1. Health and the spending squeeze
Robert Chote
Health Strategy Summit, Nuffield Trust, 24 March 2009
© Institute for Fiscal Studies

2. Overview
• Historic growth in NHS spending
• The outlook for spending before the crisis
• The credit crunch and Spending Review 2010: the PBR view
• Could it be worse?
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3. Percent age real increase
‘99
-6
-4
-2
0
2
4
6
8
10
12
1950-51
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1955-56
1960-61
1965-66
Level, RH axis
1970-71
Real increase, LH axis
1975-76
1980-81
1985-86
1990-91
1995-96
2000-01
2005-06
0
1
2
3
4
5
6
7
8
9
Consistently rapid NHS spending growth since
Percent age of nat ional income

4. Well above Tory and long-term averages
Average annual
increase (%)
Labour
April 1997 to March 2007 6.1
Conservatives
April 1979 to March 1997 3.0
Long-run average
April 1949 to March 1997 3.5
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5. Health the big winner since 1997
Total 3.2
NHS 6.1
Education 4.4
Other 2.3
0 1 2 3 4 5 6 7
Average annual real growth (%)
Source: HM Treasury
© Institute for Fiscal Studies Note: Average annual increase 1996–97 to 2006–07

6. The outlook before the crunch: big picture
Percentage of national income
43
Labour I Labour II
42
41
40
39
38
37 Current expenditure
Total expenditure
36 Receipts
35
96–97
97–98
98–99
99–00
00–01
01–02
02–03
03–04
04–05
05–06
06–07
07–08
08–09
09–10
10–11
11–12
12–13
Financial year
Source: HM Treasury
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7. The outlook before the crunch: spending
• Comprehensive Spending Review 2007
– Set to be the tightest Spending Review under Labour
– Planned average annual real growth in total spending: 2.1%
• NHS settlement
– Health spending to grow by average of 3.7% a year in real terms
• 2011–12 and 2012–13
– Tight spending plans to continue
– Planed average annual real growth in total spending: 2.2%
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8. The PBR: the impact of the crunch
• Sharp downgrade to economic growth: recession
• Crisis costs Exchequer 3.5% of GDP or £50bn a year
– Permanent 4% fall in productive potential of the economy
– Equity and house prices to stay below levels assumed in Budget
– Small ongoing cost of cyclical borrowing and fiscal stimulus
– No cost factored in for financial sector intervention

9. The PBR: policy response
• Fiscal stimulus this year and next
– Total cost £25bn
– 1.1% of national income in 2009–10
– Roughly half accounted for by temporary VAT cut
• Stimulus withdrawn and then fiscal tightening from 2010–11
– Building to 2.6% of GDP or £38bn a year by 2015-16
– Roughly 80% spending cuts and 20% tax increases
– Returns spending and tax burden to pre-crisis levels by 2013–14

10. The PBR: the policy response
3
Tight ening
Percent of nat ional income
2
1
0
-1
Loosening
-2
2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16

11. The PBR: implications for spending
• Spending to be higher than expected in 2010-11
– But more than accounted for by benefits and debt interest
– £6.3bn cut in spending on services, including £1.3bn cut in NHS
capital budget plus £5bn in “efficiency savings”
• Tougher squeeze over Spending Review 2010 and thereafter
– Total real spending growth from 2011–12 to 2013–15: 1.1%
– Total real spending growth from 2014–15 to 2015–16: 1.3%
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12. Percentage real increase
-2
-1
0
1
2
3
4
5
6
7
8
96–97
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97–98
98–99
99–00
00–01
01–02
Level, RH axis
02–03
03–04
Real increase, LH axis
04–05
05–06
06–07
07–08
Financial year
08–09
09–10
10–11
11–12
12–13
Public spending squeeze to intensify
13–14
14–15
15–16
30
32
34
36
38
40
42
44
46
48
50
Percentage of national income

13. Current spending squeezed
5
Average annual real increase
4 3.6
2.9
3
2 1.7
1.2
1
0
-0.1
-1
Conservatives: Labour, Labour, Labour, latest Labour, plans:
1979-80 to inherited Spending forecast: 2011-12 to
1996-97 Conservative Reviews to 2008-09 to 2013-14
plans: 1997- date: 1999-00 2010-11
98 to 1998-99 to 2007-08
© Institute for Fiscal Studies

14. Investment spending particularly squeezed
18 16.5
Average annual real increase
15
12
9
6
3.0
3 1.0
0
-3
-2.4
-6 -5.0
Conservatives: Labour, Labour, Labour, latest Labour, plans:
1979-80 to inherited Spending forecast: 2011-12 to
1996-97 Conservative Reviews to 2008-09 to 2013-14
plans: 1997- date: 1999-00 2010-11
98 to 1998-99 to 2007-08
© Institute for Fiscal Studies

15. A possible Spending Review 2010 allocation
10
Average annual real increases, April 2011 to March 2014
Average annual real increase
8
6
4
2
1.1
0
Remainder:
other Total
Managed
Expenditure
© Institute for Fiscal Studies

16. A possible Spending Review 2010 allocation
10
Average annual real increases, April 2011 to March 2014
Average annual real increase
8 7.7
6
4
2
0.7
0
Debt interest Remainder:
other Total
Managed
Expenditure
© Institute for Fiscal Studies

17. A possible Spending Review 2010 allocation
10
Average annual real increases, April 2011 to March 2014
Average annual real increase
8 7.7
6
4
2 1.7
0.4
0
Debt interest Social security & Remainder:
tax credits other Total
Managed
Expenditure
© Institute for Fiscal Studies

18. A possible Spending Review 2010 allocation
10
Average annual real increases, April 2011 to March 2014
Average annual real increase
8 7.7
6
4
1.7 1.9
2
0.0
0
Debt interest Social security & Other AME Remainder:
tax credits Departmental
Expenditure Limits
© Institute for Fiscal Studies

19. Real spending freeze: where would the pain
fall?
• If evenly spread relative to spending growth of recent years:
– Health would be one of only seven departments that would receive a
real increase (others include: international development, education,
energy & climate change, and intelligence agencies)
• NHS spending would:
– grow at 1.7% a year in real terms
– fall as a share of national income
– increase less quickly than under the Conservatives
© Institute for Fiscal Studies

20. Could it be worse?
• Public finances in worse shape than they appeared at PBR
– Recession longer and deeper
– Tax revenues may undershoot forecasts
– IMF estimates £130bn bill for financial sector rescues
– Government may find it more expensive to borrow
• If bigger fiscal tightening required, will it be tax or spending?
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21. Conclusions
• NHS has fared relatively well under Labour
• Credit crunch has permanent fiscal costs
• Next Spending Review to be much tighter than its predecessors
– Plausible scenario suggests real freeze in departmental spending
– Capital intensive areas hit hardest
– NHS spending could be cut as a share of GDP
• Squeeze may need to be even tighter as public finances worsen
© Institute for Fiscal Studies