Robert Chote: Health and the spending squeeze
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Transcript of Robert Chote: Health and the spending squeeze
© Institute for Fiscal Studies
Health and the spending squeezeRobert Chote
Health Strategy Summit, Nuffield Trust, 24 March 2009
© Institute for Fiscal Studies
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?
© Institute for Fiscal Studies
Consistently rapid NHS spending growth since ‘99
-6
-4
-2
0
2
4
6
8
10
1219
50-5
1
1955
-56
1960
-61
1965
-66
1970
-71
1975
-76
1980
-81
1985
-86
1990
-91
1995
-96
2000
-01
2005
-06
Perc
enta
ge re
al in
crea
se
0
1
2
3
4
5
6
7
8
9
Perc
enta
ge o
f nat
iona
l inc
ome
Real increase, LH axisLevel, RH axis
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Average annual increase (%)
LabourApril 1997 to March 2007 6.1
ConservativesApril 1979 to March 1997 3.0
Long-run averageApril 1949 to March 1997 3.5
Well above Tory and long-term averages
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Health the big winner since 1997
2.3
4.4
6.1
3.2
0 1 2 3 4 5 6 7
Other
Education
NHS
Total
Average annual real growth (%)
Source: HM TreasuryNote: Average annual increase 1996–97 to 2006–07
© Institute for Fiscal Studies
The outlook before the crunch: big picture
35
36
37
38
39
40
41
42
43
96–9
7
97–9
8
98–9
9
99–0
0
00–0
1
01–0
2
02–0
3
03–0
4
04–0
5
05–0
6
06–0
7
07–0
8
08–0
9
09–1
0
10–1
1
11–1
2
12–1
3
Financial year
Per
cent
age
of n
atio
nal i
ncom
e
Current expenditureTotal expenditureReceipts
Source: HM Treasury
Labour I Labour II
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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%
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
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
The PBR: the policy response
-2
-1
0
1
2
3
2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16
Per
cent
of
nati
ona
l inc
om
e
Loosening
Tight ening
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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%
© Institute for Fiscal Studies
Public spending squeeze to intensify
-2
-1
0
1
2
3
4
5
6
7
896
–97
97–9
898
–99
99–0
000
–01
01–0
202
–03
03–0
404
–05
05–0
606
–07
07–0
808
–09
09–1
010
–11
11–1
212
–13
13–1
414
–15
15–1
6
Financial year
Perc
enta
ge re
al in
crea
se
30
32
34
36
38
40
42
44
46
48
50
Perc
enta
ge o
f nat
iona
l inc
ome
Real increase, LH axisLevel, RH axis
© Institute for Fiscal Studies
Current spending squeezed
-0.1
3.6
1.7
2.9
1.2
-1
0
1
2
3
4
5
Conservatives:1979-80 to1996-97
Labour,inherited
Conservativeplans: 1997-
98 to 1998-99
Labour,Spending
Reviews todate: 1999-00
to 2007-08
Labour, latestforecast:
2008-09 to2010-11
Labour, plans:2011-12 to
2013-14
Aver
age
annu
al re
al in
crea
se
© Institute for Fiscal Studies
Investment spending particularly squeezed
3.0
16.5
-5.0
1.0
-2.4-6
-3
0
3
6
9
12
15
18
Conservat ives:1979-80 to
1996-97
Labour,inherited
Conservat iveplans: 1997-
98 to 1998-99
Labour,Spending
Reviews todate: 1999-00
to 2007-08
Labour, latestforecast:
2008-09 to2010-11
Labour, plans:2011-12 to
2013-14
Aver
age
annu
al re
al in
crea
se
© Institute for Fiscal Studies
A possible Spending Review 2010 allocation
1.1
0
2
4
6
8
10
Remainder: other TotalManaged
Expenditure
Aver
age
annu
al re
al in
crea
se
Average annual real increases, April 2011 to March 2014
© Institute for Fiscal Studies
A possible Spending Review 2010 allocation
7.7
0.7
0
2
4
6
8
10
Debt interest Remainder: other TotalManaged
Expenditure
Aver
age
annu
al re
al in
crea
se
Average annual real increases, April 2011 to March 2014
© Institute for Fiscal Studies
A possible Spending Review 2010 allocation
7.7
1.7
0.40
2
4
6
8
10
Debt interest Social security &tax credits
Remainder: other TotalManaged
Expenditure
Aver
age
annu
al re
al in
crea
se
Average annual real increases, April 2011 to March 2014
© Institute for Fiscal Studies
A possible Spending Review 2010 allocation
7.7
1.7 1.9
0.00
2
4
6
8
10
Debt interest Social security &tax credits
Other AME Remainder:Departmental
Expenditure Limits
Ave
rage
ann
ual r
eal i
ncre
ase
Average annual real increases, April 2011 to March 2014
© Institute for Fiscal Studies
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
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?
© Institute for Fiscal Studies
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