NHS, EU funding and VAT: possible effects of leaving the EU

If the public votes to leave on 23 June, we will continue to fund EU programmes in the UK until 2020, or up to the date when the EU is due to conclude individual programmes if that is earlier than 2020.

After protecting those now in receipt of EU funding, we will still have billions more to spend on our priorities. We propose that at least £5.5 billion of that be spent on the NHS by 2020, giving it a much-needed £100 million per week cash transfusion, and to use £1.7 billion to abolish VAT on household energy bills.

Vote Leave, 14 June 2016

An open letter signed by leading Leave campaigners this morning implies that leaving the EU will benefit public finances, leaving £5.5bn more to spend on the NHS and allowing VAT to be removed on energy bills.

The Leave campaign say that this would still be possible, even if all funding which now comes from the EU was replaced by direct funding from the UK government.

Would there be more money to spend on public services?

Most economists think it's unlikely to be the case. Most predict that leaving the EU would probably put additional strain on the UK public finances overall, making it harder to pay for public services out of tax revenue.

After leaving the EU, the UK would gain discretion over about £13bn per year, based on the UK’s contributions for 2015. £4.5 billion of that already comes back to the UK in spending, but the UK doesn’t control where it’s spent. If that was used to replace lost EU funding, then about £8.5bn would be left to spend on government priorities.

Vote Leave is suggesting that £5.5bn of the savings on the UK’s membership fee could be allocated to the the NHS, and £1.7bn to repeal VAT on household fuel. This isn’t an unrealistic sum of money if savings on the membership fee are considered on their own.

But focusing on the membership fee alone would be a red herring. Experts on both sides agree that the potential impact on economic growth would be much bigger than any savings on the membership fee— whether or not they think the effect on growth would be positive or negative.

Most economists forecast the UK will have grown less by 2020, the time frame referred to by Vote Leave, should the UK leave the EU. If this were the case then the loss in potential tax revenue would probably outweigh the gains from not paying the membership fee.

The Institute for Fiscal Studies, a think tank that has surveyed the economic forecasts, has stated its position clearly:

"…we conclude that leaving the EU would not, as Michael Gove claims we said, leave more money to spend on the NHS. Rather it would leave us spending less on public services, or taxing more, or borrowing more."

IFS Blog, 6 June 2016

As a result, the Institute for Fiscal Studies forecasts that extra years or additional cuts would be required to meet a political target of eliminating the deficit.

How this would impact the NHS is less clear. Past governments have chosen to protect NHS spending and, during the most recent recession, UK spending on the NHS continued to increase. So the size of the NHS budget is not directly related to how much tax revenue is available.

Finally, the UK might also end up contributing to the EU budget under future trade agreements, as Norway does.

Would the UK be able to lower VAT on household energy bills?

The UK would be able to lower VAT on domestic energy bills if the UK voted to leave. VAT on household gas and electricity is currently charged at 5% in the UK and EU rules mean we can’t lower this..

The EU sets a standardised system for VAT across EU member countries, including a standard VAT rate of no less than 15% and a reduced rate for certain goods or services of no less than 5%. The UK has charged household energy at 5% since 1997.

Whether rates would be lowered if the UK votes to leave would be a decision for future governments.