NHS funding increases mean difficult fiscal choices

7 Jun 18

Ministers will have to make unpopular decisions on taxation to raise health service funding, says Thomas Pope of the Institute for Fiscal Studies.

 

The NHS turns 70 next month, and it appears increasingly likely that the government is going to announce a health spending settlement for the next few years.

Health spending increases over the past eight years have averaged only 1.4% per year, compared with almost 4% between 1949 and 2009.

While the NHS has managed to do a lot more despite limited funding increases – activity on a number of measures is up considerably – there are visible signs of strain. In particular, high-profile national targets – for example the 4 hour A&E wait target – are being missed and do not look likely to be met soon.

While a consensus appears to be growing that health spending needs to increase, less attention has been paid to how the government will pay for it.

The government’s stated fiscal objective is to eliminate the deficit by the mid-2020s. Its current plans, which leave a deficit of more than £20 billion in 2022–23, are predicated on real-terms cuts to day-to-day departmental spending between now and then.

Health spending is such a significant slice of the spending pie that if the Department of Health and Social Care (DHSC) receives a big increase, the current plans imply a big cut elsewhere.

Awarding DHSC 4% a year (the long-run average) would mean cutting other day-to-day public service spending by almost 13% in real terms over four years starting in April 2019. Even a smaller increase of 2% per year would imply a cut of 7.5% elsewhere.

This would come on top of large cuts since 2010. It is important to remember that although this has been a historically tight period for health spending, that department has been protected from cuts while other departments have experienced (in many cases substantial) falls.


‘Now would be a timely opportunity for the government to set out a long-term NHS funding strategy and be honest about the trade-offs’


It seems unlikely that the government would choose to cut spending in other areas to such an extent. In that case an NHS funding settlement would imply higher public service spending than currently planned.

The government could choose to allow the deficit to increase, or it could choose to find the money elsewhere in the form of tax rises or social security cuts. Allowing the deficit to increase would suggest the government was not taking its commitment to eliminate the deficit by the mid-2020s seriously. Even on current plans more consolidation will be required beyond 2023, and any increase in the deficit would make achieving balance even harder.

However, finding social security cuts or tax rises may not be easy either.

Social security cuts in the pipeline are already due to save more over the next few years – a combination of the ongoing freeze to the cash value of working-age benefits and the roll-out of policies already on the statute book to more families (for example the two-child limit in child tax credit).

And tax revenues are already at their highest level as a share of national income since the mid-1950s so passing a substantial tax rise could be challenging.

NHS funding is not simply a short-term political challenge made complicated by the government’s current fiscal framework.

Demographic and other pressures are set to push up health spending for the foreseeable future.

Work by the IFS and the Health Foundation suggest that over the next 15 years spending on health will need to increase by 3.3% per year on average just to maintain current levels of service. Achieving modest service improvements would be even more expensive.

Such increases would almost certainly imply higher taxes.

While the current record-high tax burden suggests this will be difficult, many other European countries raise a higher share of national income in tax, which shows that it is feasible. It would, however, require difficult and possibly unpopular choices.

Now would be a timely opportunity for the government to set out such a long-term NHS funding strategy and be honest about the trade-offs the country faces between meeting health demands, increasing taxes and spending less elsewhere.

The Institute for Fiscal Studies and the Health Foundation recently published a report “Securing the Future: funding health and social care to the 2030s” looking at NHS funding and demands over the next 15 years, which can be found here: https://www.ifs.org.uk/publications/12994

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