Under the microscope

4 Nov 10
It is debatable whether the coalition kept its promise to give the NHS a real-terms increase in funding. Even if it did, the rise was so small as to be almost undetectable, argues John Appleby

By John Appleby

4 November 2010

It is debatable whether the coalition kept its promise to give the NHS a real-terms increase in funding. Even if it did, the rise was so small as to be almost undetectable, argues John Appleby

The Comprehensive Spending Review has confirmed what we knew – that the NHS in England will get a real rise in funding over the next four years. But it is small. In fact, it is so small that it was lost in the rounded spending figures announced by the chancellor on October 20. But, in the current macroeconomic circumstances, the increase of 0.084% a year is a generous settlement relative to those of other departments. This equates to around £90m – or just over 7 hours running time for the NHS – per year.

Historically, the next four years’ funding levels are parsimonious. The only similar period of near-zero real growth were the years from 1951 to 1955. And, compared with the £21bn real growth in funding from 2004/05 to this year, the next four years figure of just under £0.4bn is all but undetectable without the aid of a microscope.

There have, of course, been some ­quibbles about whether the coalition agreement to pledge a real rise for the NHS has actually been honoured. It’s worth looking in a bit more detail at the settlement to see if this is the case.

One initial puzzle with the Spending ­Review figures was the baseline spending figure – £103.8bn – it used for the current year.  This was much lower than the figure of £106.4bn reported in the June emergency Budget. Was the Treasury pulling a fast one – lowering the base to make the subsequent year’s increase look good?

The answer, it seems, is no. The ­Spending Review figure excludes an amount for depreciation (£1.1bn), the Personal Social Services grant (£1.3bn) and the cost of running the Food Standards Agency (£0.2bn). These exclusions all have some justification. Depreciation is now accounted for under a different heading; the PSS grant currently administered by the Department of Health will in future move to local authority control; and the FSA is to be abolished.

Even adding these spends back in and making some assumptions about the next four years suggests that the different baseline adopted by the Spending Review makes little difference to the real-terms changes in spending.

However, what is slightly more dubious is the fact that on top of moving the PSS grant, around £0.95bn will be earmarked each year from the NHS settlement to be spent on social care. Over the next four years, the central government grant to local authorities is set to be cut by 26% in real terms, so any additional money for social care is welcome. But why not simply add this directly to the local authority settlement? The answer, of course, is that if it wasn’t allocated to the NHS in the first place then health service funding would reduce slightly in real terms.

While the extra £1bn or so earmarked for social care spending will relieve some of the pain for councils facing severe cuts, it represents just 7% or so of net social care spending across England. And, while it provides an initial boost in the first year, changes in this fund in subsequent years mean that it just about keeps pace with inflation over the whole period. Overall, it offers only small protection against the challenges councils face in maintaining and improving services on a drastically reduced budget.

But, used wisely, this funding provides an opportunity to improve service provision and save money by, for example, reducing the length of time patients spend in hospital. Again, though, with the ring-fence on local authority grant funding having been removed, and local government funding slashed overall, it is unclear whether this translates into ­increased funding for social care services.

An important consideration for the NHS over the next four years is not so much its funding in real terms as defined by the Treasury – using a general measure of inflation, the gross domestic product deflator – but rather its actual purchasing power based on its own experience of inflation. Historically, NHS inflation has tended to be higher than the GDP deflator measure – driven largely by increases in pay, which account for half its total spend. Although the pay freeze for public sector employees over the next two years will dampen NHS inflation, incremental drift built in to most NHS pay deals will add to the wage bill – possibly between £0.7bn and £0.9bn. Non-pay inflation – in recent years fairly low – will receive a boost from the hike in Value Added Tax from next January too.

So, a best guess is that NHS inflation for the next two years is likely to be very similar to the GDP deflator – just over 4% over two years. But what then? By 2013/14, GPs will have had a pay freeze for four years, consultants for three and everyone else for two. The economy will be growing at a faster rate and so too will consumer price inflation. The pressure to relax the pay freeze is likely to be immense. 

Ultimately, the financial position of the NHS to 2014/15 is going to look much as expected – with possibly a vanishingly small real rise or an equivalent real cut: essentially what the NHS has been ­planning for over the past two years.

This leaves the NHS facing what chief executive Sir David Nicholson has described as an ‘extraordinarily challenging’ target to improve its productivity – an improvement to the value of between £15bn and £20bn over three years.

It’s worth expanding on what this ­actually means as these figures have caused much confusion. Partly this is the language used: when the public hear the words ‘productivity saving’ what they understand is ‘cuts’. Even for the NHS, ‘productivity improvement’ has tended to equal ‘cash savings’.

This is not what the productivity ­challenge for the NHS is or should be. It is about better value (for patients) from the resources at its disposal. How this is achieved might involve making cash ­savings or freeing resources to be used on activities that generate more value – more operations or higher quality care. It might also involve working in different ways to increase the proportion of patients treated as day cases or reducing the incidence of medical errors. And it is the value of these improvements that will count towards Nicholson’s productivity target. Saving money is one thing, ­spending it on things that patients value is another.

John Appleby is chief economist at the King’s Fund

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