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Feature Health Economics

Where do the cuts leave the NHS?

BMJ 2010; 341 doi: https://doi.org/10.1136/bmj.c6024 (Published 26 October 2010) Cite this as: BMJ 2010;341:c6024
  1. Nick Timmins, public policy editor, Financial Times
  1. Nick.Timmins{at}FT.com

The UK’s coalition government has honoured its promise to give the NHS an increase in real terms. But the rise—0.1% a year until 2014—could not have been smaller, reports Nick Timmins, and will leave the service struggling to meet rising demand, while cuts elsewhere could leave healthcare workers to pick up the pieces

It was, you might say, exactly as expected. The coalition government has honoured, to the letter, its promise to provide the National Health Service with real terms growth over the next four years. But only to the letter. And for the health service, the next four years will be anything but business as usual.

At no point in the memory of anyone working in the NHS will the service have faced such a prolonged and sustained spending squeeze. Not since the 1950s—between April 1951 and March 1956—has it received such a small increase, according to the Institute for Fiscal Studies. And back then, while it was coping with the effects of the long postwarbaby boom, it was not facing such a rapid rise in the numbers of older people. Nor were there such pressures from the costs of medical advance, although (in pharmaceuticals particularly) those pressures were beginning to be felt.

The NHS has been relatively protected against the spectacular cuts being imposed in other areas—23% reductions for the Home Office and Ministry of Justice, 26% for local government, larger still for new social housing. But the crucial word there is “relatively.”

The comprehensive spending review, based on the government’s own figures, delivered a rise in NHS spending in England after economy wide inflation—in other words a real terms increase—of 0.1% a year until 2014. That figure is made up of a real terms rise of 1.3% over the period in current expenditure but a 17% cut in capital. Total expenditure will rise from just under £104bn this year (€117bn, $163bn) to just over £114bn by 2014-15, with additional concomitant allocations to Scotland, Wales, and Northern Ireland.

In terms of honouring the promise of a real terms increase, the rise could not have been smaller. It will not keep up with the rising demands of medical advances and the costs of an ageing population, with the latter adding perhaps 1 percentage point a year to demand.

Some £250m to £300m of the first year’s increase will be taken up by the planned rise in VAT. Unless NHS trusts use their theoretical powers to set their own pay rates, there will be pressures from staff moving up pay scales—despite the overall freeze in NHS pay for two years for all those earning more than £21 000 per year, which will help the extra cash go further. The net result of these pressures “will be a reduction in the NHS’s purchasing power,” John Appleby, the King’s Fund chief economist, says.

Furthermore, the NHS is not an island. What happens in social care and housing, to the benefits people receive, and to the levels of unemployment that they face, also has a direct effect on demands on the service. The spending review has affected each of these areas as the coalition delivered the biggest overall cut in government spending since the second world war.

These impacts will be very real, if hard to quantify. Social care is probably the clearest area. Councils are facing a 26% cut in core grant. In recent years they have raised spending on meals-on-wheels and other forms of social support that help people stay independent. But already three quarters of local authorities provide statutory help to people living at home, or in a care home, only when they meet the top two of four levels of assessed need: substantial or critical.

In recognition of that fact, by 2014, £1bn of NHS money—approaching 1% of the budget—will be diverted to social care to help with discharge arrangements. Technically, that makes the real terms growth a real terms cut of perhaps 0.5%, although the spending should help support more effective delivery of healthcare.

Another £1bn within the much shrunken grant to local authorities is also being earmarked for social care. But the money is not actually ringfenced. So while councils will face big pressures to spend it on its intended purpose, that is not guaranteed. And social services directors say the £2bn combined plugs about a third of the £6bn gap they calculate will exist between resources and increased demand by 2015.

If the council grant is not spent as intended, “less support from council services will quickly lead to increased pressure on emergency services and hospitals,” says Nigel Edwards, the acting chief executive of the NHS Confederation. “Hospital beds will be blocked for those who badly need care because the support services that the elderly require after discharge will not be available.” The two parts of the care system are going to have to work together, he says.

The £18bn of benefit cuts include sweeping and complex changes to housing benefit, including caps on the maximum amount of rent payable and a reduction in the proportion of average rents covered. Housing charities and local authorities are warning of a rise in homelessness, while these changes—combined with cuts and changes to the way council tax benefit is administered—could see substantial population shifts, as larger unemployed families are unable to afford rents in higher priced inner city areas.

Whether or not private sector employment rises to fill the gap from public sector job losses—and whether or not the government’s hugely ambitious welfare to work programme succeeds in shifting large numbers of the long term unemployed, and those on disability benefits, in to work—500 000 public sector jobs are likely to be lost, according to the Office for Budget Responsibility. Several hundred thousand more may be lost in those parts of the private and voluntary sector that directly supply public services. These losses are likely to have mental health effects, on top of the housing changes, that will affect demand on the NHS.

Then there are internal costs to the NHS from the coalition’s programme. The health department, like all other central government departments, faces a 30% cut in management costs. Additionally, out in the NHS itself, management costs are being cut by 45% over the next few years. That cut is likely to produce a £900m redundancy bill, Sir David Nicholson, the NHS chief executive has told the Commons health committee. In the long run, he said, that should save £880m a year. But there is also, he said, “the cost of reorganisation” as GP consortiums take over the purchasing of the bulk of NHS care.

If the consortiums choose chiefly to use private sector or local authority staff to support their commissioning activities rather than existing primary care trust staff, there will be a “massive cost” in extra redundancy, he told the committee.

Finally, all other staff earning more than £21 000 per year face a two year pay freeze starting from April next year. For consultants and GPs that will add up to a three and four year freeze, respectively. And as the freeze nears its end, many staff will face an effective pay cut to offset whatever rise does or does not occur then, as contributions to public sector pensions rise by an average of three percentage points. Other than to say that the lower paid will be protected—which implies increases larger than three percentage points for the better paid—the coalition has not yet said how that will take effect or precisely when. The details may not emerge until the final report on the future of public sector pensions from the former Cabinet minister Lord Hutton in spring next year. That report is also likely to contain recommendations for a switch from final salary pensions to ones based on career average earnings—which are already used for GPs.

All these factors together underline why, over the past 18 months and more, Sir David Nicholson, the NHS chief executive, has been underlining the need for the service to make up to £20bn worth of efficiency savings over the next few years.

Pessimists will note that the last two times the NHS faced prolonged spending squeezes, which were nothing like as sustained or deep as the one now in prospect, financial crises occurred. The first, in the 1980s, produced the previous Conservative government’s plans for a purchaser/provider split in the NHS. The second, in the late 1990s, eventually led to the NHS Plan, a massive increase in funding but with an additional increase in competition that the coalition government is taking further. This time round, a big financial crisis could lead to more fundamental questioning of whether the service can survive as a largely tax funded, largely free at the point of use system.

Optimists will argue that the NHS has had plenty of notice of what is coming. Furthermore, these cuts and the additional pressures do not all arrive overnight. They will be progressive, steadily building up over the next four years, providing some time to adapt. In addition, by 2014-15, the NHS will still be spending £114bn a year. That is a huge sum of money. There must be better ways to spend it to better effect than at present.

Notes

Cite this as: BMJ 2010;341:c6024

Footnotes

  • Competing interests: All authors have completed the Unified Competing Interest form at www.icmje.org/coi_disclosure.pdf (available on request from the corresponding author) and declare: no support from any organisation for the submitted work; no financial relationships with any organisations that might have an interest in the submitted work in the previous 3 years; no other relationships or activities that could appear to have influenced the submitted work.

  • Provenance and peer review: Commissioned, not externally peer reviewed.

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