Hold on, where did that £21bn go?

Before the Chancellor raises taxes to pay for the NHS, he should ask what happened to the last injec

The safe lies empty; its door swings open as a team of detectives hunts for clues left behind by the thief. A scrap of the NHS plan, a tell-tale ministerial fingerprint and a stained scalpel are all that remain in the quest for the missing billions. The butler, one A Milburn, has come under heavy suspicion. And did the man at No 11 keep an eye on the premises carefully enough? Was it an inside job?

Before we throw our hats in the air at the latest promises of more money for the health service, perhaps someone should solve this mystery. In 1998, when the Chancellor announced £21bn for the NHS over three years, the reaction was one of glee, tinged with disbelief. Once triple-accounting was discounted, the real figure came closer to £12bn, but nobody denied it was a sizeable increase, pushing health spending to a year-on-year rise of roughly 6.1 per cent in real terms. Hospitals and GPs' surgeries, we thought, would be awash with cash as the monolithic service was transformed into a modern, clean, computerised, even patient-friendly organisation.

More cash followed. By next year, the total NHS budget will have risen by more than one-third in just five years, to £65bn. Where did it all go? How could such a colossal sum vanish with so little effect? The disappearing act perplexes everyone, and nobody more than the Chancellor.

When the money first came through in 1999, it felt like Christmas. For the first time, hospital chief executives found themselves with as much money as they wanted in order to try to clear their waiting lists. If they decided to send 200 patients to the local Bupa hospital for hip operations, to avoid the 12-month waiting time, that was fine. If they wanted to open up a ward that had been mothballed for the past few years, they got the thumbs-up.

But as the Health Secretary, Alan Milburn, quickly realised, you can't spend money if you do not have the staff to hire. An intensive care bed requires three nurses over a 24-hour period. If you can find only two, the bed has to close, and the heart operation due that morning for the patient in it has to be cancelled. Repeat that on several days, and you soon have an embryonic waiting list problem.

So hospitals were left with two courses of action. One was to recruit staff from abroad. Nobody has ever calculated the cost of this, but given, for example, that one in three nurses working in London now comes from overseas, it will be substantial. The other solution was to pay nursing agencies to provide temporary staff.

It became a vicious circle. As the shortages began to bite, more staff joined the agencies. Why stay on the staff of your local hospital trust, earning £18,000 running a ward, when you can go freelance, choose your own hours, not have any managerial responsibility, and earn nearly twice as much? Agency nurses and sick pay account for approximately £2bn a year now, double the extra cash the Chancellor announced for next year's NHS budget in his autumn statement.

Most of the missing billions went on simply trying to keep staff, so that the one benefit of having a monopoly employer - the ability to exert strong cost controls - went out the window. Salaries rose above inflation - up by 9 per cent last year for London's nurses. The health trusts spent sizeable sums wooing staff with bonuses, childcare facilities and more flexible working hours. And yet a nurse responsible for a busy coronary unit in 2001 will still not earn as much as the manager of the local cappuccino bar.

Not all the money was soaked up immediately. Consultants' requests for new diagnostic laboratories are being met, provided they speed up treatment for heart disease or cancer, the government's two biggest priorities. Nor have the funds dried up for reducing waiting lists. Milburn has just announced that patients will have the right to a bed in the private sector if they face a six-month wait for an operation.

But if the NHS has this kind of money, why do we not feel better off? By now, surely, people should have some confidence that they will be seen in less than four hours at an accident and emergency unit, or feel that they could make an appointment with their GP within the week. Yet the waiting times in casualty departments have lengthened, and the overall numbers being treated have barely shifted in the past year.

All the evidence suggests that the billions were simply absorbed into a system that was bone dry. Labour's biggest political error was that it failed, at an early stage, to spell out the size of the funding gap between the UK and other industrialised nations. When Gordon Brown made his announcement in 1998, Britain was not just lagging behind other countries on the health front - it wasn't even in the race. The expenditure per head of population was lower in the UK than in any comparable country, apart from New Zealand. At £1,510 per person, it was 13 per cent lower than in Sweden, and roughly 30 per cent lower than in Australia, France or the Netherlands.

It had been low for a very long time. Derek Wanless, whose report gave the Chancellor the ammunition for the health offensive in his autumn Budget preview, believes that, between 1972 and 1998, the UK suffered a cumulative underspend of between £220bn and £260bn.

When the money came, it was swallowed up not only in staff costs, but in a plethora of initiatives. One London health authority got an extra £100m for the current year. A study by the King's Fund, the health think-tank, found that after the authority had paid for all the "must-dos" laid down by the NHS regional office - reducing waiting times, meeting the EU working time directive for doctors, and providing services to cut smoking and teenage pregnancy, for example - it was left with discretion over how to spend just 20 per cent of the money. For a London authority, £20m is peanuts; it won't even build you a new day surgery centre.

Bureaucracy, the cost of which nobody can fully calculate, must also take some of the blame. The head of one hospital described to me how ordering new mattresses for beds last winter took five days, because the form had to be signed by three different officials. If a commercial firm ran its order books this way, it wouldn't survive the winter.

There is another, fairly obvious reason for our discontent with the health service. If you treat patients in shoddy buildings, it won't feel like much of an improvement. Banks and post offices have changed, but the hospitals endure as Lithuanian-style, 1960s concrete blocks, strewn with litter and a bewildering array of signposts.

Sixty-eight new hospitals, under the private finance initiative, have been agreed, but their creation is a lengthy, cumbersome process. The Royal London Hospital in the East End of London, one of the biggest and most complex developments, has a completion date of 2010. Can Labour afford to wait another nine years for hospitals such as this to be built, if record sums are simultaneously going into drugs, equipment and staff?

Tony Blair has so far avoided the question of where the previous handouts have gone, but he is adamant that the money has made a difference. Very soon, he says, major cancers will "get from diagnosis to treatment within a month". But talk to Germans about the happy prospect of waiting a month for their chemotherapy to begin, and they would think you were mad.

It is the difference between Britain and Europe, not the difference between Britain 2001 and Britain 1991, that people care about. One cancer specialist told me recently about his team's jubilation at achieving one of their targets: to ensure that all children with suspected cases of leukaemia see a specialist within three days. Then they found out that, in Paris, the treatment begins within three days.

France's healthcare is good, and expensive, because it has spare beds, spare units and spare staff to cope with changes in demand. Britain has not been in that position for three decades. At present levels of spending, it would probably need an increase of between one-quarter and one-third in its capacity to reach that point.

If Labour is to convince the public of the need for higher taxes, it must explain how that £21bn vanished. Was it absorbed too quickly into the arid soil of the NHS, keeping alive a system close to collapse? Or was much of it squandered on failed initiatives such as the waiting list pledge?

Gordon Brown cannot just thump the table and say that the new money will be coupled with rigorous reform; that is exactly what was supposed to have happened during the past three years. He needs to cast a colder, more forensic eye over where the missing billions went.

Jo Revill is a political reporter, and the former health correspondent, for the London Evening Standard