John Appleby: Spending Review 2015 – a view from The King's Fund

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  • Posted:Thursday 26 November 2015

Ahead of the Spending Review, John Appleby looks at the financial performance of the NHS and makes budgetary recommendations for both the NHS and social care.

This presentation was given at The King's Fund annual conference on 19 November 2015.


I'm John Appleby, I'm the Chief Economist here at the King’s Fund. I'm not Jeremy Hunt, apologies for that, so he sends his apologies and I'm sorry about that, but it’s a chance for us to say something about our view about the spending review.

Frank touched on some of the issues. I'm not sure I accept Frank’s slightly apocalyptic sort of view of the future to be honest.  It’s not like it’s the end of the EU, it’s the end of the NHS, we are going to be completely overwhelmed with, there won't be enough standing room in Britain or something because of the population or something, I don’t really accept that, but clearly we know that the NHS and social care is in a very parlous financial situation, it is very difficult, and so clearly we've been doing some thinking about the spending review, just mentioned the Barker Commission who produced a very interesting report on a longer term funding of health and social care, recommend her report to, Kate Barker’s report to you if you haven’t seen it, and we've been doing some thinking about clearly the short term and the medium term and so on.  I mean given the mood music from the government and the treasury, I'm not sure how to describe that mood music, funereal, would that be the word?  I don’t know.

It’s hard to be optimistic with the spending review next year, next week sorry, is going to deliver the sort of settlement for health and social care that will perhaps ensure relief from the financial pressures of the last five years, so it’s difficult to find reasons to be optimistic but let me just take you back to 2010 because this is not how it was meant to be. At the time of the June 2010 budget, and the 2010 spending review, the coalition’s plan, their central macroeconomic plan, was essentially to do three things.  It was to cut the public spending, public sector borrowing requirement by about one percent, 1.1 percent of GDP by this year.  It was to cut the structural current deficit to nought percent by 2014 and actually have a surplus by this year and finally it was to reduce public sector net debt from a peak of 70.3 percent of GDP, remember GDP is about two trillion in this country, to about 67.4 percent of GDP by 2015/16.

So the reasonable expectation on the part of the NHS and other public sector organisations was that while there would be some really tight financial settlements over the five years of the last parliament, by now the fiscal repair job is the IFS and the OBR we would call it will have been complete, so debt, national debt would be falling, there would be very small deficit down from about 11 percent of GDP, that's the gap between the money coming in every month and the money going out by government spending, the job would be done and perhaps the public sector of the NHS could look forward to a change in funding and increase in funding and actually over the period the plan was to close the gap quip and so on, whatever we think about that, that was the plan and the NHS did respond in terms of the funding gap and the needs gap to the last five year’s squeeze and it did more with less frankly.

Broadly, in England, the average real increase in funding over the last five years has been something like 0.8 percent. It planned to be 0.1 percent if you go right back to the 2010 spending review, but inflation, one good thing about having a good recession is inflation tends to be low, so inflation was lower than expected so the NHS got a slightly higher than expected real rise, but still 0/8 percent a year, not very much.  But on average, and just to give you some examples in terms of what the NHS actually did, elective in patients rose by 3.1 percent per annum, emergency admissions by 1.9 percent, outpatients by 3 percent, A & E attendances by 1.7 percent, i.e. double the money going in, and an estimate for GP visits, we don’t actually have an accurate number but an estimate for GP visits by around 2.7 percent a year.  So broadly, the NHS did more output for less input.

But where are we now? Not many people probably look at the office of budget responsibilities website, let alone their fiscal reports that they produce, but I do it so you don’t have to.  The OBR in their latest fiscal reports show that none of the government’s 2010 macro targets will be hit this year, so that list I read out to you, public sector net borrowing is now actually at 3.7 percent of GDP, that's three times over plan, structural current deficit is 3.2 percent, it was meant to be 0.8 percent in surplus and public sector net borrowing is actually higher, 80.3 percent rather than 67.4 percent.  So, that's the macro position for good or real and for a whole set of reasons that's where the government find itself and the new government is still, as we know, going to pursue its broad macro targets of reducing the deficit and reducing the debt.

So, what does all this mean for the public sector? Well, we are not in those sunny uplands now, we are actually more or less in the same position we were back in 2010.  What will this mean for the NHS and social care?  Well we know the promise has been an extra £8 billion real by 2020, £8 billion smeared thinly over those six years until we build up to 2020 and it will be £8 billion more than in 2014/15, so that's the promise.  What does that mean?  Well one way of looking at that is in terms of what the country generates in terms of GDP, in terms of at least one measure of its wealth, well, the OBR predict that GDP will be accelerating at a faster rate than money going into the health service, so it actually means that the NHS will lose something like one percentage point of GDP compared to 2009, so it’s quite a big dip in terms of spending.

In terms of social care, difficult to predict with social care because it is not in sense setting budgets into the future, it’s spending that turns up on the day as it were as we only know in arrears what has been spent on social care, but if the predictions are right, and local authorities are being asked to model 25 percent or 40 percent real cuts as they were back in 2010, then let’s use the last five years as a guide to the next five years. That will mean between 2009 and 2020, social care will have halved as a proportion of GDP from about 1.2 percent of GDP to about .6 percent.  These are huge cuts.  Just in terms of health, just to put this in perspective, another way of looking at it is internationally of course and looking at UK healthcare public and private – most of it is public of course – we are now slipping into the bottom half of the OECD league table of healthcare spending.  2013, only Ireland, the Slovak Republic, Israel, Chile, Hungary, the Czech Republic, Korea, Luxembourg, Poland, Mexico, Estonia and Turkey spent less than the UK, so that's our sort of relative international standing.  And I've mentioned social care taking quite a big hit as well.

So, is this – and I have to borrow the words of Simon Stevens – a workable funding settlement? I don’t think he thinks so and I don’t think we do either.  It looks to me near impossible to meet the growing demands and the need to deliver necessary changes in the way services are provided given the sort of funding commitment we seem to be having at the moment.  We will find out next week what it is exactly of course, and while the NHS has done remarkably well over the last five years, given its settlement, as we know finances are now under considerable pressure.  I'm just going to show you this – this is my only slide by the way – this is quarter one of this year, this is English providers.  These aren’t the numbers, but the total overspend from just providers is £930 million, that means about 82 percent, eight out of ten providers overspending in quarter one, 96 percent of all the Q Trusts in deficit.  That's just a tidal wave that's broken over the barrier really, it’s essentially everybody.  Tomorrow we will learn what the quarter two figures are.  My guess, for what it is worth, is it was £930 million in quarter one, I think it will have accumulated to at least one and a half billion in quarter two – it won't be linear – but the NHS is facing possible overspend by the end of the year between what, two and three billion. That money has to be found but it is an indication of the pressure the system’s under it seems to me.

So financial problems are now system wide and not concentrated in just a few organisations, so I just want to conclude with just a couple of points really.

First of all we, by ‘we’ I mean The King’s Fund, not literally, we understand the macroeconomic situation and the government’s policy response to the deficit and the national debt, but we also recognise that these policies carry an opportunity cost for public services and the public who use and rely on them. It’s a really invidious trade off of course, and these are difficult decisions that all governments have to make in terms of their policies.  I would like to say we also recognise the potential moral hazard where more money could be seen as a reward for failure but we don’t think the NHS has failed.  The rapid accumulation of deficits is evidence that the service is finding it increasingly hard in the short term to cope, that is clearly the message coming through, and I think in the end it’s one of the reasons that I love working for The King’s Fund, that it is our job to be independent, as Frank said, we are able to do that and one of our jobs is to try and speak truth to power as we understand it based on the evidence and so on and it seems to me based on the evidence that the NHS and social care system, and at a minimum for the social care system by the way, it’s not just to improve services, it’s actually just to try and arrest the decline.  There has been a massive drop in the amount of publicly funded social care in England, it’s about 25 percent drop between 2009 and 2014.  I don’t know where these people have gone, what has happened to them, whether they are getting support now, but they are not getting it from the public purse.  But the NHS has a job to improve its services, to be more productive and so on, but social care, the decline has to be arrested but it’s not going to happen without significantly higher spending, not just in five year’s time by 2020 but now and over the next five years.

I just want to end by saying it is clearly the moral duty to use every health and social care pound as effectively as possible and that remains a sort of constant and essential task. If the NHS and the social care don’t do that, the cost isn’t just wasted pounds of course, it’s actually wasted lives, it’s people whose lives could have been saved if only the NHS had been a bit more efficient with the use of its money and so on, so that’s an imperative and more, will and can be done but I really think that we shouldn’t pretend if only the NHS and social care services reformed themselves, and overnight, all will be well.  I'm sorry for the dismal message.  Thank you.


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