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Fiscal study warns substantial tax rises needed

According to the results of an independent study published today by the Institute for Fiscal Studies (IFS) and the Health Foundation in association with the NHS Federation, UK spending on healthcare will have to rise by an average of 3.3% a year over the next 15 years just to maintain NHS provision at current levels, (with slightly bigger increases in the short run to address immediate funding problems), and by at least 4% a year if services are to be improved. This would mean health spending rising faster than national income and would take health spending from 7.3% of national income today to 8.9% of national income by 2033-34. 


That looks like a formidable increase, but would imply annual spending increases below their long-run average. And this would come after eight years of the tightest spending settlements in the NHS’s history.


The report suggests 5% annual increases in the short run would allow some immediate catch-up, enable waiting time targets to be met, and tackle some of the underfunding in mental health services. This would take spending in 2033-34 to 9.9% of national income, an increase of 2.6% of national income relative to 2018-19.


At the same time, pressures on social care spending are increasing and, if we continue with something like the current funding arrangements, adult social care spending is likely to have to rise by 3.9% a year over the next 15 years taking an extra 0.4% of national income, relative to today.


Put these figures together and health and social care spending is likely to have to rise by 2-3% of national income over the next 15 years.


These are the results of careful ‘bottom-up’ modelling of supply and demand factors in the health and social care sectors. This work uses a different approach from the more usual ‘top-down’ methods for forecasting spending. It builds up spending needs from detailed models of demographic change, population health and cost data.


If we choose to meet these pressures, we would almost certainly need to increase taxes. In that sense the future may look different from the past. Government spending on health rose from 3% of national income in the 1950s to 5% by the year 2000 and over 7% today without us needing to increase overall public spending, or the overall tax burden, as a share of national income. That was possible because of sharp cuts in spending on other services, particularly defence. It is very hard to see how higher health spending in the future could be financed by big cuts to other areas of public spending, especially after eight years of austerity.


Funding these projected increases in health spending through the tax system would require taxes to rise by between 1.6 and 2.6% of GDP - that’s between £34 billion and £56 billion in present-day terms, equivalent to between £1,200 and £2,000 per household (out of projected net income growth of about £8,500 per household)Any such increases would of course need to be phased in gradually over the next 15 years.


Paul Johnson, Director of IFS and an author of the report, says: “We are finally coming face-to-face with one of the biggest choices in a generation. If we are to have a health and social care system which meets our needs and aspirations, we will have to pay a lot more for it over the next 15 years. This time we won’t be able to rely on cutting spending elsewhere - we will have to pay more in tax. But it is a choice: higher taxes and a health and social care system which meets our expectations and improves over time, or taxes at current levels and a more constrained health service delivering less than we have become accustomed to.”


Anita Charlesworth, Director of Research and Economics at the Health Foundation and an author of the report, says: “After eight years of austerity, the health service will need a sustained injection of funding just to get back on an even keel, let alone to modernise. The Prime Minister has committed to a long-term funding settlement for the NHS. Maintaining current provision and dealing with the backlog of funding problems will require NHS funding to grow by around 4% a year for the next five years. Meaningful progress on waiting times, staffing shortages and mental health will need growth of around 5% a year over that period. Much less than growth of 4% a year and the NHS will be able to do little more than tread water. It will struggle to fulfil Nye Bevan’s vision of 70 years ago.”


Niall Dickson, Chief Executive of the NHS Confederation, adds: "This objective and independent report makes clear that the next 15 years are going to be even more challenging than the last. Unless we tackle the funding issue, and build up the workforce, we will see further strain on NHS finances and services. Yes, there are more efficiencies to be made and our services need to be much better at supporting people in the community, but if we want a high quality NHS and care system we will have to pay for it.”


The study concludes that it is hard to see an alternative to raising taxes if the country is to rise to the challenge of meeting these spending pressures. The case for a hypothecated tax has been made in recent years as evidence grows that the public would be more willing to pay taxes if they were guaranteed to fund the NHS. If this could be done in a way that led to a predictable funding stream for the NHS, there might be a case for it. But it is hard to design a hypothecated tax that is simple, predictable and transparent.


The levels of taxation the study is suggesting may also be unpalatable - tax rises of at least 1.6% of national income, and up to 2.6% of national income (£34-56 billion in today’s terms) by the mid 2030s for the NHS, with an additional rise of 0.4% of national income to meet the pressures on social care would take the tax burden to historically high levels by UK standards, although not especially high by continental European standards. It is hard to see how tax rises of this scale could be implemented without increases in at least one of income tax, NICs and VAT.


A poll commissioned by independent think tank Reform and published in February found that 59% of British voters would be willing to pay higher income tax to help fund the NHS - but the 0.4p in the pound (£5.25 a month) average the poll found voters are willing to pay falls a long way short of the levels this study believes are going to be necessary.


Unions have responded with calls for the government to take the issue of funding for the NHS seriously. Sara Gorton, UNISON Head of Health says: “With the NHS turning 70, now is the time for ministers to show their commitment to a service that has cared for us all so well. That means proper investment.”


Kevin Brandstatter, GMB national Officer, says: “This report confirms what we have been saying for years - NHS funding hasn’t kept pace with inflation and the health service has been chronically short changed by the Conservatives. This shortage of cash, alongside the Health and Social Care Act 2012, has created a toxic mess. While people are desperately waiting to be treated, the government is having a little chat about whether they have a funding plan for the NHS.”


Other findings include:


* Health spending has risen by an average 3.7% a year in real terms since the NHS was founded 70 years ago. At 1.4% a year, spending growth over the last eight years has been slower than at any time in the NHS’s history.


* Once you take account of the increased size and age of the population, there has been barely any growth in spending since 2010. Age-adjusted per-capita spending has risen by just 0.1% per annum since 2009-10.


* Even so, health spending has grown sharply as a fraction of overall public service spending and has been relatively more favoured since 2009-10 than it was before that. It now accounts for 30% of all public service spending compared with 26% in 2009-10 and 23% at the turn of the century.


* Over the same period, social care spending has fallen by nearly 10%.


* Over the last 20 years, there has been a 70% increase in the number of hospital doctors per 1,000 people. Even so, the UK has fewer practising doctors per 1,000 people than any other EU15 country.


* The number of GPs per 1,000 population has fallen since 2010 along with spending on primary care.


* The NHS is a much better service on nearly all measures than it was 20 years ago with much lower waiting times and improved survival following cancer, heart attacks and stroke. But public satisfaction is beginning to fall and performance against targets is beginning to dip significantly.


* The NHS is more productive now than it was in the past, with significant increases in productivity in the last eight years. Length of stay in hospital is much shorter, more patients are treated as day cases, and advances in surgery and anaesthesiology mean less invasive operations and faster recovery.


* Over the next 15 years, the population over age 65 is likely to increase by 4.4 million, with the number over 85 rising by 1.3 million. This demographic change alone will increase costs significantly.


* The numbers of people with chronic diseases, and especially the numbers with multiple chronic diseases, are also growing rapidly. Over the next 15 years, spending in acute hospitals to treat people with chronic disease is expected to more than double.


* Spending on hospital drugs has been rising by more than 5% a year in recent years - this is likely to continue.


* The NHS could need around 179,000 more staff over the next five years if services are to meet demand pressures. This is over 100,000 more staff than the NHS is currently expecting to be able to recruit and retain over that period.


* Social care funding will need to increase by 3.9% a year to meet the needs of an ageing population and an increasing number of younger adults living with disabilities. Any reforms that reduce the severity of the current means test will put additional pressure on funding.


Click here to download the full report.