3 Expenditure on the NHS in 2011-12|
A real-terms increase?
32. In our two previous reports we discussed
whether the Government's commitment to increase cash funding on
the NHS by £12.5 billion between a 2010-11 baseline and 2014-15
represented a real-terms increase in funding. In 2012 we concluded
that "what real-terms growth there may be in the settlement
is negligible at best", and recognised that "at the
same time demand is increasing due to demographic pressures, public
expectations and medical advances".
33. The reorganisation of the NHS Commissioning
and management structure prompted by the Health and Social Care
Act also has an impact the NHS budget; the Department's latest
estimate is that the transition costs of these management changes
will be £1.5 to £1.6 billion.
34. In the Spending Review 2010 the Government
included in the settlement for the Department of Health "real
terms increases in overall NHS funding each year to meet the Government's
commitment on health spending, with total spending growing by
0.4 per cent over the Spending Review period".
In its response to our report of January 2011, the Government
set out the Department's projections for expenditure on the NHS
in each year of the Spending Review period, including its calculations
of average annual real-terms growth in the sums budgeted for spending
on health services: this showed a year-on-year increase in the
total departmental expenditure limit (DEL) of 0.1% in each financial
year to 2014-15.
35. There has been considerable debate recently
over the Government's commitment to increase real-terms funding
for health services: the Treasury's Public Expenditure Statistical
Analyses 2012, published in July 2012, appeared to show that,
in real terms, actual expenditure on the NHS had in fact decreased
between 2010-11 and 2011-12.
36. The Chair of the UK Statistics Authority
(UKSA), Andrew Dilnot CBE, wrote to the Secretary of State on
4 December 2012 to invite him to clarify his statement made in
the House of Commons on 23 October 2012 that "real-terms
spending on the NHS has increased across the country".
While UKSA had determined that, on the basis of Treasury figures
published in the Public Spending Statistics series, real
terms expenditure on the NHS was lower in 2009-10 than it was
in 2011-12, Mr Dilnot acknowledged that the changes were small
and that different official publications quoted differing expenditure
figures. He considered that "it might also be fair to say
that real terms expenditure had changed little over this period."
37. Richard Douglas CB, Director General of Policy,
Strategy and Finance at the Department of Health, suggested to
us that the Treasury figures of July 2012, which indicated a small
real terms reduction in actual expenditure, were based on provisional
returns, and that when the Department's accounts were audited
and approved "the numbers had changed, and it was then a
small real-terms increase".
Elsewhere, however, Mr Douglas indicated that the Department was
"holding spend at, broadly, flat real terms".
38. We have previously pointed out that the real-terms
increase in annual budgets for health expenditure in each year
of the Spending Review period cannot be guaranteed.
The calculation of such increases is dependent upon the
GDP deflator, which is now determined by the independent Office
for Budgetary Responsibility on the basis of its assessment of
economic performance. Similarly, calculation of real-terms changes
in actual expenditure are also dependent on the GDP deflator.
39. Based on this evidence
our working assumption is that annual spending on health services
in real terms will show little if any variation above or below
the 2010-11 baseline.
Budgetary underspends and accounting
40. In 2011-12 the Department of Health was authorised
to spend £106.8bn (£102.4bn in revenue expenditure and
£4.4bn in capital expenditure), but in fact reported outturn
expenditure (by the central Department and NHS bodies) of only
£105.4bn (£101.6bn revenue and £3.8bn capital).
The difference between budget limit and outturn expenditure was
£1.4bn, or 1.3% of the total; it was reported in some quarters
that, since this amount had not been spent in-year, the Department
had 'handed it back' to the Treasury. Given the tight financial
settlement faced by the Department, the underspend in 2011-12
attracted adverse comment.
41. We examined the issue with the NHS Chief
Executive and Deputy Chief Executive, Sir David Nicholson and
David Flory, as well as with the Secretary of State for Health
and Richard Douglas. The Secretary of State told us that a proportion
of the underspend had been carried forward to 2012-13 by the Treasury
accounting procedure known as 'budget exchange', whereby Departments
anticipating DEL underspends in one year can agree to an effective
reduction in DEL in that year and a corresponding increase in
DEL in the following year.
42. The Department has set out the accounting
principles in greater detail.
Put simply, the Departmental Expenditure Limits (DELs) assigned
to the Department by the Treasury prescribe the maximum level
of expenditure permitted for revenue and capital expenditure across
the range of NHS bodies for which the Department of Health is
43. NHS providers - trusts and foundation trusts
- received around £61bn as payments from NHS commissioners
of acute services. Annual surpluses and deficits generated by
NHS providers are credited or charged to the Provider's reserves,
and counted as, respectively, underspends and overspends against
the Department's DEL for that year. Subject to the regulations
operated by Monitor, Providers' reserves provide them with working
headroom in future years. Capital expenditure by NHS providers,
whether funded out of reserves or from capital allocations or
borrowing, will also count against the Department's DEL.
44. Whatever the movement of reserves within
individual NHS bodies (either commissioners or providers) the
Department must maintain overall NHS expenditure in each financial
year within its separate DEL allocations for revenue and capital.
The system of budget exchange, introduced in the 2011 Budget to
replace the system of end-year flexibility, allows departments
which have foreseen larger than necessary DEL underspends by December
in a financial year to seek to transfer a proportion of the DEL
for expenditure in the next financial year.
The Department of Health is permitted to transfer up to
0.75% of its revenue DEL and 1.5% of its capital DEL from one
year to the next.
In 2011-12 the Department chose to transfer £316 million
from its DEL £250 million of its resource DEL and
£66 million of its capital DEL for expenditure in
2012-13. The RDEL transfer was based on "a prudent assessment
of the forecast underspend in December 2011" and the CDEL
transfer was the maximum sum permitted for transfers of capital
DEPARTMENT OF HEALTH POLICY ON UNDERSPENDS
AND BUDGET EXCHANGE
45. The Department considers it "prudent
to plan for a modest underspend [of DEL] to mitigate against unexpected
cost pressures, while balancing at the same time against excessive
It considers that an underspend on DEL of around 1.5% at year
end is "consistent with an appropriate level of prudential
financial management", and points out that underspends in
the three years prior to 2010-11 averaged £2bn.
1.5% of the Department's total DEL in 2011-12 (£106.4bn)
is equivalent to £1.6bn.
46. Richard Douglas told us that NHS organisations
which had made surpluses in one financial year would be entitled
to draw them down in subsequent financial years. The principles
governing the operation of surpluses in NHS commissioning bodies
in 2011-12 were set out in the NHS Operating Framework for that
During 2010/11, the PCT/SHA sector has continued
to deploy the revenue surplus, which has built up over the last
few years, while maintaining a strong financial position.
As we move forward into a period of significant change,
the emphasis of the NHS financial strategy will be to ensure that
PCTs and SHAs are in the best possible position to implement the
objectives of Equity and excellence: Liberating the NHS.
This will mean that PCTs and SHAs should continue to maintain
a strong financial position underpinned by demonstrable financial
In line with current policy, the aggregate surplus
delivered in 2010/11 by SHAs and PCTs will be carried forward
to 2011/12 and continue to be available to those organisations.
In 2011/12, the expected drawdown of surplus
will be up to £150 million with the additional expectation
that this drawdown will come from the PCT sector surplus. SHAs
will determine and agree with the Department of Health the level
of aggregate PCT/SHA sector surplus for their area to be delivered
in 2011/12 and how that agreed surplus is distributed between
their PCTs and themselves.
The Department continues to require that no PCT will
plan for an operating deficit in 2011/12. NHS trust operating
deficits will only be accepted where this is part of a planned
recovery path agreed with the relevant SHA and the Department.
47. Surplus policy for clinical commissioning
groups (CCGs) in operation from 1 April 2013 is more prescriptive.
The operating framework for 2013/14 published by the NHS Commissioning
Board requires commissioning organisations to "plan to make
a cumulative surplus at the end of 2013/14 of at least 1 per cent
of revenue, including any historic surplus [from predecessor PCTs]
not drawn down", to be carried forward into 2014/15.
Commissioning bodies are required to be in 2 per cent recurrent
surplus by 31 March 2014.
48. As the Secretary of State has pointed out
to us, NHS budgets were underspent "in the previous four
years under the previous Government . . . that is a normal part
of what happens."
Richard Douglas confirmed that the Department continues to adopt
this approach: "when you cannot overspend, it is inevitable
that you will underspend".
49. We do not however accept that this is the
end of the argument. Excessive inflexibility, in particular around
year-end controls, runs the risk of re-introducing a perverse
incentive to spend budget against a year-end deadline rather than
seek the optimal outcome. This is particularly damaging at a time
when the health and care system faces the need to invest in service
change to respond to the Nicholson Challenge. Greater flexibility,
in particular for NHS Providers, to use reserves to invest in
service change would represent a small but significant step to
enable providers to facilitate change.
50. The introduction of new arrangements for
allocating and distributing funds to commissioners in April 2013
seems to us to present an opportunity for the Department to revise
its approach to financial planning and budgeting.
51. We recommend that the Department
of Health, the NHS Commissioning Board and the Treasury review
the operation of accounting policies and rules which apply to
revenue and capital expenditure on health services.
52. The Committee is particularly
concerned that the rules around budget exchange for NHS Providers
are unnecessarily inflexible. Provided NHS Commissioners are subject
to effective expenditure control, and provided also that Monitor
is able to exercise effective control over recurrent deficits
in NHS Providers, the Committee believes that the controls on
the use of reserves by NHS Providers should be abolished to encourage
Providers to invest in necessary service change.
23 Health Committee, Public
expenditure, HC 1499, paragraph 14. Back
Ev 69, Table 3. Back
Spending Review 2010, Cm 7942, paragraph 2.10 Back
HM Treasury, Public Expenditure Statistical Analyses 2012,
Cm 8376, table 1.8 Back
Letter from Andrew Dilnot CBE, Chair of the UK Statistics Authority,
to Rt Hon Jeremy Hunt MP, Secretary of State for Health, 4 December
2012, published at www.statisticsauthority.gov.uk Back
Q 276 Back
Q 225 Back
Health Committee, Second Report of Session 2010-12, Public
expenditure, HC 512, paragraph 52 Back
Q 252 Back
Ev 72, paragraphs 17-23 Back
HM Treasury, Budget 2011, HC 836, paragraph. 2.9 Back
Ev 72, paragraph 31 Back
Department of Health Annual Report and Accounts 2011-12, HC 66,
paragraphs 3.8 and 3.18 Back
Ev 72, paragraph 10 Back
Ibid., paragraphs 12-13 Back
NHS Operating Framework 2011/12, paragraphs 5.1 - 5.4. Back
NHS Commissioning Board, Everyone Counts: Planning for Patients
2013/14, December 2012, paragraph 3.19 Back
Ibid., paragraph 3.23 Back
Q 275 Back
Q 252 Back