Spring Statement 2022: What does rising inflation mean for health and social care?

Introduction

In the Spring Statement, the Chancellor responded to the OBR's latest economic forecasts with a new tax plan to tackle the cost-of-living crisis. Consumer price inflation, reflecting the impact of rising energy prices, is now higher than expected at the time of the Spending Review in October last year. The public finances have not received any extra money to offset this squeeze from higher inflation, despite an improved fiscal position on the eve of the statement.

In this analysis we take a look at what the Spring Statement could mean for health and social care funding pressures. We explore the implications of higher inflation on the health and social care funding settlement agreed in October 2021 and the immediate consequences for the real-terms pay of those working in the sector. We then highlight the significance of the real-terms pay cuts within the context of current workforce shortages, and efforts to reduce the elective care backlog.

What does higher inflation mean for health and social care?

The GDP deflator is a measure of general price inflation in the economy. It is the official indicator government use to give a more realistic picture of what can be purchased within a planned budget. While there are other measures of inflation, such as the CPI (consumer price index) or the CPIH (consumer price index including housing costs), these are narrower than the GDP deflator, which is therefore preferred for calculating real-terms changes in public spending.

GDP deflator growth is expected to be higher than previously forecast. Higher inflation means reduced spending power, as departmental budgets across government are left less able to purchase goods and services. Estimates suggest that day-to-day public spending will grow in real terms by less than planned in autumn (2.9% compared with 3.3%). The implications for health and social care are likely to be similar.

NHS day-to-day spending is now forecast to grow by an average 3.6% over the next 3 years. Baseline spending in 2021/22 was lower than previously expected and that explains the revised growth on the October forecast (from 3.7% to 4.1%). However, the higher inflation forecast counterbalances this effect, reducing overall growth. Government would then have to top up spending in cash terms by £2.4bn in 2024/25 in order to match the (revised) growth ambitions set out at the Spending Review (see the chart below).

We also know that the forecast growth of 3.6% might be an overestimate given that the true cost of public goods and services might be higher than implied by the GDP deflator forecast. As pointed out by the IFS, COVID-19 and the lockdowns that followed have produced a statistical anomaly. The government consumption deflator – a measure of the price of government goods and services that feeds into the GDP deflator measure of inflation – is now expected to fall this year. This partly explains why the OBR forecast growth in the GDP deflator of 4.1% in 2022/23, around 4 percentage points lower than CPI inflation.

Government is introducing the new Health and Social Care Levy to provide additional funding for health and social care. The money generated through the levy is intended to be used to increase funding for the NHS, as well as the new cap on care costs and wider improvements to the social care system. The levy will be a key source of funding for adult social care in the period up to 2024/25. Without it, we estimate negative growth for adult social care spending power, as shown in the chart below.

In the Spring Statement the Chancellor announced a rise in National Insurance thresholds to support those with lower incomes. We may anticipate that this, combined with higher inflation, will have a marginal impact on the funding available for health and social care. Despite this, neither the NHS nor social care budget have changed. With so much uncertainty over the extent to which the backlog of care may grow, and given the possibility of future interruptions from COVID-19 variants, there is still a risk that money generated through the levy will go to the NHS first, leaving little left for social care. 

Implications for day-to-day spending including pay

Higher inflation is mostly a short-term issue, with an immediate effect on NHS spending power and the goods and services the health service can buy. Rising energy prices, for instance, will impact the overall cost of running the NHS estate, which amounts to nearly £10bn as of 2020/21. We estimate that an increase of 50% in the unit cost per Kilowatt hour (kWh) would cause an additional cost of about £0.3bn. This may not appear substantial, but it is significant in the context of other funding pressures, including the newly announced annual efficiency target of 2.2%. The NHS is now expected to find savings worth £4.75bn to fund priority areas over the next 3 years.

One key compelling pressure is pay growth, with pay being a powerful driver of NHS staff recruitment and retention. With permanent and bank staff spend accounting for just under half the NHS’s revenue expenditure (44% in 2020/21), both the size of the workforce and staff pay growth are vital considerations for future service sustainability. The NHS is facing a worsening staffing crisis, with the number of unfilled full-time equivalent posts across health services in England rising to 110,192 in the quarter to December 2021 – the highest number since April–June 2019 (with an overall vacancy rate of 8.3%).

NHS staff are most likely to bear the burden of rising energy prices and higher inflation. With annual CPIH inflation at 5.5% in February 2022, NHS hospital and community sector staff are due to face a real-terms basic pay cut of around £850 on average given the 3% pay award made in 2021/22. This rises to around £1,700 if inflation hits 8% in spring 2022 per the Bank of England’s latest forecast, although individual earnings changes will differ across staff groups and pay bands (see the chart below).

The Department of Health and Social Care has also recommended a 3% pay uplift for all staff on Agenda for Change pay bands for the year 2022/23. This amounts to another real-terms cut in NHS staff pay if we account for continuing high inflation and higher costs of living. 

Earlier this month, health secretary Sajid Javid announced a 15-year workforce plan to address NHS workforce shortages, which is due in spring. But Javid said there will not be additional funding for workforce, meaning that staff shortages are unlikely to improve with consequences for quality of care and the state of the elective backlog.

The challenges of Omicron and ongoing uncertainty

Along with a tighter funding settlement ahead, COVID-19 continues to exert significant pressure on the NHS. During the peak of the Omicron wave in January 2022, more than 17,000 hospital beds were occupied by COVID-19 patients. This has implications for NHS services: both elective treatments and referrals fell in January and remain below pre-pandemic levels, as shown in the chart below.

The elective waiting list rose to 6.1 million in January, with the number of patient referrals waiting for more than a year rising to 311,000, up nearly 5,000 on November. In short, COVID-19 put the brakes on the elective recovery – and this is without any evidence of the anticipated rise in referrals following missed care during the pandemic. 

The first milestone for the elective recovery plan is to eliminate waits longer than 2 years by July 2022 (except for those choosing to wait longer and some specialised services). At the end of January there were nearly 24,000 patient referrals waiting 104 weeks or more. Between January 2022 (the latest data) and the end of July, up to 76,000 patients will need to be treated, based on the numbers of referrals that will tip into 104 weeks (those waiting 78 weeks to 104+ weeks). The path of COVID-19 will be crucial in determining the feasibility of meeting this first milestone.

By 2024/25, the elective recovery plan requires the NHS to deliver 30% more completed elective care pathways than before the pandemic. Some of this additional activity may be achieved through increased use of advice and guidance (A&G) and by reducing the number of follow up outpatients, but this remains a tall order. Even if this is achieved, if just 50% of missing referrals return, the waiting list could still be higher than it is today by the end of the parliament, at around 8.5 million patient referrals (see chart below).

It is unclear at this stage whether and how the NHS has been able to use the £2bn allocated in 2021/22 for elective recovery given COVID-19 once again set back the recovery. Anything unspent is unlikely to be rolled forward. Looking further ahead, with Chief Medical Officer Chris Whitty warning over future COVID-19 waves, winter 2021/22 confirmed just how precarious plans for elective recovery are in view of ongoing COVID-19 cases and other pressures in emergency care.  

Conclusion

The NHS and social care budgets set out at the last Spending Review now have less value in real terms. Government faces a challenging task, including how it can support NHS and social care staff and fund adequate pay rises to offset the increasing cost of living. The risk is that the real-terms cuts to staff wages could exacerbate existing workforce issues in the future. Against this backdrop, the target for increased activity in 2024/25 looks increasingly ambitious.

It is likely that the Chancellor will revisit his plans later this year, as the OBR’s outlook for the economy does not yet capture the full impact of the war in Ukraine, meaning that inflation might rise even further this year. We would expect additional funding announcements, possibly targeting the key areas of intervention we highlighted last autumn including social care, NHS capital and the NHS workforce. But this is not a given and will depend on the future economic context and the choices government makes. The cost-of-living crisis is expected to push more people into absolute poverty, which will require more targeted support for those in need.