This briefing was released prior to the emergency budget on Tuesday 22 June 2010.
Key decisions about public expenditure on health and social care are unlikely to be made until the Spending Review in the autumn. The Emergency Budget will set the context for these decisions and frame the terms of the debate in the months leading up to it. It may also include announcements, for example on pay and taxation, that will have a direct impact on health and social care budgets.
The coalition government has pledged to increase health spending in real terms in each year for the rest of the parliament. Despite this, the NHS faces a significant challenge to improve productivity if it is to maintain quality and avoid having to cut services.
- After years of unprecedented growth, the NHS budget will increase by 1.6 per cent in real terms in 2011/12. The coalition government has pledged real term increases in health spending in each year for the rest of the parliament, suggesting increases slightly above the rate of inflation from 2012/13.
- These increases are likely to be more than offset by the costs of meeting additional demand arising from demographic change. This is likely to cost the NHS more than £1 billion a year over the next few years – equivalent to a real terms increase in its budget of around 1 per cent.
- Despite the pledge to increase health spending, the NHS faces a productivity gap of around £14 billion a year by 2013/14, assuming that previous spending assumptions about pay and procurement, reducing waiting times and capital investment are revised.
- The previous government announced that, in line with other public sector workers, NHS staff pay increases will be capped at 1 per cent (in cash terms) in 2011/12 and 2012/13. The pay of senior NHS managers, consultants, GPs and dentists has been frozen in 2010/11.
- The coalition government has announced that it will reverse the previous government’s plan to increase employers' national insurance contributions by 1 per cent from 2011. It has pledged to spend the money this will free up on a new fund to provide cancer drugs.
- Any increase in VAT will have an impact on health expenditure. For every percentage point VAT is raised, the additional cost to the NHS would be more than £100 million.
The NHS productivity gap
If, as seems likely, the coalition government's pledge to increase health spending in real terms results in annual increases just above the rate of inflation, our analysis suggests the NHS will face a shortfall of around £20 billion a year by 2014 against the estimates of future funding needs set out by Sir Derek Wanless in his report to the Treasury in 2002.
Looking again at the assumptions underpinning the estimates set out in the Wanless report in the context of the progress made in improving health outcomes since 2002, the pressure on the public finances and policy statements made by the coalition government so far, suggests that they should be revised in three key areas:
Pay and prices: Wanless assumed year-on-year pay increases for NHS staff of 2.5 per cent above inflation. Implementing a real terms pay freeze and taking a more aggressive approach to procurement could reduce the productivity gap by around £3.5 billion.
Waiting times: Given the coalition government’s pledge to reduce the number of targets, further reductions in waiting times are unlikely to be a priority. Not pursuing further reductions in waiting times could reduce the productivity gap by around £1.4 billion.
Capital investment: There are strong arguments that making better use of existing facilities should be the priority, rather than further increasing capital investment. Assuming much lower growth in capital expenditure could reduce the gap by £1.6 billion.
Revising previous assumptions about future spending in these three areas could reduce the productivity gap to around £14 billion. This would still require productivity improvements across the NHS of 3-4 per cent a year, a significant challenge given its past record. Improving productivity must be the NHS’s top priority if it is to maintain quality and avoid cutting services.
Unlike the health budget, social care expenditure will not be protected from spending cuts. As well as further restricting local care services, potentially leading to significant increases in unmet need and additional burdens on carers, cuts to the social care budget would also impact on the NHS.
Keeping up with demographic pressures alone would require real terms annual increases of 3.5 per cent to the social care budget over the next few years.
The coalition government's recent announcement of £6.2 billion in in-year savings included a £1.165 billion cut in grants to local authorities. With further cuts in local government funding likely to follow, local authority budgets are likely to come under severe pressure.
The coalition agreement includes a commitment to freeze Council Tax for at least a year. With, on average, 39 per cent of local authority spending on adult social care coming from Council Tax revenues, this will leave authorities little room for manoeuvre in responding to cuts in central grants.
The coalition government has announced that it will not implement the previous government’s plans to introduce free personal care at home for those with the highest needs. The previous government estimated that local authorities would have to find £250 million in efficiency savings to implement the plans, with £400 million coming from the Department of Health.
Emerging evidence suggests that care services have an important role to play in, for example, enabling people to continue to live at home and preventing emergency admissions to hospital. Given the potential for achieving better use of resources across the NHS and social care system, it is essential that decisions about future spending on both are taken alongside each other.
The additional public expenditure required each year up to 2015 to gradually phase in The King's Fundss 'partnership model' for funding social care would represent less than 1 per cent of the NHS budget.
Reform of social care funding
The social care system is widely regarded as unfair and will not be able to cope with the increasing demands placed on it as the population ages. The coalition government has announced that a new commission will be established to consider options for reforming the current system. The commission will report within a year. Its challenge will be to set out a comprehensive blueprint for reform capable of commanding support across the political spectrum which can be implemented without delay.
The King's Fund has recently proposed a revised version of its 'partnership model' for funding social care which would see responsibility for future care costs shared fairly between individuals and the state. This would provide the care system with a sustainable funding settlement. Implementing it would see 50 per cent more people receive some state support than under the current system and would reduce unmet need by around half.
The annual cost to the public purse of the current social care system is £6.4 billion. We estimate that the cost to the public purse of the partnership model would be £10.1 billion in 2015. Gradually phasing this in over the next five years would mean increasing public expenditure on social care by around £700 million a year. This represents less than 1 per cent of the current annual NHS budget of £105 billion.
- Securing our future health: Taking a long term view; Derek Wanless, HM Treasury, 2002 In announcing that they will not implement the previous government's plans to introduce free personal care at home, ministers also said that the government would consider what more can be done to promote re-ablement and provide respite care for carers in light of the available resources.
- The King's Fund's partnership model would see the first 50 per cent of someone’s care costs paid for by the state. For every £2 contributed over and above this by the individual, the state would contribute a further £1 in 'matched funding'. So, if someone takes up the full package of care they are assessed as needing, once the matched funding element of this is included, the state would pay 67 per cent and the individual 33 per cent.
- All costs in 2006/07 prices.