As the economic picture worsens, Carl Emmerson and Gemma Tetlow examine the possible implications for the NHS budget

As the Labour government expanded public spending between 1999 and 2008, the NHS was one of the winners. With total public spending growth set to slow considerably over the next three years and further tight spending plans pencilled in beyond that, the NHS will see a sharp slowdown in spending growth. Economic developments over the last year have made it even more likely that there will not be any extra cash for the government to hand out.

Over the period covered by Labour's first three spending reviews (April 1999 to March 2008), total spending grew by an average of 4 per cent a year in real terms. Even within this generous package, the NHS did relatively well - spending on the NHS in England grew on average by 6.4 per cent a year in real terms. This growth in spending compared favourably with NHS spending growth in the years before Labour came to power. From 1949 to 1997, NHS spending grew on average by 3.5 per cent a year in real terms and spending growth had been slightly slower than this under the previous Conservative government.

Tightening up

However, virtually every budget and pre-budget report forecast since 2002 has been proved too optimistic in its outlook for the public finances. In light of this, the government laid out much tighter spending plans for the period from April 2008 to March 2011 in the comprehensive spending review of 2007, in order to help reduce borrowing.

Overall, the plans aimed to reduce public spending as a share of national income, which implied total spending growing at just 2.1 per cent a year in real terms. This is substantially slower than under Labour so far.

The NHS remains a relative winner under these plans - NHS spending is set to grow by 3.7 per cent a year in real terms. But this is a sharp slowdown and leaves NHS spending below the minimum that Sir Derek Wanless estimated in 2002 would be required to continue to progress towards a world class health service.

Further cuts?

At the time the comprehensive spending review was published last October, it seemed possible that, if things turned out rather better than the Treasury was expecting over the next few years, some of the extra money could have been used to top up the spending plans. This is certainly what happened during Labour's previous spending review periods.

However, developments in the economy since last October mean the outlook for the public finances is now worse, rather than better, and the chances of the government having any spare money to top up departmental spending plans over the next few years seems small.

Does this mean the government will have to cut spending further? First, will the government scale back spending plans already set out for the NHS for this year and the next two years? Second, will a continued squeeze on public spending be needed beyond the end of the current CSR period?

Slow growth

Further cuts to planned departmental budgets over the CSR period generally seem unlikely. However, the government has previously shown itself willing to scale back future NHS spending plans when it seemed that the money was not likely to be spent.

In the March 2007 budget, the outturn for English NHS capital spending in 2006–07 was estimated to be£3.7bn, compared with the£5.2bn that had been budgeted for a year earlier. With the government looking for additional money to spend on investment elsewhere, it used this opportunity to reduce the NHS capital budget for the following year by£2bn and reallocated this money to other departments. This could happen again (either to the NHS or to other departments) if a large underspend were to occur.

Recent economic weakness, particularly if any of it turns out to be permanent, makes it more likely than not that at the very least the currently pencilled in tight spending plans for 2011–12 and 2012–13 (the period likely to be covered by the next spending review) will get penned in.

At the moment, these plans imply public spending growing by just 1.9 per cent a year in real terms. This is slightly lower than the planned growth in overall spending during the current CSR years. This suggests that, unless the current government or its successor chooses to give greater priority to the NHS than it got in the current CSR, real increases in spending of below 3.7 per cent a year in 2011–12 and 2012–13 are now likely.

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