Budget 2025 preview: cost pressures leave the NHS’s funding path precarious

The NHS was one of the biggest beneficiaries of the government’s first Spending Review in June. The Department of Health and Social Care received a real-terms increase of 2.8% annual growth in its total budget between 2025/26 and 2028/29. 

The upcoming Autumn Budget will arrive amid a weak borrowing outlook and limited fiscal headroom, with tax rises likely as a result. Ahead of it, the Chancellor reiterated that the NHS – and in particular the commitment to cut waiting lists – remains a key government priority. But the NHS’s financial situation remains precarious: most of the uplift announced earlier this year will only be enough to keep up with existing cost pressures, while new pressures have also emerged this year.

Planned-for funding challenges… and some emerging ones

The Spending Review provided a real-terms increase of £18.5bn day-to-day funding for the NHS between 2025/26 and 2028/29, equivalent to 3.0% annual growth over the time period. But after factoring in one-off costs to cover redundancies and industrial action, as well as higher drug costs, the increase in funding is unlikely to do more than allow the NHS to keep up with existing long-term cost pressures. 

The chart below shows how the £18.5bn real-terms uplift could be impacted by cost pressures between 2025/26 and 2028/29. 

Four recurring cost drivers will take up most of the funding uplift: rising demand; addressing waiting lists; demographic pressures; and pay growth:

• Anticipated higher demand (£13.8bn): one of the main historical drivers of increased spending on health care, in addition to changes in demographics, is the cost associated with the adoption of new technologies and changes in clinical practice. While some technological advancements (such as improved diagnostics) can reduce health care spending, most advancements – including new drugs and other treatments – tend to increase costs over time.
• Reducing waiting times (£7.3bn): meeting the government’s commitment to restore the 18-week standard will require elective and outpatient activity to grow much more rapidly than current baselines allow. Drawing on our existing modelling, we have calculated the cost of the additional activity required to reach the 18-week standard by 2028/29, in line with the government’s pledge.
• Demographic pressures (£6.8bn): population growth and increases in life expectancy will continue to drive increased demand for health care.
• Real-terms pay growth (£6.2bn): the average pay increase for Agenda for Change staff is 3.6% for 2025/26. For subsequent years, we have assumed NHS pay increases in line with OBR forecasts for average earnings adjusted for forecasted inflation.

The NHS has also been forced to grapple with three additional cost pressures that emerged this year:

• Higher drug expenditure (£1.8bn): NHS spending on branded medicines is controlled through two schemes: the voluntary VPAG agreement between the government and the pharmaceutical industry, and the statutory scheme for companies not in VPAG. Negotiations to update VPAG stalled in August, with the industry pressing for a substantial increase in the money it receives from the NHS under the scheme. No policy change has yet been confirmed, but an increase in NHS spending under the scheme seems likely. Our £1.8bn estimate for this is less than the £2.5bn annual increase the industry has demanded.
• Redundancy and reorganisation costs (£1.2bn): the NHS has agreed with the Treasury to finance the cost of redundancies associated with the government’s cuts to integrated care boards, by overspending its budget in 2025/26 and paying this back in subsequent years. This represents a one-off cost as most of the redundancies are expected to be in 2025/26.
• Industrial action (£1.2bn): recent and planned action by resident doctors (formerly ‘junior doctors’) and consultants have repeatedly forced care to be rescheduled and diverted managerial capacity. This has direct financial impacts through cover to keep services running, as well as cancelled and postponed activity (which may require more expensive evening or weekend work to catch up). Our £1.2bn estimate is based on NHS Confederation estimates on the cost of a 5-day walkout, multiplied by an assumption around total potential strike days through 2028/29.

While the NHS and Treasury have reached a national agreement on redundancy payments, the Budget should clarify how future pay settlements will be covered (above pay uplifts reflected in existing Department of Health and Social Care financial and delivery plans), and the expected VPAG receipts (and any related NICE changes), so systems can plan on a stable basis.

Significant uncertainty ahead 

Even though the NHS emerged as a clear winner from the Spending Review, this analysis shows that the combination of recurring and one-off cost pressures could result in a funding shortfall of £19.8bn by 2028/29.  

To keep the NHS from falling into deficit, we estimate that productivity needs to grow by around 2% each year, in line with the government’s target but significantly more than the NHS has historically been able to achieve over a sustained period. This underlines both the importance of improving productivity and the precarious funding position of the NHS, particularly should productivity growth fall short and leave an even bigger gap.  

Zeyad Issa also contributed to this blog.