Can the NHS survive the crunch?

Britain is spending more and more on its debt. And if we don’t cut back on public spending, we will go broke. One obvious target for cuts is the NHS, which is currently costing over £100bn a year. Simon Wilson says it's high time to debate alternative NHS funding systems.

Britain is spending more and more on its debt. Can it afford to do the same on the NHS? Simon Wilson reports.

What's the problem?

Britain is nearly broke. As Neil Shah notes in The Wall Street Journal, national debt could reach 100% of annual economic output by 2013. Ratings agency S&P has warned that the UK could lose its AAA credit rating if it doesn't sort out its finances. And although the government managed to sell £7bn of 25-year bonds this week, it had to enlist the help of a syndicate of major banks "an approach rarely used by highly rated governments", says Shah.

So what's the solution?

There are just two. Sharp tax rises and/or huge public spending cuts. Respected think tank the Institute for Fiscal Studies has warned that Britain faces "two parliaments of pain" due to a £90bn black hole that will cost £2,480 in tax rises or spending cuts per family. And one obvious target for any cuts is the world's third largest employer after the Indian railways and the Chinese army: the NHS.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

How much does the NHS cost?

After allowing for inflation, the service costs roughly twice as much as it did ten years ago: around £102bn. State spending on healthcare has boomed under the Labour government the NHS employs 41,800 more doctors and 84,700 more nurses than it did a decade ago. Indeed, thanks to New Labour's largesse, it has enjoyed a "wonderland of extra money, on a scale that its leaders never expected", says The Daily Telegraph's Andrew Haldenby.

Yet, in spite of all this extra cash, the service, like the country it serves, is in danger of going bust. The NHS Confederation, which represents managers in the health service, has published a grim report, Dealing With The Downturn, which warns that the service will struggle to cope with anticipated spending cuts.

Despite running an overall surplus of £1.35bn this year, the service is expecting real terms funding cuts of 2.5%-3% a year, and faces a funding black hole of up to £10bn over the next spending period (the three years to 2013/ 2014) and £15bn over five years. Those numbers translate as extra cash that may have to come from the taxpayer.

How can it possibly need even more money?

It will always need more and more money. The model first established by prime minister Clement Atlee in 1948 free healthcare for all is admirable, but flawed.

First off, the UK population is ageing and people are living longer. For example, life expectancy for a British male born in 2006 is 88 years. The Office for National Statistics calculates that the number of people aged 65 and over is expected to rise by more than 60% in the next 25 years.

At the same time, researchers are uncovering more and more treatments for a wider range of conditions. Every new cure is a boon in health terms, but adds to the NHS funding problem.

So it's just the model that need fixing?

No. Any hint that the NHS might start charging even for patients failing to turn up for GP appointments, for example is often met with horror. So spending priorities need to be rethought.

For example, an official report by Derek Wanless found that 45% of New Labour's NHS budget hikes have been swallowed up by pay rises and price inflation. Meanwhile, more junior doctors are being trained than can be employed in 2008 health service managers estimate there were three applying for every NHS post.

This means the NHS is in effect subsidising training costs for other countries if young doctors choose to seek work abroad. Worse still, the service remains capable of huge waste in general.

As Sir Gerry Robinson comments, "if a charity was spending the kind of money the government is spending in the actual running of the NHS before even a penny gets to the operating theatre, we'd be furious". He estimates that administration, IT and other overheads account for between 20% and 35% of the NHS budget. "It's horrifying."

Are these problems unique to the NHS?

Far from it. Last week the Office of National Statistics published new productivity estimates for the public sector.

The figures were pretty damning. As spending on public services boomed from 1998-2007 (climbing 75% to £582bn), productivity fell by a total of 3.2% (or 0.3% a year). This compares with a productivity increase of 22.8% in the private sector over the same period. Moreover, this 3.2% figure understates the true extent of falling efficiency, because it measures only the number of services delivered per unit of resource, and does not take into account rapidly rising inflation for pay and other costs.

There was one glimmer of hope: productivity rose in 2006 and 2007. But despite this, the overall fall in NHS productivity over the ten years was still 4.3%. It's a problem that the next government urgently needs to tackle see the box for more.

Can our politicians fix the NHS?

If they have any big ideas, they aren't keen to tell us. Gordon Brown plans to cut overall public spending in real terms by 0.1% a year in the three years from 2011, but tried to hide it by quoting figures in cash rather than percentage terms, says The Spectator.

Meanwhile, the shadow health secretary, Andrew Lansley, has suggested cuts of 10% might be needed in other areas, in order to maintain spending on health and education.

Yet, says Janet Daley in The Daily Telegraph, freezing NHS spending, or even increasing it, isn't necessary. "The public has got it". They see the New Labour idea that higher spending equals improved services as "preposterous" and are "infuriated by the prospect of tax rises" to pay for it all.

The time is ripe to debate alternative NHS funding systems, from insurance to the non-profit voluntary sector. "Go on, try it."

Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.   

Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.