Key points
- This briefing examines pressures on the Department of Health and Social Care budget on the eve of the June 2025 Spending Review, looking in particular at the two financial years prior to the Spending Review period: 2024/25 and 2025/26.
- Since coming into office in July 2024, the Labour government has set budgets for health care spending in England to grow at 2.9% per year for 2024/25 and 2025/26. That’s marginally faster than under previous governments between 2011/12 and 2023/24, where it grew at 2.4% per year, but still below the historic long-run average of 3.7% per year between 1979/80 and 2019/20.
- This means that, ahead of the Spending Review, the Department of Health and Social Care’s (DHSC’s) budget this year is currently in the region of £37bn (or 18%) lower in cash terms than it would have been had it grown in line with the longer-term trend.
- This financial year looks particularly tight: £1.5bn of the funding allocated is earmarked to cover costs to the NHS stemming from increases in employer National Insurance. Excluding that money means NHS spending growth this year is set to be less than 2% in real terms, despite a cash injection of £22.6bn over the two years to 2025/26 at the autumn budget.
- This extra £22.6bn allocated to the DHSC by 2025/26 is more than absorbed by spending pressures during 2024/25 and 2025/26 such as inflation (including the cost of meeting NHS pay settlements following industrial action); population growth and ageing; rising public expectations of health care; and the cost of expanding elective care capacity to meet waiting times targets.
- Taken together, these factors have left the NHS facing substantial unfunded spending pressures by the end of the current financial year. However, around £6bn of these would be recouped if NHS providers maintained their recent levels of annual cost efficiency savings over the same two years.
- Ministers hope that savings from the dismantling of NHS England, cuts to integrated care boards and income from the immigration health surcharge will fill the remaining gap. But this looks unlikely to close the gap entirely. In the best-case scenario, the DHSC faces a funding gap of £1.3bn by the end of this financial year.
- Progress towards the three ‘shifts’ targeted in the 10-Year Health Plan will be curtailed unless the government provides more upfront funding for the NHS, or intervenes to flatten growth in demand for health care through measures such as clearer prioritisation around what existing and new treatments should be funded, or investment in preventing ill health at source.
The Labour government has been clear that the NHS should not expect a significant funding windfall when the results of the Spending Review are announced next week. The ministerial view is that while the NHS is “broken”, low levels of productivity within the service mean that it should first look inwards, to heal itself, rather than outwards to the Treasury for remedy.
This briefing sets out the state of health care funding in England ahead of this month’s Spending Review. We look first at day-to-day spending on health care as set by the government so far for this financial year and last, and how it compares to the long-run average. Then we look at the £22.6bn extra money allocated to the Department of Health and Social Care (DHSC) at last year’s autumn budget to cover the financial years 2024/25 and 2025/26, and show how much of that is left over when taking into account the cost pressures experienced in the health service over this financial year and the one before it.
How do the Labour government’s NHS spending plans compare to those of its predecessors?
Figure 1 below shows that funding levels for day-to-day spending by the DHSC are set to grow marginally faster in the two financial years from 2023/24 than was the case over the 13 years that preceded the change of government in July 2024. (See note 1 in ‘Notes’ at the end of this briefing for an explanation of why we use DHSC rather than NHS England spending in this analysis.)
Figure 1: Funding levels for day-to-day spending of the Department of Health and Social Care
ChartThe average annual increase between 2011/12 and 2023/24 was 2.4%, as measured using the GDP deflator, the government’s preferred measure of inflation in the domestic economy. However, that overall rate masks significant variation between earlier Spending Review periods. Average DHSC day-to-day funding growth has actually ranged from 1.5% a year for the period between 2015/16 and 2018/19 to 3.3% a year for the period between 2018/19 and 2023/24, when the NHS Long Term Plan gave a boost to planned spending levels. Those planned increases were further boosted by short-term increases related to the pandemic, before two years of real-terms cuts, which broadly returned NHS spending to the pre-pandemic planned level for 2023/24.
Although health spending over the past 15 years has exceeded original government plans almost every year, Figure 1 shows that actual spending levels have still been below the 40-year long-term average of 3.7% real-terms growth per year. Projecting that long-term average growth rate forward from 2011/12 indicates that planned spending this year is around £37bn (or 18%) lower in cash terms than would be the case if spending had grown in line with the longer-term trend.
There are important caveats to note about the funding levels for this (as-yet incomplete) year in particular.
Figure 1 shows funding levels for this year as set in the Main Parliamentary Supply Estimates, published in May 2025. This includes £1.5bn of additional funding which is intended to contribute to the direct costs to the NHS of the increase in employer National Insurance contributions (ENICs). These increased costs were only introduced in April 2025, so are likely not reflected in the most recent GDP inflation measure, published at the end of March. If we assume that extra funding will eventually be matched by an equivalent increase in inflation, the average real-terms growth rate over the two financial years 2024/25 and 2025/26 shrinks to 2.6%, with growth in the current financial year remaining particularly tight, at around 1.5%. Short of any rabbits – modest or otherwise – in the Spending Review, that figure might edge up very slightly as a result of routine in-year transfers from other government departments, but currently looks unlikely to go over 2%.
£22.6bn extra?
As a counter to the inevitable calls for more funding for the NHS in the lead-up to the Spending Review, government ministers and officials have been keen to point out that the NHS has already been allocated £22.6bn more by the end of this current financial year than it spent two years earlier in 2023/24.
That claim refers to actual DHSC day-to-day spending in 2023/24 (excluding depreciation) and the £200.5bn (cash terms) funding allocated to the department for 2025/26 in Rachel Reeves’s first budget in October 2024.
Mathematically speaking, it is true that the cash increase between the DHSC’s day-to-day spending in 2023/24 and the allocation set for it in the October 2024 budget is £22.6bn. But as the figure has not been adjusted for inflation and fails to take into account other unavoidable cost pressures such as population growth, the figure will feel substantially smaller to those working in, running and using the NHS.
Deconstructing the £22.6bn
NHS inflation
Inflation has had a particularly significant impact on the NHS since 2023/24, driven partly by wider economic pressures and especially by the pay settlements agreed with the incoming government in July 2024 following protracted industrial disputes.
Increases to staff pay in one year must, of course, also be funded in all following years, when staff reasonably expect their pay to increase again in line with further inflation. Figure 2 shows that over the two years between 2023/24 and 2025/26, the impact of inflation on health care costs in England can be expected to absorb around £16bn of the original £22.6bn, assuming the pay offers made by the government to staff in May this year, averaging 3.8% across all staff groups, get agreed. (See note 5 in ‘Notes’ section at the end of this briefing for more information on how we calculate health care inflation.)
Figure 2: Where has the extra £22.6bn for the NHS gone?
ChartHealth care demand
The second-largest spending pressure in the health system is driven by the NHS carrying out ever-more complex treatments and diagnoses, and constantly improving standards to meet the needs and expectations of the population. Growing demand is often understood to be synonymous with the growing and ageing population. But while these factors can be expected to increase health care expenditure by around 1.1% a year (eating into about £4.2bn of the £22.6bn as illustrated in Figure 2), a far more significant component of health care demand is rising population expectations and health care capabilities.
Health care capabilities are constantly expanding with technological developments such as new medicines and therapies. These translate into ever-rising expectations as patients and the public naturally want to be able to access diagnoses, treatments, standards and levels of convenience that were previously not possible. In other parts of the economy, technological advancements often lead to reductions in cost. But in health care across advanced economies, the trend goes in the opposite direction, as developments in drugs and other therapeutic interventions mean that more treatment is possible, not less, increasing spending pressures. Ideally, these developments also mean a higher level of health benefit is available to the population than was previously possible, although this is not always the case.
Those technological advances, and the rising expectations they bring, are estimated to add in the region of a further 1.8% per-year pressure on health care spending, on top of population growth and demographic change, and are captured in Figure 2 by the bar marked ‘higher demand’, absorbing a further £6.6bn of the £22.6bn over two years. While meeting such ‘non-demographic’ demand might be viewed theoretically as optional for the health service, in practice it is not. Clinicians aspire to constantly improve the care they offer to patients, and the public and politicians expect the health service to keep up with what is available elsewhere – an expectation codified in part through the legal requirement that the NHS funds all medicines and treatments recommended by the National Institute for Health and Care Excellence. The NHS, as is the case in many other health systems, faces constantly moving goalposts as it strives to satisfy public demand through the treatment it offers. This more than doubles the cost pressure that arises from population and demographic growth alone.
Higher levels of elective activity
In addition to the pressures exerted by technological advances and rising expectations, the NHS currently faces an elective care backlog as waiting times lag behind desired standards. In 2024/25, the government adjusted the NHS budget mid-year to provide an extra £2.5bn to fund higher levels of elective care capacity, which typically come in the form of staff overtime and outsourcing care to the private sector.
The government will hope that the £2.5bn will be a one-off cost, and that waiting time reductions this year will instead be achieved through higher levels of productivity, thereby releasing the funding for other purposes this current financial year. But threats of further rounds of industrial action from resident doctors cast doubt that the hope will be rewarded, particularly when waiting time reductions remain so politically salient. For this reason, our chart (Figure 2) assumes the funding added to electives in 2024/25 will need to remain in place during 2025/26.
Pension costs
A further cost added in 2024/25 that will also remain in place in 2025/26 is the £2bn in higher pension costs introduced as a result of a Treasury-imposed increase in the contribution rate for certain public sector pensions. This cost is unavoidable for NHS employers and has been imposed to ensure the Treasury is able to afford the pension liabilities it owes to past as well as present NHS staff.
After these spending pressures, the entirety of the £22.6bn is spent and more, leaving the health service with an unfunded spending pressure of around £8.7bn.
Filling the gap
Efficiency savings
While the extra demand for health care entailed by population growth, ageing and rising expectations is hard for the NHS to avoid, the health service is routinely asked to mitigate some of the costs of inflation through efficiency savings. Since 2022/23, local NHS systems have been asked to deliver annual efficiency savings equivalent to at least 2.2% of their costs. That level of efficiency saving is equivalent to asking health care providers – from GP practices to NHS trusts and private providers – to absorb almost half of the cost of inflation (including that driven by national pay deals) in 2024/25 and 2025/26. This absorption can take a number of forms – from reducing staff numbers in order to mitigate the cost of salary increases, to negotiating below-inflation price controls with suppliers.
Bold claims are often made about the level of efficiency savings made across the entire NHS, with NHS England claiming £8.7bn was found in 2024/25. System-wide savings are prone to double-counting, as both NHS providers and commissioners chalk up the same local savings.
A more cautious estimate of the actual level of efficiency savings within the NHS at present would be based on savings claimed only by NHS provider trusts. Data obtained by the Health Service Journal under the Freedom of Information Act and shared with the Nuffield Trust shows that by October 2024, provider trusts were on track to deliver just under £5bn in efficiency savings by the end of that year.
However, around 40% of those savings were non-recurrent. This means that while they avoided costs they otherwise would have faced in 2024/25, they did so through one-off measures – such as delaying recruitment of a new staff member, or payment of a bill, until the start of a new financial year. This means the cost has not been avoided recurrently, but can be expected to re-emerge as a spending pressure the following year.
After removing these one-off cost savings, recurrent provider efficiencies over 2024/25 look likely to have been nearer £3bn, or around 2.1% of provider trust operating costs, similar to the level achieved in 2023/24. This marked a significant increase in efficiencies compared to the period during and immediately after the pandemic. These cost reductions have been achieved through sharp decreases in both bank and agency forms of temporary staffing, with agency spending reducing by almost £1bn in 2024/25 alone. Together with a slowdown in the growth of permanently employed staff, these spending reductions mean staffing levels between March 2024 and March 2025 remained almost flat.
Assuming NHS providers will be able find a similar rate of recurrent efficiencies in 2025/26 is ambitious, as costs that have been removed once cannot be removed again. However, if providers do manage to achieve a similar rate of new recurrent savings in 2025/26, this would pull back a total of £6bn in avoided costs over the two years, offsetting almost 40% of inflation pressures and exceeding expectations implicit in modelling by the Office for Budget Responsibility.
Other savings
That would still leave the DHSC around £2.8bn below water by the end of this financial year, despite the £22.6bn extra.
The government will hope two forms of relief will fill that gap.
The first is that further savings will emerge this financial year through the government’s announced cuts to posts in integrated care boards, the DHSC and NHS England. The scale of the job cuts announced suggest headline savings to pay costs could eventually exceed £1.3bn recurrently, but it is unclear how quickly these will emerge – particularly as legislation required to dissolve NHS England is not expected to reach Parliament until the autumn – and it is unlikely that anything near to that figure will hit the bottom line this year.
When they do emerge, though, headline savings from role reductions will likely be offset in the short term by redundancy costs. How post reductions will be implemented, and the extent to which they will be found through recruitment freezes as opposed to redundancy schemes, is uncertain. However, we calculate that if post reductions follow a similar path to those seen during the Lansley reforms of 2012 – where around half of removed posts resulted in a redundancy payout – redundancy costs could be in the region of half the headline annual savings. Although the Treasury has set aside funds to cover redundancy payments to centrally employed staff in NHS England and the DHSC, these arrangements do not currently apply to job cuts in integrated care boards, which can be expected to make up around half of the final redundancy bill. For these reasons, it would be optimistic to assume savings from post cuts will make a significant dent in NHS spending pressures this financial year.
Income
A more significant and rarely discussed relief to spending pressures this year might alternatively be found in the immigration health surcharge. The scheme is controversial, in part because it requires people who have moved to the UK under most visas for work or study to pay an annual fee of £1,035 to access (with some restrictions) NHS care, in addition to any income tax or other tax contributions they make while in the UK. The NHS’s income from the scheme – which reached around £1.45bn for England in 2023/24, or almost 1% of its total funding – is not included in headline Treasury announcements on the DHSC budget, as the income is first received by the Home Office and then transferred to the DHSC in tranches over the course of the year. While income will fluctuate based on immigration levels, it would be reasonable to assume that at least £1.5bn will be received this year, in addition to the £22.6bn provided by the Chancellor in her October autumn statement. That would close some of the remaining funding gap in our analysis, but still leaves a hole of around £1.3bn at the end of this financial year.
Conclusion
When the Chancellor announced her first Budget in October last year, she described the £22.6bn extra funding as a “down payment” on the 10-Year Plan for the NHS, expected to be published later this summer. Our analysis shows that, far from providing the financial headroom to develop new forms of care, or to help reduce health inequalities – for example by addressing lower access to primary care in the most deprived areas – the entirety and more of the £22.6bn is likely to be consumed by pre-existing spending pressures, including those created by demand.
In the context of multiple demands on the constrained public finances, this creates a challenge for the government: increasing resources for health without raising taxation could potentially come at the detriment of other public spending priorities, including those that have an impact on health, such as education, the environment and housing. Alternatively, the government could explore options to flatten the growth in demand for health care. These might include a tightening of the criteria for adopting new health care technologies (for example setting a higher bar on cost effectiveness), preventing ill health by addressing the drivers of chronic disease at source, or both.
Notes
- In this analysis we have shifted our usual focus from NHS England’s finances to the Department of Health and Social Care (DHSC) as a whole. Although NHS England accounts for the vast majority of DHSC revenue spending (97% by the end of 2024/25), the Department also oversees broader areas of spending, including public health and social care. Our change reflects both the government’s plan to dismantle NHS England and the increasingly blurred lines between the two budgets. The expiry of the 2015 Spending Review’s NHS ring fence also makes it timely to consider the wider departmental picture.
- Figure 1: Average real-terms increases for each period are calculated from a baseline of the final year of the preceding period, with the exception of the 2010 Spending Review, which is calculated from 2011/12.
- Figure 1: Figures have been adjusted to remove the impact of changes in accounting for NHS provider trust depreciation during the period and significant increases in the NHS employer pension contribution rate from both 2019/20 and 2024/25 onwards, which increased NHS expenses without increasing spending power. Without adjusting for those two pension rate changes, the average increase would be 3.6% for the Long Term Plan period and 3.5% for the period covering 2024/25 and 2025/26. Previous periods are unaffected by the adjustment.
- Figure 1: The long-term average growth rate is based on total health spending (current and capital spending combined) but is applied here to current health spending for illustrative purposes.
- How we calculated the estimated spending pressures:
Each year, NHS England (and its predecessors) calculate the expected impact of inflation on the cost of the NHS patient care that is funded through core contracts between NHS commissioners (i.e. integrated care boards) and NHS trusts and independent sector providers. This measure of inflation is based on the particular basket of goods and services that NHS providers use in the direct care of patients, of which in the region of 70% is staff cost, and excludes the majority of their drug costs, as these are funded separately. These calculations are known as the ‘cost uplift factor’ (CUF). Although we generally measure health care expenditure using an entire domestic economy measure of inflation (the GDP inflation measure), when looking at expenditure over a shorter time period, it can be helpful to use an NHS-specific measure which more accurately reflects the timings of NHS pay deals, as these can differ from trends in the wider economy – for example with NHS pay increases typically coming later than in the private sector.
As the DHSC has a broader cost base than NHS providers alone, and funds NHS drug costs through a separate mechanism, we have adjusted the original NHS provider CUF to fit a simplified model of the DHSC cost base, based on the 2023/24 DHSC accounts. The main differences between the our adapted CUF for the DHSC cost base and the original CUF are as follows.
- We have removed the impact of higher employer National Insurance charges (ENICs) which are included in the original CUF for 2025/26, as these costs have been funded in addition to the £22.6bn and add a further 1.8% to staff pay costs in 2025/26.
- We have adjusted the increase for staff pay in the original CUF for 2025/26 to include the impact of the government’s pay offer made to NHS staff in May this year, which is 1% higher than assumed in the original CUF, which we expect will be updated shortly.
- We give a higher weight to drug costs in our adapted CUF compared to the original CUF, as these costs represent 10% of the DHSC’s expenditure (after the industry rebate on branded medicines) compared to a 2.4% weighting in the original 2024/25 NHS provider CUF. As the inflation figure applied to drug costs in the original CUF explicitly excludes high-cost drugs, we have applied a different, higher inflation figure to drug costs in our adapted CUF. In recent years, DHSC drug costs have risen by around 5% each year, through a mixture of volume, price and product mix changes (with the latter entailing that, over time, patients are moved on to higher cost products). We proxy this 5% annual increase in our simplified model by applying the GDP deflator for each year to the proportion of the DHSC budget that represents drug spending and then applying a further 2.9% activity increase (detailed below) with the results subject to the 2.1% provider efficiency saving. Using a higher inflation figure for drug costs than the original provider CUF model adds £340m to our estimate of DHSC costs over the two years.
- Our adapted CUF has a lower staff-pay weight of 59% compared to 70% in the original. To calculate a DHSC staff pay weight, we have included directly measured staff pay costs as set out in the DHSC accounts for 2023/24 (equating to 51%) plus 70% of DHSC spending on primary care, dental services, community pharmacies, social care and professional education and training. Decreasing the weighting for staff costs has the effect of decreasing the overall inflation measure, as staff cost inflation has been relatively high in recent years, with a one-percentage-point reduction in the staff cost weight leading to a £120m reduction in estimated costs over the two years.
- 12% of DHSC net expenditure is on health care provided by non-NHS organisations, including private and voluntary sector providers, compared to around 3% for NHS trusts. This difference is largely accounted for by NHS commissioners contracting directly with private providers. We have assumed this proportion of DHSC expenditure rises in line with the original NHS CUF for each year after the application of a 1.1% reduction for efficiency in 2024/25 and a 2% reduction in 2025/26. This echoes how the CUF is applied to payments made between NHS commissioners and NHS trusts. This adaptation also decreases the overall measure of inflation compared to the original NHS provider model.
Adapting the CUF in these ways to reflect the DHSC cost base results in a lower level of inflation than simply applying the original CUF, with the latter implying £330m higher costs over the two years to 2025/26 than costs presented in Figure 2.
Overall, the adapted CUF estimates inflation for 2024/25 at 5% (equal to the original NHS CUF, as the lower staff cost weighting is offset by the higher estimate for drug costs, based on the GDP deflator for the year) and inflation for 2025/26 at 3.4%, compared to 3.6% in the original method (adapted to exclude the impact of higher ENIC costs but to include pay offers made to staff in May 2025).
To estimate demographic pressures in 2024/25 and 2025/26 we use the general and acute age cost curve which is used to calculate NHS resource allocations for local areas and apply this to the mid-year population estimates from 2015 to 2023 and then apply the average growth rate of that period (1.13%) to 2024/25 and 2025/26. Our estimate of demand related to rising expectations and health care capabilities is based on estimates set out by the Office for Budget Responsibility for non-demographic drivers of health care costs, from which we have excluded the influence of the so-called Baumol cost disease, which aims to capture a cost driver associated with relatively low levels of productivity seen in labour-intensive sectors such as health care, as those costs are in theory captured in our inflation estimate.
Suggested citation
Gainsbury S (2025) Down payment or making ends meet? NHS financial pressures in the run-up to the Spending Review. Briefing, Nuffield Trust.