Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday 28 February 2017

The Budget and Health Care

The reasons for substantially increasing current spending on the NHS and social care are obvious. Here is some data. The first is from the OECD on UK spending on health over a long period as a share of GDP (source).
This reveals an important truth which talk of ‘protecting the NHS’ is deliberately designed to ignore: health spending increases as a share of total GDP over time. The two noticeable points beyond that are the increase in spending under Labour, and the slight decrease in spending under the Coalition government.

One area of health spending that has been particularly hit in the recent past has been spending on social care by local authorities (source).

It is in areas like this that I get so frustrated with TV journalism. I have seen countless segments or interviews on what is causing the current crisis in the NHS and health care, but I do not remember ever seeing graphs like this. Is there an unwritten understanding in the TV networks that people cannot read graphs?

The outlook for the next five years for total health spending is further falls relative to total GDP (source).

The red bars are the projected growth in GDP, and the blue bars the projected growth in health spending. Unless something is done the current crisis in social care and the NHS will get worse and worse.

This increase in spending should be permanent and financed by a permanent increase in taxes. As such a specific tax funded increase in spending would be popular, it seems sensible to do it that way. Given the current crisis in the NHS, if this is not done in the budget we either have to downgrade our assessment of the morality of our current rulers still further, or assume they really do have an ulterior motive in running the NHS into the ground.

What would be the macroeconomic effect of such a policy change? You might expect a permanent tax financed increase in spending to have no effect. Taxes would rise by an equal amount to the extra government spending, and knowing this was permanent consumers would reduce their spending by the full amount of the tax cut. So private spending falls to offset additional public spending.

There are two reasons for thinking that would not be the full story. First, consumers initially appear not to fully adjust consumption to a tax change, even when that tax change is perceived as permanent. This is quite rational if they hold precautionary savings, and wish these savings to adjust to be a constant share of post-tax income. As a result there might be a short term boost to activity from a tax financed spending increase. This could be amplified, of course, if the tax increase was delayed for a year or two. As interest rates are still at their lower bound, such a boost to activity would be welcome.

Second, spending on health care is likely to be less import intensive than the private consumption spending it replaces. This would give a permanent boost to GDP and permanently reduce the current account deficit. Now both these effects might lead to an offsetting exchange rate appreciation, but the consequent reduction in inflation and boost to real incomes that this appreciation brings would not be unwelcome given the impact of Brexit.

Three final points that I hope are obvious. First these beneficial macro effects are incidental in the sense they are not required to justify the spending increase. The case for additional spending on health care financed by higher taxes is overwhelming on its own terms. Second, this is additional to the large increase in public investment, financed by borrowing, that should be underway right now. The changes in this direction in the Autumn Statement were an order of magnitude too small. Third, the second biggest threat to the NHS right now after lack of money are staff shortages. As an important source of staff is the EU, the government seems to be doing everything it can to make things more difficult.  


  1. But Mr. Wren-Lewis, surely, given that nearly half of the NHS budget goes on paying its staff, for these stats to be at all useful you would need perhaps somehow to correlate them to immediate health outcomes (eg track them to coronary infarct survival rates, or some other fast health measurable).

    Perhaps a higher sugar tax, or higher tobacco excise, or replacing junior doctors with low-paid Fillipa nurses would be a more efficient way of delivering better health outcomes, at a lower cost to the NHS budget, or outside of it altogether.

    In other words, when you're dealing with something as huge and (inevitably) inefficient as the NHS, more money isn't necessarily a panacea, or even the first go-to (otherwise you might equally argue that indexing the salaries of professors of economics to UK GDP would lead somehow to an automatic improvement in national economic performance).

    1. But statistics of immediate health outcomes have been getting steadily worse. The NHS is relatively efficient compared to other health services. What is happening here is that the public demand more health as time goes on and this government is intent on reducing supply.

    2. Well this certainly is a complex issue, but if we look solely at eg deaths from IHD (Ischaemic Heart Disease) I don't believe that the available data is at all supportive of your contention.

      I agree in general terms that the NHS is 'efficient' relative to the highly inefficient health systems of some other countries, but fail to understand why this fact should preclude us from looking for further efficiencies before chucking money at the problems of the NHS, such as they are.

      Your argument seems to be the old trade union one - higher pay for teachers and smaller class sizes = better educational outcomes. And we know that this is simply untrue.

  2. I have seen economic graphs on the BBC and Sky, and they come over clearly on television.

  3. I believe your analysis is entirely correct but I don't think for one minute that the government will increase taxes to fund the NHS, however much it is justified.

    I'm not a conspiracy theorist by nature but this drop off in spending has to be deliberate and I believe the stresses which will inevitably build up will pave the way for further privatisation and /or the introduction of many more user charges. Now I agree with your implicit view on this as I see this as drifting more towards a US style of healthcare - virtually totally privatised and unaffordable to many leaving people unable to obtain treatment and I believe this would be a social disaster of the worst order.

    1. The really sad thing is that Tory politicians visit the US to talk private health provision, when the US has one of the most inefficient systems around. One of the best insurance based systems seems to be the French, but do they go there?

  4. Fear not, spending on healthcare as a fraction of GDP is about to rise significantly.

  5. Finally a post I agree with (getting very tired of anti-brexit posts. Just let it go !). Quick question: There is some evidence, I think, that the reduction from 50% to 45% on the top rate actually increased tax revenue. Could we possibly be at the top of the Leffer curve for the UK (taking into account UK culture. This is not Sweden)? Could possibly any tax increase decrease tax revenue? And if health as % of GDP is always increasing, where does it stop?

    1. On the Laffer curve, no. Those in favour of tax cuts exploit the tax shifting that went on around recent tax changes. On when will it stop, I have no idea but the way we will find out is by observing demand not starving supply. On Brexit, you should have realised by now that economists will never let such a stupid act of self-harm go.

  6. "This increase in spending should be permanent and financed by a permanent increase in taxes. As such a specific tax funded increase in spending would be popular, it seems sensible to do it that way."

    Not really sensible though is it. The restriction is qualified doctors available to buy at the current time.

    Raising taxes is a vote loser compared to not doing it. There appears to be a genuine belief amongst some economists that the mere process of extracting money from rich people will cause doctors, nurses and hospitals to pop into existence by magic. If there are no doctors to buy, then it doesn’t matter how much you extract with taxation. The NHS will not have any more capacity to treat patients.

    When you do look around, you’ll find where a good supply of doctors you need is — in the private healthcare system. Because contrary to popular belief private healthcare does not reduce the load on the NHS. It take scarce doctors away from the NHS so they can treat people with money ahead of those with the most pressing clinical need. It is queue jumping for the wealthy.

    So the most pressing question in healthcare is not whether we need to tax people to save the NHS. Clearly we don’t. What we need to ask is whether private healthcare should continue to exist in the UK at all or whether we should ask the rich to get in the queue alongside the poor. You’ll *struggle to find a politician making that case*.

    There are other sources. There are many doctors that have retired or left the NHS completely. We should ask them why that is, and what it would take to persuade them to rejoin. Then we need to redesign the job using job enrichment techniques to make it more attractive.

    1. First, the money should initially go to local authorities to look after old people, and they have the capacity to do that. Second, more money should go to training doctors. The harm that Hunt did can be undone. Money helps to do that. And, of course, we could guarantee the rights of EU nationals.

      Your stuff on private health care is more interesting. Many people in the NHS will tell you it is a good thing, because it reduces the strain on the NHS - money again. Of course it is queue jumping, but if that was the only effect it reduces demand on the NHS (given an adequate supply of doctors).

    2. "The restriction is qualified doctors available to buy at the current time."

      But you then go on to point to sources of qualified doctors - recently retired, in the private health sector etc. - so the restriction is not of available doctors but of funds to recruit the doctors.

      To the commenter, further down, asking why the NHS does not restrict the use of agency personnel, we can all agree that that would be much more efficient. However, for reasons that may be more complicated than they first appear, NHS trusts are heavily restricted on the headcount they can take on as full employees. This is both to try to stop budget padding - staff being held on to when not really 'needed' and, some may think, to transfer at least some of the resources labelled 'NHS' into the private business sector (agency owners).

      The key point, that Simon makes but perhsps bears repeating and reframing, is that the UK has a very cheap, very efficient but limited health system, which could provide more effective (by any measure) care if more resources were made available.

      We heard a lot about the UK being the 5th, or possibly 6th largest economy in the world less than a year ago. Why can't the 5th or 6th largest economy provide health care as good as many 'smaller' and 'poorer' economies?

  7. "As an important source of staff is the EU, the government seems to be doing everything it can to make things more difficult."

    Er no. Stealing staff from another country with poorer health outcomes than ours is *immoral*, so instead we need to look at where the people are deployed across the nation and what they are currently doing. (And yes we need to look and see if there are any more people available in the country that could be trained as doctors. But that is required investment for the future. It won’t solve today’s issue).

  8. "Third, the second biggest threat to the NHS right now after lack of money are staff shortages"

    If the NHS is short of staff, why would it then purchase staff through agencies? That approach creates the very shortage the NHS is trying to resolve. Instead it should ban the use of agencies and cut out the middlemen.

  9. The point I am making is tax is a shotgun method. You need more surgical measures perhaps in addition to tax increases.

  10. Also, if the tax is progressive, much of it comes from higher income households, who probably won't reduce spending so much as reduce savings in response.

  11. There is no issue with money. Money is always available to a government to purchase anything available for sale in its own denomination. So let's park that one. If there are doctors we can hire them, if there are nurses we can give them a job, if there are hospitals required we can get them built.

    Government is about buying things for the public good.

    The cost is the alternative use of those items. And that can only be the provision of private healthcare where you can jump the queue if you are minted. That should be scrapped and the resources used in that area returned to the public sphere. Getting rid of a load of insurance agents frees up clerical resources as well.

    The problem in the NHS is one of entropy, and that is because the items and structures within it are not replaced sufficiently often. Hospitals and surgeries should be rebuilt and reorganised regularly, not only to update to the latest practices and environmentally friendly buildings but to purge the ossification you get by having them in one place too long. You can't have creative destruction by competition - because competition is wasteful of scarce medical resources. So you have to imitate it as best you can.

    But once you have created a structure, then leave it be until the next scheduled renewal time. Constant churn of design and organisation is just as damaging as ossification.

    And actually half the problem is having private businesses in the NHS - GPs surgeries, all of which are private practices. These small operations do not work. It is time to hire the GPs as employees and get proper managers and standard management structures in place to do the administration, appointments and triaging - as we do in accident and emergency.

    If we shift to a genuine single payer system, have dedicated government buyers driving down the cost of equipment (because where else are you going to sell your stuff?), align the NHS with the local authorities so that social care can be integrated efficiently and most importantly start thinking in terms of actual resources rather than mere money, then we can get the NHS back on an even keel.

  12. I agree with the case for higher tax-financed spending on health and social care. Moving onto the macroeconomic impacts, does your answer change if the ONS put the majority of the marginal increase in nominal government health and social spending into the government consumption deflator? I think it does, causing the first round effect to be most likely negative for RGDP, with the initial reduction in household consumption big enough to offset the artificially small increase in real government consumption. This would widen the output gap causing a monetary policy response so in the medium-term RGDP is unchanged but with NGDP most likely permanently higher due to the higher level of the GDP deflator.

  13. Mr Wren Lewis what is your opinion on changing from our single-payer system to a multi-payer Singapore-style accounts system or European-style health insurance system?

  14. What I do not understand is that in the first four years of the coalition government they took out £20 billions in efficiency savings which was almost one fifth of the total budget, i.e. £110 billion, then in this last term they intend to take a further £22 billions out of course as efficiency savings, noting the so called STPs were designed enable this.

    Why is it that those numbers never appear to be represented in diagrams and charts such as yours, because having campaigned locally and witnessed the reductions to budgets locally I can confirm the deleterious impact it is having on the NHS here?


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