NHS reform holds the key to the UK’s future prosperity

2 February 2017

In every year since its inception, the Government’s fiscal watchdog – the Office for Budget Responsibility – has declared the public finances to be on an unsustainable path. But January’s Fiscal Sustainability Report painted a particularly gloomy picture. Compared to the 2015 edition, the OBR’s central projection for government debt was revised upwards by nearly 150 per cent of GDP.  By the middle of the century, the UK’s public finances could be in a state of disarray similar to that experienced immediately after the Second World War.

plot from API (257)

A number of factors are in play here. The OBR downgraded its productivity projections for the whole economy. The country is also in a worse position than had been anticipated when the last projections were published. But these pale in comparison to the OBR’s principal concern: the future cost of healthcare.

It will surprise no one that the relative cost of the NHS will rise over the long-run. Our population is getting older (the number of 85 year olds is expected to triple over the next 50 years); and as our understanding of medicine improves, the number of people living with multiple and complex health conditions is growing.

These trends are unfolding across the developed world. But studies from the OECD and the US Congressional Budget Office find demographic trends alone are not enough to explain the rising cost of healthcare. ‘Other cost pressures’ – due to low productivity growth in the healthcare sector and the introduction of expensive new procedures – are also to blame. And these non-demographic factors have applied serious pressure to budgets in recent years. Using data from NHS England, the OBR estimates other cost pressures added between 1.3 and 2.7 percentage points onto growth in primary and secondary care spending in 2015-16. To put these costs into context, demographic factors added 1.3 percentage points onto the total annual activity growth rate.

These pressures are now reflected in the OBR’s estimates of future healthcare expenditure, a move which effectively downgrades the OBR’s estimates for NHS productivity. And as Paul Krugman noted in a different context, while productivity isn’t everything, in the long-run it is almost everything. If improvements in the service offered by the NHS are to keep pace with productivity growth in the rest of the economy, an increasing proportion of government – and national – expenditure will need to be put towards healthcare. As a result, healthcare expenditure is expected to rise much more rapidly than in previous years.

plot from API (256)

It should be stressed that these are projections, not forecasts. They do not spell out where the country will end up in 50 years’ time, but what is most likely to happen if government policy remained unchanged. Neither can we be certain that the OBR’s assumptions are right. Big data and AI could significantly boost the effectiveness of preventative medicine, delivering an unforeseen shot in the arm to healthcare productivity. Demographic pressures might suddenly abate due to an influx of migration (unlikely) or a slowdown in life expectancy gains (more likely).

But these caveats do not provide cover for those wishing to procrastinate. Policymakers have to take decisions with the information at their disposal, not the benefit of hindsight. And in our current position, improving NHS performance appears to be the single largest domestic policy challenge faced by Whitehall, touching not just the lives of today’s NHS users, but also the prosperity of future taxpayers.

William Mosseri-Marlio, Research Manager, Reform

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