The real terms increase in health funding will be “swallowed up” by rising costs in the NHS, John Appleby has warned in response to the spending review.

The chief economist at the King’s Fund said that the Department of Health’s settlement was “generous” relative to other departments.

But, he said: “While the increase in health spending meets the pledge to protect the NHS budget, an increase of 0.1 per cent a year in real terms will soon be swallowed up by cost pressures such as incremental pay drift and the increase in VAT.”

“The net result will be a reduction in the NHS’s purchasing power,” he added.

Professor Appleby said that this placed even greater emphasis on the £20bn productivity gains demanded of the NHS. He said: “The status of this has moved from an ambition to a commitment.”

Also responding to the government’s spending review, health think tank Nuffield Trust said that, despite a real terms increase in funding, the volume of health services could fall.

Director Jennifer Dixon said: “In reality, unless the NHS can keep a tight grip on pay and price inflation, this will mean a reduction each year in the volume of health care services the NHS can deliver if current trends continue.”

She welcomed the extra £2bn promised to go towards social care, but said that “the reality is that local authority budgets will be stretched and funds for social care are not ring-fenced, so the extra £1bn per year is by no means certain”.