The annual report on the sustainability of public finances was published today by the Office for Budget Responsibility (OBR) – the government's independent economic forecaster. These are numbers that will inform the debate and decisions we face on the future sustainability of the NHS.
There’s some good news – the OBR expects that the UK economy will continue to grow by around 2.4% a year above inflation over the long-term. But despite this, the report highlights that even with this sustained economic growth, we still have to confront some big issues to secure the NHS.
Between now and 2063/64 the OBR expects that the financial challenge for the NHS may get even bigger than it is now. Its central projection is that UK health spending will be £23bn lower in 2018-19 than in 2015-16 (in nominal terms, ie not adjusted for inflation). How much will be available to spend on health is of course a matter for the next government, following the general election.
The OBR is not seeking to second guess these decisions but rather has assessed the implications of continuing current spending plans. Delivering the planned reduction in national debt, without putting up taxes, means reducing public spending. If health takes an equal share of the reduction in public spending, then health spending would fall by 1.1% of GDP (£23bn). To avoid this there are two basic options – cut other areas of spending again or raise more money (through increased taxes).
Beyond the next parliament, the report shows that the tough choices on spending and tax are not going away. Population ageing will put upwards pressure on public spending through pensions, health and social care. At the same time, the OBR estimates that government revenue will be broadly static as the population changes, but some areas of tax revenue, such as from North Sea oil and gas, will decline. Over the longer-term these pressures mean that ‘Government will need to find new sources of revenue to maintain the overall ration of revenue to national income, let alone to meet the spending pressures from an ageing population.’
As Sir Andrew Dilnot stated over and over again when conducting his review of social care, the fact that we are all living longer is a triumph and a cause for celebration. But it does have implications, not least of which that our needs and expectations for public services and the amount of tax we are paying to fund them are not aligned. This is not about the 2008 great recession and the current round of austerity, it is a fundamental long-term challenge that the UK needs to face up to and address.
The OBR, by its own admission, won’t have the numbers precisely right, because it’s impossible to be accurate with this sort of forecasting. But its diagnosis – that spending and tax are on divergent paths even after the current deficit is resolved – is correct. We are not alone in this – most countries are facing a similar change. But this is a challenge we need to address very soon.
The detail of this report also highlights that if we decide we’d prefer to pay more, rather than spend less, structuring a tax increase will be difficult. Chart 1 below shows how much each of us is paying in tax (receipts) and receiving in health care by age (on average).
Unsurprisingly tax is concentrated in the working age population, who use relatively little health care, whereas spending on health is concentrated in older age groups who pay less tax (although obviously over a lifetime, things even out). How far will the working age population, already facing pressures such as rising housing costs, be prepared to pay for better health care for other people? Would any tax increase need to be targeted more at the over 65s? These are the debates we need to have – there is no right or wrong answer, it’s a choice we need to make as a society about what we think is fair and appropriate.
Whatever we decide, the clear message is that the NHS matters, for our economic prosperity as well as our health. It is a large part of our GDP (all health spending is more than 9% of GDP), a growing share of the public finances, and its productivity has big implications for economic and health wellbeing. Chart 2 below, taken from the OBR’s report, shows what would happen to the national debt assuming no policy changes, comparing two different rates of health productivity.
If health services’ productivity grows in line with the whole economy, national debt would be fairly stable. But if health productivity was around half of this, at broadly 1% a year, national debt would reach 200% of GDP by 2063/64 as a result of additional spend. Of course national debt is unlikely to actually ever reach 200% of GDP, policy would change as it has done in other countries and over our own history. Across the post-war period, health spending has increased in nominal terms and as a share of GDP, and the economy has continued to grow.
But whatever else happens, the need to get the most out of every taxpayer pound spent on health care isn’t going away. If anything it will become more important. We owe it to patients, and to taxpayers, to make sure this is done.
Anita is Chief Economist at the Health Foundation.