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Scalpels out for tricky surgery on health budgets

The IFS and Nuffield Trust have a report out today on scenarios for health and social care spending over the next decade. This is a very important contribution to the debate on future fiscal pressures and priorities.

NHS spending represents about a third of all departmental spending, so decisions about the level of resources directed to the health budget have enormous implications for other public services and welfare spending. Two tables from the IFS/Nuffield Trust report demonstrate this very clearly.

In the first table below, the overall spending context up to 2021/22 is set out. It assumes that total public spending remains constant (at an annual real growth rate of 2.1 per cent) as a share of national income between 2016/17 (beyond which we currently do not have official projections) and 2021/22. It also factors in welfare cuts in 2016/16 and 2016/17 of the magnitude that the Treasury specifies would be necessary to keep the average annual cuts to departmental spending at the same level as those that are taking place in the current spending review period. Finally, it factors in debt interest payments from OBR forecasts.

Assumed average annual growth in total public spending and public service spending

Assumed average annual growth in total public spending and public service spending

This gives average annual real terms growth for public services spending of 1.1 per cent over the full period 2014/15 to 2021/22.

The second table sets out what happens when that 1.1 per cent annual growth is shared out to the rest of the public sector under different scenarios for English NHS spending:

Example possible trade-offs between English NHS spending and other public service spending for the period 2014/15 to 2021/22, given total public spending

Example possible trade-offs between English NHS spending and other public service spending

It seems likely that the NHS will continue to have a real-terms freeze in funding until 2016/17, which will be presented as a continuation of the ‘ring-fence’ on health spending. In this period, the government will still be trying to eradicate the structural deficit (assuming that the Office for Budget Responsibility doesn’t change its position on the output gap in the economy, that its view remains sovereign, and that no political party enters the 2015 election challenging it). Real-terms NHS growth looks too difficult for other services, while real cuts are politically unpalatable. Other public services can therefore expect average annual cuts of -2.3 per cent in these two years (and remember, this is after welfare cuts have been made). Beyond 2016/17, it is likely that NHS spending will grow in real terms, albeit at a rate nothing like its 4 per cent long-run average. If it increases in line with GDP growth at 2.1 per cent, then other services can grow by 2.3 per cent. Note that none of this takes into account demographic pressures on health and social care spending, which the IFS/Nuffield Trust report also looks at, nor declining tax revenues from things like vehicle excise duty, which the OBR has separately modelled (to read about these in the round, see Rick Muir’s paper, The Long View).

What is really valuable about this exercise is that it supplies a further big piece of the jigsaw for those trying to work out plausible tax and spend options for the next parliament. I blogged last week on why I thought the next spending review might now take place in two halves: a one year settlement before the 2015 general election, and the rest after a new government is formed. We can now work out the room for manoeuvre in this spending review after the NHS has been taken into consideration, and it is not very big – indeed, it is vanishingly small.

As in the late 1990s, we can expect a tough funding environment to precipitate siren calls for the dismantling of the NHS, the introduction of social insurance models, or charges for GP visits. Each is a blind alley, since they would raise overall costs, not diminish them. The onus instead has to be on NHS reform to drive greater productivity and efficiency.

The other conclusion that stares you in the face from the IFS/Nuffield report is that social care system – which also needs a heavy dose of reform – can only be saved from collapse by a spending increase that must be financed either from additional welfare cuts (over and above the £8.5 billion) or tax increases, since taking resources from the overall spending envelope squeezes other public services too sharply. In my view, the only fair way to increase social care funding is to ask the retired population to pay for it by taxing their property and other forms of capital or cutting universal benefits like the winter fuel allowance. Since I believe that the latter should be means-tested to help pay for universal childcare, I see little option but to increase wealth taxes to fund social care. The working-age population should not be asked to shoulder the burden.

Cutting spending in the teeth of a recession simply takes demand out of the economy and weakens your long-term growth potential. But in the medium term, fiscal consolidation is necessary and when that happens there is no escaping the dilemmas posed by today’s report, unless you believe that big tax increases or clampdowns on tax avoidance can plug the whole gap. To be sure, greater action to tackle tax avoidance is necessary, and politicians could do just about anything to the taxation of banks in the present climate. But I don’t think it’s politically or substantively plausible to believe that tough fiscal choices can be avoided by tax increases, despite supporting new capital taxes to pay for social care.

Either way, we need to have these debates in earnest and in public, and not just behind closed Whitehall doors.

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2 Responses to Scalpels out for tricky surgery on health budgets

  1. Prateek Buch says:

    “The onus instead has to be on NHS reform to drive greater productivity and efficiency.” An interesting thought, but probably the wrong focus. Healthcare costs are best driven down by decreased demand for acute care, which in turn stems from people living healthier lifestyles. Managing the demand for healthcare will be a much more effective method of driving down the costs, through better public health management and through tackling Marmot’s social determinants of health, than through attempting to squeeze yet further ‘productivity gains’ from healthcare providers…

    you are, of course, right to raise the issue…!

  2. James Peskett says:

    I wonder how much it matters if we raise overall health care costs a bit, as long as these don’t all fall on the public purse? If the UK continues to lag behind it peers in terms of percentage of GDP spent on health and social care then, presumably, there is space in the economy to grow spending in this area. Also, the percentage of GDP measure doesn’t distinguish between public and private spending. You seem happy to advocate increasing spending on social care, funded through taxation; so why not private spending increases for health care?