Health spending over time

There has been some comment on the fact that, with recent increases in spending on the NHS, the health budget is taking a growing proportion of UK state spending. I am missing Flip Chart Fairy Tales, so here is a chart heavy post to make one or two obvious points that regrettably are often missing from political reporting.

The first is that health has been taking up a growing slice of our total expenditure (i.e.GDP: expenditure on everything including investment) for a very long time. Here is a chart from a recent IFS publication which is a good source for more in depth analysis.

Note that real spending numbers can be misleading: although real spending has increased since 2010, as a share of GDP it has not, which is a reversal of previous trends. That alone does not inevitably explain recent problems in the NHS, but it certainly could do.

So why is it only recently that the growing share of public spending has been so obvious? Again the IFS have a handy chart that goes a long way to providing the answer.

In 1955/6, defence spending was over 20% of total spending, while by 2015/6 it had fallen to just 5%. This peace dividend (actually two: first a retreat from empire and then the end of the cold war) masked a steady rise in heath, which was only 7.5% of total spending in 1955/6 but was approaching 20% by 2015/6.

Many economists would simply describe this as reflecting that health was a luxury good, which means that spending as a share of income rises when income rises. Not all the evidence confirms this, e.g. the spending patterns of lottery winners. In reality I think there are various things going on. One may be that medical science has got better at prolonging life faster than it has held back the aging process. Another is that medical innovation is increasing the scope of what medicine can do. For example cancer is now increasingly survivable, but only with expensive care. While there is productivity growth in the NHS, it is below the national average and therefore fails to match increases in wages. In the document all the figures so far come from, the IFS expect these factors will require real health spending to increase by 3.3% each year over the next fifteen years.

Politicians, particularly those adverse to taxation, love to think that some kind of reorganisation will somehow change the inevitability of an increasing share of government spending and GDP. But this chart, taken from this source, suggests these trends are not some peculiarity of the way we organise things in the UK

In 1970 health spending was between 4-6% of GDP in these 5 countries, but by 2016 it was between 9-16% of GDP. (There is a definitional break in the UK series in 2013: there was no leap of spending in 2013 as earlier graphs show.) If there is any organisational lesson here, it is not to run a health service in the way they do in the US. It is indicative of the mess the world is currently in that politicians are busy trying to dismantle the positive recent reforms in the US and key politicians in the UK have once talked about making the UK health system more US like.

If the IFS is right, this inevitably means that taxes of some kind will have to rise significantly. Yet the Conservatives have repeatedly pledged not to raise any of the headline taxes, and Labour have felt compelled to match these pledges at least in part. That the budget included increases in the tax thresholds, and Labour’s internal spat over whether to vote for them, illustrates nothing has changed in this respect. This year this tax/spend dilemma was avoided by a tax windfall no one had forecast. But at some point in the near future something will have to give, and I really hope it is not once again the quality of our health services.

A comparison in accountability: Oxfam and the NHS

Although the original allegations in the Times looked weak, it turns out (from an interview with ex-employee Helen Evans by Channel4 News) that the leadership at Oxfam had not been giving the issue of exploitation by a tiny minority of its aid workers the attention it deserved. The deputy chief executive has resigned.

The original allegations concerned actions by some aid worker in Haiti some years ago. Oxfam took action at the time, and the charity has put in place various safeguards since. But nevertheless, it is important the media holds charities to account to ensure they do all they can to avoid this happening again.

But threatening to cut off all government funding is the last thing you should do. The message that sends to other charities is to hide any similar problems they come across in their own work, or worse still stop looking. Any responsible minister would have known that, but perhaps they wanted to get political points from their own side for being tough with a ‘leftie charity’. In none of the BBC coverage I saw (this story was the lead item on the BBC news I watched for four days running) were any questions raised about the government’s actions.

Contrast the behaviour of politicians and the media in relation to what is currently happening in the NHS. Quite simply people are dying because there are insufficient resources to cope with needs. Thousands have had operations postponed, leaving them in pain. Patients are lying in trolleys because there are not enough beds. Huge numbers, more than ever before, are having to wait for more than four hours in A&E.

The reason for all this is not mysterious. Health has been starved of resources by this and the previous coalition government like never before. I have shown the Kings Fund analysis in the past. Here is World Bank data up to 2014. The key point is that health spending as a share of GDP needs to rise to keep up with demand, but since 2010 the government has been shrinking the share of total output spent on health. The downward trend it shows until 2014 has continued and is projected to continue.

This shows neglect on a scale that make the leadership of Oxfam’s misdeeds look trivial. Yet where is the media scandal? The man who has been in charge of the NHS while this has happened and is happening in front of our noses is still in his job. The government continues to fail to provide the resources the NHS needs, while promising to protect the NHS, and yet it has not been held to account for killing people and leaving them in pain by the same media that has been happy to pursue the leadership of Oxfam. The Minister for International Development told the leaders of Oxfam that “an organisation’s moral leadership comes from individuals taking responsibility for their actions”. Quite.

The government are in denial about what is happening, and the media allow them to get away with it. Of course there have been countless reports about the crisis in the NHS, but we have not seen the kind of sustained and coordinated media focus on who is responsible that we saw with Oxfam. This is not about sexual exploitation in another country some years ago, but about people dying and in pain right here right now.

And incredibly, it is actually worse than this. The same politicians have attempted to use immigrants as a scapegoat for what is happening, whereas in fact immigrants provide more resources that could be used for health spending than they take out. Yet time and time again ministers can get away with this lie in the broadcast media. Worse still, one part of the government is busy preventing doctors the NHS desperately needs from coming to work here. And finally, I have never heard anyone in the broadcast media question why the government is starving the NHS of resources with such devastating effects. Its silence on the growing privatisation of NHS services is almost total, even though the vast majority of people do not want this.

This reminds me of the US election, where the media spent far too much time going on about Clinton’s emails and far too little time on Trump’s obvious unfitness to be a POTUS. But in this case there is no competing narrative, no two sides to balance. The media is simply failing to hold the government to account for allowing totally avoidable death and pain. This is what the UK has become in just seven years. A country that is happy to treat those who run charities as close to criminals, but shrugs its collective shoulders while the government destroys the NHS in front of our eyes.

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.  

The sharp but effectual remedy

This is about the Eurozone, and it needs to be rather long to be provocative. You do not need any prior knowledge to understand the message.

Mario Draghi, head of the ECB, declared the Eurozone as an “island of stability” yesterday as he announced no change in policy. He was referring to the impact of the Ukrainian crisis, but I think it serves for macroeconomic policy as a whole. Inflation is well below target, and there is a negative output gap of nearly 4% according to the OECD. Unemployment remains at 12%. There is a recovery from recession, but as Reza Moghadam from the IMF points out, it is weak and fragile.

So the Eurozone is stable, stuck in a bad place. As the IMF again warns, this place looks a lot like Japan in the 1990s. I have my misgivings (technical discussion here) about the ‘two equilibria’ idea that Gavin Davis among others have used, but where it might apply is when a central bank’s inflation target is either unclear or one-sided, and that is much more true for the ECB than for the Fed or the Bank of England. What is clear is that the ECB should not wait until there is deflation before doing more than sitting on its hands.

Yet complacency is not confined to the ECB. We had a second Eurozone recession because fiscal austerity has been acute in some member countries, and it has not been offset elsewhere. (For the numbers, see here.) If you think that is because the Eurozone is a monetary union and not a fiscal union, ask yourself this. If overall fiscal policy was being determined in Brussels rather than by individual national governments, would it be so very different today? I suspect we would be seeing similar overall austerity as the ‘Eurozone government’ obsessed with reducing debt. Given their relative competitive positions, that would mean ‘stability’ in parts of the Eurozone and severe recessions elsewhere, much as we have now.

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“drastic reductions to municipality budgets have led to a scaling back of several activities (eg, mosquito spraying programmes), which, in combination with other factors, has allowed the re-emergence of locally transmitted malaria for the first time in 40 years”

“a 21% rise in stillbirths between 2008 and 2011 …. attributed to reduced access to prenatal health services for pregnant women.”

These are statements not about some poor African nation, but about Greece, from a recent paper in the Lancet. (HT Francesco Saraceno. Quotes above and below exclude footnotes giving references.) The title of the paper is  ‘Greece's health crisis: from austerity to denialism’. By denialism they mean the following:

“Greek citizens ... are subject to one of the most radical programmes of welfare-state retrenchment in recent times, which in turn affects population health. Yet despite this clear evidence, there has been little agreement about the causal role of austerity. There is a

broad consensus that the social sector in Greece was in grave need of reform, with widespread corruption, misuse of patronage, and inefficiencies, and many commentators have noted that the crisis presented an opportunity to introduce long-overdue changes. Greek Government officials, and several sympathetic commentators, have argued that the introduction of the wide ranging changes and deep public-spending cuts have not damaged health and, indeed, might lead to long-term improvements. However, the scientific literature presents a different picture. In view of this detailed body of evidence for the harmful effects of austerity on health, the failure of public recognition of the issue by successive Greek Governments and international agencies is remarkable.”

This paper focuses on Greece, but here I talked more generally about the work of one of the co-authors, David Stuckler, who finds a general association between austerity and deteriorating public health.

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Between 1846 and 1851 about a million died of starvation and epidemic disease in the Irish potato famine. The general consensus today is that although this famine began as an extraordinary natural catastrophe, its impact was made much worse by the actions (or lack of action) of the British government, headed by the Whig Lord John Russell. As Jim Donnelly describes here, there seem to be three ideologies that held the “British political élite and the middle classes in their grip, and largely determined the decisions not to adopt the possible relief measures.” These were “the economic doctrines of laissez-faire, the Protestant evangelical belief in divine Providence, and the deep-dyed ethnic prejudice against the Catholic Irish.” The system of agriculture in Ireland was perceived in Britain to be riddled with inefficiency and abuse. The British civil servant Charles Trevelyan, chiefly responsible for administering Irish relief policy, wrote that the famine was “the sharp but effectual remedy by which the cure is likely to be effected.”

There is a debate about the humanity and personal responsibility of Charles Trevelyan. Yet his actions were hardly idiosyncratic. The Lord Lieutenant of Ireland, the Earl of Clarendon wrote a letter to Prime Minister Russell on April 26th, 1849, expressing his feelings about lack of aid from the British House of Commons: "I do not think there is another legislature in Europe that would disregard such suffering as now exists in the west of Ireland, or coldly persist in a policy of extermination." Henry Farrell notes that the Economist magazine strongly supported the laissez-faire line pursued by Trevelyan and Russell. Were the governing elite collectively evil, as they provided armed guards for the shipping of huge quantities of grain away from the same areas affected by the blight? We could just say people act in their own interests, but as Dani Rodrik argues, this underestimates the power of ideas and ideologies.

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Of course the Irish famine is different in degree and form to the difficulties being faced by many in some Eurozone economies. But the similarities should worry us. There is the widespread view that the inefficiencies and corruption that exist in these economies are a key factor in explaining the difficulties these countries are in. Worse still is the idea that severe austerity is necessary to ensure ‘structural reform’ takes place to reduce these inefficiencies. There is also a common belief today that various economic processes cannot be interfered with and contracts have to be upheld, which are not very different from beliefs held by the British government in the 1840s. When the ‘effectual remedy’ leads directly to suffering, the evidence that it does so is ignored, as the Lancet paper argues is happening in Greece today.

If you think that the problems in Greece and elsewhere are clearly self-inflicted, rather than the result of an act of God like potato blight, consider this. The Greek government borrowed way too much and concealed that fact, but this was hidden from the Greek people as much as anyone else. Just because politicians are elected, does that make the people as a whole responsible for everything they do? Are they more responsible than those who lent the government this money, or in the case of other Eurozone countries lent money to banks that were subsequently bailed out with no public discussion? 

In Victorian times there was a belief that the debtor must be made to repay their debts whatever the hardship that this entails, and with minimal cost to the creditor. We think we live in more enlightened times today, but at least the individuals in debtor prisons normally signed the contracts they were being held to. In the case of Greece and elsewhere their leaders signed on their population’s behalf.

If you say that the law must be followed, well the British government was also protecting the rule of law when it ensured that those shipments of grain left famine stricken Ireland. Are those shipments of grain so very different from the flows of money now leaving Greece and elsewhere to pay the interest on government debt? Our attitude to famines is a little more enlightened than it was in the 1840s, but perhaps some of that enlightenment is needed elsewhere.

Measuring the cost of austerity

How do we count the cost of fiscal austerity? The most obvious question to ask, at least for a macroeconomist, is how much higher GDP would be without it. This is what Oscar Jorda and Alan Taylor did in some recent research, which I discussed in this post. All I did in my post was translate this percentage into the amount of output lost per household, because I think that kind of number is easier for non-economists to relate to.

Many macroeconomists today might point out that this is an overestimate of the true cost of austerity, because to the extent that we are collectively producing less because we are working less, we should offset this GDP number with the benefit of the extra leisure we are enjoying.

Many other people, including I hope some macroeconomists, might think that was just silly, and gets things the wrong way round. To the extent that this fall in GDP is associated with a rise in unemployment, that increase in unemployment does much more harm than the amount of goods that unemployed person might otherwise have produced. Chris Dillow has a useful post on this, and the evidence is in my view overwhelming. Exactly why macroeconomists continue to get this backwards will have to be the subject of another post.

David Stuckler, who is in the sociology department at Oxford but who I do not think I have ever met, looks more generally at the impact of austerity on health. Together with Sanjay Basu from Stanford, they have written a book called ‘The Body Economic: Why Austerity Kills’. There is a NYT OpEd by them here, a Mark Thoma synopsis here, and for those who like podcasts an interview (with transcript) here. What Stuckler and Basu do is essentially cross examine a large amount of health data across countries and across time, looking at the relationship between recessions and particular austerity measures with health, including deaths. The examples are varied and interesting: for example how improvements in child mortality and reductions in tuberculosis and whooping cough in the 1930s were correlated with the extent to which state governors embraced Roosevelt’s New Deal (will we see the same with Obamacare?), to how HIV has increased and malaria returned to Greece as a result of health cutbacks.

Of course what we are talking about here are particular forms of fiscal tightening: cuts to welfare and health programmes in particular, but more generally measures that hit the vulnerable poor rather than the rich. A programme to reduce government deficits that only involved increasing taxes on the reasonably well off would have a far less serious impact on health. Their book is also about how best to use public money to most effectively improve health outcomes, and how cutting this money in the short term not only has a negative impact on health, but can also raise costs in the longer run.

For this reason, it would be pointless to say that X amount of fiscal contraction leads on average to some Y deterioration in health outcomes. Nevertheless, the frustration the authors clearly feel is self evident. Talking of the UK government’s new regime for disability testing, they say “It was hard for us, as public health researchers, to understand the government’s position. The Department for Work and Pensions, after all, considered cheating a relatively minor issue.” Talking more generally of austerity, David Stuckler says: “These are massive uncontrolled experiments with entire populations. Had austerity been organised like a drug trial, with a board of ethics, it would have been discontinued, given evidence of its deadly side-effects and the failure of its purported economic benefits to accrue.”

Now some might say that because austerity need not necessarily involve measures that have large negative health outcomes, statements like this, and indeed the title of their book, is alarmist. This is similar to the Troika saying that they are quite right to insist on fiscal contraction so that the interest on Greek loans can be repaid, because it is up to the Greek government how it chooses to reduce its deficit. Typically, however, the same people who make that kind of excuse are also those who want to direct austerity to cutting spending rather than raising taxes, and who complain about the ‘burden’ of social programmes.

Let me end by quoting the conclusion of their New York Times article. “One need not be an economic ideologue — we certainly aren’t — to recognize that the price of austerity can be calculated in human lives. We are not exonerating poor policy decisions of the past or calling for universal debt forgiveness. It’s up to policy makers in America and Europe to figure out the right mix of fiscal and monetary policy. What we have found is that austerity — severe, immediate, indiscriminate cuts to social and health spending — is not only self-defeating, but fatal.”

Why the National Health Service played a central part in the Olympic Ceremony

Although the British are a patriotic nation like any other, we are also quite happy to criticise our institutions and national efforts. So before the Olympics our press was full of stories about actual or potential problems. Of course, it is another matter if someone overseas repeats these things, as a certain US politician found out. So everyone thought that being in charge of the opening ceremony was a poisoned chalice for Danny Boyle. Get anything wrong, and mistakes would be analysed in fine detail. Get the tone wrong and he would be torn apart.

Given that, the reaction to the opening ceremony in the UK has been extraordinary. Universal praise for once would not be a cliché. Not just praise of the ‘good effort’ kind – genuine emotion at having captured something quintessentially British. Examples here, and here, and here.  The appreciation seems to have come equally from left and right: when one Conservative MP tweeted that it represented ‘leftie multicultural crap’, his comment was described as ‘idiotic’ by the Prime Minister.

I think those watching from overseas will be able to understand a lot of this. There is the British sense of humour, the evocative depiction of the first transformation from a rural to industrial society, the central role of immigration, and consequent cultural diversity. But why so much time devoted to the National Health Service (NHS)? – that seemed to puzzle some in the US at least.

What is perhaps not understood outside the UK is that the British regard the NHS as an institution on an equal par to our monarchy. Not beyond criticism, but seen as absolutely essential to national life. While many aspects of the 1945 post-war social transformation have been swept aside (nationalisation of utilities) or greatly modified, the idea that the health service should be free to all and paid for through taxation is sacrosanct. In a MORI survey, when people were asked to agree that either ‘The NHS is critical to British society and we must do everything we can to maintain it’ or ‘The NHS was a great project but we probably can’t maintain it in its current form’, nearly 80% chose the former and only 20% the latter. A report for the Healthcare Commission prepared by MORI concluded

“The NHS as a whole, and in particular the principles it embodies, remains a huge source of latent pride. It is still perceived by the British general public to be one of the best of its kind in the world. People also see the NHS as critical to society, and despite concerns about its management, they feel it needs to be protected and maintained rather than re-invented.”

To suggest that the NHS should be replaced by a system based on insurance would be political suicide. That is why David Cameron promised that there would be no top down reform of the NHS if he was elected, and why many – even in his own party – suggest that his failure to honour that commitment may be his undoing.

Of course principles and practice do not exactly converge. There are some minor charges within the NHS, and there is plenty of private, insurance based provision available alongside the NHS. Nor do I want to argue that this attachment to the principle of equality of health provision is necessarily logical or consistent with British attitudes in other areas, but just to note that it exists.

Is this attachment to the NHS national self delusion? After all, many countries seem to have replaced their monarchies with alternative heads of state, and are doing just fine. I think there is a difference. The monarchy in the UK symbolises our history – its actual function is relatively trivial beyond that. The NHS embodies a principle that in critical matters involving health, all members of a society should be equal. Overall the UK is not a particularly equal society, and income and wealth inequalities have been growing, but this is one area where there is a strong national consensus that while additional income should mean that you contribute more to a health service, this does not entitle you to receive better treatment.

Do the British pay dearly for this attachment to equality in health provision? If you look at measures of quality or efficiency, the UK does reasonably well (for example here or here), but what does appear consistent is how badly the US performs in terms of efficiency. (For some clues as to why, see Timothy Taylor here.) So what seems more likely is that it is the US aversion to government involvement in health provision that is a little delusional. Which of course brings us back to that certain US politician, who not only came up with a plan to try and improve the US health care system, but when the President took it up, he has been kind enough to let the President take all the credit.


Postscript (4/08/12)


On US attitudes, see this more recent article by Uwe Reinhardt (HT MT)