In an exclusive, Noel Plumridge explains how the government's spending round will affect the health sector

Alistair Darling has announced that government spending on health will rise by an average of 4 per cent per year during the three years covered by the comprehensive spending review. Total expenditure will rise from£90bn per year to£110bn by 2010-11.

Having honoured its commitment to deliver real terms growth of 7.4 per cent per year in the health sector over a five-year period, bringingUKexpenditure as a share of GDPup to the then average for the EU, it was understood that the level of growth would fall from 2008-09. The question was: by how much? And it was also understood that the reduction would hurt.

The actual level of financial growth announced yesterday is some way above the more pessimistic forecasts that have abounded in recent weeks. There had been speculation that the average annual growth allocation could be as low as 2.5 per cent - and that was before the chancellor was last week forced, largely as a result of the international credit squeeze that claimed Northern Rock among its victims, to downgrade his economic forecasts. The national growth assumption underpinning the comprehensive spending review is 2-2.5 per cent in 2008-09, down 0.5 per cent on earlier projections.

Under the circumstances, health has done tolerably well. Sir Derek Wanless's review of health funding for the King's Fund last month recommended an annual 4.4 per cent increase in health funding. The CSR settlement therefore leaves the NHS with a shortfall: significant, but not as daunting as it might have been.

However, the devil is in the detail. First, the NHS is expected to release£8.2bn of efficiency savings over the three years. The Treasury intends to squeeze out the productivity improvements that were always the intended price of its massive investment in health since 2002. Undoubtedly, there is scope for material efficiency gain, and the key areas being targeted - improved community-based services for people with long-term illnesses, reducing variations in the way hospitals work and more aggressive procurement - offer a considerable opportunity.

Missed targets

The catch is that, as Sir Derek's recent report observed, the annual unit cost reductions of 0.75-1 per cent assumed in his original review for the Treasury have not actually been achieved. NHS managers are as weary of the annual cost improvement round as they are of restructuring. In recent years, relatively high annual growth has been allowed to conceal a pattern of savings programmes being delivered late, if at all. So why would one suppose these new, challenging productivity targets will actually be met?

Second, when is a 4 per cent annual uplift not really 4 per cent? The answer is when a disproportionate part is earmarked for capital investment. Within the overall total announced by the Treasury, government capital spending increases by 45 per cent. This may well be a coherent approach to delivering recent pledges on improving the NHS estate, withprivate finance initiativeinvestment becoming increasingly unattractive, but the money has still to be found in the overall financial settlement. A provisional assessment is that this may downgrade the average revenue uplift to around 3.85 per cent.

But at least now we know. And with yesterday's announcement of the draft payment by results tariff for 2008-09, the NHS at local level is in a position to make strategic plans with some degree of certainty around the funding that will be available.

Or is it? The CSR announcement potentially carries a sting in the tail, due to its context. Recent projections from City analysts suggest that Mr Darling's national growth assumption of 2-2.5 per cent for 2008-09 may yet prove optimistic. Moreover, recent political positioning surrounding inheritance tax thresholds - explicitly linked to health funding in the chancellor's statement - makes it clear that the political agenda in the months ahead is more likely to focus on tax cuts than public spending. It is not impossible that the assumptions announced this week may need to be reassessed before the winter is over.

To read more HSJ coverage of the spending review, click here