An NHS ice age may have only just begun

It is tempting to believe that after one of the worst funding settlements in its history, from 2015 onwards the NHS can look forward to an end to the financial freeze as the sun comes out, the climate improves and money, like the meltwaters of spring, begins to flow again.

But it is also easy to get carried away, and not just in an extended seasonal metaphor. The fact is that the NHS may find its budget constrained for some years after the end of the current spending review period.

Obviously, predictions of the economic future are uncertain but it is worth asking just how likely it is that funding for the NHS after 2015 will return to its long-run real annual growth trend of around 3-4 per cent (let alone the trend since the turn of the century of around 6-7 per cent).

How much the NHS spends in future is of course a policy – or rather a political – decision. Predictions of future spending are not, therefore, a simple (sic) case of forecasting demand based on an economic model constructed from variables and their relationships and drawn from real world data. Assuming the NHS remains funded largely from general taxation, future spending will be a choice taken by future governments. The question is what will influence that choice.

One clear influence will be the macroeconomic context for the decision. While UK GDP is making a painfully slow recovery from its nadir in 2008-09, on the basis of previous trends in GDP for other major recessionary periods, by some time during 2012 GDP growth will be back to where it was at the beginning of the recession. By then, UK GDP will be around 15 per cent smaller than it would have been in the absence of recession. This loss is likely to be permanent.

Return to growth?

So, if the past is any guide, post-2015 real GDP will be growing more or less at its long-run trend of around 2 per cent per year. Good news for public spending perhaps?

Well, possibly. While the NHS will have fared pretty well financially up to 2015, other areas of government spending will have taken some very large real cuts indeed. The NHS could easily find itself on the wrong end of haggling over who gets extra resources; local councils, education, defence and others will all have a strong argument for a claim to increased funds.

And what if debt reduction strategies do not go exactly to plan? By 2016 the government hopes that the spending squeeze and tax increases will have reduced borrowing to around 1.5 per cent of GDP and that overall debt will be heading down to more sustainable levels (around 40 per cent of GDP).

Well, that’s the plan. But already there are signs of slippage. The National Institute for Economic and Social Research predicts it will be 2013 before economic activity returns to its 2008 peak, borrowing will be nearer to 3.5 per cent in 2016 and weak growth will mean lower tax revenues. On top of this, the Institute for Fiscal Studies suggests there is a 30 per cent chance that further spending cuts or tax increases will be required in 2015-16 to achieve a balanced budget.

So one not unrealistic option, and (almost) regardless of the state of the general economy, is that the NHS faces a near real freeze in its budget for some years beyond 2015. If this happens, then NHS spending as a proportion of GDP will fall from its historic high of 8.2 per cent to 6.7 per cent by 2019. By that date, Sir Derek Wanless’s 2002 review of future healthcare funding had envisaged NHS spending at around 9.8 per cent of GDP.

A near 50 per cent shortfall in spending compared with Sir Derek’s recommendation looks exceptionally depressing. Public pressure to boost health spending may generate a more optimistic scenario. But even if the NHS kept pace with real growth in GDP, at least on the Wanless vision, this would leave it short of money by around 1.5 percentage points of GDP.

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