The NHS is set to lose the underspend totalling more than £5.5 billion which it has accumulated since 2007-8, under new Treasury rules which take effect at the end of the current financial year.

The abolition of the “end-year flexibility” arrangements, which were introduced in 1998 to allow government departments to carry forward any unspent resources from one year to the next, will mean underspends totaling £20 billion will be lost to government departments overall.

Since 2008-9, the NHS has been required by the Department of Health not to spend its full resource allocation in each year. The cumulative underspend – or “accumulated stocks” – which the NHS has amassed to date consists of £3.1 billion in resources and $1.8 billion in capital.

The Service is also expected to lose its planned underspend totaling around $1 billion for 2010-11, under the new rules.

The independent health think tank the Nuffield Trust has warned that the fact that none of these existing and planned underspends will be returned to the NHS constitutes, in effect, a retrospective cut in spending plans, which will potentially add further pressure to the squeeze on resources and have profound implications for health.

The Trust describes the Spending Review announcements for health as generous in comparison to many other areas of public spending. Nevetheless, the 0.4% real terms growth which the NHS will receive over the next four years to 2014-15 - ie, 0.1% per year and against an average real terms increase of 5.7% from 1997-8 to 2009-10 - are at the lowest level possible to fulfill the government's commitment to a real-terms increase, says the Nuffield Trust’s chief economist, Anita Charlesworth.

Nor do they take account of the fact that the Government is transferring £1billion a year from the NHS budget to social care, she adds.

“On the one hand - given the pressures on local government spending, ageing population and close link between social care support and admissions to hospital - this may well be good value for money,” says Ms Charlesworth. But it also means that health spending will actually fall in real terms over the Spending Review by around 0.5%, which will make the loss of at least £5.5billion of cumulative underspends “even harder for the Service to manage,” she adds.

The real-terms change in health funding will represent a reduction of 0.5% over the next four years, the Trust estimates, in its analysis of the implications of the Spending Review and the reform proposals set out in the government’s NHS White Paper.

The think tank says it backs the broad direction of NHS reform outlined by the government and commends the decision to protect health spending relative to other areas of the public sector, but also warns that, unless the NHS can keep a tight grip on pay and price inflation, it will mean a reduction each year in the volume of health care services the NHS can deliver, if current trends continue.

“Make no mistake, the NHS has never faced a challenge like this,” says Nuffield Trust director Jennifer Dixon. “The biggest question now is whether the NHS can meet the £15-£20 billion of efficiency savings that are required at the same time as coping with a major reorganisation and a 45% cut in management costs. Productivity increases of around 4%-5% a year are now required; this may be possible but it is unlikely to happen without fundamental changes to services,” Dr Dixon adds.