Savings on a daunting scale

John Appleby uncovers the full extent of the health budget cuts.

There seems little doubt that spending on the NHS across the UK over the next four years will reduce in real terms. As plans and inflation estimates now stand, the NHS in Scotland and Northern Ireland will find that spending lags behind inflation - leaving real decreases of 2-3 per cent in budgets by 2014/2015. NHS spending in Wales will fall by roughly 8 per cent in real terms. By contrast, the NHS in England looks like it will do rather well. Planned spend between 2010/2011 and 2014/2015 will increase in real terms - by 0.98 per cent.

Ministers in all parts of the UK have put a brave face on these figures - and engaged in not a little selective presentation of the data. It is hard to blame them. These are very difficult financial times and it has been hard to mirror politicians' efforts to reflect the undoubted priority the public places on health spending in any final decisions about expenditure.

But the fallout from the global financial crisis and our seeming inability to reach escape velocity, returning to pre-recession levels of GDP growth, suggest considerable uncertainty about health (and other) spending.

Even a small increase in general (GDP deflator) inflation will be enough to defeat the government's funding promise for the NHS in England. With its budgets more or less frozen in real terms, the biggest source of pressure on the NHS has nothing to do with the government's health reforms and everything to do with a policy decision to get more and better care for the same money. It will be the equivalent of spending an extra £20bn by 2014/2015 - but without the extra money.

One of the tactics to get the NHS to meet this huge productivity challenge is a real reduction in the prices that hospitals can charge for their services and pressure to divert patients into cheaper forms of care. With falling prices and less work, many hospitals are looking to cut costs, but the scale is daunting; improvements in productivity of about 6 per cent each year, for the next four years. Meeting this would be a rare achievement in any sector of the economy, let alone the NHS, where productivity (however crudely measured) has remained flat at best for many years.

Meanwhile, as the government's health reform bill meanders its way through parliament, it is the financial pressure on the ground in the health service that is driving hospital mergers and potentially enormous changes in the ways we provide and run care. And this is just the first year of a four-year funding freeze.

John Appleby is chief economist at the King's Fund and a visiting professor at City University.

This article first appeared in the 14 November 2011 issue of the New Statesman, The NHS 1948-2011, so what comes next?