Higher inflation to erode NHS spending power

After the new Prime Minister made headlines by suggesting she would divert money planned for the NHS into social care instead, John Appleby and Sally Gainsbury take a closer look at how inflation is already significantly reducing the spending power of the health service. There is a pressing need for increased capacity in the care sector, but a raid on already pinched NHS funds is not the solution.

Blog post

Published: 21/09/2022

New Prime Minister Liz Truss has stated she would like to see a reversal of last autumn’s plan to plough the bulk of the £11 billion of new tax revenue raised this year through the National Insurance increase into the NHSsaying more of it should instead go to adult social care.

There is a pressing need for both sustained investment in increased capacity in the adult social care sector, as well as help for existing providers with energy bills this winter. But with inflation already significantly reducing the spending power of the NHS this year and next, can it really afford for extra spending in social care to come at its expense?

New inflation forecast a further blow to NHS coffers

Back in March this year, the Department of Health and Social Care in England expected to receive an extra £30.5 billion cash increase over the three years from 2021/22 in its core funding – that is, excluding ringfenced money for Covid-19 measures. This would take its budget from £152.5 billion in 2021/22 to £182.9 billion in 2024/25.

Of course, a significant chunk of this money would be absorbed by higher prices. Based on increases in official inflation forecasts from March this year, the £30.5 billion shrinks to nearer £17.9 billion, after taking into account our projections for NHS-specific inflation over the next few years. Still, that would represent a real rise of around 7.7% this year, 2.7% next year, and a slightly less impressive 0.9% in 2024/25.

But these real increases are based on our best understanding of future inflation back in March. The OBR’s forecast then was for the Consumer Price Index (CPI) to rise by 7.4% this year, 4% next year, and 1.5% in 2024/25. By August, however, the Bank of England’s Monetary Policy Committee’s report forecast even higher CPI inflation – to 9.9% this year, 8.4% next year, but with slightly lower inflation in 2024/25 of 0.9%.

Given these new forecasts, our estimate is that the original £30.5 billion cash increase will be equivalent to around £14 billion by 2024/25 – a cut of just over a fifth to the originally pledged real spending power for the Department. This cuts the planned budget in 2024/25 from £182.9 billion in cash terms to £166.5 billion in today’s prices.

The NHS budget for this current financial year has already had to be revised twice to take in around £3 billion of unexpected higher cost pressures, including fuel costs and a £1.4 billion unfunded pay offer to staff.

Resources to be hit

Of course, as we’ve seen in the last few months, inflation forecasts will change as the drivers of inflation (not least the economic fallout of Russia’s invasion of Ukraine) also change. Nevertheless, as things stand the Department can expect a significant cut in the level of resources it expected just six months ago. This comes at a time when it is grappling with huge backlogs of care due to the impact of Covid-19.

There is a pressing need for increased capacity in the care sector – this is needed both to improve the quality of life of disabled and frail people and also to ease bed pressures in the NHS. But for extra capacity to be grown, it needs a long-term and sustainable funding settlement, not a sticking plaster raid on already pinched NHS funds.

The new Prime Minister’s reference to “people in beds in the NHS who'd be better off in social care beds” may suggest she hopes the NHS would save a pound for each pound spent in social care, but reality is unlikely to be so neat. The NHS beds and staff will still be there, with a queue of further patients to see. The only way to get money out in such a short timeframe would be to cut the number of health service workers or facilities.