One thing is clear from the Autumn Statement, the NHS needs to plan for a much longer period of austerity – it’s at least seven years and it could well be a decade.

The Chancellor has reopened the current Spending Review and taken a further £6.6 billion of public spending to fund an infrastructure investment programme with the aim of supporting economic growth.

The Autumn Statement certainly confirms that we need economic growth. The Office of Budget Responsibility is now forecasting that the economy will have shrunk by 0.1 per cent in 2012 and will only grow by 1.2 per cent in 2013.

Health has been protected from these cuts. Recent polling from Ipsos MORI, commissioned by the Nuffield Trust, showed that this is in line with public attitudes. Around eight in ten people want to see some services protected from cuts, with the NHS the service most people want to protect.

Austerity is more like climate change than a storm

This picture is largely unchanged from 2009 demonstrating the public’s reluctance to contemplate a reduction in NHS funding.

But while that is good news for the NHS, the Autumn Statement had a very big sting in its tail – it is going to take much longer to eliminate the fiscal deficit than planned. As a result, the Government will continue to cut public spending all the way through to 2017-18.

That means three more years of reduced spending beyond the four year squeeze announced in the 2010 Spending Review.

The chart below shows the scale of the further cuts being planned. The green line shows the proportion of GDP being collected in tax and the black line the proportion of GDP which will be spent on public services – the large gap between the two arising from the banking and subsequent economic crisis is being closed largely by reducing spending.

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Click on the image to enlarge. Taken from the Chancellor of the Exchequer's Autumn Statement (December 2012) © HM Treasury

The size of the fiscal consolidation is eye-watering and 80 per cent is coming from public spending with 20 per cent from increased tax. Tax as a share of GDP stays pretty constant at around 38 per cent of GDP but public spending falls from 43 per cent of GDP this year (2012-13) to 39.5 per cent of GDP in 2017-18.

The squeeze on public services is even greater than these figures imply as debt interest payments grow alongside the deficit. For the NHS, the Chancellor has continued to protect the health budget for at least another year.

In 2015-16 the health budget will grow in line with inflation but will be spared its share of the cut in public service spending. For 2016-17 and 2017-18 overall public spending continues to fall but can health continue to be protected?

The Nuffield Trust’s research looking at the pressures on the health budget found that additional demands on the service combined with rising input costs mean that funding pressures might be expected to grow at around four percent a year after inflation.

If the health budget is pegged to inflation increases, that means the NHS needs to find productivity improvements of four per cent a year for at least seven years. A massive task for which there doesn’t seem to be either past or international precedent.

Up to 2014-15 this task is made easier by the Government’s pay policy. The Nuffield Trust study suggests that between 2011-12 and 2014-15 around 40 per cent of the funding gap is being met by pay restraint. As austerity continues the challenge becomes all the greater if pay awards begin to rise.

Against expectations, the Chancellor didn’t announce an extension of the current pay freeze beyond 2013. The Government had previously announced two years of additional pay restraint with awards averaging one per cent.

On local pay the Government accepted the recommendations of the Pay Review Bodies that there will be no new centrally-determined local pay rates or zones but much greater use of existing flexibilities.

For the NHS, Agenda for Change remains although some aspects are going to be reviewed, but the Pay Review Body made clear that it does not expect a rapid move towards more market-facing pay.

Austerity is more like climate change than a storm. But the impact of that austerity beyond 2015 is much less clear: can the Government continue to protect health relative to other public services or will the additional cuts that will be required to education, transport, social care and police become unsustainable so that in the end the health budget will also have to fall?

And what is the pay outlook beyond 2015 – if pay awards start to pick up this will increase the productivity improvements needed but if they don’t what impact will such a prolonged period of real pay cuts have on morale and ultimately recruitment and retention? There are no easy answers and no easy options.

Managing the NHS just got a whole lot harder.

This blog is also available to read on the Health Service Journal website.

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Comments (1)

Sydenham's Law: Increases in public expenditure decrease private sector growth. This is a simple law of economics. See: http://pol-check.blogspot.com/2013/01/sydenhams-law-of-public-expenditur...

John
12 January 2013

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