. There has been the example of the Treasury, on a non-statutory basis, committing to spend on the NHS the proceeds from above-inflation increases in tobacco duties2. Exactly the same kind of discussion has taken place in the context of congestion charging for motor vehicles. It is necessary to draw a distinction between formal schemes of hypothecation, when there is a statutory obligation to spend revenues from particular sources on particular programmes, and to commitments, to be taken on trust, by politicians to spend (additional) revenues in a particular way. The standard objection to formal hypothecation is that such a mechanism may lead to wasteful expenditure (a buoyant tax base) or to insufficient expenditure (a depressed tax base); there is no reason to believe that the ‘optimal’ amount of revenue will be forthcoming. The problem with hypothecation taken on trust is that there is no way of assessing the counterfactual: how much would expenditure have increased in the absence of hypothecation? Formal hypothecation is easier where there is some link between the tax and the service rendered (for example, television licence fees funding the British Broadcasting Corporation). An undertaking to spend particular revenues in particular ways is most credible when the amounts are comparatively small or the impact localised: for example, congestion charges are used for transport improvements. Those who support hypothecation often believe that there has been a breakdown of trust between governments and citizens over taxation and expenditure; such hypothecation schemes are intended to be persuasive, usually in the direction of more expenditure.


The ‘additional rate’ is legislated in the National Insurance Contributions Act 2002 (c 19), s 1. NICA 2002, s 4, amends the Social Security Administration Act 1992 (c 5), s 162, with the effect that 100 per cent of this additional rate is allocated towards the cost of the NHS in England, Scotland and Wales. There is comparable provision for Northern Ireland in NICA 2002, s 5, with the amendment applying to the Social Security Administration (Northern Ireland) Act 1992 (c 8), s 142. In the November 1999 Pre-Budget Report, the Chancellor of the Exchequer announced that any additional revenue raised from future real increases in tobacco duties would be spent on improving health care (HM Treasury Stability and steady growth for Britain: Pre-Budget report (Cm 4479) (1999), para 5.113; HM Treasury Additional money from tobacco duty increases to go to health spending, Press Release HMT/Health, 9 November 1999). The proceeds from the 5 per cent real-terms increase in tobacco duties in Budget 2000 contributed to the additional £2 billion health funding for 2000–01 and to the increased allocations for the NHS up to 2003–04. In both Budget 2001 and Budget 2002, tobacco duty was increased in line with inflation, so there was no real-terms increase and hence no additional revenue to increase further the contribution from tobacco duty towards the funding settlements for health care. The government had committed itself to large real-terms increases in spending on the NHS and it is therefore not clear what difference in substantive, as opposed to presentational, terms was made by this linkage.

This Briefing should be cited as: David Heald and Alasdair McLeod (2002), ‘Public Expenditure’, in Constitutional Law, 2002, The Laws of Scotland: Stair Memorial Encyclopaedia, Edinburgh, Butterworths, para 499.

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