Winner of the New Statesman SPERI Prize in Political Economy 2016

Thursday, 26 November 2015

Is this the right way to shrink the state (NHS edition)?

In terms of changes since his July budget, the basic story of the Autumn Statement is that George Osborne has used more favourable tax forecasts from the OBR to ease up a little on planned spending cuts. The stress here is on ‘a little’. This is why my piece for The Independent focuses on the big picture. (There are a number of minor points that I think are interesting, and I’ll comment on those in a later post.) We still have sharp fiscal tightening, with the OBR’s estimate of the cyclically adjusted budget deficit showing a turnaround worth 4% of GDP between 2015/16 and 2019/20. (That is nearly as much as the contraction from 2009/10 until 2015/16. The turnaround in the actual deficit is slightly larger.) While the US and Euro area ease off on fiscal consolidation, George wants to carry on.

For regular readers there are two new points that I make in The Independent article. The first is about the myth of ‘protected departments’. It is classic spin: employ words which the media will use endlessly that do not mean what most people think they mean. The second is that if the goal is to reduce the size of the state, this seems a remarkably incompetent way of doing it. Rather than look at what the state does and strategically decide what we could do without, the method seems to be to keep cutting until a crisis becomes visible. I do not think enough is made of this government’s incompetence. I want to illustrate both points by looking at health.

Let’s start with this nice chart from John Appleby of the King’s Fund. It should be shown every time anyone claims that NHS spending under this government has been protected.
For reasons that are well known, the share of spending on health pretty well everywhere has been rising steadily since WWII. Try to reverse that and you get a crisis. Try to reverse that when you are also slashing local authority spending for community help, so that elderly patients cannot be discharged into local authority care, and you get a major crisis.

But that is not the only sign of incompetence. Under the coalition Cameron undertook a massive reorganisation of the NHS, which was badly conceived and used up precious resources. (Perhaps the biggest political failure of the Liberal Democrats in coalition was to allow this reorganisation to go through: see this Institute for Government report aptly titled ‘Never Again?’) Then before the last election the Conservatives thought it would be a clever strategy to establish a ‘7-day a week’ health service. To try and justify that policy, health minister Jeremy Hunt made dodgy use of data to argue that health outcomes were worse if you were admitted to hospital at the weekend. Did no one tell him that this might lead some to do themselves harm by trying to delay going into hospital?

There is no money to fund this new policy, so Hunt has tried to restructure junior doctors contracts to pay for it. With many junior doctors already leaving the UK to work overseas, this was the last straw and they have voted overwhelmingly to go on strike. (Watch this video if you think picking this fight is clever politics.) In 2012 training places for nurses were cut, so now hospitals have to use more expensive agency nurses. All this indicates basic incompetence by those who ultimately are responsible for the NHS.

It was this kind of thing that I had in mind when I wrote: “It is difficult to know which is worse: duplicity to achieve an ideological goal or pursuing that goal incompetently.”

Postscript: More detail on the small print of the spending review settlement from Sally Gainsbury here.

40 comments:

  1. When did the Govt ever claim they were increasing NHS spending as a proportion of GDP? I'm pretty sure by "protection" it meant no cuts in cash terms.

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    1. And I'm pretty sure that most people thought protection meant maintaining standards of provision, which requires an increasing share of GDP. I do not remember Cameron or Osborne ever saying that their form of protection would mean poorer services, reduced quality of care etc.

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    2. Come on now - if this was a verbal reasoning question you would get zero marks. Let's be objective here. They never claimed anything on NHS expenditure as a share of GDP - you have taken "ringfenced budget" to imply something else.

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    3. You misunderstand what I'm saying. I'm not saying they are doing anything differently from what they said they would do. I said "It is classic spin: employ words which the media will use endlessly that do not mean what most people think they mean." Why do you think they use the word protected in the context of cuts? I have had people ask me 'if the NHS is protected, why is it in crisis'. This post answers that question.

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    4. @Unknown (&Anon):
      "I'm pretty sure by "protection" it meant no cuts in cash terms."

      "no cuts in cash terms" does not protect the NHS, given increasing demand for NHS services over time (and increasingly expensive services at that older people in an ageing population typically require more expensive treatments than younger patients).
      Hence the wilful deception by the Tories and myth of 'protected department' that SWL writes about.

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  2. I think the NHS is good value for money. But I am not sure I would be happy to see the NHS increase forever in terms of share of GDP. One could argue that with an ageing population we need to increase spending just to maintain quality, but at some point it has to give.

    Comparing growth in NHS spending with growth in the past I think is somewhat misleading. Growth has gone down everywhere: both in terms of population and GDP. Technology is not filling the gap left by reduced population growth. A reduction in population growth is also not so terrible given the technological and environmental constraints we face.

    Top down re-organizations are high risk strategies in all businesses... The current government was incompetent in try yet again a full re-organization. But some form of experimentation and liberalization I think is useful. The NHS is already a private/public structure (all GPs are independent for example). There is no reason why some sort of internal market could not be tried. Big bang changes are bad, but pilot programs slowly extended could be useful...

    I think a national contract for all NHS workers is a bad idea to be honest. Conditions are different in the country. A good wage in Wales would be terrible in London. Some more flexibility should be welcomed.

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    1. Obviously it cannot go on rising forever. But I think we can be reasonably sure that the increase over the past reflected people's preferences, because (a) poll evidence does not suggest people want a smaller NHS and (b) the UK set-up is very efficient by international standards. This is why those who insist that taxes cannot rise as a share of GDP have some explaining to do.

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    2. I'm old enough - and I'll hazard a guess that Simon is too - to remember when the basic rate of income tax was set at 33% and the upper rate at 83%. We managed. To anyone who says we can't afford decent public services, the first question should always be "why not?"

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    3. Well said Phil. Let's be absolutely clear: in this society, some ten times richer than 100 years ago, saying "We cannot afford" something actually means "I do not want to pay for it, and I can't work out how to make you pay for it".

      The big change in our economic society today is not the exact level of GDP compared with any time in the past; it's the reluctance of those who feel they have some economic power to share the rewards of that power with those who haven't.

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    4. It should be noted as well that a number of years of "internal market" experiments were tried across the late Thatcher, Major and early Blair years. Each one was shelved because it didn't perform as hoped.

      The tendency to ignore that history of failure is one of the biggest problems with the health reform debate. (Certain thinktankers, esp. ASI are very guilty of this.) There are meaningful reforms that have shown promise in other nations, but very few of them relate to "market solutions." And unfortunately, unlike market solutions, said effective reforms nearly all require some political courage and leadership to put in place.

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    5. While the government are perhaps unwilling to fund a service that is clearly beneficial to the nation, they ARE willing to spend our taxes on a 'service' that is of doubtful value. What evidence is there that our independent nuclear deterrent has deterred anyone? Update Trident costing an arm and a leg, but hamstring the NHS on ideological grounds? Fine! Oh, I forgot. The military-industrial complex, and all our arms sales would decline, as a consequence of disinvestment in Trident.

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  3. It was nice to see Osborne reveal that, like Cameron, he too can't do basic accounting. I mean, how on Earth does he think that councils selling property to fund day-to-day, year-on-year, spending is sustainable?

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    1. I'm sure they can, and don't care. The primary aim is that the state (or local government) should not own assets from which profits can be made. They will do what they can to further this aim, depending on the political reaction at the time. It's an ideological stance.

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  4. You often argue that Osborne is primarily motivated by shrinking the size of the state, but more recent evidence suggests that his primary concerns are even more political.

    If the OBR had said that the tax credit cuts were needed to eliminate the budget deficit, then I am sure he would have gone ahead with them. Similarly, Osborne has factored in large increases in government spending in 2020 of 9.2% as that is what the budget allows him to do. If he wanted to shrink the state or reduce the debt as much as possible then he would not do these things.

    It seems then that his primary determination is budget surplus as an end in itself, that is to say that he thinks there is enough political capital in being the man who brought the books into balance to win the Conservatives (with him at the helm) another term come 2020: and if the he can afford a few giveaways along the way that's not a problem.

    That this budget (sorry statement) does include some real tax increases (such as the apprenticeship levy) is a testament to the fact that he sees budget balance, and not just a smaller state, as the ultimate prize.

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  5. Excellent piece.

    I spent a number of years researching the organisation of management and clinicians in the NHS and the Lansley reforms were incredibly depressing because they indicated that few in government or politics had learned anything from all the previous rounds of reforms dating back to the Thatcher era. Crucially, whether or not you agreed with the ideology of the Lansley reforms, they contained several contradictions that were pointed out beforehand as bound to implode and cost a lot of money to fix.

    As for the Hunt era. Well, hard not to come back to the failings of our press. When we allowed the Tories to pretend that "cuts will not affect frontline services" we set up a really bad dynamic where cuts are made in a random and panic fashion, wherever Hunt guesses they can shift the blame away from the government.

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  6. "All this indicates basic incompetence by those who ultimately are responsible for the NHS."

    Well, unless they see their role as accelerating the collapse of NHS so that they can enrich their buddies whose interests are aligned to the private health sector.
    Any assumption that this government might be trying to work for the public good should be treated with the kind of suspicion that ideas that violently clash with all observable evidence usually trigger.

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    1. Great comment and exactly right. Looking at Tory policy, privatisations (Royal Mail being a prime example), one only has to 'follow the money' and you soon realise what motivates them and where their priorities are. Enacting policy in the interest of the public good could not be further away from the truth.

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  7. Interesting (I don't always agree with you, but I like your posts).

    Just on NHS spending - (or more correctly NHS/Y spending) did they agree to cut the ratio to the economy, or just the numerator?

    It is interesting to get the perspective from the right wing, (who usually say that a 'country has to live within its means') - ie they confuse a national economy with a household. But this right wing commentator also makes the following observations

    "..while the economy is in better shape than it was when his Coalition took office in 2010, it remains chronically unbalanced in favour of debt-driven consumer spending rather than creation of goods and services.

    We still pay ourselves more than we earn: government debt rises by £1.5billion each week and the overall debt is £550billion higher than it was five years ago.

    British productivity is poor, especially by comparison with the U.S. The balance of payments figures are alarming: the gap between what we export and what we import - which is far higher - will sooner or later prove a serious embarrassment."

    I guess the point he is making is that Britain is running large deficits in the context of an external payments imbalance, low productivity and any recovery likely to come from consumer spending rather than industrial production - which would aggravate external imbalance. Is that a problem? Would your answer to this be state-led investment in industry?


    http://www.dailymail.co.uk/debate/article-3334424/MAX-HASTINGS-George-s-one-chance-make-tough-decisions-Britain-s-future-fluffed-it.html#ixzz3sbTkCRG1

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  8. This should have been a golden moment for the opposition - clearly their lack of political professionalism is a problem. I hope they learn fast enough.

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    1. They seriously bunged up. Here was a massive u-turn. Whatever their policies are the Opposition have to present an image that they can keep the country safe and responsibly manage an economy. They have to look like the party of the centre. It is all about perception. They are not giving the right image when it comes to foreign policy and economic policy. They do not look like they are up to the task.

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  9. I guess the critical question is has real NHS spending (and police spending for that matter) changed per head.

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    1. Actually I disagree - I think the GDP comparison is the right one. The starting point is that as GDP increases we tend to want increases in every type of good (i.e. equal shares). In practice some types of goods (e.g. food) fall in share as GDP rises, and others (e.g. health) rise, reflecting people's preferences.

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    2. demographics also relevant here - an ageing population - end of life care very expensive

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    3. Indeed. I suspect its partly technology too - we are getting better at prolonging life, but often in expensive ways.

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  10. Professor you have made excellent points as usual. That being said none of this well get through to the public, because all the talk is about McDonnell's unbelievably dumb stunt of reading the musings Chairman Mao who killed 50 million people with his atrocious economic policies. Until Labour gets rid of Corbyn and McDonnell all hope is lost.

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    1. Unbelievably dumb indeed. One point I have made before is that many on the left are their own worst enemies when it comes to the issue of political spin. They despise it, which is healthy in itself, but they actually need to be far better at it than their opponents because of media bias.

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    2. Is proficiency in spin really a requirement? Blogs like yours expose Tory misinformation and deception without indulging in spin. Of course there is a problem in that comparing a government's finances to those of an individual is easy and can be done quickly whilst talk of fiscal multipliers and so on takes a little longer and requires a little more attention on the part of the listener. Is the problem really so insurmountable, however? My guess is that Keynes is a lot better understood by regular Greeks today than was the case a few years ago. Couldn't something similar happen here? If not, then we are surely sunk. You grant that contempt for spin is healthy but then insist that the left need to get better at it, better even than the right. Becoming that good at something you despise sounds like a recipe for self-loathing. Is explaining clearly and honestly, without spin, the case against austerity really such a hopeless strategy? Am I right in thinking that you have more interested non-economist readers, like me, than you used to?

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    3. This blog does not do spin. But most people get their information by other means (and will never have the time nor inclination to research issues). Much of that information is distorted. So you have to worry about spin, as well as how the media will use what you do. I recognise the dangers you note, but what that means is employ lots of spin doctors, but keep them out of policy discussions.

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    4. Thanks. Sentimentally, I'd been daring to believe that Varoufakis was right.

      'The people are there if the message is right, if you are sincere, if you forget about spinning, and speak to their hearts and address them directly as adults ..'


      https://www.youtube.com/watch?v=oH7aS4bEhnA

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  11. The problem is this. Taxes and 'funding' have nothing to do with what the NHS needs. This obsession the left has with the holy power of taxation is deeply depressing.

    The NHS is a national organisation. It can clearly get the staff it needs - but through agencies. Since those staff exist the NHS could hire them directly, and the way it should do that is get the government to 'crowd out' the agencies - by banning them from existing.

    There should be no opportunity for recruitment agents to sit in the middle and make money.

    And if the staff don't exist then taxing people won't create them. You have to work out what the people who should be working for the NHS are currently doing and free them up first. Then you have to train them, and then give them a job.

    There are lots of ways of freeing up real resources. Taxation is just one of them, and it is only any good for freeing up general fungible resources.

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    1. You make a good point about agencies, which ought to be obvious. I wonder if anyone has researched the beneficial ownership of agencies, like that of other public sector outsourcing providers. We (or at least I) tend to think of employment agencies in the health field as being small groups of professionals seeking a market opportunity but I wonder if that's right. Are there big, political grant-making, corporations involved?

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  12. The chart seems to show that at the end of this government, the share of spending on the NHS in GDP will be back on its long-term trend after an extraordinary boost under Blair/Brown. So you have to argue that the pre-Blair/Brown upward trend was too slow. Perhaps, it was. But it cannot be asserted.

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    1. You are right (of course): it could just be that the current cuts are reversing additional inefficiencies and over-provision that followed the Blair/Brown increase. However, as the John Appleby link notes, both international comparisons and failures to meet targets suggest otherwise.

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    2. 1) If the intention of the government were to sustain the long-term trend that might be reasonable. However, their avowed intention is to keep spending flat.

      2) For those who were part of the debate at the time Blair was elected, many years of underinvestment were coming to a head. The physical fabric of around half of the hospitals was in a visibily parlous state. (Over 50 wards were suffering regular loss of capacity due to roof leaks, for instance.) So at the very least, a spurt of investment was justified. (Much of the problems are rooted in the 1980s where there was not only a funding dip, but a lot of money put into "internal market" experiments which did not bear fruit.

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    3. I agree that spending on health will have to rise again, relative to GDP, in the 2020s. This will not be compatible with keeping spending overall at 36 per cent of GDP. Not only do I think this, I have also written it many times.

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    4. Seems likely that the increased inefficiency from the Blair/Brown boost is being only partly reversed by recent cuts, leading to an overall more inefficient system than would have been in place had the long run trend been followed.

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  13. Unfortunately your graph lacks resolution and the link does not take us to a readable version.
    The comparison with other countries is interesting.
    Especially the USA figures.
    Is Mr Appleby comparing like-for-like?
    (apples with apples?)

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  14. The aggregate effect of budget changes, modifies, over time, the Total Net Worth of UK plc. The ONS just published the latest version of “National Balance Sheet, 2015 Estimates”, it is a fascinating read. http://www.ons.gov.uk/ons/dcp171778_425486.pdf It will not get a lot of press coverage, the macro-media has no understanding of Quadruple Entry Bookkeeping used in the government’s national, fiat currency, accounting system. That is; double entry “financial asset” accounting, balanced with double entry “non-financial asset” (real assets) accounting.

    Fig 1 shows that the nation is currently worth £2 trillion less than the trend line, had the 2008 crash had not been allowed to occur. BUT; it is Table 7 “General Government: Total net worth by asset and year at Current Prices”, that really bamboozles politicians that still think that the government has to tax and borrow before it can spend. By normal business terms, UK government is clearly insolvent. It has negative working capital and highly negative net worth. (You get the same picture from the Treasury Whole of Government Accounts.)

    Alas, fear not. The true simple beauty of being insolvent in your own sovereign issued fiat currency is, that you can never be insolvent in your own currency.

    PS. Spot the line item in Table 7 “Other buildings and Structures”, £766 billion of land and property. How much of that will have been sold, probably to foreigners, by the next election?

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  15. it isn't incompetence, it's malice.

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  16. I wonder if you have read much of Paul Krugman's favourite analyst of conservatism, Corey Robin?

    When you say 'the second is that if the goal is to reduce the size of the state, this seems a remarkably incompetent way of doing it. Rather than look at what the state does and strategically decide what we could do without, the method seems to be to keep cutting until a crisis becomes visible. I do not think enough is made of this government’s incompetence.'

    Here is Robin in his ‘Conservatism and Counterrevolution’ (2010):

    ‘Whether in Europe or the United States, in this century or previous ones, conservatism has been a forward movement of restless and relentless change, partial to risk taking and ideological adventurism, militant in its posture and populist in its bearings, friendly to upstarts and insurgents, outsiders and newcomers alike. While the conservative theorist claims for his tradition the mantle of prudence and moderation, there is a not-so-subterranean strain of imprudence and immoderation running through that tradition, a strain that, however counterintuitive it seems, connects Sarah Palin to Edmund Burke.’

    In a way, politically, a divided Labour Party until the conclusion of the 2017 EU referendum may help their election prospects in 2020 as long as the vote is to remain in. Robin again, ‘as Irving Kristol complained after the end of the Cold War, the defeat of the Soviet Union and the Left more generally “deprived” conservatives like himself “of an enemy,” and “in politics, being deprived of an enemy is a very serious matter. You tend to get relaxed and dispirited. Turn inward.”’

    Is this not what happened over Europe in the Tory Party in the early 1990s; they felt electorally secure so were more inclined to internal rebellion?

    And hopefully, while the Labour Party is fighting politically and wasting its energy in that direction pre-2018, there is less time for their politicians to be thinking and so leaving greater scope for economic assistance from expert advice, as once the squabbling is over they will still need robust policies for the current economic environment.

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