Data briefing: why NHS budgets have always been a bugbear

John Appleby, Ruth Thorlby

Setting the first NHS budget in 1948 was no easy task. The Beveridge report, the 1942 blueprint for the welfare state, suggested £130m.

Publication:  Health Service Journal
Reference:  Health Service Journal, 14 February 2008

But as the appointed day grew closer estimates varied, from £108m in the 1944 white paper, then £122m in various cabinet papers, and £134m in the NHS bills laid before Parliament. Some independent estimates put the cost at nearer £230m.

In fact, price rises, higher standards and simple errors in forecasting demand and costs meant that for the full financial year the actual spend turned out to be £373m - in today's prices this was equivalent to around £10.5bn, around a tenth of the NHS budget in 2007.

The need for extra money prompted the start of Treasury worries about the financial sustainability of the new service. Hospital spending was considerably over budget; spending on dentistry was three times higher than estimated and on ophthalmic services nearly five times higher.

But a key contributor to the increases in costs in the first few years of the NHS was pay and staffing. As Charles Webster put it, pay increases were 'streaming through the negotiating machinery'; nurses received a 30 per cent pay rise in 1949 and many more staff were being employed than anticipated. The NHS pay bill rose by 22 per cent in one year.

For the Treasury, part of the answer to these growing costs was to introduce patient charges, which began in 1951.

While charging provided some income for the NHS, concerns about rising costs persisted. Five years after the inception of the NHS the Conservative government set up a committee, chaired by the Cambridge economist Claude Guillebaud, to look into the current and prospective cost pressures on the NHS.

Brian Abel-Smith and Richard Titmuss provided technical support to the committee and put anxiety about costs in perspective. They demonstrated that fears the NHS was financially out of control and wasteful were unfounded. Although there had been an 8 per cent real rise in spending by its second year, by 1953-54 real spending had in fact fallen back to its 1948-49 level. When looked at as a proportion of national income or in per-capita terms, Abel-Smith and Titmuss noted: 'Contrary to public opinion, the net diversion of resources to the NHS since 1949-50 has been of relatively insignificant proportions'.

The committee - following a recommendation from a 1952 report on NHS costing from The King's Fund - endorsed what it termed 'departmental costing' (in today's speak, service line budgeting and reporting) to 'promote increased efficiency and a fuller sense of responsibility for spending among all those concerned with the running of hospitals'.

Remarkably and perhaps uniquely in the history of reports on the NHS they also concluded that 'no major change is needed in the general administrative structure of the NHS' and the 'service now requires a period of stability'.