Tax rises and budget squeezes for other departments at Whitehall could be on the horizon if political promises to protect National Health Service spend from any cutbacks are delivered, a new joint analysis by think-tanks The King’s Fund and Institute for Fiscal Studies has warned.

The report How cold will it be? Prospects for NHS funding: 2011–17, looks at three different funding scenarios for the health service over the coming two spending review periods, none of which look particularly encouraging. Even in the best-case scenario, whereby the NHS gets budget increases of around 2.5% for six years, the service will still “struggle” to meet the health needs of the population if productivity levels remain as they are, it warns.

Furthermore, such increases to the NHS budget could mean cuts of an average 2.8% a year for other government departments, representing a real reduction of around 16% on 2010/11 budgets over six years, although this could be lessened by a hike in taxes, the report says. For example, freezing NHS spend and capping budget cuts elsewhere to 2% over the next spending review period would leave a shortfall of around £10.6 billion, which equates to extra tax of around £340 per family.

“Our analysis shows that the NHS is facing the most significant financial challenge in its history,” stressed report co-author John Appleby, chief economist at The King’s Fund. “Both the Labour and Conservative parties have pledged to avoid cutting NHS spending in real terms from 2011 but this will come at a big price – whether in departmental cuts elsewhere or tax hikes”, he added.

In addition, analysis of all three budget scenarios – rises of 2.5%, flat funding, and reductions of 2%-1% – has revealed that whatever the case there will be a sizeable gap between what the NHS has to spend and what it needs in order to meet the increasing healthcare demands of the population. All scenarios fall significantly short of Sir Derek Wanless’s 2002 forecasts for NHS’ funding needs in order to achieve ‘solid progress’ by between £6.4 billion and £32.4 billion by 2016/17, or 6%-31% of the entire NHS budget, it points out.

According to Appleby, it is “crucial that the service does all it can over the next two years to prepare itself for the financial freeze that will take hold over the two coming spending review periods”.

One way to address the shortfall, the report points out, would be to boost NHS productivity. However, in order to plug the funding gap the health service would need to make efficiency gains of between £3.9 billion and £8.2 billion per year over 2011 to 2017, a very ambitious target given that this equates to annual improvements of around 3.7% to 7.7% when productivity has actually been in decline, by about 0.4% a year.

Tough decisions, significant gains
NHS Confederation chief executive Steve Barnett agreed that there are “significant productivity gains” to be made in the NHS, but he stressed that this will require “system-wide solutions, adoption of innovation and courage in decision making”. Greater efficiency and service redesign services can provide substantial improvements to quality as well as budget savings, he said, and added that these may well involve some tough decisions.

“We believe the NHS has the people, the ideas and the capacity to meet this challenge but we should be under no illusions of the size of the task ahead and the urgency in which action is required,” Barnett stressed.

“The scale of what is about to hit the health care system is unprecedented” and should not be underestimated, warned The King’s Fund’s Chief Executive Niall Dickson. “There is an opportunity now to improve efficiency but if the NHS doesn’t tackle this head on we will once again see the vultures circling, questioning whether we can sustain a free comprehensive system funded out of general taxation”.