A new analysis of the reason for and distribution of NHS deficits published by the Department of Health, Explaining NHS Deficits, contains an interesting analysis of what the extra funding from 2000-04 was spent on. The answer, apparently, is that nearly 80 per cent was consumed by the costs of employing extra staff.
Although NHS staff numbers have increased massively over this period, the DoH arrives at its answer by asking a very narrow question; not, 'where did the total extra investment go?', but 'where did the extra investment over the trend increase in funding go?'
The latter is a perfectly legitimate question, but is hardly the one on the public's lips. So how did the DoH arrive at its answer?
First, it estimated that the cumulative actual increase in NHS spend from 2000-01 to 2004-05 was£253.4bn. But then argued that in the absence of any decision to spend more on the NHS it would in any case have been£240.5bn. Hence, the extra spend is actually the difference between the two -£12.9bn.
Next, it carried out the same procedure for numbers of staff, cumulating the extra staff employed over and above a trend increase, and found that the total extra cumulative costs were£9.2bn. Adding an assumed amount for higher unit costs induced by pumping more money into the NHS and the higher unit costs of employing the extra staff and out pops a total cost of£10.3bn - around 80 per cent of the extra investment.
Because of the way the DoH has carried out its analysis, essentially ignoring the effect of higher unit costs on all staff and not just the increase above trend, it is able to say that the vast majority of this increase is due to increased staff numbers - not higher wages.
But a different answer can be obtained if we ask where the total extra spend on the NHS has gone. Performing exactly the same analysis as the DoH produces a cumulative increase in spend of£42.9bn and a cumulative increase in the wage bill for the extra staff of£12bn - just 28 per cent of the cumulative increase in total spending.
As for higher wage costs, what neither of these results make clear is that a significant chunk of the extra spend on staff is actually due to higher unit staff costs - in both cases, higher costs account for around£5bn of the extra wage bill.
Of course a simpler calculation shows that the actual wage bill has increased by£10.2bn and the extra funding by£18.1bn: the extra costs of extra staff therefore account for around 56 per cent of the extra spending - or is this too simple?
John Appleby is chief economist King's Fund.