Comment / Surplus support

For many years, the NHS has been required to achieve considerable feats of financial management to break even. In fact, given the huge size of the NHS, its sometimes sluggish finance systems and the unpredictable nature of some of its work, this was equivalent to landing a jumbo jet on a postage stamp while wearing a blindfold. Much effort was dedicated to ingenious financial techniques that did little for long-term planning. Most of this has stopped and some serious effort has produced a healthy surplus. Yet this is being treated by some as though it is as bad as a deficit.

This is not necessarily the case. The argument against a surplus is that it represents money that could have been applied to something useful. It is true that some of the surplus was created by an over-reaction to the financial situation and that areas such as training and development need to have money returned. Much of the surplus, however, seems to have arisen from changes in primary care trust commissioning and a general improvement in provider efficiency.

Money that is not applied now is still going to be available later. Experience also shows us two things: first, it is difficult to spend it both wisely and quickly; second, once a project or plan has started, it is hard to stop. Perhaps of even more significance is that the NHS is now in a position in which most of the changes and investments it needs to make require pump-priming, periods of double running, time to experiment and trial, or capital that generates additional revenue requirements. The tradition of keeping few reserves, year-on-year budgeting and the absence of any banking system for working capital has been a major structural weakness in NHS planning. It was possible to overcome these problems, but it required ingenuity and a sympathetic regional or strategic health authority. This is no way to run a £100bn system.

More transparent ways of working have been introduced, often to the discomfort of people used to the old system. Now, we see the emergence of a 2% surplus. This will correct the absence of a reserve for strategic investment and provide a cushion as the tough years of the spending review start to bite. But 2% is not large by the standard of other organisations, including not-for-profit enterprises, and leaves little room for manoeuvre. It would, say, be completely inadequate to deal with a major flu pandemic. Health secretary Alan Johnson recently said that he thought a 5% surplus was too much. I think we can afford to be less cautious. For hospitals with a very low reference cost index, a surplus of this level may accrue automatically. That’s how payment by results was designed to work. For PCTs, I would want to know if it was part of a strategic plan to improve services.

It seems that the NHS cannot win and will be criticised for anything other than complete balance. If there is a criticism, it is that it has not underspent enough and used the money to facilitate major change. Some PCTs have managed to create a virtuous cycle in which savings generate new services that produce further savings, but which still improve quality. We need more of this, not less.


Nigel Edwards is director of policy at the NHS Confederation