Checking the NHS’s reality: the true state of the health service’s finances

Sally Gainsbury takes a forensic look at the current NHS finances – showing how trusts in England are on course to spend almost £5 billion more in the next financial year than was anticipated when funding levels were set. She argues that a heavy dose of realism is needed ahead of the new spending settlement for the health service.

Blog post

Published: 20/08/2021

Parliament may be in recess, but across Zoom, Teams and other available virtual meeting spaces, NHS England, the Department of Health and Social Care, Number 10 and the Treasury are still thrashing out a new spending settlement for the NHS, to cover additional spending needed for the rest of this financial year and the five years beyond it.

Some big numbers have been thrown into the ring. £2 billion a year to even start to fix the elective waiting list that threatens to swell to 13 million or even 15 million patients by the end of 2025; perhaps a further £6.6 billion needed from October onwards to deal with ongoing Covid admissions to hospitals and the infection prevention and control measures that will need to continue for some time after the last Covid patient has been discharged.

These numbers are important, but come with a significant degree of uncertainty – not least where the clinicians required to deliver thousands of additional operations and extra GP appointments will come from. What can be more certain is what the NHS has been spending to date on a more or less recurrent basis. Ascertaining what that baseline is – the “baked-in” costs the NHS already has today – and comparing that to where it was supposed to be under the last spending plan, has to be the first step in establishing a minimum requirement for any new funding settlement. It is only by funding that baseline sustainably that the NHS can be given a firm and secure basis for tackling the challenges for which future costs – and resource availability – are less clear.

The single biggest driver of that spending baseline is the costs of NHS providers – the hospital, mental health, ambulance and community service trusts, which together consume the equivalent of over three-quarters of the total £133 billion revenue budget for NHS England. [i]

In the financial year 2018-19, the gross expenditure of those 230 NHS trusts came to £87.4 billion, against an original plan (after adjusting upwards to take in extra funding provided mid-year to cover the new staff pay settlement) of £85.3 billion. [ii]

That £2 billion gap between plan and reality was created in almost equal measure by unrealistically low assumptions on behalf of commissioners about the likely number of patients requiring care on one side, and unrealistically high assumptions about the value of cost savings that could be extracted from providers’ expenses on the other.

In fact, the gap was not unique to the 2018 spending settlement – it can be seen in the planning documents for the NHS provider sector every year since the 2015 Spending Review. The same reality gap is present each time: activity assumptions understating the cost pressures brought by increasing patient numbers by around £1 billion each year, accompanied by a further £1 billion or so over-optimism on the scale of costs that could be permanently (i.e recurrently) removed from providers’ cost bases.  

How provider spending plans were missed 20/08/2021



From financial performance reports published by Monitor, NHS Improvement and NHS England, 2015-16 to 2020-21. As methods for reporting and calculating savings against efficiency targets have changed substantially during that time (including the reporting of additional income as a "cost improvement") figures shown here are estimates and for illustrative purposes only. Trust income and expenditure reporting during the period was also subject to manipulation through the use of one-off accountancy adjustments. Planned spending increases in 2018-19 and 2019-20 include funding the cost of the Agenda for Change pay deal in both years, and the impact of £1bn extra commissioner spending on emergency care in 2019-20. 2020-21 figures are net of extra spending on Covid-19.

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Together those habitual flawed assumptions meant the NHS in England went into the current five-year spending settlement – announced in June 2018 and later incorporated into the Long Term Plan (LTP) – with the cost base of its hungriest beasts running some 2.5% higher than the settlement had assumed.

The LTP settlement: 2019-20 to 2023-24

In cash terms, the LTP settlement worked out at an average 5.3% extra cash a year. With NHS inflation running at around 2.5% (dependent in large part on NHS pay awards), and activity increases (in response to patient demand and need) adding a further 3% cost pressure a year, the settlement was only ever going to work if the health service held back some of those cost pressures through efficiency measures.

The headline efficiency “ask” for the settlement was a 1.1% recurrent reduction in costs each year – essentially asking the NHS to absorb the first 1.1% of inflation through “cost improvement plans” such as seeing more patients with the same number of staff, or negotiating lower prices with suppliers. On the face of things, a 1.1% saving each year should have been sufficient to cover not just expenditure growth, but to also gradually free up resources to invest in the vision of health care out of hospital set out in the 2014 Five Year Forward View and the 2019 LTP.

That 1.1% efficiency figure had not just been plucked from the air. Analysis by the health economic regulator NHS Improvement had found that average efficiency improvements by NHS trusts in the decade to 2016-17 – after stripping out advantages and disadvantages beyond their control (as well as discounting temporary one-off savings) – was around 0.9%. 1.1% then represented a “stretch” target, albeit a substantial reprieve from the 4% required – and never delivered – between 2011 and 2016.

The problem was that £2 billion extra spend above the baseline in the year which the LTP was conceived. To make the LTP figures work, that overspend first needed to be eliminated. Year one of the LTP (2019-20) therefore saw trusts given an efficiency target of £3.3 billion – the equivalent to three times the headline “1.1%” figure cited in the settlement, and more than three-and-a-half times the rate that recent performance indicated would be achievable.

Not surprisingly, that target was missed. The effective merger of NHS Improvement (originally responsible for overseeing NHS provider finances) and NHS England (responsible for the overall budget) was accompanied by a rapid deterioration in the transparency of aggregate national financial reporting on the NHS trust sector as a whole. No official figure has therefore been published for actual performance against the £3.3 billion target, although it looks as though trusts may have mustered around two-thirds of it, albeit with part of those savings being on a non-recurrent basis only.

By the time of the last published financial report for the year – January 2020 – trusts were on track to again end 2019-20 with a gap between their planned and actual total gross expenditure of around £2 billion. Just as in 2018-19, that gap stemmed in almost equal measure from unrealistically low assumptions about activity growth (indicated by plans for income from increasingly cash-strapped NHS commissioners to grow by just 2% from their 2018-19 levels, after accounting for increases in prices) on one side of the equation, and the unrealistically high hopes for £3.3 billion in cost savings on the other.

Year two: the plan

By the time NHS England’s detailed spending plans for 2020-21 were published, the pandemic was already underway and the prevailing financing regime for NHS trusts suspended. NHS England quickly and appropriately moved into pragmatic mode – instructing clinical commissioning groups to fund NHS trusts through block contracts based on the financial value of activity levels as they were towards the end of 2019-20, rather than the tendency to base plans on the somewhat wishful (lower) activity levels that commissioners might like to see.[iii]

For current purposes – which are to assess how far the recurrent NHS provider cost base has strayed from the assumptions in the LTP – we need to estimate what the provider spending plan would have been in 2020-21 in a parallel reality where there was no Covid, and where everything had gone according to the Long Term Plan the year before it (and indeed the year before that).

Planning figures published by NHS England covering the LTP period include a gross uplift for provider inflation in 2020-21 of 2.5%, against which the headline 1.1% cost efficiencies were to be netted off. Further efficiencies were also entailed in the LTP target for the provider sector to balance as a whole by the end of 2020-21, which – on the original LTP trajectory – would have brought the total efficiency ask for 2020-21 up to around 2%, leaving a net allowance for cost inflation in the provider sector of 0.5%.

In addition to cost inflation, the LTP of course envisaged growth in provider activity, although there are no precise figures or ranges for this cited in the planning guidance. Instead guidance asked commissioners to set annual growth assumptions that were “realistic”, taking into account recent local trends and waiting lists, but also adapting these to take into account initiatives to limit demand.

In the absence of an official figure, we can calculate the implicit NHS trust activity growth rate assumed in the original overall LTP spending trajectory by looking at the growth between planned provider income from NHS commissioners in 2018-19 and the plan for the same in 2019-20, after adjusting for changes in the prices paid by commissioners. [iv]

That produces a growth rate of 2.7% – a little lower than the 2.9% assumed at the time of the Five Year Forward View, but somewhat higher than the 2.2% all-NHS output growth (including services outside of NHS trusts) found by York Centre for Health Economics’ assessment on productivity in 2018-19. But it was precisely the net increase in core CCG allocations in 2020-21 after adjusting for increases in what they were expected to pay providers to cover inflation.

That would suggest an original LTP assumption for NHS provider spending in 2020-21 of £92.7 billion – a 3.2% cash increase above the 2019-20 plan.

Year two: Covid and the reality

In practice, Covid hit and providers necessarily spent far more – funded in part through additional allocations from the Treasury. Working out how much in total was spent “on Covid” in 2020-21 (and therefore, ultimately, non-recurrent) may prove an impossible, and not entirely relevant, task. Instead, NHS England asked NHS trusts to provide monthly details on the incremental additional costs created by Covid, once existing resources – the staff, equipment and buildings already there – had been redeployed and exhausted.

NHS England reports that those incremental Covid costs totalled £2.7 billion in additional pay (overtime, extra staff and agency staff), and £2.4 billion in other costs such as opening or adapting facilities to prevent infection spread, and testing staff for Covid. We can add to this a further £800 million accrued to 2020-21 costs to cover untaken annual leave that staff were unable to take during the pandemic, and have now carried over into 2021-22 when that holiday time will need to be covered through temporary staff or overtime. These £5.9 billion in additional Covid costs were theoretically non-recurrent – as the pandemic subsides, so too will they. Removing those costs leaves the cost base for providers at the end of 2020-21 at £97.7 billion. [v]

The resulting £5 billion gap between actual “no Covid” costs in 2020-21 and the costs as they would be if the LTP assumptions had come true is perhaps no surprise. The gap between reality and plan was already £2 billion at the end of 2019-20 (as indeed it was at the baseline year 2018-19). In the absence of the pandemic, providers would again have been asked – as they were in 2019-20 – to make in the region of £3 billion efficiencies over the course of 2020-21.

The apparent scale of provider overspending against the LTP assumptions begs the question how NHS England – which directly funds almost nine-tenths of the NHS provider cost base – managed to balance its books in the financial year just ended, as it appears to have done, after discounting the extra costs of Covid that were covered through extra non-recurrent funds from the Treasury.

A generous analysis might assume that up to £1 billion of extra spending above the implicit plan related to targets to increase spending on mental health and community services over and above the trend growth rate – a proportion of which would be delivered by NHS trusts, potentially increasing their cost base.[vi] That would still leave a best-case scenario excess spend above plan for the year to March 2021 of £4 billion. Having started the LTP period with a cost base already larger than planned, NHS trust spending has grown faster than the total NHS budget for England. The result is that, although NHS England can still just about balance its books, it seems to be doing so only using funds intended for investing in LTP priorities, such as primary care and the elective care backlog, to instead plug the reality gap between planned and actual spending by trusts.

Even without Covid, growth in provider spending has outstripped growth in the NHS England budget 20/08/2021



Nuffield Trust analysis of provider sector spending plans and aggregate finance reports. The index line for provider spend starts at 2.5% representing the 2.5% spend above the baseline plan. NHS England budget is as per the Financial Directions to NHS England and is net of funding for Covid-19 and additional pension contributions. 

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Year three: off track by £5 billion +?

Moving into the current financial year, NHS England sensibly set providers a relatively modest target for the first half of the year to absorb through efficiencies the first 0.3% of inflation. It further suggested that this target would be ratcheted up in the second half of the year to perhaps reach the original LTP target of 1.1% over the course of the full year, depending on the return or not of fresh surges in Covid hospitalisations.

If that original target was achieved – and assuming NHS staff unions settle for the government’s 3% offer on pay – the minimum £4 billion gap against the original plan found at the end of 2020-21 would increase to just under £5 billion by the end of this financial year. That would leave the recurrent NHS provider cost base – before any additional costs of dealing with Covid or the waiting list backlog – at over £102 billion, which would be a full £1 billion higher than it was supposed to be at the end of 2022-23.

That would still result in the NHS trust gross cost base being a smidgen smaller as a proportion of the overall NHS England budget (75.6%) than it started out at in 2018-19 (76.4%). The problem is that the plan – even after including additional spending on mental health and community services – entailed this share would fall by a further 2 percentage points below that.

Year four: A new funding settlement?

What then is needed for a new funding settlement, to start in April 2022?

A minimum starting point would be to reset recurrent baseline funding by at least the £2 billion missed from the start of the last two funding settlements. That would irk the Treasury – not least because it would be before considering the extra funds needed to deal with Covid and to help clear the waiting list backlog. But recognising those costs that are already there and funding them recurrently could represent more than the sum of its parts. Giving NHS trusts security that £2 billion of their existing cost base was now regarded legitimate, rather than forever held in abeyance and ring-fenced for deletion [vii], would provide a firmer basis on which to plan and make the increases in patient through-put necessary to start addressing the waiting list backlog.

That would still leave a minimum £3 billion funding gap against the LTP at the start of 2022-23 – attributable in the main to trusts being unable to make efficiency savings during the pandemic – although the supporting role played by activity rates perennially running higher than planned should not be overlooked. It might be tempting for policy-makers to believe these efficiencies could be rapidly recouped, but seeking total efficiency gains much over 1.5% a year from 2022-23 would imply cash cuts to spending per patient at a time when NHS staff have been exhausted and when recruitment and retention trends look perilous.

For their part, NHS England are reported to be of the view that the Long Term Plan settlement was a generous one, or at least as good as it could get. That may be true relative to the rest of the public sector, but it is patently not true relative to the demands and costs in the NHS. As we have seen, the LTP assumed baseline costs in the provider sector in 2018-19 that were £2 billion lower than they in fact proved to be – an error that goes all the way back to the time of the 2015 Spending Review, repeated each year since and then further exacerbated by the pandemic.

What is needed then, above all, is a heavy dose of realism. Past performance may not be a perfect guide to future performance, but it is often more reliable than ignoring reality altogether. The Treasury may not like the sound of it, and NHS England may not like to admit it, but NHS trusts were never likely to be able to make 3% recurrent efficiency savings in 2019-20 because there is no reliable evidence they have made such savings in the recent past and nor will they do so in the future.

Likewise, as commissioner plans to hold down activity growth rates in the secondary care sector have not yielded the hoped-for results before, notions that this “excess” activity will somehow vanish in the years that follow need to be viewed as the fantasy they are – particularly in the context of today’s waiting lists.

Much of the discussion over the next few weeks about the NHS spending settlement will take place in the virtual reality of remote meeting rooms. But the NHS very much operates In Real Life. At the very least, the starting point for spending review discussions needs to be the NHS as it really is today, not the parallel fiction NHS funders might wish it to be.


[i] NHS England’s revenue budget for 2021-22, net of £2.85 billion supplementary pension funding and additional non-recurrent Covid-19 funding. Throughout this analysis, NHS England’s revenue budget and NHS trust planned and actual spend figures are expressed net of the supplementary pension funding which followed an increase in the NHS employers’ pension contribution rate from 2019-20.

Note that although the total expenditure of NHS trusts equates to over 75% of the total NHS England budget, not all NHS trust income comes from the NHS England commissioning budget. A minority of trust income (around 13%) comes from other sources, the most significant being: the Department of Health and Social Care (via Health Education England) to fund clinical education and training (~3%); local authorities (~2%); public and privately funded research and development (~1%); and private patients (~0.9%). However, Treasury spending controls entail that any income and expenditure deficit related to activities in these non-NHS areas should be covered by NHS England.

[ii] This analysis uses the gross expenditure plans and actual/forecast spending for NHS trusts reported as part of aggregate national in-year financial monitoring rather than the net expenditure figures generally only reported in the consolidated accounts. In-year reports have been used here in order to enable comparison between the financial years before 2020-21 with 2020-21 itself, for which there are currently no consolidated accounts. The net expenditure figures in the accounts eliminate on consolidation income and expenditure stemming from around £2.4 billion of trading between NHS trusts. As in-year reports detail performance on income and expenditure against plans which include this intra-provider trading, there should be no impact on the overall analysis here.

[iii] In more detail: For the first six months of 2020-21, NHS England also had to introduce a monthly block “top up” for trusts, which covered the gap between the income they earned from NHS commissioners on the basis of 2019-20 activity levels and the actual costs of providing that activity (a separate top up system also reimbursed trusts for their additional Covid costs). This “top up” was necessary because, over the last decade, a large gap has opened up between the income trusts earn per patient treated and their actual costs, producing an underlying deficit in the provider sector which NHS Improvement estimated to be £5 billion at the end of 2018-19. The size of the block top up over the first six months of 2020-21 indicates that underlying deficit was unchanged by the end of 2019-20. We have written about the NHS provider deficit extensively. However, although closely related, for the current analysis it is important to not confuse the provider deficit with the overall NHS budget deficit. The provider deficit represents how the pressure of shortfalls on the overall NHS budget is distributed within the NHS – typically by requiring NHS trusts to reduce real terms costs while maintaining or increasing activity levels. In 2020-21 there was no provider deficit, because the need to ensure hospitals were adequately resourced during the pandemic meant the pressure of managing the overall budget shortfall was temporarily shifted to other spending areas, particularly Long Term Plan priorities and transformation. 

[iv] The adjustment for prices paid by commissioners in 2019-20 includes the £1 billion extra added to the NHS tariff for emergency care that year.

[v] NHS England’s end-of-year finance report states total NHS provider costs for 2020-21 were £105.8 billion. Our estimate that £97.7 billion of this represents the recurrent spend is calculated by subtracting £5.1 billion in reported “Covid” costs, a further £0.8 billion in additional annual leave accruals and £2.2 billion centrally funded pension costs which have also been excluded throughout this analysis. There were some movements in spending lines between NHS England’s January and the end of March 2021 finance reports, but the £97.7 billion figure is broadly consistent with a projected recurrent spend based on figures published for January.    

[vi] This would be a generous analysis as there is no clear evidence this additional spending happened, at least not in 2019-20. The consolidated NHS provider accounts for that year show that the income from CCGs and NHS England into community services provided by NHS trusts grew at below the rate of income growth into acute services, even after adjusting for the £1 billion increase in prices by commissioners for acute emergency care. As a whole, commissioner spending on mental health services provided by NHS trusts did grow faster than their spending on acute care, but this would account for less than £200 million of additional spending that year.

[vii] It is noteworthy that this £2 billion roughly equates to the size of the NHS trust cost base that is currently funded non-recurrently – and therefore precariously – through the Financial Recovery Fund, which in the original LTP was due to be phased out so funds could be shifted to LTP priorities such as primary and community care.

Suggested citation

Gainsbury S (2021) “Checking the NHS’s reality: the true state of the health service’s finances”, Nuffield Trust comment.