The coalition plan to rescue public finances has one hand tied behind its back – the NHS must change alongside other services
Cabinet ministers, including defence secretary, Philip Hammond, justice secretary, Chris Grayling, and local government secretary, Eric Pickles, have mounted a collective attack on the “ringfence” protecting the NHS from budget cuts.
In the 2010 comprehensive spending review, the coalition government set out plans to eliminate the structural deficit and then put public debt on a downward track. This has been hard going. Continuing challenges in the global economic environment have been one reason for this, particularly problems in the eurozone, which is the UK’s largest market. But the coalition has scored some own goals too. One was to refuse to consider properly how savings could be made in the NHS. Along with areas such as pensioner benefits, schools and international aid, health has been protected from the cuts to budgets facing other areas.
This ringfencing has weakened the political case for reform. When all budgets are subject to the same principles of value for money it is, quite simply, harder for individual ministers to complain. But when some spending receives special treatment then consensus breaks down. Divisions are created in Cabinet and the government no longer presents a unified front on its mission of rescuing the public finances.
Protecting the ringfencing of the largest budgets also means, perhaps unsurprisingly, that the government will struggle to meet its fiscal targets. Reform estimates that 60% of the total increase in spending in between 2011-2012 and 2014-2015 is expected to be in the NHS, pensioner benefits and schools. Spending on the NHS alone accounts for close to a quarter of the total increase. The government is trying to rescue the public finances with one hand tied behind its back.
This means that more of the heavy lifting will fall on a smaller number of departments, capital budgets and working-age welfare. To illustrate, we at Reform compared the increases in the NHS, pensions and schools budgets from 2011-2012 to 2014-2015 under a scenario where they grew at their current ringfenced rates with another scenario where they were just fixed in cash terms. The extra increase in total spending over these years was some £20 billion as a result of the ringfencing. This is a lot of extra money to find from departments who have, in several cases, already faced very deep cuts in real terms.
Ringfencing also fails on the grounds of improving health outcomes. It means that the NHS fails to benefit from the pressure to innovate and change, in the way that other services such as policing are already showing. The irony is that health is probably the department with the most to gain from efforts to reduce waste or transform services. While there is a current efficiency drive in the NHS – the £20bn “Nicholson challenge” – it is nothing compared with the pressure going on budgets in other areas, such as local government.
And, of course, health services do not operate in isolation. When services like adult social care face cuts but services in hospitals do not, hospital services come under pressure to address other areas of need, although they may not be best placed to do this. Ringfencing reinforces problems of silos.
The overall result is that ringfencing is like putting the public finances on a crash diet that actually reduces the chances of long-term weight loss. There is a perception that services are being underfunded while the real drivers of spending have been left untouched. Without reform to health and pensions, spending will balloon again when growth returns.
In 2010, when the comprehensive spending review was launched, a Treasury spokesperson said: “Anyone who thinks the review is just about saving money is missing the point. This is a once-in-a-generation opportunity to transform the way that government works.” Yet by protecting the largest spending areas, the coalition has failed to achieve this vision. It is time for them to outline a new course that applies pressure on public spending across the board.