2 How the financial turnaround was achieved
7. The turnaround of over £1 billion in NHS financial performance between 2005-06 and 2006-07 came as a result of several factors:
the use of top-slicing from the allocated budgets of Primary Care Trusts;
the diversion of resources from central budgets to support deficits;
controls over staffing levels;
controls over expenditure, as a result of the turnaround process;
changes to the application of the Resource Accounting and Budgeting accounting rules to NHS Trusts; and
loans to NHS Trusts.[12]
8. In 2006-07, Strategic Health Authorities withheld part of the allocated budgets of Primary Care Trusts in a process known as top-slicing. Most Primary Care Trusts had their budgets reduced in this manner, with between 0.5 and 3% of Primary Care Trust allocations retained by their Strategic Health Authorities. A total of £1,144 million was originally held back, with £319 million returned to Primary Care Trusts at the end of the financial year leaving £825 million of their allocated budgets unavailable to Primary Care Trusts for the delivery of healthcare in 2006-07. The Department has given a commitment that these funds will be returned to Primary Care Trusts, probably over a three-year period.[13]
9. In addition to the Primary Care Trust allocations, there is a £5.5 billion central budget which is for services including training and education. In 2006-07, the Department held £450 million of this budget back from Strategic Health Authorities as a contingency fund and added it to the reported NHS financial position. This represented a 9% reduction in central services. Workforce training and education were particularly affected, and the budget was reduced by 4% in real terms in 2006-07. This reduction contributed £354 million to the £450 million contingency fund.[14]
10. After several years of growth, the Department considered that greater control was needed over total NHS staffing, particularly to ensure that increases were not at the expense of resources allocated to clinical care. A total of 2,330 compulsory redundancies were made in 2006-07, which saved £239 million. Of those made redundant, 80% were non-clinical staff. Moreover, 80 trusts had a vacancy freeze during 2006, and expenditure on agency staff was significantly reduced, from £1,182 million in 2005-06 to £903 million in 2006-07.[15]
11. In February 2006, the Department initiated a turnaround programme designed to reverse the financial performance of those NHS organisations in deficit. The programme cost £46 million to implement, of which £36 million were payments to external consultants met by the individual organisations concerned, and £10 million was used to fund the National Programme Office which administered the programme. The 104 organisations in the turnaround programme reported a £1,121 million deficit in 2005-06 which was reduced to a £637 million deficit by the time the programme formally ended on 31 March 2007.[16] The conclusions drawn from the turnaround programme are that most NHS organisations are aware of the requirements of sound financial management, but that a significant number lack the capability or expertise to implement them effectively.[17]
12. Prior to 2006-07 the way that the Department applied Resource Accounting and Budgeting (RAB) to NHS Trusts meant that overspending Trusts had their income reduced in the following year by the amount of the overspend, and also had to pay back the overspend. This was known as the 'double deficit', as deficits had to be paid back from already reduced levels of funding. In 2006-07 the Department changed this so that overspending Trusts, whilst still required to pay back the overspend, do not also have their income reduced. Income deductions under RAB were reversed, returning £178 million to NHS Trusts in 2006-07. In the same year, NHS organisations borrowed £777 million in the form of working capital loans using internal Departmental mechanisms. This amount is expected to be reduced to £615 million by the end of 2007-08 and to be re-paid entirely within five years.[18]
13. The methods employed by the Department helped ensure that the NHS was able to report a surplus in 2006-07. The surplus was, however, mainly achieved through the top-down imposition of spending controls. The Department's view is that NHS senior management had to get a firm grip on the deficit, and that tighter financial controls were most likely to be successful in restoring the NHS to financial health in the short term. The Department's aspiration is to make local NHS managers more autonomous as they are best placed to make spending decisions that most effectively meets local needs. Improved financial management is intended to provide a basis for more autonomy.[19]
12 C&AG's Report, paras 2.1-2.16, 2.23-2.25 Back
13 Qq 32-33, 75-78; C&AG's Report, para 2.8 Back
14 Qq 63-66 Back
15 Qq 17-18, 58-59 Back
16 C&AG's Report, para. 2.15 Back
17 Qq 68-69 Back
18 Qq 67, 147-149; C&AG's Report, paras 2.23-2.24 Back
19 Qq 14-16 Back
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