The NHS is experiencing its tightest financial period in more than 50 years, but there is unlikely to be much relief when the spending freeze ends in 2014/15. The Institute for Fiscal Studies looks at the options facing the health service
If the NHS keeps to its budget for a real-terms freeze through to 2014/15, this would represent its tightest four-year period in more than 50 years. The health service continues to do relatively well, in the sense that despite substantial cuts to overall spending on public services, its budget is not being cut. But this is a far cry from the average increase in spending of 4.0% a year (above economy-wide inflation) it has had in the past 60 years. Our study, published today, looks beyond 2014/15 and concludes that the chances of the NHS returning to this kind of budget increase don’t look strong.
The government has pencilled in real cuts to total public spending averaging 0.9% a year in 2015/16 and 2016/17. Within this, spending on welfare benefits and debt interest payments are forecast to continue rising which, if unchecked, would leave public services facing deeper cuts. If the government were to implement welfare cuts of £8.5bn (in today’s terms) in 2016/17, as mooted by the chancellor in his March 2012 Budget speech, spending on public services would still need to be cut in real terms by an average of 1.7% a year over 2015/16 and 2016/17. If public spending beyond 2016/17 is increased in line with forecast economic growth, this would leave spending on public services growing by an average of 1.1% a year over the seven years from 2015/16 to 2021/22.
One possible scenario for NHS spending is that it is increased in line with national income from 2015/16 to 2021/22. Without further welfare cuts (over and above those mooted by the chancellor in his budget speech), this would leave other spending on public services growing by just 0.6% a year in real terms. Keeping the NHS budget constant as a share of national income while increasing other spending on public services by 1.0% a year in real terms could be afforded by implementing welfare cuts of twice the size suggested by the chancellor or by increasing the main rate of VAT from 20% to just over 22%. Clearly an unattractive set of choices.
A four-year budget freeze, while most other departments are having to contend with deep cuts, followed by a period in which spending grows in line with national income might not be considered such a hard deal for the NHS. Indeed, even if the health service budget was frozen beyond 2014/15, by 2017/18 it would still represent a similar share of national income as it did in 2007/08.
But the NHS faces considerable pressures on its budgets from the increasing costs of an ageing population. The Office for Budget Responsibility has forecast that, even if NHS productivity growth keeps pace with that seen across the economy, an increase in health spending in line with national income would not be sufficient to keep up with demographic pressures.
Boosting productivity growth would be a pain-free solution to this conundrum, but one that is easier said than done – not least because eking such continued improvements out of a labour-intensive service is particularly difficult. The risk in such a tight funding environment is that if genuine value-for-money improvements are not delivered, then access to, and quality of, care could suffer. Serious thought should therefore be given to options for the NHS. These include reconsidering the range of services available free of charge to the whole population and the level of taxation needed to finance those services in the future.
Rowena Crawford is senior research economist and Carl Emmerson is deputy director at the Institute for Fiscal Studies