At first glance, the NHS appears to have done well from chancellor Alistair Darling's comprehensive spending review, but a closer look suggests it falls short of Sir Derek Wanless's recommendations and on the future costs of adult social care, argues John Appleby

The government's fifth spending review since 1997 was delayed by a year and became the second to be suffixed by the word 'comprehensive'.

Regardless of the review's comprehensiveness, all too comprehensible was the bald bottom line for the chancellor: to meet the government's borrowing forecasts, public spending needed to fall and tax receipts rise as a share of national income. The Institute for Fiscal Studies' pre-spending review briefing note made this clear, and pointed out that all previous spending reviews planned (and delivered) a rising share of national income devoted to public spending.

So, in the jargon, a tight fiscal envelope. The question was whether Alistair Darling, like so many previous chancellors who found themselves backed into a financial corner, could manage to pull a rabbit out of the hat.

The bigger question

At first sight the answer appears to be yes. The headline-grabbing figure for health was the 4 per cent real annual increase over the next three years for the English NHS. This was more than many had expected and defied the rumours of a more paltry 3 per cent, which would have been below the historic average of around 3.4 per cent and some distance from the 2002 Wanless review recommendation of 4.4 per cent.

In fact - and just to get what some may feel is a somewhat nerdy accounting point out of the way - the 4 per cent real rise was only possible due to what was essentially the recycling over the next three years of a reduction in the planned capital spend for the NHS in England this year of£1.96bn. Without this deferred spending, the real annual average rise would have been closer to 3 per cent.

So what if the real increase this year was reduced slightly? The NHS still got the money in the end. Of course, in a fiscally tight CSR it was presentationally important to push the coming years' allocations as close as possible to the Wanless figure. Aside from the presentation, this forward transfer of funds does raise a more substantial question: why and how has the NHS underspent its£15.8bn capital budget by nearly£6bn over the last three years? It is not as if the NHS estate is beyond further improvement.

Nevertheless, the English NHS can expect a cash increase of just over£6bn next year, nearly£6.5bn in 2009-10 and£6.9bn in 2010-11. With the broad measure of economy-wide inflation estimated by the Treasury to be 2.75 per cent per year over the next three years, this will effectively reduce the total cash increase of£19.4bn by around£8bn or 40 per cent.

Of course, NHS-specific inflation is likely to be slightly higher than that for the economy generally - say an additional 0.5 per cent. This would reduce the total cash amounts by around 50 per cent.

Assuming Scotland, Wales and Northern Ireland follow the percentage rises announced for England, this will take UK-wide NHS spending to around£131bn, equivalent to about 8.2 per cent of projected GDP in 2010. Together with estimated private spending of 1.4 per cent of GDP, this means the UK is within touching distance of Tony Blair's 2000 pledge to match the average European spend on healthcare - and represents a three-fold cash increase since 1997. However, the downside is that other countries are also increasing their spending - the EU average spend is a moving target.

Nevertheless, adding nearly 2.5 per cent of GDP to health spending must be seen as a pretty substantial achievement given the fact that since the early 1960s the UK has lagged behind the average health spend for EU countries - a cumulative 'underspend' running into hundreds of billions of pounds.

The UK's historic parsimony has also defied the international experience that as national wealth increases, health spend tends to increase more than proportionally.

Apart from the planned carry-over of the 'underspend' on capital this year, the NHS will also carry over any surplus from this year - probably of the order of£250m. To this should also be added reserves built up by foundation trusts - possibly around£900m.

On the one hand this provides some buffer against the reduced growth over the next three years; on the other, the opportunity cost of this has been reduced spending this year.

More money, but is it enough?

So, all in all, the NHS, especially compared with other departments, has done reasonably well out of this year's CSR. The question is, has it done well enough to do the job expected of it?

The first (and still only) time anyone has formally tried to make this judgement was five years ago when Sir Derek Wanless published his Gordon Brown-commissioned analysis of future NHS funding needs. As most people will by now know, Sir Derek recommended that in the five years to 2007-08, the NHS needed around 7.2 per cent annual real increases in funding, followed in the next five years by increases ranging from 4.4 per cent ('fully engaged') to 5.6 per cent ('slow uptake') depending on assumptions about future health engagement of the population, NHS productivity improvements, etc.

For the first five years, actual funding broadly followed the Wanless recommendations. But the then chancellor's commitment was only until this year, and it now turns out that even with the capital redistribution it looks as though funding falls short of even the most optimistic fully engaged Wanless scenario of 4.4 per cent.

While the old joke: 'How do you know when an economist is joking?' Answer: 'They use a decimal point,' still holds, a 0.4 per cent real rise is equivalent to a cash increase of around 3.2 per cent - or£2.9bn on next year's spend in England.

Fractions of a per cent are in fact no joke. More importantly, and as a recent King's Fund review of NHS performance over the last five years showed, the NHS is not on the fully engaged spending path, not least because it has failed to achieve the increases in productivity assumed by Sir Derek.

So, the gap between the CSR settlement and (in the absence of any better analysis) funding recommended by Sir Derek is almost certainly larger than 0.4 per cent.

The focus for the NHS will have to be in bridging the gap through improvements in productivity, or explaining to a puzzled public why services are not improving at the rate originally envisaged by Sir Derek.

The other major news from the CSR was the financial settlement for adult social care. These spending figures, however, were disappointing. As the Local Government Association said in its reaction to the CSR, a 1 per cent real increase in support for local authorities is unlikely to be able to provide for the growth in needs arising simply from demographic change over the next three years, let alone for improvements in the quality of services. Here, the gap is likely to be filled by increases in council taxes.

However, there was some further news on social care which may, hopefully, lead to a big change in the funding base and source for social care. The CSR white paper noted that the government intends to consult on reform of the public support and care system, focusing on older people 'to ensure a sustainable system that targets resources effectively, is affordable and promotes independence, well-being and control for those in need'.

In what could be a historic move, the government has signalled that there is an opportunity to reform the current means-tested system - widely acknowledged to be unfair and unsustainable. In its place, ministers will consider the possibility of introducing a universal entitlement together with a co-payment and progressive elements.

While this does not amount to an absolute commitment to reform the current system, the promise of a major public consultation and a green paper in the near future will be welcome news to older and disabled people and their carers.

The CSR report acknowledges the Wanless-led King's Fund report on social care and its suggestions for overhauling the current unfair patchwork of social care funding. At the heart of the report's recommendations - which the government says it believes have real potential for reforming the current system - is the abolition of means testing and a new deal between the state and the individual, with a better and fairer balance of contributions.

Ignore at their peril

Sir Derek's landmark report revealed that sharp increases in funding will be needed over the next two decades simply to keep pace with population changes caused by increasing numbers of older people.

He calculated this would require total spending (public and private) on social care for older people to increase from the 2002 level of£10.1bn (1.1 per cent of GDP) to£24bn (1.5 per cent of GDP) by 2026. Achieving more ambitious goals for social care would mean increasing GDP to 2.0 per cent by 2026.

The promise of a green paper and a national debate on the future of long-term care funding, while welcome, cannot escape from the fact that at some point in the not too distant future, ministers will have to find extra funding from somewhere to deliver better outcomes for older and disabled people. It is clear that future chancellors and administrations ignore this issue at their peril.