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Home Publications Cost pressures on the NHS will only grow: it needs a long term funding solution, and that is likely to mean substantial tax rises

Cost pressures on the NHS will only grow: it needs a long term funding solution, and that is likely to mean substantial tax rises

Paul Johnson, Elaine Kelly, Tom Lee, George Stoye, Ben Zaranko, Anita Charlesworth, Zoe Firth, Ben Gershlick and Toby Watt
Press release

With the older population growing rapidly, along with the numbers suffering chronic health problems, and a growing pay and drugs bill, demands on the health service will only continue to grow. Just to keep the NHS providing the level of service it does today will require us to increase spending by an average 3.3% a year for the next 15 years – with slightly bigger increases in the short run to address immediate funding problems. This would mean health spending rising faster than national income and would take health spending from 7.3% of national income today to 8.9% of national income by 2033–34.

That looks like a formidable increase, but would imply annual spending increases below their long-run average. And this would come after eight years of the tightest spending settlements in the NHS’s history.

To secure some modest improvements in NHS services, funding increases of nearer 4% a year would be required over the medium term, with 5% annual increases in the short run. This would allow some immediate catch-up, enable waiting time targets to be met, and tackle some of the underfunding in mental health services. This would take spending in 2033–34 to 9.9% of national income, an increase of 2.6% of national income relative to 2018–19.

At the same time, pressures on social care spending are increasing and, if we continue with something like the current funding arrangements, adult social care spending is likely to have to rise by 3.9% a year over the next 15 years taking an extra 0.4% of national income, relative to today.

Put these figures together and health and social care spending is likely to have to rise by 2–3% of national income over the next 15 years.

These are the results of careful ‘bottom-up’ modelling of supply and demand factors in the health and social care sectors carried out by researchers from the Health Foundation and the Institute for Fiscal Studies, in association with the NHS Confederation. This work uses a different approach from the more usual ‘top-down’ methods for forecasting spending. It builds up spending needs from detailed models of demographic change, population health and cost data.

If we choose to meet these pressures, we would almost certainly need to increase taxes. In that sense the future may look different from the past. Government spending on health rose from 3% of national income in the 1950s to 5% by the year 2000 and over 7% today without us needing to increase overall public spending, or the overall tax burden, as a share of national income. That was possible because of sharp cuts in spending on other services, particularly defence. It is very hard to see how higher health spending in the future could be financed by big cuts to other areas of public spending, especially after eight years of austerity.

Funding these projected increases in health spending through the tax system would require taxes to rise by between 1.6 and 2.6% of GDP – that’s between £34 billion and £56 billion in present-day terms, equivalent to between £1,200 and £2,000 per household (out of projected net income growth of about £8,500 per household). Any such increases would of course need to be phased in gradually over the next 15 years.

Paul Johnson, director of IFS and an author of the report, said: “We are finally coming face to face with one of the biggest choices in a generation. If we are to have a health and social care system which meets our needs and aspirations, we will have to pay a lot more for it over the next 15 years. This time we won’t be able to rely on cutting spending elsewhere – we will have to pay more in tax. But it is a choice: higher taxes and a health and social care system which meets our expectations and improves over time, or taxes at current levels and a more constrained health service delivering less than we have become accustomed to”.

Anita Charlesworth, director of research and economics at the Health Foundation and an author of the report, said: “After eight years of austerity, the health service will need a sustained injection of funding just to get back on an even keel, let alone to modernise. The Prime Minister has committed to a long-term funding settlement for the NHS. Maintaining current provision and dealing with the backlog of funding problems will require NHS funding to grow by around 4% a year for the next five years. Meaningful progress on waiting times, staffing shortages and mental health will need growth of around 5% a year over that period. Much less than growth of 4% a year and the NHS will be able to do little more than tread water. It will struggle to fulfil Nye Bevan’s vision of 70 years ago”.

Niall Dickson, Chief Executive of the NHS Confederation, said: "This objective and independent report makes clear that the next 15 years are going to be even more challenging than the last. Unless we tackle the funding issue, and build up the workforce, we will see further strain on NHS finances and services. Yes, there are more efficiencies to be made and our services need to be much better at supporting people in the community, but if we want a high quality NHS and care system we will have to pay for it”.

Other findings include:

How we got here

  • Health spending has risen by an average 3.7% a year in real terms since the NHS was founded 70 years ago. At 1.4% a year, spending growth over the last eight years has been slower than at any time in the NHS’s history.
  • Once you take account of the increased size and age of the population, there has been barely any growth in spending since 2010. Age-adjusted per-capita spending has risen by just 0.1% per annum since 2009–10.
  • Even so, health spending has grown sharply as a fraction of overall public service spending and has been relatively more favoured since 2009–10 than it was before that. It now accounts for 30% of all public service spending compared with 26% in 2009–10 and 23% at the turn of the century.
  • Over the same period, social care spending has fallen by nearly 10%.

Where the money goes

  • Over the last 20 years, there has been a 70% increase in the number of hospital doctors per 1,000 people. Even so, the UK has fewer practising doctors per 1,000 people than any other EU15 country.
  • The number of GPs per 1,000 population has fallen since 2010 along with spending on primary care.
  • The NHS is a much better service on nearly all measures than it was 20 years ago with much lower waiting times and improved survival following cancer, heart attacks and stroke. But public satisfaction is beginning to fall and performance against targets is beginning to dip significantly.
  • The NHS is more productive now than it was in the past, with significant increases in productivity in the last eight years. Length of stay in hospital is much shorter, more patients are treated as day cases, and advances in surgery and anaesthesiology mean less invasive operations and faster recovery.

Future pressures

  • Over the next 15 years, the population over age 65 is likely to increase by 4.4 million, with the number over 85 rising by 1.3 million. This demographic change alone will increase costs significantly.
  • The numbers of people with chronic diseases, and especially the numbers with multiple chronic diseases, are also growing rapidly. Over the next 15 years, spending in acute hospitals to treat people with chronic disease is expected to more than double.
  • Spending on hospital drugs has been rising by more than 5% a year in recent years – this is likely to continue.
  • With pay needing to rise with earnings in the rest of the economy, and assuming productivity growth at its long-run average, these pressures between them mean that spending will need to grow at about 3.3% a year on average for the next 15 years just to maintain current service levels. That growth is likely to need to be front-loaded to deal with the current backlog of funding problems.
  • Faster growth, of perhaps 4% a year, will be required if targets are to be met, capital spending is to rise, and services such as mental health services are to be improved.

Careful long-term planning, especially of the workforce, will be required if such increases are to happen effectively. The NHS could need around 179,000 more staff over the next five years if services are to meet demand pressures. This is over 100,000 more staff than the NHS is currently expecting to be able to recruit and retain over that period.

  • Social care funding will need to increase by 3.9% a year to meet the needs of an ageing population and an increasing number of younger adults living with disabilities. Any reforms that reduce the severity of the current means test will put additional pressure on funding.

Paying for it

  • If we choose to meet these spending pressures, it is hard to see an alternative to raising taxes. A higher deficit is possible in the short run, but not permanently; it is not clear that there are large areas of public spending that could be cut to pay for more health and social care spending; and scope for significant additional charging is limited.
  • It looks like tax rises of at least 1.6% of national income, and up to 2.6% of national income (£34-56 billion in today’s terms) will be required by the mid 2030s for the NHS, with an additional rise of 0.4% of national income if we were to meet the pressures on social care. This would take the tax burden to historically high levels by UK standards, but not especially high by continental European standards. It is hard to see how tax rises of this scale could be implemented without increases in at least one of income tax, NICs and VAT;
  • The case for a hypothecated tax has been made in recent years as evidence grows that the public would be more willing to pay taxes if they were guaranteed to fund the NHS. If this could be done in a way that led to a predictable funding stream for the NHS, there might be a case for it. But it is hard to design a hypothecated tax that is simple, predictable and transparent.

 

Notes to editors:

1. ‘Securing the future: funding health and social care to the 2030s’, edited by Anita Charlesworth (Health Foundation) and Paul Johnson (IFS), was published on Thursday 24 May 2018. For enquiries, please contact the IFS Press Office: 020 7291 4800 / 07730 667 013 / bonnie_b@ifs.org.uk  / tom.jeffery@ifs.org.uk  

2. The NHS Confederation brought together the Institute for Fiscal Studies (IFS) and the Health Foundation to independently conduct this study.

How would you fund the NHS? Use this tool to try and reach these projected funding “targets” through increasing taxes and / or by cutting government spending in other areas.