70 years of NHS spending

After last week’s Spring Statement made no immediate tax and spend promises, John Appleby looks at the history of NHS spending and the recent trend of it falling as a share of GDP, while suggesting we might be seeing the first signs of a welcome change of direction.

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Published: 21/03/2018

While the Chancellor’s recent Spring Statement made no immediate tax and spend commitments, it did suggest that, depending on progress with the government’s debt/deficit reduction goals, there might be the "capacity for further increases in public spending and investment in the years ahead". But with current plans suggesting a continuing fall in NHS spending as a share of national wealth, what would it take to recover this loss of the next few years?

Before we answer that though, let’s first take a look back at NHS spending across the decades.

Then and now 

In 1950, the NHS spent an estimated £460 million. By 2020 it is likely to spend over 340 times as much – around £158.4 billion. That is such a huge increase that the original spending is now a mere decimal point.

But these figures are cash, and over this period a huge chunk of the increase in spending will have been swallowed up by higher costs. In real terms, after adjusting for inflation, NHS spending in 2020 is likely to be 10 times as much as in 1950.

Around half of this increase in spending was and will be funded by economic growth – by 2020 the UK’s GDP will be around five times larger in real terms than it was in 1950. The rest of the increase is the result of government decisions on priorities across all public spending. While government revenues from taxes have remained fairly flat at around 36% of GDP since the 1950s (with the absolute revenue growing in real terms as the economy has grown), the UK now spends much less on things like defence, housing, utilities and transport than we once did – leaving more to be spent on the NHS.

Economic growth and political decisions about spending priorities mean that, between 1950 and 2020, spending on the NHS across the UK is likely to have doubled as a share of GDP – from 3.5% to around 7.1%.

As the chart shows, however, changes from year to year in both NHS spending and GDP mean that the spending path from 1950 to 2020 has been somewhat erratic. Some of the sharp increases in spending as a percentage of GDP are arithmetical – when GDP growth is low or falling (as in recessions). Subsequent falls in the ratio following recessions are partly the reverse (with GDP growth accelerating), and partly deliberate policy as public spending is squeezed.

NHS spending as a percentage of GDP: 1950 – 2020 21/03/2018

Chart

Note:  

UK NHS spend 2017/18 to 2020/21 (based on planned spending by English NHS scaled up to UK)

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How much to reverse the trend?

Since the historic peak of 7.6% in 2009/10, spending has been falling as a percentage of GDP. On current projections and NHS spending plans, between 2009/10 and 2020/21 spending will have fallen by around 0.5 percentage points of GDP – to 7.1%.

After 11 years of NHS spending falling as a share of GDP, what would it take to reverse this trend?

Just getting back to spending of 7.6% of GDP over the next three years would require a real increase in funding of £15.1 billion – £11.4 billion more than current plans – and equivalent to an average annual real increase of 3.3%, rather than the 0.8% currently planned. Such growth is not out of line with the history of NHS spending – indeed, somewhat below the 4% or so per year long run average.

With the news this week of extra money for NHS staff pay rises, perhaps we are seeing the first signs of a change of direction in funding – one very likely to be welcomed by the public, whose concern about the NHS has grown over the last few years.

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