Spending on the National Health Service is the fastest growing area of public expenditure. The NHS budget for 2004-05 was £69.7 billion, rising to £76.4 billion in 2005-06 and will be £92.6 billion in 2007-08. Despite the increased resources, the NHS reported an overall deficit of £251 million (including Foundation Trusts) in 2004-05, the first time since 1999-2000 that the NHS as a whole had overspent. In 2005-06, the overall deficit increased to £570 million (£547 million excluding Foundation Trusts). There was an increase in both the number of NHS organisationsStrategic Health Authorities, Primary Care Trusts, NHS Trusts and NHS Foundation Trustsreporting a deficit (up from 168 to 190) and the proportion of those bodies reporting a deficit (up from 28% to 32%).
On the basis of a Report by the Comptroller and Auditor General, jointly prepared by the National Audit Office and the Audit Commission, the Committee took evidence from the Department on three main issues: what factors had led to the deficits, what the impact was on organisations in deficits, and what steps were being taken to recover deficits.
We found that there is no single reason why NHS bodies are in deficit, but that a number of factors are at work. Those reporting a deficit tended to have had a deficit the previous year. Excluding foundation trusts, of the 159 bodies reporting a deficit in 2004-05, 117 (74%) also recorded a deficit in 2005-06. The NHS has also been under significant financial pressure to meet the costs of national pay initiatives which the Department had not fully costed. Some NHS bodies have coped better than others in managing these cost pressures, indicating that the standard of financial management expertise varies across the NHS, as does the level of clinical engagement in financial matters. Bodies already in deficit looking to turn their financial position around can also be disadvantaged as they are expected to recover that deficit in the next financial period.
NHS bodies in deficit face the challenge of maintaining and improving the level of healthcare services whilst managing and recovering their deficit, during a period of significant reform and rationalisation within the NHS. To manage their deficits, NHS bodies have needed to cut the size of the workforce, with 903 compulsory redundancies in the six months to 30 September 2006; reduce the number of open hospital wards; and defer significant capital projects. It has also become much more difficult for recently qualified clinical staff to find work in the NHS.
The NHS is aiming to return to financial balance in 2006-07 and to produce a £250 million surplus in the subsequent financial year. In order to achieve balance in 2006-07, the Department has top-sliced the budgets to create a strategic reserve of £450 million as at the end of September 2006. Bodies with large deficits are required to produce financial recovery plans which are reviewed by the Department. Whilst some plans have been successfully designed and delivered, others have been based on unrealistic assumptions or short-term measures. A key feature of the strategy to return to financial balance has been the formalisation of the turnaround process and the creation of the National Programme Office to oversee it. It is too early to judge whether the turnaround process will deliver financial balance and offer good value for money. However, there are instances of organisations successfully implementing turnaround plans, whether internally or with the aid of external consultants, and it is important that the lessons learned in these cases are shared with the wider NHS.