Is the NHS financially sustainable?

John Appleby examines recent data from the Office for Budget Responsibility, which provides valuable insight into how health spending will evolve in the future.

Briefing

Published: 22/09/2016

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Can we afford our health service? NHS providers are set to end the year in financial deficit, and many have warned of the "unbridgeable gap" between what we need to deliver and the money available to pay for it. Just this week, the Royal College of Physicians called for more cash to meet rising demand. There is clearly widespread anxiety about the future of the service, with much speculation that we will need to find new ways to fund the service. The NHS is undoubtedly on a bumpy road, but are we moving into a future where it will soon be unaffordable?

NHS spending has risen in real terms by around four per cent each year since its inception. Historical trends suggest public spending on health as a share of GDP will double by 2065. The question of whether this trend can continue is the subject of a current House of Lords inquiry, with a committee looking into the sustainability of the health service up to 2030.

New projections from the Office for Budget Responsibility (OBR) released this week provide valuable insight into how spending on health will evolve in the future, and go some way to answering this question.

New projections from the Office for Budget Responsibility

The OBR figures outline their estimates of how spending could grow in future. As well as looking at demographic change and any effects of growing national income, they also look at the impact of ‘cost pressures’.

While projections do not predict the future, they can tell us something about how NHS spending might evolve and suggest how we might respond.

A key change in the OBR’s assumptions about future spending is the inclusion of a factor for ‘other cost pressures’. These are in essence the extra growth in costs over and above demographic change and any effects of growing national income (and the desire to devote increasing wealth to health). This element of the growth in health spending is hard to pin down, but is generally recognised as an important driver of additional growth in health spending over time for all countries.

The OBR’s new ‘cost pressures’ growth projections suggest that public spending on health care in the UK could rise from 7.4 per cent of GDP in 2015/16 to between 8.8 per cent and 8.9 per cent by 2030/31, depending on the extent of any containment of this element of growth.

Based on the OBR’s 2015 projections for growth in GDP, this is broadly equivalent to a real increase in health spending of just under £100 billion over the next fifteen years (from £139 billion to £237 billion, in 2015/16 prices).

Of course, the OBR is not the only organisation to project health spending into the future. Other studies by McKinsey, the OECD and the European Commission (EC), for example, also suggest changes in spending of between 7.3 per cent and 12.3 per cent of GDP by 2030.

What do OBR’s projections tell us about the long-term sustainability of the NHS?

UK public health spending as share of GDP - various projections 22/09/2016

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Use the legend to view other projections on the chart.

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While these figures come with the inevitable uncertainty of any projections, taking the OBR’s new projection of around 8.8 per cent of GDP by 2030 (and bearing in mind other projections from the OECD and others), is it possible to draw a conclusion about the financial sustainability of the NHS up to 2030?

The short answer is, yes, but the OBR’s projection does have implications for taxation and spending priorities across government.

NHS spending has grown at a rate of four per cent since 1950. The OBR’s projection implies an annual real growth of 3.5 per cent to 2030.

From this perspective, then, the increase in projected spending does not seem out of line with history – and indeed, slightly lower than the long-term growth in spending.

From an international perspective (caveated with warnings about the difficulty of making comparisons in health spending between countries), a national public spend of 8.8 per cent by 2030 would take the UK to the levels of public spending for France, the Netherlands, Denmark, Sweden, Germany and Japan (and a little above Norway and the US) – in 2015.

OECD estimates of public spend on health as share of GDP in 2010 and 2030 22/09/2016

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And in terms of where other countries are likely to be situated on public spending by 2030, the OECD projections suggest that all countries’ spending is likely to increase, leaving the UK’s relative rank on public spending on health essentially unchanged between 2010 and 2030.

In themselves, these triangulations of the UK’s possible spending on health by 2030 do not provide a conclusive answer to the financial sustainability of the NHS over the next fifteen years. However, they do provide a strong indication that – judged historically and across countries – spending increases are sustainable.

Higher health spending – but who pays?

The estimates provided by the OBR (as well as the OECD and the EC) are what you might call ‘policy neutral’. This means that they are based on what spending would look like given forecasts of the path of key spending drivers (such as demographic change). They do not take into consideration political choices – such as seven-day working.

If the OBR’s cost pressures projection became the chosen spending path (remember these are not predictions), this would have policy implications. Not least is the question of where the extra money would come from. The choice, crudely, is between (or rather, some combination of) extra taxation and/or shifting government spending away from some areas and towards health.

However, it is important to bear in mind that a big chunk of the £100 billion increase implied by the OBR projection arises because the economy – and its measure, GDP – is also projected to increase; even if the health spend share remained unchanged at its current rate of 7.4 per cent (and all other government spend also stayed the same as the 2015/16 shares), the NHS would grow by nearly £60 billion in real terms. This would leave around £40 billion (an extra £2.7 billion each year) to be funded through some combination of increased tax and reprioritisation of government spending.

Of course, all these estimates depend on the rate at which GDP will grow in the future. The full impact of the Brexit decision on GDP, for example, remains unknown, but most projections indicate a reduction in the rate of growth of GDP into the future. This will clearly limit the choices available to future governments in terms of their tax and spend decisions.

So, going back to the original question, can we afford our NHS? There are grounds to be optimistic that we can. A funding increase in line with OBR projections of 8.8 per cent by 2030 is both possible and affordable. But it won’t come for free. It will require some difficult spending decisions, and there is an immediate financial challenge to be dealt with first.

Suggested citation

Appleby J (2016) 'Is the NHS financially sustainable?'. Nuffield Trust briefing, 22 September 2016. https://www.nuffieldtrust.org.uk/resource/is-the-nhs-financially-sustainable

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