NHS funding increases and the public finances

Recent IFS work (joint with the Health Foundation) documented the considerable pressures on health and social care spending over the next fifteen years. In the near term, an announced funding settlement for the NHS covering the next few years may be on the horizon.

Earlier this year Theresa May said:

“This year and in advance of next year’s spending review I do want to come forward with a long-term plan. I want that to be done in conjunction with leaders of the NHS, clinicians and health experts. The Government will provide a multi-year funding settlement in support of the plan, consistent with our fiscal rules and balanced approach, but ensuring that the NHS can cope with the rising demand ahead of the spending review. Ultimately, it is for the Government to take decisions about spending priorities, and I would suggest that we cannot afford to wait until next Easter. I think in this, the 70th anniversary year of the NHS’ foundation, we need an answer on this.”[1]

With the date of the 70th anniversary now just a month away (5 July) there is growing speculation that there might be an announcement soon. Whether soon or not, spending on the NHS is so big that whatever decision is made over how much to spend will have a big impact on the government’s fiscal position and/or on its ability to fund other services.

The key facts are these:

• The government’s stated fiscal objective is to reach an overall budget balance by the mid-2020s – it is currently heading for a deficit of £21 billion in 2022–23;
• That is on the basis that it will implement £5 billion (1.6%) of real terms cuts to day-to-day spending on public services by central government between now and then (on top of a real terms cut of 8.1% between 2009–10 and 2018–19),[2] as well as continuing with a programme of cuts to working age social security benefits;
• At £122 billion the Department of Health and Social Care (DHSC) is the biggest government department accounting for nearly two-fifths (38%) of day-to-day departmental expenditure limits (RDEL) set by the Treasury;
• If the DHSC day-to-day budget were to be increased by 4% a year in real terms over the four years from 2019–20 to 2022–23 (inclusive) this would increase spending by £21 billion;
• If the government wanted to avoid additional borrowing that would mean other day-to-day departmental spending falling by £26 billion (12.7%), or an equivalent rise in taxes/additional cut to benefit spending;
• A much more modest annual increase of 2% a year, well below what the NHS is likely to need even to maintain services, would still require a real terms cut of £15 billion (7.5%) to non-health day-to-day spend on the government’s current plans (i.e. to reduce the deficit as planned without any new tax rises or social security cuts being implemented).

The government is in a bind. It is extremely doubtful that large additional cuts to spending on other public services are either feasible politically or consistent with maintaining quality. So unless it is able and willing to implement tax rises or further cuts to the social security budget over the rest of this parliament it is hard to see how a significant injection of additional cash into the NHS would be consistent with the government’s stated fiscal objective. Furthermore, there is an unusual degree of uncertainty over the path of economy –and hence the public finances – over the next few years. The Treasury may be even more reluctant than usual to commit to a significant increase in NHS spending over a number of years given this uncertainty.

Whenever an announcement on health spending is made, the same dilemma will also play out when the overall spending ceiling for next year’s spending review is announced in the Autumn. Either public services will face more years of substantial cuts, or taxes will rise or social security benefits will be cut further, or yet another set of fiscal rules will, in effect, be abandoned.

[1] Theresa May’s evidence to the House of Commons Liaison Committee, 27 March 2018 (https://www.parliament.uk/documents/commons-committees/liaison/LC-27-03-18.pdf).

[2] Source: Office for Budget Responsibility Economic and Fiscal Outlook, March 2018 (http://obr.uk/efo/economic-fiscal-outlook-march-2018/).