Robert Chote: Health and the spending squeeze

© Institute for Fiscal Studies

Health and the spending squeezeRobert Chote

Health Strategy Summit, Nuffield Trust, 24 March 2009

© Institute for Fiscal Studies

Overview

• Historic growth in NHS spending

• The outlook for spending before the crisis

• The credit crunch and Spending Review 2010: the PBR view

• Could it be worse?

© Institute for Fiscal Studies

Consistently rapid NHS spending growth since ‘99

-6

-4

-2

0

2

4

6

8

10

1219

50-5

1

1955

-56

1960

-61

1965

-66

1970

-71

1975

-76

1980

-81

1985

-86

1990

-91

1995

-96

2000

-01

2005

-06

Perc

enta

ge re

al in

crea

se

0

1

2

3

4

5

6

7

8

9

Perc

enta

ge o

f nat

iona

l inc

ome

Real increase, LH axisLevel, RH axis

© Institute for Fiscal Studies

Average annual increase (%)

LabourApril 1997 to March 2007 6.1

ConservativesApril 1979 to March 1997 3.0

Long-run averageApril 1949 to March 1997 3.5

Well above Tory and long-term averages

© Institute for Fiscal Studies

Health the big winner since 1997

2.3

4.4

6.1

3.2

0 1 2 3 4 5 6 7

Other

Education

NHS

Total

Average annual real growth (%)

Source: HM TreasuryNote: Average annual increase 1996–97 to 2006–07

© Institute for Fiscal Studies

The outlook before the crunch: big picture

35

36

37

38

39

40

41

42

43

96–9

7

97–9

8

98–9

9

99–0

0

00–0

1

01–0

2

02–0

3

03–0

4

04–0

5

05–0

6

06–0

7

07–0

8

08–0

9

09–1

0

10–1

1

11–1

2

12–1

3

Financial year

Per

cent

age

of n

atio

nal i

ncom

e

Current expenditureTotal expenditureReceipts

Source: HM Treasury

Labour I Labour II

© Institute for Fiscal Studies

The outlook before the crunch: spending

• Comprehensive Spending Review 2007– Set to be the tightest Spending Review under Labour

– Planned average annual real growth in total spending: 2.1%

• NHS settlement– Health spending to grow by average of 3.7% a year in real terms

• 2011–12 and 2012–13– Tight spending plans to continue– Planed average annual real growth in total spending: 2.2%

The PBR: the impact of the crunch

• Sharp downgrade to economic growth: recession

• Crisis costs Exchequer 3.5% of GDP or £50bn a year

– Permanent 4% fall in productive potential of the economy

– Equity and house prices to stay below levels assumed in Budget

– Small ongoing cost of cyclical borrowing and fiscal stimulus

– No cost factored in for financial sector intervention

The PBR: policy response

• Fiscal stimulus this year and next– Total cost £25bn – 1.1% of national income in 2009–10– Roughly half accounted for by temporary VAT cut

• Stimulus withdrawn and then fiscal tightening from 2010–11 – Building to 2.6% of GDP or £38bn a year by 2015-16– Roughly 80% spending cuts and 20% tax increases– Returns spending and tax burden to pre-crisis levels by 2013–14

The PBR: the policy response

-2

-1

0

1

2

3

2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16

Per

cent

of

nati

ona

l inc

om

e

Loosening

Tight ening

© Institute for Fiscal Studies

The PBR: implications for spending

• Spending to be higher than expected in 2010-11– But more than accounted for by benefits and debt interest– £6.3bn cut in spending on services, including £1.3bn cut in NHS

capital budget plus £5bn in “efficiency savings”

• Tougher squeeze over Spending Review 2010 and thereafter– Total real spending growth from 2011–12 to 2013–15: 1.1%– Total real spending growth from 2014–15 to 2015–16: 1.3%

© Institute for Fiscal Studies

Public spending squeeze to intensify

-2

-1

0

1

2

3

4

5

6

7

896

–97

97–9

898

–99

99–0

000

–01

01–0

202

–03

03–0

404

–05

05–0

606

–07

07–0

808

–09

09–1

010

–11

11–1

212

–13

13–1

414

–15

15–1

6

Financial year

Perc

enta

ge re

al in

crea

se

30

32

34

36

38

40

42

44

46

48

50

Perc

enta

ge o

f nat

iona

l inc

ome

Real increase, LH axisLevel, RH axis

© Institute for Fiscal Studies

Current spending squeezed

-0.1

3.6

1.7

2.9

1.2

-1

0

1

2

3

4

5

Conservatives:1979-80 to1996-97

Labour,inherited

Conservativeplans: 1997-

98 to 1998-99

Labour,Spending

Reviews todate: 1999-00

to 2007-08

Labour, latestforecast:

2008-09 to2010-11

Labour, plans:2011-12 to

2013-14

Aver

age

annu

al re

al in

crea

se

© Institute for Fiscal Studies

Investment spending particularly squeezed

3.0

16.5

-5.0

1.0

-2.4-6

-3

0

3

6

9

12

15

18

Conservat ives:1979-80 to

1996-97

Labour,inherited

Conservat iveplans: 1997-

98 to 1998-99

Labour,Spending

Reviews todate: 1999-00

to 2007-08

Labour, latestforecast:

2008-09 to2010-11

Labour, plans:2011-12 to

2013-14

Aver

age

annu

al re

al in

crea

se

© Institute for Fiscal Studies

A possible Spending Review 2010 allocation

1.1

0

2

4

6

8

10

Remainder: other TotalManaged

Expenditure

Aver

age

annu

al re

al in

crea

se

Average annual real increases, April 2011 to March 2014

© Institute for Fiscal Studies

A possible Spending Review 2010 allocation

7.7

0.7

0

2

4

6

8

10

Debt interest Remainder: other TotalManaged

Expenditure

Aver

age

annu

al re

al in

crea

se

Average annual real increases, April 2011 to March 2014

© Institute for Fiscal Studies

A possible Spending Review 2010 allocation

7.7

1.7

0.40

2

4

6

8

10

Debt interest Social security &tax credits

Remainder: other TotalManaged

Expenditure

Aver

age

annu

al re

al in

crea

se

Average annual real increases, April 2011 to March 2014

© Institute for Fiscal Studies

A possible Spending Review 2010 allocation

7.7

1.7 1.9

0.00

2

4

6

8

10

Debt interest Social security &tax credits

Other AME Remainder:Departmental

Expenditure Limits

Ave

rage

ann

ual r

eal i

ncre

ase

Average annual real increases, April 2011 to March 2014

© Institute for Fiscal Studies

Real spending freeze: where would the pain fall?

• If evenly spread relative to spending growth of recent years:– Health would be one of only seven departments that would receive a

real increase (others include: international development, education, energy & climate change, and intelligence agencies)

• NHS spending would:– grow at 1.7% a year in real terms– fall as a share of national income– increase less quickly than under the Conservatives

© Institute for Fiscal Studies

Could it be worse?

• Public finances in worse shape than they appeared at PBR– Recession longer and deeper– Tax revenues may undershoot forecasts– IMF estimates £130bn bill for financial sector rescues– Government may find it more expensive to borrow

• If bigger fiscal tightening required, will it be tax or spending?

© Institute for Fiscal Studies

Conclusions

• NHS has fared relatively well under Labour

• Credit crunch has permanent fiscal costs

• Next Spending Review to be much tighter than its predecessors– Plausible scenario suggests real freeze in departmental spending– Capital intensive areas hit hardest– NHS spending could be cut as a share of GDP

• Squeeze may need to be even tighter as public finances worsen