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
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 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 underfunding by successive conservative governments ensured that the NHS has been unable to cope with an increase in ageing population and growing demand.
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.
November 2021 spending review
In November 2021, the government’s spending review announced an increase in health spending, with day-to-day spend in 2024/25 to be 13% higher in real terms than in 2021/22.
Day-to-day spending on the NHS was due to rise by 3.8% between 2021/22 and 2024/25, reaching a total of £166bn by 2024/25. The capital budget to cover NHS infrastructure costs will reach £10.5bn in 2024/25 (in today’s prices).
The spending review, however, failed to increase the public health grant. It will be maintained in real terms until 2024/25, and so does not reverse the 24% real-terms cut to the grant since 2015/16.
As inflation rocketed up over 2022, however, these increases have rapidly become insignificant.
Inflation destroys funding increase
Since the November 2021 announcement inflation has rocketed and the increase in funding announced is now actually a decrease in real terms and a massive funding gap has 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 Treasury has insisted that there will 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.
In May 2022, it was found that almost all of those ICB for which figures are available were projecting substantial deficits for their ICS in their first year in charge.
This brings the ICBs into conflict with guidance from NHS England, which was revealed back in March by the Health Service Journal, which reported “Every health and care system — including those carrying huge deficits going into the pandemic — will be told to deliver financial balance in 2022-23.”
The HSJ quoted from draft guidance circulated to local leaders which set out a hard line and attempted to crack the disciplinary whip:
“NHS England and NHS Improvement intend to use additional powers in the legislation to set a financial objective for each integrated care board [the local commissioning body] and its partner trusts to deliver a financially balanced system, namely a duty on break even.”
But as the HSJ report commented “it is unclear what the consequences will be for an ICS that fails to meet what is described as a “new joint legal duty”.
The funding issue, therefore, is absolutely crucial for trusts and ICBs seeking to balance the books. Too little was allocated in Rishi Sunak’s autumn spending review, with no significant change in the Spring Statement. and that limited increase in spending is being rapidly eroded by rising inflation.
In April 2022 NHS England issued tough guidance that insists ICBs have a duty to break even, and urged trusts to seek to maximise their income from private patients:
But inflation has now risen more sharply still, piling added pressure on to NHS budgets, and effectively wiping out the value of the 3.3% cash increase for ICB allocations. ICSs have also reported pressure due to the previous year’s Covid funding being cut by more than half, the additional funding for hospital discharges (Hospital Discharge Plan) ending, and having to spend more on agency staff due to staff shortages.
On April 26 the HSJ headlined “Every health system to face real-terms funding cut in 2022-23” and calculated the real terms cuts ranging from 2.1% in North Central and South East London down to 0.2% in Buckinghamshire Oxfordshire and Berkshire West.
But these calculations are on the basis of the official forecast of inflation of 4% in the public sector this year – which came before the Bank of England announced general inflation had risen to 7% and was set to rise to 10.2%. Hopes that the public sector will not face as high a level of inflation hinge on the number of supply contracts already in place at fixed prices – and the assumption that health workers will accept a brutal real-terms cut in pay as price rises outstrip the 3% maximum increase proposed by the government for 2022/23.
By November 2022, it was clear that all ICSs were struggling to clear deficits. At the halfway point in the 2022/23 financial year, HSJ found that two out of three ICS were not on track to break-even and many are likely to have to report large deficits in their first year of operation, despite them signing up to break-even plans at the start of the year.
Cost-cutting by ICBs, which were formed from the mergers of several CCG, includes staff redundancies and cuts in infrastructure.
In early December 2022, it was revealed that NHS England has told local leaders that ICS are currently on course for a combined deficit of more than £1bn this year. However, the ICS are still obliged to break-even by the end of the 2022/23 financial year in April 2023.
More information on the deficits in ICBs can be found here.
