What we think
Even before the Covid-19 pandemic the NHS was facing a significant funding shortfall because of increasing demand for services and years of funding settlements that were both below the long-term average and excluded important areas of spending like long-term capital investment (including spending on buildings and equipment) and the education and training of clinical staff.
This was manifesting itself in rising pressures on services, workforce shortages and rising waiting times, with all areas of NHS care affected. A lack of capital investment has seen the NHS develop a maintenance backlog of £9.2 billion, which includes high risk and urgent repairs.
The pandemic then created significant new cost pressures for the NHS both to meet the immediate costs of dealing with Covid (for example, supplying vaccines) and to then make up the lost activity suffered over the course of the pandemic. In recognition of this the government announced a new three-year funding settlement in September 2021 that will see the Department of Health and Social Care’s resource budget (day-to-day spending on items such as salaries or medicines) rise by an average of 3.8 per cent each year until 2024/25.
The multi-year investment in services was much needed, but even with this new funding the recovery and restoration of key services and performance standards will take years. Long-standing workforce shortages and the fact that the pandemic has placed significant extra pressures on staff – with growing numbers suffering from burnout and considering leaving their role in the NHS – may prevent progress. For the new funding to be used effectively and efficiently, the NHS will need a comprehensive and fully funded workforce strategy to secure future workforce supply.
The NHS should focus on delivering better value for money by tackling unwarranted variation and improving efficiency. But given the operational pressures it faces, including rising inflation, it is difficult to see how the NHS can achieve the government’s ambition to double efficiency targets. Considering the uncertain and challenging context the NHS faces, ministers will need to revisit the current funding settlement if the NHS is to deliver on the government’s ambitions to recover and reform services.
Most of the funding for publicly funded health care services in England comes from central taxation, primarily from general tax revenues and National Insurance. This model is fundamentally sound and has strong public support. The uplift to the current funding settlement, up to 2023/24, is part-funded through an increase to National Insurance Contributions, known as the Health and Social Care Levy.
Historically, NHS funding has faced a ‘boom and bust cycle’, with periods of under-investment followed by rapid growth in spending. In the decade following the global financial crisis in 2008, the health service faced the most prolonged spending squeeze in its history: between 2009/10 and 2018/19 health spending increased by an average of just 1.5% per year in real terms, compared to a long-term average increase of 3.6 per cent per year. These pressures were not unique to the UK, whose public spending on health care as a share of GDP is above the EU average, though lower than several comparable nations, including Germany, France, Denmark and the Netherlands.
This funding squeeze led to trade-offs between different areas of health expenditure; spending on buildings, equipment, investing in training more staff and prevention was deprioritised in order to pay for the day-to-day running of services such as staff and medicines. This was a false economy that stored up problems for the future.
In response to rising financial pressures in the NHS, in 2018 the government announced a five-year settlement for some areas of health spending, covering the period from 2019/20 to 2023/24. Under this deal, NHS England’s budget would rise by an average of 3.4 per cent each year in real terms.
The Covid-19 pandemic exacerbated and accelerated a range of challenges across the NHS, including leading to a growing backlog for elective care, as well as increased demand for primary care and mental health services. This, as well as the direct cost of responding to the pandemic, required further increases to health spending in 2020/21 and 2021/22, which totalled approximately £90 billion across both years.
The new three-year funding increase announced in September 2021 will see day-to-day (resource) health spending rise by 3.8 per cent per year between 2021/22 and 2024/25. But a substantial share of the funding for services such as public health and adult social care (which are funded and delivered through local government) currently sit outside of the new funding settlement, and growing funding pressures in these areas can have a direct impact on the pressures facing the NHS.