The Department of Health is to examine introducing a national freeze in annual pay increments affecting more than a million NHS staff.

Director general of NHS finance, performance and operations David Flory spoke to HSJ in the wake of last week’s spending review, which left the NHS with a real terms increase of 0.1 per cent a year.

Asked if the tight settlement now made a pay increment freeze more pressing, Mr Flory said: “The pay drift around increments is a significant cost pressure. In the end, within our resource limit, there is a trade-off between increases in pay and number of jobs.”

From April next year NHS staff, in common with other public sector employees, will not receive a cost of living pay rise. However Agenda for Change pay increments – worth an average 2.5 per cent a year - are not affected.

Approximately 70 per cent of staff on the AfC pay deal receive such increments at an estimated cost of almost £1bn a year across the NHS.

Last month HSJ reported that foundation trusts were drawing up plans to freeze increments. Speaking this week, Mr Flory said the department would not stand in their way.

However, rather than going it alone, foundations are hoping the DH would implement a national freeze. Asked if the DH would consider such a move, Mr Flory said: “It’s clearly an issue we’re thinking about. As we move forward we will discuss that.”

Unison senior national officer for health Mike Jackson said the suggestion was “deplorable”. He added that although a number of foundation trusts had proposed increment freezes to their local staff representatives, none of them had been able to offer guarantees against redundancies in exchange.

Concerns about the NHS funding settlement came despite chancellor George Osborne claiming he had “protected” the NHS with a headline real terms increase of 0.1 per cent a year.

The claim is based on comparison with GDP inflation, currently running at 1.9 per cent and significantly lower than the consumer price index measure of 3.1 per cent.

However, the spending review also announced a cumulative £3.8bn transfer over four years from the NHS’s capital budget to fund adult social care. After that transfer – which will peak at £1.1bn in 2013-14 – the average real terms change falls to minus 0.1 per cent a year over the four year period (see graph).

Mr Flory said the transfer from the NHS budget had been necessary due to the 26 per cent real terms cut to local authority budgets.

He argued that, as the spending would be channelled through the “statutory structures of the NHS”, the NHS would be “at the table” working out the best way to spend the money and therefore reducing the knock-on effects on the NHS, such as delayed discharge.

As HSJ reported last week, the spending review also saw the Treasury delete the £5.5bn the DH had accumulated in NHS underspends since 2007-08. The surpluses included £1.8bn of capital budget underspends.

Of the remaining £3.7bn surpluses, Mr Flory said approximately £1bn related to foundation trust surpluses and £1bn to strategic health authority and primary care trust surpluses.

The DH has stressed that although the Treasury will not allow the department to top up its budget with previous year overspends, the DH itself will still honour the surpluses carried forward by individual NHS organisations. To do that, the DH will have to ensure surplus spending is counterbalanced by underspending elsewhere, so that total spending fits within its annual budget.

Mr Flory acknowledged that could be a problem if all organisations chose to spend their surpluses at once, but he said that was a “hypothetical” risk.

He said that trusts were “not all queuing up at the door saying we want to spend all our surplus immediately; that’s not sensible financial planning. So we’re not stopping them doing something they want to do”.

The DH cannot control foundation trust spending. Monitor figures show foundations are planning £5.1bn capital spending over the next three years. However Mr Flory said he did not anticipate that causing a problem.

NHS management challenge stays much the same, rich or poor