News / News analysis: Slow ahead

The spending review may have produced a real terms increase for the NHS over the next four years, but the chancellor’s relative largesse has come with caveats. These included a significant cut in the capital budget, the transfer of up to £1bn of NHS funding to social care and the Treasury denying the Department of Health access to a reported £5.5bn in underspends amassed up to the beginning of this financial year.

The headline figure shows an overall 0.4% real terms increase for NHS England over the spending review period (2011/12 to 2014/15). Chancellor George Osborne said total NHS spending in England would rise from £104bn in 2010/11 to £114bn in 2014/15. The figures are for NHS spending only, and do not include the £2.8bn for non-NHS spending (largely local authority grants) included in the planned 2011/12 allocation in the June Budget.

The review handed the NHS a cumulative 1.3% real terms rise in current spending and a 17% real terms cut in the capital budget (see table). The capital budget will be further reduced. By 2014/15, £1bn of capital will be transferred to revenue to allow commissioners to support social care initiatives that also benefit health, including reablement schemes.

King’s Fund chief economist John Appleby said the government had given the NHS the ‘bare minimum’ required to fulfil its election pledge to increase NHS funding in real terms in every year of the Parliament. The settlement was the lowest in the service’s 60-year history. ‘Compared with other departmental budgets the NHS settlement is generous. But, while the increase in health spending meets the pledge to protect the NHS budget, an increase of 0.1% a year in real terms will soon be swallowed up by cost pressures,’ he said.

NHS Confederation acting chief executive Nigel Edwards said the government was right to treat the health service differently as it faced significant, unavoidable financial pressure. But he added:  ‘Even with this settlement, the NHS faces a potent cocktail of pressures and we will have to work very hard to ensure the impact on services is minimised.’

These pressures will include spending review commitments such as the cancer drugs fund of up to £200m a year, and some developments with no figures attached – the expansion of access to talking therapies and additional spending on NHS research. The NHS will also contend with the increase in VAT to 20% next year, which the King’s Fund believes will cost between £200m and £300m a year.

While pay will be frozen for most staff, NHS Employers has said the increase of £250 for staff on less than £21,000 in April 2011 will add 0.3% to the pay bill. And despite the pay freeze, it believed the pay bill would rise by a further 1.6% in 2011/12 as staff receive annual increments.

NHS finance directors gave the settlement a muted welcome. Though they acknowledged health had done much better than other departments, they did not believe it guaranteed financial stability over the next four years. One felt ministers’ emphasis on protecting NHS spending could strengthen public opposition to required closures. Another warned the service was too reliant on making savings through cost cutting and had to step up attempts to change how services were delivered.

There was concern over the cuts in capital allocations. Finance directors said moving services closer to patients’ homes would require investment in buildings and technology and these could now have to be procured through revenue, adding pressure on operational budgets.

The government said the capital budget will remain higher in real terms in each year than the average yearly spend over the last three spending review periods. It added the reduction also reflected a number of factors, including savings of £700m in the national programme for IT savings over the spending review period. The chancellor said spending would be prioritised on essential maintenance and equipment (backlog maintenance stands at £4bn, according to Department figures in October), as well as priority hospital schemes including St Helier, Royal Oldham and West Cumberland.

The review announced that the current end-year flexibility system, which allows departments to carry forward surpluses into future years, will end in 2010/11. This might seem one of the more arcane paragraphs in the spending review, but according to the Nuffield Trust it will have an impact on the growth available to NHS England and the Department’s access to £5.5bn of underspends.

The system was established to discourage wasteful end-year spending, but the Treasury argued it had led to ‘accumulated stocks’ (funding that departments would in theory be able to claim) of about £20bn across government, which would further increase

the national deficit if spent. This included £5.5bn unspent by the Department of Health – about

£3.7bn in unspent resource funding and £1.76bn in unspent capital.

A new system will be introduced from 2011/12, which the Treasury said will retain an incentive for departments to avoid wasteful end-year spending and strengthen spending control. Nuffield Trust chief economist Anita Charlesworth said the Department will no longer be able to access the £5.5bn, but the Department indicated this was manageable. It would continue to ask the NHS to plan for a surplus as this was a key part of good financial management.

The Department told Healthcare Finance: ‘The Department of Health will manage the NHS surplus within its own financial envelope, without reference to the Treasury’s requirement around end-year flexibilities. Local NHS priorities and spending plans will be taken account of to ensure the Department of Health continues to live within the spending review settlement each year. The operating framework will lay out the requirements around this.’

Elsewhere, it was reported insisting that surpluses generated by NHS bodies in the past two years would be protected. It is expected the Department will require that these are drawn down slowly.

However, Ms Charlesworth said protecting surpluses would add pressure on spending: ‘I understand the Department will be honouring underspends within the NHS, but it will have to do that within its current allocation.’

The future for the NHS is slightly less opaque, though next month’s operating framework will clarify the financial and managerial challenge to come. But for now, the word from the bridge at the Department of Health is slow ahead.

Increased NHS spending in England will be passed on to the devolved nations via the Barnett formula, the chancellor confirmed. But the money is not ring-fenced, so administrations will be free to decide whether to spend it on the NHS or not.

By 2014/15 resource budgets will rise to £25.4bn in Scotland (a cumulative drop of 6.8%), £13.5bn in Wales (a 7.5% fall) and £9.5bn in Northern Ireland (a 6.9% fall).

There was concern over cuts in capital allocations, which are due to fall by 38% in Scotland, 41% in Wales and 37% in Northern Ireland over the four-year period. There were fears these reductions could threaten planned hospital developments.

The abolition of the current end-year flexibility scheme could also affect the devolved nations – the Scottish government having built up underspends of almost £367m, the Welsh Assembly £594m and the Northern Ireland executive £624m.

Mr Osborne said the Calman reforms, which include new tax raising powers, would be implemented in Scotland. The Treasury would talk to the Welsh Assembly government about the Holtham commission proposals, which include replacing Barnett with a needs-based formula and introducing tax varying and borrowing powers.

Source: Spending Review 2010, Treasury
(Note: figures have been rounded up)