How much more money does the NHS need?

The drumbeat of pre-budget speculation is a familiar rhythm for the NHS. It is not unusual for the Treasury to want to leak out rumours of an NHS settlement early: at well over a third of total departmental revenue spending, news of a reasonably generous bounty for health in England is useful in quelling the demands and managing the expectations of other departments.

Early reports of real-terms increases, without the pesky detail on what baseline such increases apply to, can also be helpful in distracting the wider public from the allegorical devil in the detail that will emerge only later.

This long read offers context to this speculation by laying out the numbers and context that need to be considered before any figures emerging from the Budget can be fully judged. It also examines the spending pressures evident this year as a basis to understand what is needed to put the NHS in England’s budget on a more even keel before next year’s Spending Review.

In it, we examine NHS and DHSC revenue funding – the part of the budget given to day-to-day spending like staffing and medicines. The separate capital spending budget – to cover investment on buildings and equipment – is subject to separate pressures and policy questions that require more consideration than we can give here.

The baseline

One key detail is: what’s the baseline upon which any funding increase will be made? Last year’s actual budget? The last government’s plans for this current year? Actual spending levels already happening this year? In an ideal world, a definitive reference point for the baseline budget for the NHS in England would exist, against which we could judge any revisions when the Autumn Budget is published on October 30.

But this is not an ideal world. This is NHS funding and finance. And so a multitude of baselines, viewed through a panoply of smokes and mirrors are available, going far beyond the simple question of whether the baseline is last year’s actual revenue spend or the last government’s plan for the same this current year.

Being clear about what baseline is being spoken about when the final increase for the current year is revealed is crucial. That’s not just because the denominator matters when a headline percentage increase is announced. It is even more relevant when seen in the context of a decision made back in 2015 to redefine NHSE’s spending as “front-line NHS” and theoretically “protect” it with real-terms growth, albeit at historically low rates, while exposing the wider Department of Health and Social Care to the ravages of full austerity through cuts.

This decision established an artificial distinction between two parts of the same accounting group, making it even less clear what is meant by any lauded increase to “the NHS” of a given percentage.

The Spring Budget red book baseline

One version of the NHS baseline is established in the previous government’s Spring Budget red book, published in March. This set out a day-to-day funding envelope for NHSE this year of £165 billion, up just 0.2% in real terms from the previous year’s £163 billion – a rate significantly below the speed of crude population growth, let alone population growth adjusted for the health needs associated with ageing.

The Department for Health and Social Care fared even worse. NHSE makes up the majority of DHSC’s day-to-day revenue expenditure. But while NHSE’s spending envelope was marginally increased in the Spring Budget – in keeping with its “protected” status – the broader DHSC envelope from which that increased spending was to come was cut, by a real-terms 0.2%* to £179.6 billion. [*As with all real-terms adjustments cited here, our adjustment uses the Treasury’s preferred domestic-economy wide measure of inflation, which is currently expected to be just 0.8% this financial year. Cited figures exclude depreciation, in line with the 2024 Spring Budget.]

Responses to the Spring Budget were unenthused, and perhaps also somewhat jaded. Even prior to the pandemic it had become the norm for the budget for the NHS in England to be set unrealistically low at the start of each financial year, only for it to be upwardly adjusted at each passing fiscal event, winter crisis and staff pay settlement.

Come the pandemic, this habit was put on steroids. The NHS dropped the quaint notion of planning periods spanning an entire 12 months and instead adopted the colloquialism of “H1” and “H2”, to refer to six-month blocks of time, of which at least the final three months would be spent setting out the case for the funding increase required in the next. It would not be an exaggeration to suggest that between 2020 and today, each half-year block has enjoyed at least as many substantial revisions to the NHS budget – usually funded by raids on wider DHSC budgets – as the full financial years before the pandemic.

The actual existing baseline

The recurring habit of making in-year adjustments to the NHSE budget means there is more than one “official” baseline for the NHS in England budget, this current financial year and last. 

In particular, there is the £179 billion day-to-day budget for 2024/25 referenced in NHSE’s most recent board report, setting out its financial performance to the end of July. This, on paper, looks like a 3.9% in real-terms increase from what earlier board documents show was its actual spend (after the usual round of post-budget adjustments) of £171 billion in 2023/24 – so already at the upper end of some of that early speculation about what the October Budget might bring.

Around £2 billion of that increase is accounted for by an uplift in NHS pension costs triggered by a Treasury change in the contribution rate for some public sector pension schemes. This increase has been funded and we will likely see it formally recognised in any revisions to the Budget red book on October 30. It will be important to note that (like any increase we might see to fund rumoured uplifts in employers’ National Insurance) it will not increase the spending power of the NHS, but is rather extra funding to cover higher, Treasury-imposed, unavoidable costs.

But that still leaves a £12 billion difference between two authoritative official sources as to what the revenue budget for NHSE is for 2024/25. Around £5.3 billion of that difference reflects NHSE’s absorption from the DHSC of the budget and responsibility for health care education and training. That move happened in 2023/24 but had yet to be formally recognised in the Treasury’s March Budget red book, which left the budget sat under DHSC.

The status of the remaining £7 billion difference between the red book and NHSE’s actual, higher working revenue budget is particularly unclear, and is made up of multiple additional transfers from the DHSC to the NHSE budget, as we explore in the section below.

Beyond the baseline: what does NHS spending even mean?

Remember the accountancy trick to redefine NHSE spending as front-line NHS spending, back in 2015? Roll forward nine years and this has become an albatross around the necks of officials in NHSE, the DHSC and the Treasury seeking to make sense of where spending commitments and those hallowed real-terms “protections” fall.

While it was NHSE that got the better end of that deal, it is also NHSE with the harder-to-control cost base, dominated by immediate emergency care and politically salient elective waiting lists, rather than the DHSC’s longer-term concerns of staff training, public health and capital investment. And so the intervening years since the artificial boundary was drawn has seen multiple in-year transfers of ever-increasing slices of DHSC’s ever-decreasing non-NHS budget to NHSE.

In some instances, these transfers represent genuine one-off additions to NHSE’s responsibilities and budget – such as some of the pandemic vaccination campaigns – that might arguably be best managed as non-recurrent additions to the NHSE budget. However, in other cases, they represent desperate Peter-to-Paul measures that result in underspends in DHSC’s original plans for public health, adult social care and capital to plug the perennially under-estimated day-to-day spending needs of the NHS, at the price of storing up future costs in the form of under-investment in sickness prevention and health care infrastructure.

These transfers all fall outside the invisible magic circle of “protected front-line NHS” spending drawn by George Osborne in 2015, and so are not necessarily funded through increases in DHSC’s original budget nor reflected in the March 2024 Budget red book version of the NHSE baseline: all the better to avoid expanding the remit of what’s “protected”. Yet these funds are an essential part of NHSE’s resourcing, and comprise almost 4% of its planned day-to-day spending this year. 

These transfers mean that even before the new chancellor makes any changes on October 30, NHSE’s actual revenue budget for 2024/25 is already 2.8% higher in real terms (after adjusting for that pension increase) than its board reports show the NHS as a whole spent in 2023/24. 

Indeed, the Treasury will no doubt have been quick to point out during negotiations these past months that funding in 2023/24 included £1.7 billion of non-recurrent assistance to deal with the impact of doctor strikes, which have been mercifully less of a feature so far this financial year. Adjust for that assistance and the real-terms increase in the board report version of the NHSE revenue budget is more like 3.7% since last year: almost all apparently stemming from the DHSC’s own budget with so far little or no increase in that to make up the difference in its non-NHS responsibilities.

With press reports over the weekend citing an in-year increase to the NHS revenue budget of “3 to 4%”, the crucial missing detail for October 30 to provide is: on top of what and to whom? Is that 3 to 4% extra to go to the DHSC to help fund the transfers it has already made to keep the NHS afloat this year and last, or is that 3 to 4% essentially what the NHS has already received, but just not yet formally announced?

The next crucial question is, how much extra is needed?

Actual NHS spending: how much more is needed?

Answering this requires a clear sense of just how much the NHS is already spending – and therefore how much will be needed to keep it afloat without service cuts, before going on to consider how service extensions, additions or improvements might be resourced. One might assume that the obvious place to look would be the overspends chalked up by local health systems known as integrated care boards, but this does not provide the clarity we need.

An unfortunate consequence of the Treasury’s habitual low-balling of NHSE’s opening budget is it leaves NHSE with few coping mechanisms other than to cascade the same dysfunction down in the form of similarly low-balled ICB allocations, which this year left local NHS systems planning to overspend by £2.2 billion. The resulting “reserves” or “contingency” held back in NHSE’s central budget – intended to offset that planned system overspend – then becomes a focal point of hope-tinged-with-suspicion-tinged-with-apathy over the extent to which that pot may or may not be larger than NHSE is letting on, and how much of the demanded £9.3 billion efficiency savings might really be required.

It also means that the ICB overspend by July – 1% over plan – may not be a reliable or consistent bellwether of where the NHS budget as a whole might land.

To get a more robust picture, our analysis turns to NHS trust expenditure, which consumes in excess of 90% of system-level resources and provides the bulk of patient care, in cost terms. This shows that by the end of July, on a like-for-like basis (including removing strike costs incurred in 2023/24), NHS trusts were spending a real-terms 4.6% more each month than in 2023/24: a significantly faster pace of spend than the 3.7% real-terms increase to NHSE’s (like-for-like) actual budget, let alone the 0.2% budget increase set out in the March red book.

If replicated across that budget as a whole, the rate of spending growth observed in NHS trusts by July would be the equivalent to a full-year £1.4 billion overspend by NHSE, wiping out the entire NHSE budget, regardless of how much its head office may or may not have squirrelled away as “contingency”.

The picture becomes more grave when it is recognised that trust spending levels to the end of July did not include the impact of pay settlements for this year agreed with staff unions over the summer, as those payments were not made until August and September. Across the NHS, those settlements averaged at around 5.5% for most staff groups, substantially higher than the 2% originally assumed in NHSE’s plans and funding level. We estimate the total additional cost above the 2% plan is likely to be in the region of £3.5 billion, including the additional cost of pension contributions and national insurance at current rates.

Taken together, the rate of NHS trust spending growth to July and the additional cost of pay deals entail a real-terms cost pressure of 6.7% above like-for-like recurrent spending in 2023/24. After adding the Treasury-imposed higher cost of pensions, that translates as a need for a £12.9 billion cash increase above the final level of total NHSE spending in 2023/24, of which £4.8 billion is not currently covered by any account of NHSE’s – or DHSC’s – funding envelope for the year.

Fully funding that without further cuts to DHSC’s unprotected budgets would require a real-terms headline increase to DHSC’s 2023/24 revenue budget as set out in the March red book of 3.6% (including the additional cost of the Treasury’s pension rate) to £186.4 billion. This would represent the minimum needed to stabilise NHS funding this current year and would still leave questions about how far transfers already made from the DHSC’s wider budget earlier this year have been at the price of much-needed investment in public health, adult social care and health care infrastructure.

The season for openness and transparency?

Any changes to the NHS’s budget by the Chancellor next week will no doubt be met with the usual flurry of voices offering a variety of takes on what it might mean for the health service. But unnecessary complexity surrounding the finances of our biggest public service make such snap assessments unfeasibly difficult to make.

As this analysis has shown, any understanding of the likely budget announcement on the NHS needs to be set in the context not only of what the baseline is, but also what’s in scope and how it compares to some £4.8 billion of largely unavoidable day-to-day cost pressures already in train this year.

There is nothing inevitable about NHS finances being obscured by complex accounting and a lack of transparency. Up until 2018, quarterly reports from the now-defunct NHS economic regulator Monitor (and its successor NHS Improvement) provided admirable transparency about the financial and operational performance of the NHS provider sector, which consumes the bulk of NHSE’s resources. These were discontinued when its functions were folded into NHSE, and perhaps the truths about the costs of health care provision became too uncomfortable for the body also charged with health care commissioning to lay bare.

The resulting lack of transparency is not merely a source of frustration for analysts and policy wonks. It is a problem for the government and, ultimately, the public that the NHS is intended to serve. Just this week, the government launched what it terms a “rallying cry” to the public to ask for their ideas and views about how to fix the NHS. The Secretary of State himself has committed to a spirit of openness and radical candour about the problems facing the health service. Public deliberation events and a vast public consultation are part of the plan. And yet the basic facts about how we treat, measure and account for the billions of taxpayers’ pounds that fund this crucial service remain obscured.

As well as views on how to fix the NHS, the public are being asked about the government’s three “shifts” (hospital to home, treatment to prevention, analogue to digital). With at least two of these shifts heavily reliant on the part of the health budget that has been allowed to wither in order to protect “front-line” NHS services – public health and capital investment – it is perhaps time for politicians to recast NHS spending as health spending and simultaneously bring much-needed openness to the murky world of NHS finances. That is a proposal you're unlikely to see on the NHS Change website but is one that could make a positive difference to how we view and understand NHS spending.