News / Spending review spells out size of productivity challenge

Last month’s spending review confirmed the significant productivity challenge facing the NHS, despite making good on the coalition government’s promise to deliver real terms growth for health over the four years covered by the settlement.

Total spending will grow by 0.4% in real terms over the spending review period – a 1.3% real-terms increase in revenue and a 17% cut in capital. At the end of the period, health spending will amount to £114bn, underlining the sector as a clear government spending priority.

King’s Fund chief economist John Appleby acknowledged that the settlement was generous relative to other spending departments but the increase was ‘about as small a real rise as the government could get away with’ while fulfilling its pledge.

The relative protection given to the NHS masks the huge efficiency challenge it faces to cope with demographic changes, the cost of new technology and the health service’s higher levels of inflation.

Politicians and managers were united in recognising the challenge ahead. Speaking exclusively to Healthcare Finance, director general of NHS finance, performance and operations and deputy chief executive David Flory said: ‘It is what we expected and we appreciate we are in a situation that is relatively much stronger than other parts of government. But the fact is that the cash uplift year on year for us now is significantly lower than we’ve experienced. That presents a significant challenge for the NHS in planning and delivering in 2011/12 and beyond.’

Think tank the Nuffield Trust said that, taking account of a £1bn transfer from NHS funding to social care, the real terms change in NHS funding amounted to a ‘reduction of 0.5% over the next four years’.

But the NHS Confederation welcomed the ‘interim solution’ for social care, involving both the NHS transfer and extra money to councils for social care. ‘Much of the extra NHS money being used for social care would probably have been spent on this anyway,’ said acting chief executive Nigel Edwards. He raised concerns about the lack of ringfencing for these funds with wider cuts to local government putting pressure on all council spending.

While the social care transfer will increase immediate pressures on NHS budgets, finance managers recognised it as a sensible response, but echoed the need for cooperation on how it was spent.

One finance director said: ‘There will need to be spending plans agreed at local level and focused performance management to ensure funding gets to the intended place and has the desired effect.’

In general, finance directors acknowledged the settlement was as good as could be expected, but the service faced a significant challenge to maintain financial stability. One gave this summary: ‘The challenge is huge, and beyond anything that has had to be delivered before, complicated by there being fewer people to deliver it and the up-coming reorganisation. Coupled to this, morale in PCTs has never been lower.’

In an analysis paper NHS resources and reform, the Nuffield Trust highlighted the Treasury’s decision to abolish ‘accumulated stocks’ as part of changes to end-year flexibilities, suggesting this would add to the financial challenge. It said this put £5.5bn of health underspends (including £3.7bn of resource) at risk. But the Department said it would manage the NHS surplus within its own financial envelope.

The Nuffield also warned that increments on pay would continue to add pressures over the next two years, despite the announced pay freeze. And beyond 2013, with whole economy earnings predicted to be growing by more than 4% a year, it could be harder to hold down health pay.