Does the NHS Drag the UK Economy Down?

US presidential election candidate Mitt Romney’s choice as vice-presidential running mate, Paul Ryan, has some interesting things to say about the U.K.’s National Health Service (NHS). The NHS is of course, free at the point of delivery, a healthcare concept that is right up there when it comes to passionate debating topics in the USA.

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The London Times reported his comments thus: "The NHS interferes with democracy and the U.S. must beware of following Britain’s path, the Republican vice-presidential contender has said."

The political ideology is apparent, but this is a column on macroeconomics so we’ll consider only the economic implications of Mr Ryan’s comments, where he went on to suggest that concepts such as universal free healthcare were what was dragging the U.K. and other euro zone countries down the road to economic ruin.

Is this the case? Is the NHSto blame for the UK’s economic ills? In 2011 it cost the taxpayer 160 billion pounds, which was about 8 percent of total UK GDP that year. A substantial sum. Is it to blame for our economic woes?

Public sector spending becomes a problem when a government can’t raise enough in taxes to cover it, and so must borrow to cover its revenue shortfall. It then becomes an even bigger problem when it can no longer borrow. This is a very big problem for Greece, and possibly Spain and Portugal, because they are in the eurozone. If they had their own currency, it would be less of an issue and possibly a non-issue, as until actual default occurs there is always an investor out there who will invest under just about any risk-reward profile.

Paul Ryan’s political beliefs are based on the concept of reducing public sector spending. But not eliminating it. This is a subtle but important distinction. The U.S. Treasury market is the biggest in the world, the US government borrows more than any other sovereign authority. Clearly it isn’t public spending per se that troubles Mr Ryan, otherwise he could have chosen to target the U.K.’s spending in the war in Afghanistan (standing at about 30 billion pounds over the last six years), which has produced no tangible benefit to the taxpayer and certainly hasn’t helped our economic performance.

The U.K.’s ills stem from underperformance caused in part by an overreliance on private sector debt, which built up during the boom, and then the recession arising following the bank crash. If one was to identify one single cause that created the crash in both the U.S. and U.K., it would be the housing boom and bust. Subsequent to that both individuals and companies have been repairing their balance sheets and paying down debt. The lack of action on the supply side, most especially with regard to the labor market and incentivising companies to hire more staff, has since acted as a severe drag on growth. But none of this has anything to do with the NHS.

Governments will always spend money that they don’t have. It isn’t the concept of free healthcare on its own that stifles economic recovery, but rather a whole raft of issues, admittedly including public sector spending. In a recessionary environment, individuals as well as companies have to reign in spending (call it “austerity” if you wish”), but this is in order to maintain the confidence of creditors. It isn’t the actual concept of public expenditure itself. If it was, we wouldn't have financed the recent wars that have cost the public purse so much tax dollars.

The NHS is an industry in itself and generates knock-on spending that feeds through to the private sector. If Mr Ryan had targeted social welfare payments for the unemployed, for example, one can see the connection. But it isn’t the NHS that has caused the U.K. to stay in recession.

A final observation for the skeptic: the U.S. spends an astonishing 17.6 percent of GDP on healthcare (compared to about 8 percent in the U.K. (the U.K. is in line with the OECD average). The notion that the US has an efficient, competitive health care system that delivers value for money is highly questionable.

The author thanks his colleague and chum Ross Walker at Royal Bank of Scotland for assistance with this article. Errors and omissions remain the author’s responsibility!

Professor Moorad Choudhry is Treasurer, Corporate Banking Division, Royal Bank of Scotland.

The views expressed in this article are an expression of the author’s personal views only and do not necessarily reflect the views or policies of The Royal Bank of Scotland Group plc, its subsidiaries or affiliated companies, or its Board of Directors. RBS does not guarantee the accuracy of the data included in this article and accepts no responsibility for any consequence of their use. This article does not constitute an offer or a solicitation of an offer with respect to any particular investment.