NHS assessing inflation impact

NHS England chief financial officer Julian Kelly (pictured) told Thursday’s board meeting of the two national bodies that there had been a number of changes since initial NHS planning guidance was issued and since last autumn’s spending review published three-year spending figures for the health service.

‘As flagged in the chancellor’s spring statement, inflation is running much higher than was assumed in the spending round and clearly that is going to have a knock-on effect to the NHS,’ he said. ‘We are just working through the implications, but that could be materially over an additional billion pounds pressure on the NHS.’

In addition, Mr Kelly said the NHS faced further pressure to cut spending. ‘As a consequence of needing to find funding to deal with the government’s living with Covid plan and the cost of the public health policy around Test and Trace, we have been asked to see if we can cut core NHS funding,’ he said. ‘At the moment that is probably to the tune of £500m.’

While options were still being worked through, this is likely to involve slowing down transformation programmes and rephasing some of the long-term planned changes, Mr Kelly added.

The NHS chief financial officer also highlighted the government’s decision to stop funding for the hospital discharge programme. The scheme had ‘significantly helped flow through hospitals and support into the social care sector’, he said. And the end of the funding would have an impact on emergency care performance.

NHS Providers said the request to cut £500m from the budget showed the health service was being ‘left to pick up the bill’ against a backdrop of rising Covid cases and hospital admissions. Deputy chief executive Saffron Cordery said trusts were understandably concerned.

‘The current funding settlement intends to help the NHS to deal with care backlogs, continuing Covid-19 pressures and the additional costs arising from major workforce shortages. However, inflationary pressures mean the cash settlements agreed at the spending review are worth less in real terms, and rising energy and fuel costs will make trusts’ savings requirement even more stretching.

‘A cut as substantial as £500m creates a very real risk of trade-offs, which could affect trusts’ ability to increase activity and improve the quality of patient care – something no one wants to see. Trust leaders will be looking for clarity as soon as possible about where the cuts to planned spending will be made.’

IFS assessment 

In its analysis of the impact of rising inflation on the NHS, the Institute for Fiscal Studies (IFS) said funding growth is being eroded, but there seems little prospect that the chancellor will revisit health service spending this year.

IFS senior research economist Ben Zaranko (pictured) said the 2021 spending review last October showed a planned real-terms increase in health and social care spending of 4.1% on average over the review period. In fact, lower than forecast outturn spend in 2021/22, shown in figures within the spring statement, changes the baseline against which this real-terms growth is measured. So the cash figures announced in October would really have suggested average real terms growth of 4.3% using the October GDP deflator (the measure of public sector inflation).  

Rising inflation since then means the unchanged cash settlements will now buy less healthcare. Using the updated GDP deflator, the 4.3% average real-terms growth falls to 3.8%. And, deflating by the latest forecast consumer price index (CPI) – a measure of inflation facing households, but which arguably overstates the pressure on public services – real-terms growth falls to 2.6%.

A top-up in health and social care spending of between £2.2bn (if using the GDP deflator to measure inflation) and £8.7bn (using CPI) would be needed to maintain the real growth rate planned in the 2021 spending review, he added.

The spring statement was not the appropriate time to increase spending in health and care and other parts of the public sector, Mr Zaranko said. ‘There are lots of things to be decided and will hopefully become clearer during the year, not least inflation and pay settlements. You could make adjustments in the autumn, halfway through the financial year, based on the experience so far.’

This is unlikely as the chancellor seemed reluctant to increase spending on public services, insisting in his statement that tax cuts rather than higher spending should have first call on any extra resources.

Mr Zaranko added that the health and social care levy is now forecast to raise £17.4bn in 2024/25, substantially more than the £12bn initially anticipated. The increase is largely due to inflation, he said. ‘Rishi Sunak repeated yesterday that every penny was going straight to the health and social care budgets. Yet shockingly, the NHS and social care budget was not changed. There is no relation between how much is raised and what is spent on NHS and social care.’

Public sector pay will be a big factor in how much growth the NHS will have. He said pay growth in the public sector is lagging behind that in the private sector. Government policy is that the two should be broadly aligned.

Between January 2020 and January this year, private sector average earnings have increased by 3.2%, he said, while the public sector increase over the same period was 1.3%. And, since January 2010 private sector salaries have risen by an average of 5.3%, while it has declined by 2.1% in the public sector. Below inflation awards seem likely in 2022/23, Mr Zaranko said.

The Department of Health and Social Care has indicated there is enough money in the NHS budget for a 3% pay rise for NHS staff.

Mr Zaranko said: ‘[Public sector pay] is a tricky issue for the chancellor and I think will be one of the big stories of the summer and early autumn. It seems likely there will be positive pay awards, but below inflation awards seem a certainty.

‘The key thing for departments is if pay awards exceed their original budgets agreed with the Treasury.’