Select Committee on Treasury Appendices to the Minutes of Evidence


Memorandum submitted by the King's Fund

  This memorandum addresses issues about the funding of the National Health Service raised by the Chancellor's 2001 Pre Budget Report, the Wanless Report on NHS funding and subsequent debate in Parliament on these matters.

  Based on new data from the Pre Budget Report (forecasts of GDP, additional funding for the NHS next year) and in the light of the Prime Minister's commitment to an "aspiration" articulated last year to increase NHS spending to meet the average of the European Union, this note reworks figures published last year in the British Medical Journal (J Appleby and S Boyle, 2000, Blair's billions: where will he find the money for the NHS? British Medical Journal; 320: 865-867) on the financial implications of this policy.


1.1  Pre Budget report

  The 2001 Pre Budget Report announced the allocation of an additional increase in the UK NHS budget next year of £1 billion.

  The Pre Budget Report does not explain why more money—over and above allocations decided by the 1999 Spending Review—will be made available to the NHS next year. However, this year the NHS has faced significant cost pressures—higher pay and prices, increases in the employer's superannuation contributions, costs of reducing junior doctors' hours etc—possibly amounting to 75 per cent of its 8.6 per cent cash increase (UK NHS net allocation).

  There has also been little growth in patient activity so far this year, which not only implies a fall in NHS efficiency, but also threatens the ability of the NHS to meet the NHS Plan targets to reduce inpatient and outpatient waiting times.

  It appears that it is high NHS-specific inflation and low to no growth in key areas of patient activity which have prompted the additional money.

1.2  The Wanless Report

  In the same week a report on the long term funding needs of the NHS was also published. Although the Wanless Report (a consultation document) does not recommend an amount of money that should be allocated to the NHS over the next 20 years, it hints heavily that more money will be needed—very possibly a lot more—to meet various demand pressures. A final report will be produced next year (in order to inform the next Spending Review).

1.3  Parliamentary debate

  During Prime Minister's Question Time on 28 November, the Prime Minister reconfirmed the Government's commitment to raise total health care spending in the UK to the average of the European Union by 2005-06 (the end of the next Spending Review) (Hansard 28 November, Col 964). However the waters have been muddied by subsequent statements by both the Prime Minister and the Chancellor in the media.


2.1  What is meant by "average"?

  The Government's apparent preferred measure to calculate the average EU spend on health care (as a proportion of GDP) is the arithmetic or unweighted mean—simply a sum of the percentage spends in all EU countries divided by 15. In effect, this gives the same weight to Germany as to, say, Portugal. Based on the latest data which is for 1998 (OECD 2000), this measure gives an average EU spend on health care of 8 per cent.

  There are three problems with this calculation, however:

    —  Use of the unweighted mean is wrong in this context:

    —  A weighted mean should have been used instead. That is, summing the absolute levels of health care spending and GDPs across the EU and then dividing the former by the latter. This gives the average spend per EU head of population as a percentage of GDP.

    —  The UK should be excluded from the calculation of the EU average.

    —  Inclusion of the UK reduces the current average (as UK spending is currently below the average), but will move the average up as spending in the UK increases. A weighted mean which excludes the UK produces an EU average of 9.03 per cent (for 1998).

    —  By the end of the next Spending Round in 2005-06, the EU average will have changed.

    —  On past trends, the EU average total health care spend will almost certainly be somewhat higher than the 1998 figure used by Government. Based on trends in the EU average spend over the past 40 years, the weighted EU average health care spend as a percentage of GDP (and excluding the UK) will reach 10.72 per cent by 2005-06 (J Appleby and S Boyle, 2001, NHS spending: the wrong target (again)?, in Health Care UK, Spring 2001).

2.2  Meeting the target(s)

  Figure 1 shows the net (ie excluding income such as patient charges) NHS spending paths required to meet three versions of the EU average total health care spend by 2005-06. Table 1 summarises the increases in expenditure necessary to meet these targets.

  The figure and the table rely on a number of assumptions: that,

    —  Private health care spending remains at current levels (approximately 1.1 per cent of GDP).

    —  Next year's NHS allocation (plus the additional £1 billion) will not change.

    —  The split between net and gross NHS spending is 93.5 per cent.

    —  The Pre Budget forecasts for growth in GDP and the GDP deflator are correct.

Figure 1

Table 1


Target as % GDP
Net UK NHS Spending
% change
% change

  Notes: 1 Real spend based on GDP deflator

  Meeting the Government's 8 per cent by 2005-06 is likely to require an additional £14.2 billion over the three years 2003-04 to 2005-06. This is a cash increase of over 22 per cent. In real terms this is equivalent to a rise of 4.3 per cent a year -this compares to an average real increase over the last three years of just over 7 per cent.

  However, to meet the 1998 weighted average—excluding the UK—(9.03 per cent) would require a £26 billion cash increase (over 40 per cent more than next year's allocation), equivalent to real annual growth of just under 9.4 per cent per year.

  Finally, to meet the weighted average (excluding the UK) as it is estimated to be in 2005-06 will require cash increases of £45 billion—70 per cent more than next year's allocation; a real annual rise of just under 17 per cent per annum for three years.


  Our analysis shows that the significance of a commitment to meet the EU average depends critically on its precise definition and on how spending on health care in the other EU countries changes over the next few years.

  At one end of the scale, on the basis of the Government's conception of the European Union average (and the Pre Budget forecasts for GDP growth etc) it would seem that there should be little difficulty in meeting this target—if recent increases in resources for the NHS are any indication of the future. Although the real rise is just over 4 per cent per annum, this is significantly less than has been allocated to the NHS over the previous three years and should not, in our opinion, have any implications for taxation policy (although we would note that this is in excess of the predicted real growth for GDP). If growth in GDP is less than forecast this may impact on future tax yield but it will also make the target (expressed as a percentage of GDP) easier to attain.

  However, at the other end of the scale, using other measures of the average which most commentators agree are more appropriate, suggests that very large sums of money will be required if the UK is to meet the EU average total health care spend by 2005-06—up to £45 billion under one scenario. Clearly, such large sums raise questions about the balance of spending across departments in general and the possible need to raise taxation levels.

  In our view, however, these issues concerning which average to use and the date by which the, "target" is to be met are already being overtaken by the Wanless Report. If the final report from Derek Wanless and the Treasury Health Trends Team is to mean anything then it will have to recommend a figure (or possibly range of figures) for NHS spending which is judged sufficient to meet pressures to spend more such as demographic change and to raise the quality of care to acceptable standards. However, long term forecasts of this kind are clearly subject to a high degree of uncertainty and can only give a very broad indication of how much is required.

  The Chancellor can then accept the recommendations, and, importantly, choose a period of time by which this new target is to be met based on other calls on public resources, the state of the economy and other macroeconomic goals.

Ultimately, of course, regardless of the technical work carried out by the Health Trends Team to support their conclusions, the choice about the level of NHS spending of course remains a political decision.

5 December 2001

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