When is £8 billion not £8 billion?

As a health economist, I am often asked the same question: what does the government actually mean by its commitment to increase ‘NHS spending in England in real terms by a minimum of £8 billion over the next five years’ (Conservative Party Manifesto, 2015)?

It seems simple doesn’t it? But there are two ways this promise could be interpreted, which give very different results.

To add the context, the commitment was made in response to the Five Year Forward View (5YFV), which sets out the future vision for our health service and the changes required. This included three scenarios for the extra money that the NHS would be need, the lowest of which was an extra £8bn above inflation (real terms) by 2020/21.

The commitment has prompted much debate, largely around whether this is enough to maintain services and fund the required changes. But we need a clear understanding of what the £8bn actually means before we can properly debate these issues. So let’s explore the two common interpretations and determine which is correct.

The Budget Interpretation

The first interpretation is that the NHS budget in 2020/21 will be £8bn higher than it is now (after accounting for inflation) – regardless of what happens in other years. Let’s call this the ‘Budget Interpretation’, represented by the red line in Figure 1.

This would mean that the total extra money available to the NHS across the five years will be more than £8bn. For example, if we assume that the funding increases steadily (and this is a big assumption, as discussed later), total additional money would be £24bn (i.e. the sum of each annual increase, so £1.6bn + £3.2bn + £4.8bn + £6.4bn + £8.0bn = £24bn).

The Cumulative Interpretation

The second interpretation is that the NHS will receive an additional £8bn in total, to be spread over the next five years. Let’s call this the ‘Cumulative Interpretation’, represented by the green line in Figure 1. In this case, again assuming the increases are spread equally, the NHS budget in 2020/21 would be £2.7bn higher than it is now.

Figure 1 - Two interpretations of an extra £8bn

So, depending on the interpretation, the budget in 2020/21 will have risen by either £8bn or £2.7bn and the total increase over the five years will be £24bn or £8bn. Clearly the interpretation makes a big difference. So which is correct?

Let’s look back at what the Conservatives said in their manifesto (p38):

'we are able to commit to increasing NHS spending in England in real terms by a minimum of £8 billion over the next five years.'

Ok, this could easily be interpreted in either way. Thankfully we can use what they say four sentences earlier to clarify:

'We are set to increase health spending by more than £7 billion above and beyond inflation in the five years since 2010.'

Again, we could apply either interpretation to the words alone. But this time we can look at the data to see which interpretation fits the facts. So:

• In 2010/11 the budget for the NHS in England was £109bn.
• The planned budget for 2015/16 is £116bn.
• This is an increase in the budget of £7bn above inflation.
• The total extra money for the five years was £19bn.

(All figures are based on total department expenditure limit from the 2014 public expenditure statistical analysis, converted to 2015/16 prices using the March 2015 GDP deflator.)

This clearly shows that the ‘more than £7 billion’ increase uses the Budget interpretation. Therefore, we should assume that the government is using this same definition for its £8bn commitment and that the budget will change each year, reaching £8bn in 2020/21.

Timing Matters

But that’s not quite the end of the story. What all this actually means for the NHS before 2020/21 will depend on the timing for increasing the budget.

Rather than the (highly unlikely) steady increase mentioned earlier, Figure 2 shows two other examples for how the budget could rise, both of which also result in a budget increase of £8bn by 2020/21.

The blue line shows a scenario where the budget is increased slowly at first and at a faster rate in later years (i.e. back-loaded). In this example, the budget in 2020/21 has still risen by £8bn, but the combined total for the five years is now £18bn (£0.5bn + £1.5bn + £3.0bn + £5.0bn + £8.0bn = £18bn), instead of £24bn.

But if the budget rises faster in the earlier years (i.e. front-loaded), the combined total would be higher. In our example the purple line shows a total increase of £30bn (i.e. £3.0bn + £5.0bn + £6.5bn + £7.5bn + £8.0bn = £30bn).

Figure 2 – Different timings for increasing the NHS budget by £8bn

With an understanding that the government plans to increase the NHS budget by at least £8bn above inflation by 2020/21, the next important question is that of timing for the increase. We don’t yet know whether the Spending Review in the autumn will cover this full five year period, but it will at least give us some strong evidence to help answer this crucial question.

Adam is Senior Economics Fellow, www.twitter.com/ADRoberts777

This blog first appeared on the Guardian Healthcare Network.