For years in New Zealand it was widely believed that lack of money was the only problem afflicting our public health system. Our Labour government put this theory to the test. We increased spending by 20 per cent in 1987-88. We got a gain in hospital output of only 1.8 per cent. The lesson was plain. Throwing money at a structurally defective health system was not going to solve its fundamental problems.

The New Labour government in Britain looks set to make the same painful mistake. Since 1997 the NHS budget has increased by a third, but hospital operations have increased by just 5 per cent. Waiting lists have stuck at over a million for nearly a decade. The Chancellor's popularity has soared for announcing huge additional resources for a failing system. He should enjoy the applause while it lasts, because without a change in policy the remedy is bound to fail.

The Government has got the right message when it says investment must be matched by reform. But despite its fine words, the reform programme is scratching at the surface. It is an irritant, not a cure. Its mistake is to believe that political direction and centralised targets are a substitute for hospital freedom and patient choice.

Hospitals are asked to be more businesslike, but ministers still peer over their shoulder to prevent sound long-term decisions. Managers are prevented by politicians from maximising efficiency, and resort to cuts in their services to try and contain rising costs. New Primary Care Trusts are heralded as advancing the interests of patients, but they answer to the Secretary of State, not the public.

We went down this path in New Zealand. Regional authorities were set up to buy care on behalf of the public, separating health delivery from purchasing. Some efficiency gains were made, but they were offset by increased demand, and tougher rationing meant less choice for patients.

Every British family already funds a lifetime of healthcare, but it has no real say over how the money is spent. Hospitals and GPs depend on the system for their income, not their own patients. The only way to make providers more responsive is to give back to consumers the power to buy their own care.

That is why reform of funding of is essential. Social insurance schemes give patients the power of choice and the status of customers whom healthcare providers have to satisfy. No one is excluded. The disadvantaged receive assistance with premiums, making them – for the first time – purchasers with equal rights to the rich. Since the public have a free choice of doctor or hospital, the patient-doctor relationship is restored. Hospital staff no longer feel like political pawns. Everyone wins.

In Britain the privileged enjoy access to high-quality health care while the majority rely on sub-standard services. You are the fourth largest economy in the world, but you allow tens of thousands of your people to die from cancer when they would survive in Germany. You acclaim a system that has put the disadvantaged and the inarticulate at the bottom of the health-care heap and kept them there.

The mission of a Labour government should be to put the needs of people first. Challenging privilege in healthcare is not about screwing down the right of doctors to mix private and public practice. It does not mean clinging to a ludicrously dated belief that only nationalised provision can be fair. It means handing back to ordinary people the right to make personal choices that at present are available only to the few.

It is a tragedy that a New Labour government with such promise should set its face against real reform. Its first and outstandingly successful action was to grant independence to the Bank of England – a policy pioneered in New Zealand. That success should tell the Government two things.

First, quality actions are far more important than considerations of short-term popularity. The Chancellor gave up the traditional power of governments to inflate the economy for political advantage, but reaped a much greater economic and political dividend because the policy was right.

Second, central bank independence is a model that should be applied to core public services. Free them of political control, set clear objectives for performance, give them freedom to manage, and make them accountable.

Concern about how its extra billions will be spent has made the Government even more determined to exercise control. But Ministers must learn that they cannot be managers. It is not just that they are professional politicians who are unqualified for the job. They cannot possibly micro-manage departments and programmes that have multi-billion pound budgets and hundreds of thousands of employees, dwarfing the world's biggest corporations.

Bringing in business people to become powerless tsars, setting up centralised task forces and setting ever more ambitious performance targets will not work. Ministers must let go, giving doctors and hospitals freedom to compete and empowering patients as the purchasers of care. If they continue to spend without reform, the price will be a less efficient economy and poor quality services, and the weakest in society will pay.

By Roger Douglas,

The author was Minister of Finance in New Zealand's Labour government, 1984-88.

Reprinted from The Independent, 18 June 2002