The Deficit
The NHS has been struggling to cope for many years as demand has increased due to an increasingly ageing population, and an increase in costs of treatments. Its budget, however, has failed to keep up with need. As a result, NHS organisations have often been in deficit over the past 12 years. To avoid or reduce a deficit situation, the NHS has been forced to make billions worth of efficiencies or cuts.
A decade of underfunding
The new Labour government that took power in July 2024 inherited an NHS that had been starved of funding for 14 years and was struggling to cope with an increase in ageing population and growing demand.
During the 13 years of the last Labour government, from 1997 to 2010, the NHS in England received average annual budget rises of 6%. In 2010, the NHS was in fairly good shape and hitting targets, including for A&E waits. As soon as the Conservatives came into power in 2010 funding plummeted; down to an average of just 1.1% per year under the coalition from 2010 to 2015, and then 1.6% under David Cameron and Theresa May (2015-18). In 2018, Theresa May boosted funding slightly and it rose to 3.4%.
The NHS’s performance has got progressively worse since 2015. Since 2010, the NHS has been forced to make enormous savings and as a result its ability to meet key targets, including A&E, cancer care, surgery and diagnostic tests has fallen off a cliff.
Despite cuts to services and savings made by NHS organisations, deficits continued to build over time. By 2018/19 the headline deficit for NHS providers was £571m with nearly half of trusts in deficit by the end of the financial year. This figure is flattered by temporary extra funding, one-off savings and accountancy changes. In fact, the underlying deficit for the provider sector was estimated at £5bn.
In early 2020 prior to the Covid pandemic, the National Audit Office found that parts of the NHS were “seriously financially unstable” and trusts were building up debt they are unlikely to ever repay. NHS provider trusts reported a combined deficit of £827m and CCGs a £150m deficit in 2018/19.
Then in spring 2020 the NHS had to confront the challenges posed by Covid after this decade of underfunding.
An up-to-date analysis of the deficit for the Integrated Care Boards (ICBs) can be found on The Lowdown publication.
November 2024 budget
The November 2024 budget, the first of the new Labour government, announced a £22.6 billion cash injection for the NHS, hailed as the largest spending increase since 2010 outside of the Covid pandemic. While it appears generous compared to previous years, questions arise about whether this funding will truly transform an NHS that has faced over a decade of financial strain.
Keeping track
It can be difficult for those outside of the think-tanks, government and the NHS to make sense of the funding figures for healthcare in England. For a start the figure given at the start of a financial year in April is invariably not the final figure spent by the end of that year, due to in-year negotiations with the treasury for more money, such as to cover industrial action, pay awards and a winter crisis. This leads to percentage increases year on year, varying between sources.
NHS England or Department of health?
The other issue is determining whether funding increases refer to the Department of Health and Social Care (DHSC) as a whole or just to NHS England. The vast majority (around 90%) of the DHSC budget is allocated to NHS England, with the rest allocated to capital spending, the department’s various organisations, such as the UK Health Security Agency and the National Institute for Health and Care Research, and finally, the public health grant given to local authorities.
How much in real terms?
The Chancellor’s budget announcement of £22.6 million for the DHSC to 2025/26 increases the spending for the entire DHSC by 3.8% between 2023/24 and 2025/26 on average in real terms.
This means health spending in England will be £214.1 billion in 2025/26 under current plans, up from £201.9 billion in 2024/25 and £188.5 billion in 2023/24. Between 2010 and 2019, the average annual increases were just 1.4%.
DHSC spending can be split into day-to-day spending (pay, medicines etc.) and capital spending, which is used to finance long-term investments, such as buildings and medical equipment.
For day-to-day spending, the £22.6 billion announced in the budget equates to an increase in spending to £200.5 billion by 2025/26. This breaks down to an increase of 3.8% to £190.1 billion in 2024/25, then a 3% increase to £200.5 billion by 2025/26. Over the two years, this represents a 3.4% average annual increase in real terms compared to 2023/24.
Within this spending, NHS England’s budget will rise by 4.0% over the period, up to £192 billion for 2025/26. The increase is front-loaded, however, to help fund pay deals and other immediate cost pressures, so up 4.7% in 2024/25 then 3.3% in 2025/26.
Future funding unclear
Outside of NHS England and capital spending, in areas such as public health, which is included within the wider DHSC budget, it is not yet clear how much will be allocated for 2025/26.
Public health spending has been squeezed for many years, with the public health grant effectively cut by 28% per person in real terms since 2025/16 and in 2024/25 is £3.6bn, equivalent to just 2.2% of the NHS England budget.
The public health grant is given to local authorities for services, including sexual health services, health visiting, the NHS Health Check programme, and health improvement programmes such as stop smoking, healthy weight, and drug and alcohol services. All services that are vital if the government’s aim to move to a more preventative approach to healthcare are to be achieved.
Despite how generous the headline figure of £22.6 billion looks, the consensus of opinion from commentators that have analysed the figures, is that the funding is nowhere near enough. There are also concerns about the lack of attention to social care.
Siva Anandaciva, the chief analyst at the King’s Fund think tank, said that while the budget increase would help sustain services, “it is unlikely to drastically improve care over the rest of this year, and certainly not overnight.”
Budget increase already spent
Much of the money is already spoken for in pay increases and the current deficit in the NHS. Sally Gainsbury of the Nuffield Trust noted in a discussion on the budget, despite looking “generous” the increase is “still not quite enough to resolve all the immediate cost pressures that the NHS in England is experiencing this year,” and it is likely that there are more negotiations and clarifications to come.
Gainsbury noted that in practice a lot of the extra money is tied up with elective activity at hospital trusts. Increasing elective activity to chase targets leads to high costs in staff overtime. Hitting the targets will bring money in for the trusts to offset the higher staff bill, but those trusts not hitting the targets will struggle with deficits, noted Gainsbury.
Adding, that whilst the budget might help NHS England breakeven overall, there will be considerable differences in performance between trusts, with many still in deficit.
This budget is the first phase of a two-part spending review and sets the spending for health and care services in 2024/25 and 2025/26. Phase 2 comes in next year’s spending review, which will set budgets for 2026/27 and 2027/28.
As already noted the figure in the budget is rarely the final figure for spending on health. The Autumn Budget has reset spending levels for the current financial year (2024/25), but the onset of winter may well result in the need for more funding to be voted through early in 2025 to avoid the DHSC overspending its budget.
After years of underfunding leading to staffing issues, failing infrastructure and financial deficits, commentators agree that this is a budget that will help keep the NHS moving and deliver some improvement, albeit in a patchy way that will not be seen across the entire system, but it is unlikely to allow the NHS to make significant changes to the way it operates and towards its goal of moving to preventative care. For that to happen, budgets across the time of the parliament and beyond will have to keep up the increased investment.
Inflation pressures in the NHS
From 2021 to 2023 inflation rocketed and the increase in funding announced became a decrease in real terms and a massive funding gap opened up.
In early October 2022, the NHSE’s chief financial officer Julian Kelly told the Board of NHS England that the NHS now faces a funding gap of over £14 billion by 2025: he warned that this raises real questions now over whether commitments on cancer, mental health and more are affordable.
However, his report’s executive summary shows that the gap is even bigger, and still growing:
“In total we have committed to delivering £12bn of annualised savings by 2024/25 including reducing exceptional funding for covid. The impact of higher inflation this year and the potential recurrent effect of this year’s pay settlement and other responsibilities transferred to us could add substantially to this. In addition to this we could face a further £6-7bn depending on how inflation feeds through into pay and other prices next year.”
So the gap to be bridged by “annualised savings” (aka cutbacks) by 2025 is likely to be upwards of £18-£19bn.
Inflation is increasing the cost of non-pay goods and services, but also adding to the pressure to increase beyond the hopelessly inadequate £1,400 flat rate NHS pay award, much of which is not fully funded but has to be funded by NHS organisations out of their budgets.
Despite surging inflation, the Conservative government insisted that there was to be no revision of November’s spending review, which had assumed pay rises of no more than 2% over the next three years.
Then later in October, much worse figures were published in the HSJ. The article used updated inflation forecasts given to the HSJ produced by the Institute for Fiscal Studies and investment bank Citi. These showed that the NHS in England will have to endure two more years, 2023/24 and 2024/25, of real terms cuts on top of the cut in budget in 2022/23. NHSE’s budget will be 2.2% smaller in real terms in 2024-25 than it was in 2021-22.
Deficits for Integrated Care Systems
NHS reorganisation in 2021/22 led to 42 integrated care systems (ICS) across England, led by integrated care boards (ICB), which became statutory bodies controlling ICS across England on July 1 2022. ICBs are responsible for overseeing financial management at each ICS.
For up to date information on the state of ICB deficits see The Lowdown.
A recent investigation of ICB Board papers by The Lowdown of all 42 Integrated Care Systems (ICS) in England found that nearly all are making decisions to restrict spending by a collective total of around £8bn.
