More funding isn't just good for the NHS - it's good for the economy

The BBC’s fantastic Hospital documentary lays bare the intolerable pressures that our health and social care system is under after nearly a decade of funding cuts.

Following intense pressure from unions, frontline health workers and MPs, the government is now signalling a change of direction – an official announcement of a multi-year funding deal is expected in the next couple of months.

In this context, today’s report from the IFS and Health Foundation is both timely and helpful.

It makes clear that our health and social care system is in desperate need of a new funding settlement not only to address the current financial pressures it is under but also to provide the capital and workforce investment needed to transform services in the future.

The report has sparked intense political debate over how these changes will be paid for, but there’s no need for the scaremongering headlines we saw in some of the media coverage today.

What’s in the report?

The IFS and Health Foundation report calls for transformative change in the way our health and social care system is funded.

This will require an estimated 4 per cent per year increase in NHS funding over the next 15 years, bringing the proportion of national income spend on our health service up to 9.9 per cent of GDP by 2033/34.

A similar level of funding growth is needed to meet the social care needs of a growing cohort of older people and disabled adults – and more will be necessary if we want to introduce cost caps, reform means-testing and increase access.

Combined, this amounts to a total increase of spending on health and social care of around 2-3 per cent of GDP over a 15-year period.

How will this be funded?

With few further savings to be found from a wider public sector that has been cut to the bone, the IFS argues that some combination of tax increases will be required.

While tax increases inevitably grabbed the headlines , it is worth putting these proposals in context. The report already makes some useful points in this regard, but there are more we’d like to add.

First, let’s look at some important points in the report:

• A 4 per cent per annum increase brings annual NHS funding growth back in line with its historic trend over the last 70 years. The abnormality here is the current funding squeeze imposed by successive Conservative-led governments since 2010.
• The share of national income dedicated to health and social care spending projected by 2034 is roughly in line with what Germany, Sweden and the Netherlands spend today.
• If the OBR growth estimates underpinning their analysis are correct, household incomes will rise by 17 per cent over the 15-year period. If taxes were to rise by 2 or 3 per cent of GDP over that time, this may dent income growth but it would still be economically feasible.
• While income tax, VAT and NI are the three biggest sources of tax revenue, there are other revenue streams that could form part of the mix. For example, corporation tax cuts since 2010 have reduced government revenue by over £16bn per year according to the IFS.
• And, as the report states, “the tax burden in the UK remains well below that in a number of other, economically successful, European countries”. Surveys suggest that the British public are prepared for a tax increases to invest more in public services.

More work to do

The TUC believes that the report could even go a bit further.

After all, public spending is not a zero-sum game: money invested in jobs, pay and infrastructure has knock-on effects in the wider economy.

We’ve stressed before that cuts have weakened economic growth .

If our estimates of the multiplier effect of government spending (or even those of the IMF) are accurate, then increased investment of the order proposed in today’s report may well lead to a higher rate of economic growth.

This would ease some of the spending pressures highlighted by the media and commentators today.

In fact, this effect could be even more pronounced given the particularly high impact of health spending. According to the Kings Fund :

Across countries, the average multiplier effect of public health care spending has been about 3.6 – larger than almost all other categories of spending, studies of Obama’s fiscal stimulus in the United States suggest that the fiscal multiplier on Medicaid spending has been around 2.1. Unfortunately, there are no national NHS specific estimates that we have been able to identify – but from these studies it is likely that the economic multiplier effect of NHS spending is somewhere in the range of two to four.

It is also worth noting the supply-side effects that additional health spending would bring as well.

The OECD states that “the health system contributes to economic performance. It is a major employer – it accounts for nearly one in every ten jobs in OECD countries; health spending helps stabilise the economy in times of crisis, and it is a contributor to the productive capacity of OECD economies”

The role that health care spending plays in supporting health, well-being and an individual’s productive capacity has knock-on effects for other parts of government spending.

The Work Foundation reports that “in 2009, in the region of 11,000 people in England and Wales were enabled to return to work by hip replacement surgery, saving the UK welfare system £37.4m each year of their working lives”.

The future

The IFS and Health Foundation report is a useful addition to the current debate, and we think that their estimate of the funding increases required sounds about right.

The debate over how this challenge is met is understandable, but it’s important that these arguments are properly informed.

Today’s scaremongering headlines show we have some way to go in this regard, but we’ll keep making the case for a properly funded health service that works for everyone.