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
The Pre Budget Report does not explain why more
moneyover and above allocations decided by the 1999 Spending
Reviewwill be made available to the NHS next year. However,
this year the NHS has faced significant cost pressureshigher
pay and prices, increases in the employer's superannuation contributions,
costs of reducing junior doctors' hours etcpossibly 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
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 neededvery possibly
a lot moreto meet various demand pressures. A final report
will be produced next year (in order to inform the next Spending
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. A SPENDING
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 meansimply 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,
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,
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
The figure and the table rely on a number of
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.
ADDITIONAL MONIES NEEDED TO MEET VARIOUS
SPENDING TARGETS: CHANGES IN NET UK NHS SPEND OVER THREE YEARS:
|Target as % GDP
||Net UK NHS Spending
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 averageexcluding
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
Finally, to meet the weighted average (excluding the UK)
as it is estimated to be in 2005-06 will require cash increases
of £45 billion70 per cent more than next year's allocation;
a real annual rise of just under 17 per cent per annum for three
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 targetif 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
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 2005-06up
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
5 December 2001