Note that this article was updated on November 23 2023 to reflect a significant revision in the Office For Budget Responsibility’s (OBR) inflation forecast for the current financial year.
Although the threatened NHS budget deficit this financial year may be very significant – particularly given ambitions to scale back higher levels of spending accumulated during the pandemic – it is unlikely to be the largest this decade in percentage terms. That dubious accolade falls to the financial year 2015/16, when the NHS as a whole reported an overspend in the accounts of £2.5 billion in today’s prices, against a budget of £128.9 billion.
That year, the Department of Health only avoided a formal breach of its fiduciary duty to the Treasury and Parliament by dint of an apparent administrative oversight, through which it neglected to inform the Treasury that its separate funding stream from National Insurance receipts had been higher than assumed at the time that its funding from Parliament was set.
But the fact the NHS has yet to report an overspend as large in proportional terms as that in 2015/16 is less due to any slowdown in the growth of spending than to the regularity with which its budget has been revised upwards. Original plans are rendered unsustainable amid our relentless demand and need to consume ever more health care, efficiency assumptions within them prove unrealistic, and baseline spending expectations turn out to be flawed.
To explore this further, we have constructed a time series of spending for the NHS in England going back to 2013/14 – the date at which the organisation NHS England took on responsibility for managing the budget for the service as a whole. That required NHS England to keep the spending of both NHS commissioners (the local NHS bodies that pay for care on behalf of patients) and NHS providers (the hospital and other health care service trusts that deliver the bulk of care) within a single spending limit for day-to-day costs. To present the data as a continuous time series, we have had to apply a set of adjustments to cater for changes in the shape and running of the NHS and its finances over that time (see 'Methodology' section).
To track spending against frequently changing annual budgets, we have focused on the two dominant, overarching public spending plans during the period: the 2015 Spending Review and the 2019 NHS Long Term Plan, for which the financial settlement emerged from the 2018 Spending Review. Our analysis focuses on NHS planned and actual spending on day-to-day resources in England, covering the NHS’s consumable costs – predominantly staff salaries, medicines, clinical supplies and fuel.
Our charts here present the figures in real terms, stated in 2023/24 prices. For these purposes, we measure “real terms” in two ways. First against the government’s preferred measure of inflation in the domestic economy (the GDP deflator – which is also the measure against which government spending commitments tend to be set), and second against a measure of inflation in the particular set of goods and services that the NHS must pay for. It is important to note that these two measures of inflation have diverged quite significantly at points over the course of the pandemic, with the NHS metric recording increases later than the GDP measure (in part reflecting the time it takes for economy-wide pay inflation to translate into new pay settlements for NHS staff). Further, in 2021/22 the GDP inflation measure dropped into negative – indicating a price reduction in domestically produced goods – which was not reflected in the NHS measure. We updated this analysis on November 23 2023 following the government’s Autumn Statement. This was accompanied by a large upwards revision to the forecast for inflation in the domestic economy for the current year, which has profound effects on the real-terms value of the NHS budget and spending.
These significant fluctuations in inflation (and its measurement), as well as in NHS spending since the start of the pandemic, make future predictions of spending subject to uncertainty. In our charts we show the latest published figure for the NHS budget in 2024/25, set out in the government’s November 2023 Autumn Statement. This figure is well below the level of NHS spending this year, and does not reflect NHS England’s previously stated assumption that most of the ongoing cost implications of this year’s NHS pay rises will be funded through increases to its budget for next year. This figure is liable to change, however, particularly in light of a likely NHS overspend this current year, but also to reflect routine changes in the ”mandate” for NHS England – that is, the range of responsibilities it has, including additional rounds of vaccinations since the start of the pandemic.
Predictions of NHS spending levels in 2024/25 and 2025/26 need to be treated with caution. However, we include them here as our current best available – but by no means conclusive – guide to inform discussion on the crucial question: how much funding does the NHS need? Our predictions at present are based on rolling forward the average annual rate of spending growth seen between 2021/22 and mid-year 2023/24, moderated by the assumption that there will be no further strike action in the medical workforce from this month onwards. We will update these predictions as new information, realities and trends emerge, including for changes in forecasts and measures of inflation. Our charts and figures now reflect domestic economy inflation for 2022/23 as forecast by the OBR on November 22 2023.
2013/14 to 2015/16
During this period, NHS provider organisations began to run up significant deficits between their income and outgoings – largely reflecting a policy to cut their funding per procedure year on year as a means to hold-down expenditure. Despite this policy, the health service as a whole saw real-terms increases in its rate of spending each year, averaging 3.5% a year on the GDP measure and 3.4% on the NHS inflation measure. As our chart shows, this rate of spending growth clashed with the slower rate at which the NHS budget was growing in real terms – at 2.2% a year on the GDP inflation measure, and 2% on the NHS measure, resulting in 2015/16’s £2.5 billion overspend in today’s prices.
2015 Spending Review plan
Time then for the first major budget revision of our time series. In the 2015 Spending Review, the government increased its planned budget for “the front-line NHS” from 2016/17 onwards. This resulted in a modest boost to the average annual real-terms increase in the NHS budget in the years to 2017/18 of 2.6% and 2.8% against our two measures of inflation. These increases were intended to fund the NHS’s “Five Year Forward View”, although they came at the cost of “Whitehall” budgets in the Department of Health, intended to fund public health, clinical training and the NHS budget for buildings, technology and equipment.
During these two years, actual NHS spending grew on average by 1.6% and 1.8% against our two measures respectively, as the health service slowed spending to try and claw back the overspending in the prior period, although this still resulted in a small deficit at the end of 2017/18.
2019 Long Term Plan funding trajectory
That overspend was followed by a further budget revision in 2018, this time as part of the government’s promised £20.5 billion real-terms extra spending by the end of this current financial year – intended to fund the then-new Long Term Plan from April 2019. As part of that revision, a new pay deal was agreed covering the majority of NHS staff, increasing both the budget and baseline spending in 2018/19 by around £800 million, as the government lifted the 1% cap on cost-of-living pay increases that had been in place since 2013.
The Long Term Plan funding settlement set out annual average real-terms increases to the NHS budget for day-to-day spending of 3.4% a year between 2019/20 and 2023/24, measured against the GDP inflation metric, with a profile that saw slightly faster funding growth in the first and last years, and translated into average annual increases of 3% on the NHS inflation measure.
In the first year of the plan, the NHS did keep within that spending growth limit – recording a 3.3% increase in spending to the end of 2019/20 on the GDP measure.
The pandemic
However, by the end of the financial year 2019/20, the Covid-19 pandemic was underway, with government policy during 2020 being to give the NHS “whatever it needs” to deal with that, hailing a sharp departure away from the Long Term Plan funding trajectory.
In 2020/21, NHS spending increased by over 10% in real terms above spending in 2019/20, on both our inflation measures, leaving it around £9 billion higher than the Long Term Plan figure for the year – the equivalent to double running the NHS for 23 days that year. That excess spend above the plan is significantly lower than the estimate in the Department for Health and Social Care’s 2020/21 accounts for total “NHS Covid” spending that year (around £17.5 billion), implying that around half of reported NHS “Covid” spending was funded through reductions in spending on “business as usual” activities.
However, in practice, distinguishing the point at which an NHS resource – such as a member of staff, fuel, hospital bed or medicine – is consumed in dealing with Covid and when it is being consumed in the course of “normal” activities is impractical, if not bordering on the futile. The more pressing point for the NHS is that the higher spending triggered by the pandemic has proven somewhat sticky, or recurrent, and has not fallen as fast as Treasury tolerance for it has declined.
In 2021/22 spending rose again in real terms, leaving it around £12 billion or 9% above the Long Term Plan level for the year. At this point, with government policy now entering a “Living with Covid-19” phase, the NHS was asked to embark on a course of “convergence” back towards the Long Term Plan funding trajectory – the trajectory marked on our charts by the green line. The original LTP funding trajectory ended this financial year. For the purposes of this analysis, we have projected it beyond that, although (as shown on our chart) the budget level currently pencilled in for the NHS next financial year falls some way short of the projected LTP level.
Convergence
This convergence course has been rocky, with the NHS budget needing frequent and substantial top-ups against the opening budgets set for both 2022/23 and 2023/24 – most significantly to fund staff pay settlements in both years. An additional limitation on the NHS’s ability to return to the Long Term Plan funding level has been that, while tolerance for “Covid costs” such as additional infection prevention measures and staff sickness absence may have worn thin with budget-setters, substantial direct Covid costs have become unavoidable – for instance, adding over £1 billion worth of additional vaccination expense in 2022/23. They were clearly not foreseen at the time the Long Term Plan funding level was set.
The radical revision to the OBR’s estimate for GDP inflation in 2023-24 (published alongside the Autumn Statement on 23 November 2023) has had a profound impact on the implicit target of this convergence. The revision increased the official estimate of inflation in the domestic economy this financial year from 2.5% to 6.1%. As the Long Term Plan funding level set out annual increases to the NHS budget running 3.4% above GDP inflation, the revision entails that the budget the NHS would have received this year under the plan is £5.6bn higher than the level based on the earlier, much lower, estimate of inflation.
Future prospects
Our current central forecast is for the NHS to overspend its budget this financial year by a figure in the region of £1.7 billion – a forecast which assumes no further strike action, or increases to doctor pay above the 6% already offered. But it does not currently factor in potential spending slowdowns due to cutting expenditure on elective care or planned investment in new services. If that level of estimated spending transpires, the revised estimate of GDP inflation means NHS spending will have slightly fallen on average each year in real terms between 2021/22 and 2023/24.
That would be a radical departure from the average 3.4% real-terms increases in the Long Term Plan trajectory, and would reduce the excess spend above the LTP level to around £1.4bn, or less than 1% of the original plan.
Looking forward beyond the end of this current financial year, that level of real-terms spending reduction against the revised GDP measure would, if maintained, leave NHS spending in the region of £4.6 billion less than the Long Term Plan trajectory by 2024/25, and £10.7bn less the year after it.
This is a profound revision to estimates based on the GDP inflation measure as it was at the start of this week, which entailed that the NHS would continue to spend above the level of the Long Term Plan until 2026/27.
There are, however, some very big uncertainties here, even beyond the question marks which hang over the potential cost of settling the current pay dispute with doctors, which could reverse the current real terms reduction in NHS spending this year on the GDP measure. Annual real-terms spending increases of around 0.9% on the NHS inflation measure would mean a rate of spending growth significantly below any other experienced in the past decade, and fall below the rate at which both population growth and ageing can be expected to translate into higher levels of demand for health care. Managing that, at a time when the elective care backlog implies a need for NHS activity to ‘catch up’ with past demand not yet met, as well as meet new demand as it rises gradually each year, will require significant improvements in NHS productivity.
Methodology
NHS resource spending presented here is the sum of NHS England’s net expenditure adjusted by the surplus or deficit recorded by NHS providers, with a provider surplus reducing total expenditure and a deficit increasing it. This is consistent with the “NHS net outturn” figure presented in the DHSC’s annual accounts, although figures for 2022/23 and 2023/24 are based on in-year performance reports which have not been audited.
NHS England’s spending over this period has been affected by a number of additions and subtractions to its responsibilities, which we have adjusted for. The most significant adjustments are:
- The transfer of responsibility for public health spending for the 0-5 age group from the NHS to local authorities from 2015/16 onwards. We adjust for this by reducing spending down in prior years to create a “like-for-like” budget baseline, using the same adjustment figures used in the Financial Directions to the NHS in 2016/17.
- In 2019/20, the Treasury increased the NHS employer’s contribution rate for the NHS pension scheme, following a scheme revaluation. This led to an increase in NHS spending that year of £2.3 billion, which was fully funded by a £2.85 billion budget supplement to cover the additional expense. As this additional expenditure was not related to any increase in NHS resource consumption, and to ensure consistency with years prior to 2019/20, we remove the extra expenditure associated with it for each year from 2019/20. We estimate this year’s additional pension cost as a result of the increased contribution rate at £3.3 billion.
- In 2023/24, NHS England absorbed the functions and responsibilities of Health Education England, which entailed a £5 billion addition to its budget and costs. To ensure consistency with prior years, we deduct this from NHS England’s projected spending for this year, alongside smaller additions relating to its absorption of the regulator NHS Improvement and of NHS Digital. These deductions are consistent with the latest published Financial Directions to NHS England for 2023/24.
- NHS England’s in-year financial performance reports for 2023/24 include a large technical adjustment to its reported budget and year-to-date spending, reflecting a change in approach to the accounting treatment of NHS provider depreciation costs. The figures presented in this time series reverse that change, to ensure consistency with prior years.
To calculate funding plans for the 2015 Spending Review, we take the real terms annual growth rate entailed by the cash plans to 2020/21 as they were set out in the Spending Review, based on the GDP deflator at the time (November 2015). We then adjust that implicit real terms annual growth commitment for actual inflation as it is reported in the most recent GDP deflators at the time of publication (2 October 2023, with figures from 2022-23 onwards revised to reflect the OBR’s forecast published on 22 November 2023) [GDP deflators at market prices, and money GDP September 2023 (Quarterly National Accounts) - GOV.UK (www.gov.uk) and CP 944 – Office for Budget Responsibility – Economic and fiscal outlook – November 2023 (obr.uk)]. The same average growth rate over the five years of the Spending Review is then projected forward to the most recent years in our chart.
For the Long Term Plan funding commitment we use a similar method, using the annual real-terms growth trajectory as set out in NHS England’s January 2019 board report on the funding settlement, adjusted for the October 2023 GDP deflators.
To adjust figures for NHS inflation, we use the NHS Cost Inflation Index (NHSCII) to estimate NHS annual inflation affecting the NHS between 2016/17 and 2021/22. For the period 2013/14 to 2015/16, we use the then Department of Health’s Hospital and Community Health Services (HCHS) inflation index. As the NHSCII is retrospective, there is currently no estimate of NHS inflation from 2022/23 onwards. For 2022/23 and 2023/24, we therefore use the relevant “cost uplift factor” published by NHS England which is used to adjust NHS contracts for estimated unavoidable cost inflation. The cost uplift factor for 2024/25 and beyond has not yet been calculated, so we do not provide estimates for figures on the NHS inflation measure beyond the current year.
The Nuffield Foundation is an independent charitable trust with a mission to advance social well-being. It funds research that informs social policy, primarily in Education, Welfare, and Justice. The Nuffield Foundation is the founder and co-funder of the Nuffield Council on Bioethics, the Ada Lovelace Institute and the Nuffield Family Justice Observatory. The Foundation has funded this project, but the views expressed are those of the authors and not necessarily the Foundation. www.nuffieldfoundation.org / @NuffieldFound