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The Health and Care Levy: what was announced and what does it mean for health spending?


Spending Reviews aren't what they used to be.

For most of the past 20 years, these rhythmic fiscal events have been the set-piece moments where governments would set out their spending plans for the coming years. But as the July 2018 NHS five-year funding deal and September 2021 health and care levy announcements demonstrate - NHS funding announcements now seem to march to the beat of a different drum.

So, because of their unusual significance, and ahead of the upcoming Autumn Budget and Spending Review planned for October, let's take a detailed look at what the September 2021 announcements mean for health spending in England.

Defining some relevant terms

Government departments are allocated budgets through the Spending Review process - these budgets are called departmental expenditure limits (DELs).

The overall budget for a department is called the total departmental expenditure limit (TDEL). TDEL can be subdivided into two parts: resource departmental expenditure limits (RDELs), for day-to-day running costs on items such as staff salaries or medicines, and capital departmental expenditure limits (CDELs), for long-term spend on fixed assets that have a useable life longer than a year, such as buildings and equipment.

Both the Department of Health and Social Care and NHS England and NHS Improvement have TDELs, RDELs and CDELs, though NHSE holds a relatively small annual capital budgets of around £3-400 million.

In this document, the term 'health spending' refers to Department of Health and Social Care TDEL and 'NHS spending' refers to NHE England and NHS Improvement RDEL.

The majority of the spending announcements in September 2021 affect resource spending.

A brief intro to the September 2021 announcements

Before the government's announcements in September, in addition to the funding announced in 2020/21 to help the NHS deal with the direct costs of Covid-19, we broadly knew three things about future health and NHS spending plans in England (see Table 1).

Table 1 Health and NHS spending plans before the September 2021 announcements

First, we knew NHS England’s planned revenue (or day-to-day spending) to the end of 2023/24 (the first line in Table 1). These were the budgets that had been set in the five-year funding deal announced by Prime Minister Theresa May in July 2018. Second, we knew the Department of Health and Social Care's planned total spending (including revenue spending and long-term capital investment budgets) to the end of 2021/22 (lines 3 and 4 in Table 1). And third, we knew planned spending for some elements of the department’s capital budget to the end of 2024/25, because the Autumn Budget 2020 had set out funding plans for government's programmes to build, refurbish or upgrade hospital facilities (lines 5 and 6).

If that all sounds confusing to you then join the club. Even before the Covid-19 pandemic, it was surely more of a hinderance than a help to have different parts of the total health budget run on different planning cycles. As we will see later, the September 2021 announcements tidied up some – but not all – of this problem by both filling in and extending spending plans for NHSE and DHSC.

6 September announcements on 2021/22 spending

Two key health spending announcements were split over two days in September (with a further adult social care announcement towards the end of the month).

The announcement on 6 September focused on finalising budgets for the second half of the 2021/22 financial year, providing an extra £5.4 billion of funding for health services from October 2021 to March 2022 (see Figure 1). This funding came on top of the £6.6 billion of extra Covid-related funding the government had provided on 18 March 2021 to cover the first six months of 2021/22.

The £5.4 billion includes £1 billion of revenue funding and £500 million of capital funding for tackling growing waits for planned consultant-led care. This £500 million is comprised of two elements set out on the 7 September Build, Back, Better document: £250 million for increasing operating theatre capacity and hospital productivity and £250 million for a new elective recovery technology fund.

There was also an extra £2.8 billion to meet the costs of enhanced infection control procedures in the NHS during Covid-19. And later announcement on 30 September would see funding for infection control and testing in adult social care extended for the second half of the year.

Figure 1 An extra £5.4 billion of funding was given to the NHS for the second half of 2021/22

This will see NHS England’s budget rise to £151 billion in 2021/22. While this is a significant improvement on the £139 billion announced in the March 2021 Spring Budget (and demonstrates that money did follow need, as evidence of the additional costs of Covid-19 became more apparent), there is no denying that the timing went down to the wire on this one.

On the evening of 5 September 2021, NHS finance directors across the country didn’t know how much funding would be available for their services from October onwards – including funding for key services that had been built up during Covid-19 to speed up and smooth the hospital discharge process for patients. Finance directors will now have limited time to develop ideas for how to wisely spend the money, including the £500 million of capital funding, by the end of the year. And directors of adult social care were in the same boat for infection control funding, which was only extended for the second half of 2021/22 on the last day in September.

It would be unrealistic to expect any government or national body to have a developed a 2021/22 financial plan that is robust in the face of Covid-19. But as the immediate threat of the pandemic recedes finance directors must be hoping that some much-needed certainty and predictability can begin to return to NHS financial planning.

7 September announcements on 2022/23 to 2024/25 spending

So, if the 6 September announcement provided greater certainty over immediate health spending over the next six months, the 7 September announcements – through what was essentially a mini-spending review for the NHS contained in the Build Back Better document – aims to extend that certainty over the next three years.

How much funding was announced?

A headline £36 billion three-year funding boost for both health and care services was announced, which will be funded through the new Health and Care Levy. The government has said it will compensate government departments and other public sector employers for the increased employer costs of the levy. And the spending boost is described as ‘a permanent increase in public spending’ in government documents, which implies it will be added to the baseline for future funding increases – rather than being treated as a one-off temporary investment.

As per convention, the £36 billion announced by the Prime Minister refers to spending across the whole of the UK. On an England-only basis, health and care services will receive a increase over the next three years.

What will the funding be spent on?

£5.4 billion of the £30.3 billion increase (about 18 per cent) over the next three years will be directed to adult social care, to support reforms to how people pay for care services in England. We will only find out in the Spending Review if this will come from a flat £1.8 billion a year, or a different funding profile with, for example, more funding allocated for later years).

This then leaves £24.9 billion of funding for health services over the three years. The spending growth is front-loaded, with a big boost to budgets in 2022/23 followed by more modest rises in later years (see Figure 2). In part this is because, as Figure 2 shows, the government has assumed NHS spending would only rise in line with inflation between 2023/24 and 2024/25 before the levy funding was included.

This may be a reasonable planning assumption for most government departments facing a spending review, but an assumption that flies in the face of history – with health spending tending to rise by 3.6 per cent above inflation on average. The additional levy funding in 2024/25 includes an estimate of the additional cost pressures facing the NHS. Because of this, the baseline spending could indeed have been higher in 2024/25, but this would have meant commensurately less funding from the levy being provided – which is a long way of saying that it’s the final spending total in 2024/25 that matters.

Figure 2 Annual change in NHS England and Improvement revenue (day-to-day) spending

The government has specified some areas of health spending that will receive a dedicated share of the £24.9 billion. This includes £8 billion over three years to tackle growing waiting lists for planned care (see Figure 3). And with this greater funding comes greater expectations. The government has indicated that the extra funding should allow the NHS to deliver around 30 per cent more elective activity by 2024/25 than it was before the pandemic (with the caveat that this target will be adjusted for changes to how the NHS delivers services, including increased use of advice and guidance services).

Figure 3 An extra £24.9 billion will be shared across the Department of Health and Social Care (DHSC) and NHS England (NHSE) over the next three years

The remaining £17 billion has not yet been allocated to specific programmes within the Department of Health and Social Care or NHS England (though the Secretary of State for Health and Social Care has said that ‘the new funding that will go in over the next three years to help to deal with the backlog absolutely includes mental health funding’).

What will have a claim on this unallocated funding then? Well, everything else. For the past two years, health spending settlements have drawn a distinction between ‘core’ spending on business-as-usual health care and ‘Covid-19-direct spending’ on things like test and trace, personal protective equipment and the vaccine programme. It is likely that this large unallocated portion of funding means Covid-19-direct spending will now be normalised within the Department of Health and Social Care budget in future years.

So, here then is the certainty. Rather than breaking financial years into two six-month chunks, and settling budgets by the skin of the teeth, the NHS and the Department of Health and Social Care will know how much funding they have for the next three years for both core and Coivd-19 activities. And if the word ‘core’ in this context can seem a bit prosaic, remember then that it includes everything from support for the education and training of the clinical workforce to public health services. The specific funding allocated to these programmes will be closely watched in the coming Spending Review.

And the tapered profile of the three-year funding boost then reflects lower planned Department of Health and Social Care spending in the later years of the settlement on areas directly related to Covid – because of less activity being needed, lower costs for delivering that activity, or a combination of the two.

NHS spending in 2024/25 will also return to broadly the same level it would have been if the NHS Long Term Plan had been extended. A chancellor who said he would give the NHS whatever it takes to combat Covid-19 and a Secretary of State for Health and Social Care focused on reform and recovery of health and care services must now hope that a sizeable share of £24.9 billion over three years will be all that is needed.

What does all this mean for health spending?

The government’s September announcements have filled in many – but not all – of the missing pieces to understand health spending plans over the next three years. Revenue spending for NHS England in 2022/23 and 2023/24 will be higher than previously published plans. And new revenue budgets have been created for NHS England in 2024/25 and for the Department of Health and Social Care between 2022/23 and 2024/25 (see Table 2).

Table 2 Health and NHS spending plans after the September 2021 announcements

Because of these changes, NHS England’s core revenue budget will have risen on average by 3.9 per cent (in real terms) between 2018/19 and 2024/25 under the new spending plans. This is the same average increase as the previous NHS five-year funding deal (see Figure 4).

Figure 4 NHS England resource spending will rise to £160 billion by 2024/25

Over the same six-year period, Department of Health and Social Care’s core revenue budget will also have risen on average by 3.9 per cent (in real terms) under the new spending plans (this assumes the £5.4 billion of adult social care funding over the three years is a flat £1.8 billion per annum, with the remainder of the levy funding going to Department of Health and Social Care RDEL).

Figure 5 Department of Health and Social Care resource spending will rise to over £170 billion by 2024/25

What remains for the Spending Review and Autumn Budget?

The September 2021 health spending announcements are not the end of the story. The figures from September are first estimates and will be subject to scrutiny by the Office for Budget Responsibility. And more details on the announcements should be expected – for example, how the £5.4 billion of health and care levy funding for adult social care will be spread over the next three years.

And the September 2021 announcements are not the whole story either. The announcements largely focused on day-to-day revenue spending, with only £500 million of extra capital funding announced for 2021/22 to tackle elective backlogs. With full details of capital budgets only set to the end of the current financial year (see Figure 6), eyes will turn to the Spending Review and Autumn Budget to deliver on the government’s much promised multi-year capital funding settlement.

Figure 6 Overall Department of Health and Social Care capital budgets have not been set beyond 2021/22

The September funding announcements provided many more pieces of the jigsaw for health spending in England over the coming years, but the picture is still incomplete. Critical parts of the health and care budget have either not been settled (ie, capital investment) or have been settled but to the tune of an unknown amount (eg, budgets for the education and training of the clinical workforce). And government departments that hold budgets for the wider factors that contribute to health – from education to housing – must now wonder how much (or little) funding is left to support their services over the coming three years.

So, even if Spending Reviews aren’t quite what they used to be, that doesn’t mean they don’t matter. Because the coherence and certainty they can provide will be much needed as the NHS and wider health and care services start to emerge from the shadow of Covid-19.