What is the outlook for health funding?

24 January 2023

About 6 mins to read

Giulia Boccarini

Data analysis

Key points

The 2022 Autumn Statement saw the Chancellor promise an extra £3.3bn for the NHS and £1.4bn for capital investment in 2023/24 and 2024/25. In cash terms, spending in 2024/25 will be almost £14bn higher than in 2022/23.
Much of this additional spending will be needed to meet inflation. After accounting for inflation, real-terms funding in 2024/25 will be £6bn higher than in 2022/23.
This means that in real terms, core day-to-day spending on the NHS will rise by 2% a year by 2024/25, while capital spending will grow by just 0.2%.
Overall, the Department of Health and Social Care’s funding settlement will increase by 1.2% a year in real terms over the next 2 years. This is higher than planned at the last Spending Review but far below the 3.6% long-term average growth rate.
The NHS continues to face rising cost pressures that will erode the spending power of this settlement, with pay being the most significant. Health service inflationary pressures may be higher than the government estimates through the central GDP deflator forecast.
The different methods used to estimate inflation for the whole economy show that the buying power of this settlement is uncertain. The unknown outcome of future pay negotiations and volatility in the cost of other key inputs add further uncertainty around the actual cost pressures the health care sector will face.

Introduction

In this analysis we look at the outlook for health funding following the 2022 Autumn Statement, draw out some implications for clearing the NHS estate maintenance backlog and look at the potential impact of pay and other cost pressures on NHS spending power.

Overall health spending

The 2022 Autumn Statement updates the plans set out in the 2021 Spending Review and confirms the overall budget for health care in England (DHSC TDEL) until the end of this parliament (2024/25). TDEL is now projected to grow by 1.2% a year in real terms over the next 2 years of the parliament (Table 1). This is below the average seen in the decade preceding the pandemic (2%), and well below the historical average of 3.6% since the NHS was founded in 1948 (Table 2).

Total spending on health care (DHSC TDEL) includes revenue funding (DHSC RDEL) – spending on day-to-day costs such as salaries and medicines, and capital funding (DHSC CDEL) – spending on assets such as buildings, research and development, and medical equipment. The vast majority of the DHSC TDEL budget, around 87%, goes to NHS England for the day to day running costs of the NHS. The remainder is for workforce education and training, public health, central programmes and capital investment.

Table 1: Funding levels and growth for the DHSC health budget

Note: Funding excluding COVID-19 and including COVID-19 (in brackets)

	Outturn (cash terms, £bn)			Planned (cash terms, £bn)			Compound annual growth rate (CAGR) (real terms, %)
	2019/20	2020/21	2021/22	2022/23	2023/24	2024/25	2021/22–2024/25	2022/23–2024/25
DHSC total health budget (TDEL), of which:	140.5	144.9 (193.0)	153.1 (189.8)	180.2	187.9	193.0	4.8% (-2.5%)	1.2%
Day-to-day spending (RDEL)	133.5	136.3 (180.2)	144.1 (180.7)	168.2	176.2	180.4	4.5% (-3.1%)	1.3%
Of which: NHS England	123.8	125.9 (149.5)	133.7 (150.6)	152.6	160.4	165.9	4.2% (0.1%)	2.0%
Other health budgets	9.7	10.4	10.4	15.6	15.8	14.5	8.3%	-5.7%
Capital spending (CDEL)	7.0	8.6 (12.7)	9.0 (9.0)	12.0	11.7	12.6	8.5% (8.3%)	0.2%

Source: Autumn Statement 2022 and OBR Economic and Fiscal Outlook November 2022. Note: numbers in brackets show total health budgets including funding for COVID-19 (sources: PESA July 2022 and 2022/23 Variation to the Financial Directions to NHS England).

Note: Total Departmental Expenditure Limit (TDEL) is the Resource Departmental Expenditure Limit (RDEL) plus the Capital Departmental Expenditure Limit (CDEL). Other health budgets cover wider health spending, including workforce education and training and public health services, and are obtained as the difference between DHSC RDEL and NHS RDEL.

Table 2: Average real-terms growth in DHSC TDEL by administration

Government	Time period	Annual growth
Thatcher and Major Conservative governments	1978/79 to 1996/97	3.0%
Blair and Brown Labour governments	1996/97 to 2009/10	6.7%
Coalition government	2009/10 to 2014/15	1.1%
Cameron and May Conservative governments	2014/15 to 2018/19	1.7%
Johnson, Truss and Sunak Conservative government	2019/20 to 2022/23	4.9%
Sunak Conservative government	2023/24 to 2024/25	1.2%
Long-term average (pre-COVID-19)	1949/50 to 2019/20	3.6%

Source: HMT Autumn Statement 2022 and House of Commons NHS Funding and Expenditure (Briefing paper, January 2019).

Note: The table shows real terms average growth rates for DHSC TDEL spending excluding COVID-19 spending in years 2020/21 and 2021/22, using the GDP deflator. The long-term average is calculated for UK-wide health spending, for which data are available starting from 1949/50.

Day-to-day NHS spending

In the 2022 Autumn Statement, the Chancellor promised an extra £3.3bn for the NHS in 2023/24 and 2024/25, in addition to the funding committed in the 2021 Spending Review. This is around half of the shortfall that NHS England estimated in October could be needed to cover inflation and pay increases. Since then, non-pay inflation forecasts have been revised down so the extra funding should make up part of this gap. As a result, NHS England’s funding will increase by an average of 2% in real terms over the next 2 years, up from the 1.4% average increases set out in the Spending Review. This means that over this parliament (2019/20 to 2024/25) NHS spending will increase by around 3% a year on average in real terms.

Capital spending

The DHSC TDEL budget also includes a ringfenced allocation for capital investment (CDEL), accounting for around 6% of the total health budget. This budget is used for research and development activities, investments in building or upgrading hospitals, and to purchase medical equipment such as CT and MRI scanners.

The Autumn Statement provides an extra £1.4bn per year for capital investment by 2024/25 compared to Spending Review plans (Table 3). After accounting for inflation, capital spending will grow by just 0.2% on average over the next 2 years based on the GDP deflator, although other measures of inflation suggest this could be even lower (see below).

Moreover, DHSC reports that some of this increase since Spending Review 2021 reflects accounting rule changes that they have not quantified – so while the headline capital budget is increasing, this may not translate into greater buying power.

Table 3: Capital investment in health, £bn

Cash terms (£bn)	2022/23	2023/24	2024/25	CAGR real terms 2022/23–2024/25
Spending Review 2021	10.6	10.4	11.2	0.7%
Autumn Statement 2022	12	11.7	12.6	0.2%
Difference	1.4	1.3	1.4	0.5% points

Source: HMT Autumn Statement 2022 and Spending Review 2021, and OBR Economic and Fiscal Outlook November 2022.

However, the latest allocation for capital represents a substantial increase over the previous decade. Capital spending increased on average by 3.2% between 2010 and 2020, almost three times lower than the growth rate over this parliament. In the decade before the pandemic, capital investment was consistently reallocated to support day-to-day running costs in the NHS. The underinvestment in capital infrastructure is the main contributor to the high cost of fixing the backlog of maintenance – the cost of bringing deteriorating assets back into suitable working condition.

Figure 1

Latest estimates suggest the maintenance backlog for the NHS estate reached £10.2bn (almost £11bn in real terms) in 2021/22, more than twice as high as it was a decade ago (Figure 2). With inflation in the construction sector reaching 10% in September 2022, the cost of clearing the backlog might yet increase further. Around half of the estate backlog is classified as high or significant risk, requiring urgent priority repairs and replacements. This means patients and staff are using outdated facilities and equipment that could be unsafe and lead to poor care.

Figure 2

Other health budgets

DHSC TDEL also covers wider health spending, including workforce education and training and public health services. The public health grant and Health Education England budget accounted for £8.9bn out of the £15.6bn of non-NHS RDEL in 2022/23. The budgets for the public health grant and Health Education England spend on workforce education and training had not been published by end of January 2023 but non-NHS revenue spending in cash terms is now around £0.3bn lower in each year compared with Spending Review plans (we are advised by DHSC that this is the result of accounting changes and revisions following the reversal of the Health and Social Care Levy).

The public health grant is paid to local authorities from the DHSC budget and plays a key role in improving the health of the population. In 2022/23 this amounted to £3.4bn, a 21% real-terms per capita cut since 2015/16. Failure to invest in vital preventive services risks health worsening further, widening health inequalities, and the costs of dealing with this poor health will be felt across society and the economy.

The NHS also faces the long-term challenge of chronic staff shortages. The Autumn Statement included a commitment to publish a comprehensive workforce plan next year, with independently verified workforce forecasts. This is welcome but adequate funding for training and education is crucial to implement the plan.

Cost pressures on health budgets

Different measures of inflation

Since the Spending Review in 2021 the macroeconomic context has changed, with GDP growth slowing and inflation rising. There are multiple measures of inflation but two of the main ones are the Consumer Prices Index (CPI), which is the government’s preferred measure of inflation in the economy, and the GDP deflator, which is used by the Treasury to measure cost pressures facing government departments.

The actual spending power of the NHS budget depends on how inflation is measured. For instance, NHS England allocation will increase by nearly £13bn in cash terms between 2022/23 and 2024/25.This is equivalent to £6bn if the GDP deflator is used, but only around £5bn if using the CPI.

The GDP deflator estimates of inflation for the next few years are much lower than the CPI inflation estimates (Figure 3). The OBR notes in its latest Economic and Fiscal Outlook that the true impact of higher-than-expected inflation on departmental budgets is likely to lie somewhere between the two. Another measure of inflation, the consumer deflator, could then be a good proxy of this intermediate measure. Figure 4 shows how growth rates in health budgets could be even lower than predicted at the Autumn Statement, if the actual inflation in the health care sector follows the same path as the consumer deflator or the CPI.

Figure 3

Figure 4

Uncertainty around cost pressures

There is high uncertainty around the true cost pressures the health care sector is going to face in the next 2 years. One obvious reason is due to staff pay, which makes up almost 70% of NHS providers’ costs, and almost half of the total DHSC budget. Any unfunded pay increase to settle current industrial action would have a significant impact on NHS budgets and implications for services.

There are no published plans for NHS pay beyond this year. If health care staff earnings rise in line with the OBR’s forecast for the whole economy (nominal) earnings, they would increase by 3.5% and 1.6% in each of the next 2 years. However, the ongoing cost-of-living crisis is also likely to have adverse implications for staff morale and retention, particularly after the burnout experienced by many staff during the pandemic. The health care sector is braced for a prolonged period of industrial action and the outcome of this adds uncertainty about earnings growth over the next 2 years.

Another source of uncertainty is the future cost of energy. The Department for Business, Energy & Industrial Strategy estimates that in the year up to September 2022, non-domestic users have seen electricity and gas prices increase by 63% and 124% respectively. Energy costs account for more than 7% of the total cost of running the NHS estate (NHS Digital, Estates Returns Information Collection 2021/22). Hospitals will benefit from the Energy Bill Relief Scheme running until March 2023, and to a lesser extent from the new Energy Bills Discount Scheme over the next 12 months. But as pointed out by the ONS, the extent to which public services are exposed to price increases and will benefit from the scheme are unknown, due to these services using a mix of variable and fixed tariffs.

In addition, NHS leaders have recognised the risk that significant inflation in the construction and raw material markets could erode the value of the capital budget and therefore increase the cost of delivering key capital priorities. They also acknowledge the further volatility expected in these markets, adding to the uncertain outlook.

Conclusion

The 2022 Autumn Statement committed extra funding for day-to-day health care services that will help to mitigate the cost pressures facing the NHS. However, the true cost pressures in the health care sector might not be adequately captured by the official inflation estimates. Considerable uncertainty also remains in areas such as staff pay and the cost of energy in future years. This could add to existing challenges around persistent workforce shortages and maintaining and improving NHS buildings and equipment. While there is significant uncertainty, the funding outlook for the NHS remains very challenging for the rest of this parliament.