How will public sector cuts in the 2015 Spending Round impact on the UK health sector?
Deloitte together with the think tank Reform, published their third annual report: State of the State 2014-15: Government’s inflection point. Based on an analysis of public data, augmented with information from roundtable discussions and interviews with senior executives across the public sector, the report presents a snapshot of the pressures on government finances and the challenges facing public services today and over the next five years.
The focus is government-wide with messages for both local and national government, policy makers and all public sector organisations. While healthcare has, to all intents and purposes, enjoyed a less stringent approach to its funding than most other public spending areas, and the signs are that some growth money is likely to be available over the next few years, this report has important findings and recommendations that should be taken on board by all of those who are accountable for healthcare spending.
The report reminds us that, following the global financial crisis, in 2010 the newly elected Coalition Government faced a record level budget deficit, with spending £159 billion more than income and that the Government consequently set out a reform programme to reduce this deficit, largely through cuts to public spending. People at all levels of the public service, particular the elected and executive leadership of the myriad of individual public sector organisations, have had to take many difficult decisions. The approach so far has focused on cuts to public services and administration typically managed through pay freezes, contact negotiations, shared service agreements and workforce reductions. As a result the deficit is expected to have reduced to £96 billion by end of 2014-15, and be eliminated by 2018-19.
The report contends, however, that the challenges and decisions needed are about to get much harder. Completing the deficit reduction plan will require the Government that is elected in May 2015 to decide where the next, deeper, half of public sector cuts will fall as part of a 2015 Spending Round.
The report concludes that the UK public sector is approaching an historic inflection point and that the public sector reform required to achieve the second half of the consolidation will require a dramatic change in the way that many public bodies operate. While the public spending outlook may appear bleak and national and local government will need to balance citizen expectation with affordability, there will be an even greater need to maximise the public sector’s effectiveness. More specifically, this will require an improvement in public sector productivity (we estimate that every productivity measure that saves one percent of public sector workforce time is worth around £1.64 billion per year).
However, as many commentators are quick to point out, the public sector does not have a good track record on improving productivity; indeed historically the UK has only ever got more from its public services by spending more money. Moreover, the UK’s current debt levels, as a percentage of GDP, are the ninth highest in the EU and the UK already spends £1 billion a week on debt interest, more than it spends on education. The report recommends, therefore, that the Government elected in 2015 should consider its programme through three lenses:
1. a debt reduction lens that would help restrain public sector spending growth and move from a period of austerity to an era of prudence from 2020
2. a productivity lens focusing on sustainable productivity gains
3. a talent lens, to enable the government to manage and deploy its people to best effect.
So what does this mean for Health?
As we all know, the health budget, unlike most other budgets, has to all intents and purposes been protected from actual budget cuts. However, the increasing demand from a growing and ageing population, coupled with lengthening life expectancies and increasing prevalence of chronic disease, has increased demand some way beyond the budget increases. Indeed, the accepted view is that the shortfall in 2014-15 would have been some £20 billion if the gap hadn’t been plugged through stringent efficiency and productivity savings. Going forward, as discussed in last week’s blog on the NHS Five Year Forward View, the expectation is that there will be a further £30 billion efficiency gap in 2020-21 unless further efficiencies and productivity savings are found.
This suggests, that the recommendations in the State of the State, to examine public spending through the above three lenses, is relevant to health. In particular that:
- productivity could be improved, by linking pay and rewards to demonstrable ways of working differently, supported by more effective deployment of digital technology and adoption of alternative delivery models
- the need for a concerted approach to talent management to ensure that there are sufficient numbers of the right people, with the right skills in the right place, at the right time.