While the City will moan about Darling's bonus super tax, the real political and economic problem facing the government going into the PBR was to design tax and spend policies that would look credible and promise to be effective in reducing the unprecedented gap between revenues and spending.
Although all governments have always boosted tax revenues through borrowing money, the problem now is that the cumulative impact of the current debt gap would push total borrowing close to 100 per cent of UK GDP by 2013/14 – well beyond the long-term trend of around 40 per cent.
Something has to be done, but options are limited: tax more and spend less – how do we stop the former putting the brakes on economic recovery and the latter causing pain and political anguish?
And now we know (er, sort of) how the Chancellor plans to square the circle: yes, there will be higher taxes and lower spending – but, for the NHS, for the years 2011/12 and 2012/13, 95 per cent of the budget will 'rise in line with inflation'.
In the circumstances this doesn't sound too bad.
But what constitutes the remaining five per cent (training, administration, research…?) is unclear, and if this is not to enjoy increases that match inflation, presumably it will be cut in real terms. Overall, therefore, the NHS will see a real cut in its total budget in 2011/12 and 2012/13.
Relative to other departments the NHS has done well. But 'well' in this context is indeed a relative achievement.
A real freeze in NHS funding will mean a funding gap compared with Derek Wanless's projections for NHS spending. The King's Fund's and Institute for Fiscal Studies' analysis identified this funding gap to be of the order of £20 billion by 2013/14.
This will be reduced a bit as the government wants a cap on public sector pay increases up to one per cent in cash terms – a real cut if inflation is greater than 1 per cent. This will cut around £3 to £4 billion off the £20 billion funding gap as Wanless built in an assumed real rise for NHS staff of around 2.5 per cent a year into his original funding projections.
Nevertheless, the massive productivity challenge remains: a relentless five per cent a year (presuming a pay freeze), each year, for three years to meet Wanless's vision for the NHS.