What the Spending Review really means for the NHS

“The NHS will receive an additional £10 billion a year above inflation by 2020, delivering in full the Five Year Forward View,” the Treasury announced a day ahead of this week’s Spending Review.

Other versions of The Truth were also available, however.

Chancellor George Osborne attempted to steal a march on those competing versions by announcing partial details of NHS England’s element of the Department of Health’s settlement a day early. 

That announcement included reference to an annual £10bn real terms increase to NHS’s England’s budget by 2020–21. This first version of The Truth relies on the strange – but not unfamiliar – tactic of reporting an increase against an out-of-date baseline; in this case, NHS England’s spend for 2014–15, allowing Mr Osborne to include the £2bn additional spending already included in the current year’s budget.

Version two took that into account, bringing the reported real terms annual growth down to £8bn by 2020–21, leading the Chancellor to claim the funding request set out in the Five Year Forward View had been met, with a modest front-loading of the extra cash and average annual real terms increases over the five years of 1.5 per cent.

It is after this that things get sticky.

A redefined NHS ringfence

As we feared, a significant portion – just under £3.5bn – of the £8bn extra for NHS England will be funded through very significant cash reductions to the £15bn worth of the Department of Health’s total £116.4bn spending that lies outside of NHS England.

Although characterised as 'Whitehall' budgets by the Chancellor, that spending comprises almost £5bn in NHS-wide capital investment, with the same again in clinical education and training, including the salary costs of doctors who train on the job. It also covers over £3.5bn in public health spending, a similar amount in central and local NHS administration costs, and £0.8bn in arm's length bodies such as NICE, NHS Blood and Transplant, those overseeing medical and health research and development and the Care Quality Commission.

Those budgets will now be slashed by over 20 per cent in real terms over the next five years, with the most severe cut front-loaded to the next financial year, when an immediate cash reduction of £1.5bn will be made – 12 per cent in real terms.

Few details have been provided as to where the £3.5bn Department of Health axe will fall, although the Spending Review Blue Book announced average annual real terms reductions to local authority public health grants (currently around £3bn) of 3.9 per cent. That would suggest in the region of £600m of the NHS England’s 'extra' £8bn will be funded through cuts from public health – a move which sits uncomfortably with the Chancellor’s claims to have delivered “in full” the Forward View, which had at the centre of its plans to ensure the sustainability of the NHS a “radical upgrade in prevention and public health”.

The knock-on effects of ending nursing bursaries 

The Spending Review also announced plans to end NHS bursaries for student nurses – switching these instead to the Student Loan Company. If successful in expanding student nurse numbers, the switch could be cost saving to the Department of Health, representing an annual saving to the Health Education England (HEE) budget of around £1.2bn. However, the need to honour existing commitments means this saving will not transpire until the end of the five-year period, with only £650m saved per year by 2018–19. (Net savings will be lower to the NHS, of course, if personal debt liabilities for newly qualified nurses translate into pressure on NHS pay rates.)

In the meantime – and following HEE’s indication that its budget for next year is likely to be frozen – there is a risk of stealth cuts to NHS hospitals if HEE is forced to respond by reducing or freezing the subsidies it currently pays to NHS providers to cover part of the salary costs of junior doctors and placement expenses for undergraduate medical trainees.

Will the urgency of budget cuts cause panic sale of NHS assets?

But one of the biggest dangers is the sheer size of the cut to the Department of Health’s budget needed by next April. With just four months to find £1.5bn in cash, the risk of a short-sighted fire sale of NHS assets is perhaps greater than ever. 

The scale of these reductions to the Department of Health’s wider budget means that while NHS England’s budget will grow at an annual average 1.5 percent in real terms over the next five years, the rate of growth for health spending as a whole will be just half that.

This third version of The Truth is one the Treasury is almost as happy to convey as the first and second. However, in the context of continued austerity and severe spending reductions elsewhere in the public sector, the Department of Health will continue to receive real terms annual increases – just – when measured against economy-wide inflation. 

All smoke and mirrors?

The Treasury is less keen to trumpet what that means for health spending as a proportion of GDP: it is left to the Office for Budget Responsibility to set out in its accompanying analysis to the Blue Book that spending plans for health will translate into a 0.2 per cent decrease in NHS spending as a share of GDP between 2015–16 and 2020–21, and a 0.3 per cent decrease after adjusting for our ageing population – continuing the same downward trajectory started in 2010–11.

These figures are a sobering antidote to the headline 3.7 per cent real terms increase to NHS England’s budget next year. However, that 'frontloaded' increase itself risks feeling substantially lower if – as seems likely – NHS England’s total spending this year is higher than planned as a result of the hospital overspend optimistically projected at a net £2.2bn. That will perhaps require NHS England’s net spending this year to be raised above the Chancellor’s baseline by around £1bn – most likely funded through a cut to the Department of Health’s capital spending programme – reducing the real terms increase for NHS England next year to something closer to 2.7 per cent.

Yet even without that risk, the planned profile of the £8bn (a 3.7 per cent at best increase next year, followed by much lower increases down to less than half a per cent in real terms by 2018–19) indicate that the spending of this 'transformation fund' – intended to help the NHS deliver new models of care and invest to save – will need to be tightly managed. There will be little room for double-running costs (and therefore additional permanent staff) to run beyond 12 months as the tolerance for recurrent additional spending is minimal.

The NHS isn't out of the woods yet

These pressures exist even before considering those brought by additional commitments explicitly referenced in the Spending Review’s Autumn Statement – such as seven-day working – as well as those that are not – such as new pension costs for NHS employers. And as my colleague Mark Dayan will explain in his blog later today, the continued underfunding of council adult social care services can be expected to have ongoing repercussions across the health service.

Big decisions such as Spending Reviews always throw up many versions of The Truth. But public and politicians alike should not walk away from this Autumn Statement believing the NHS has been taken care of, with no more legitimate reason for concern. As cuts to supporting services and continued pressure roll on, the health service experience may be of a very different reality indeed.