Anita Charlesworth explains how the fiscal sustainability report of the government’s economic forecasting body poses specific challenges regarding healthcare spending and improved productivity in the NHS
This week the prime minister set out her objectives for Brexit and the focus was on the UK’s prospects after we leave the EU. At the same time the urgent pressures facing the health and social care system have been dominating the news.
The NHS and social care services are under immediate pressure. While there is always scope to improve efficiency, it seems clear that problems in the social care system have hit emergency care providers who are now operating at, or beyond, capacity.
OBR figures demonstrate that once winter is over health and social care issues aren’t going away
While UK health spending may be in line with the European average as a share of GDP, when you compare the real resources in our system (people and beds for example) we run our system hot and capacity is always tight. The NHS has relatively few staff and hospital beds: France, Germany, Sweden and the Netherlands have more doctors, nurses and beds per head of population.
And we work our resources hard, with bed occupancy rates of over 90 per cent. Urgent action is needed: the budget in March provides an opportunity for the government to find additional funding for social care to avoid déjà vu next winter.
None of the above will be surprising to anyone who has been watching the news. But on the day of the prime minister’s speech, without much attention, a report was published showing that Brexit is not the UK’s only long term challenge.
The Office for Budget Responsibility (the government’s official economic forecasting body) published its annual Fiscal Sustainability Report. Its figures demonstrate that once winter is over health and social care issues aren’t going away.
The OBR has analysed the sustainability of the UK’s public finances over the long term – up to 2066-67. To do that it has looked at the path of tax receipts and public spending.
There are huge uncertainties and the events never turn out quite as forecasts anticipate. But its broad conclusions are important. The OBR’s analysis shows spending increasing significantly after the current period of austerity, driven by pressures from state pensions, health and social care.
But as a result of the aging of the population, tax receipts are projected to remain pretty stable as a share of GDP. In other words, without change the UK would face the prospect of a growing fiscal deficit.
Beyond the forward view
The OBR’s projections also provide some very clear insights into the period following the Five Year Forward View. From the OBR projections for 2026-27, two things stand out.
The OBR’s projections are based on the NHS facing significant cost pressures from, for example, new technologies, but being able to offset at least some of that by rates of productivity growth which broadly match the expected rate of improvement across the whole economy
First, any vaguely plausible scenario for the future has health and social care funding rising by more than the last decade and more than GDP. Spending on the NHS in England will have fallen to 6.9 per cent of the GDP by 2021-22.
The OBR project that health spending will rise again to 7.6 per cent in 2026-27 – back to where it was before this decade of austerity. This would mean average annual growth on health spending would need to return to something like the historic average of about 4 per cent over inflation.
Social care pressures are also rising and in real terms by closer to 5 per cent a year.
It is difficult to see how these spending pressures can be accommodated within current projections for tax, unless the government is prepared to run a fiscal deficit. While this might be possible for a short period, in the end, as the OBR report shows, tax and spending policy need to be aligned and on current trajectories they are not.
The alternative would be further cuts to other public services to accommodate rising health and care pressures. Health and social care together account for around £1 in £5 of all public spending. Many other big areas of spending – most notably state pensions – are projected to continue to rise.
The scope for big cuts in other public services beyond 2021-22 must be limited.
The second take home from the OBR’s analysis is that productivity matters a lot, but isn’t a get out of jail free card. The OBR’s projections are based on the NHS facing significant cost pressures from, for example, new technologies, but being able to offset at least some of that by rates of productivity growth which broadly match the expected rate of improvement across the whole economy (2 per cent).
That is not just a few years of productivity growth but a consistent year in, year out part of the day job of the health system. Without that we either can’t maintain standards and access to new and effective care, or face even bigger calls on the public purse.
So the OBR report is a sober read. It sets out tough choices for government and society about whether we are prepared to pay more for health and care in the next decade. But also a big challenge for those delivering care: how to embed the imperative for improved productivity into the DNA of the NHS.
Anita Charlesworth is chief economist at the Health Foundation