United Kingdom / Analyst Insights
Unhealthy Outlook: Part Two

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by John Griffin, Industry Analyst
Sep 23 2019

Unhealthy Outlook: Part One


As a publicly funded health-care system, the NHS is somewhat exposed to fluctuations in the wider economy. According to The Kings Fund, 98.8% of NHS funding comes from general taxation and National Insurance, with only a very small portion of funding coming from patient charges. While the vital nature of health-care services has rendered growth in health spending inevitable, the rate of growth has slowed considerably in recent years compared with historical trends, with growth tending to be underpinned by voluntary contributions as the government has initiated efforts to transfer some of the burden of care to the private sector. The UK’s decision to leave the European Union has exacerbated public spending pressures. Uncertainty surrounding near-term economic prospects is expected to spur a fall in business and consumer confidence through the current year, adding a degree of hesitation to investment decisions and weighing on consumer spending. This has the potential to cause a more general slowdown in the UK economy, which would negatively affect public finances, as tax receipts fall when economic activity is weaker. This is expected to place additional pressure on NHS funding, while any changes in access to capital funding from the European Investment Bank are anticipated to limit financing for maintenance and improvement of NHS infrastructure.

Budget constraints

According to The King’s Fund, planned spending for the Department of Health and Social Care (DHSC) is £139.3 billion in 2019-20, with £132.3 billion of this funding directed towards day-to-day items such as staffing and medicines, and the remaining £7 billion to capital spending on NHS infrastructure. Meanwhile, spending plans revealed by the Chancellor, Sajid Javid, in the September 2019 Spending Round outline further boosts to health-care spending for 2020-21 and include a cash increase of £33.9 billion a year by 2023-24, compared with 2018-19 spending levels. The planned 2.9% increase in the DHSC budget between 2019-20 and 2020-21 will provide some optimism for NHS operators; however, the rate of growth remains below both historic pre-recession averages and the 3.4% a year real-terms increase set out by the government in the five-year funding plan in June 2018. Therefore, despite easing current pressures, the increase in NHS funding is unlikely to be sufficient to positively transform services and infrastructure amid unrelenting pressure on health-care services from an ageing UK population.

Uncertain prospects

Health-care funding is dependent on money from tax receipts, which in turn is contingent on the level of economic activity. The UK’s decision to leave the European Union has already caused economic growth to slow, and the potential of a sustained economic decline, which is a particularly strong risk under a no-deal scenario, presents a substantial threat to the NHS. The upshot of a potential economic slowdown is expected to exceed the effects of the potential re-routing of ceased EU membership payments to the NHS, despite the Leave campaign promising that NHS funding would benefit from exiting the European Union prior to the EU referendum. According to research carried out by The Health Foundation shortly after the EU referendum, the impact of the UK’s exit from the European Union could cause a drop in DHSC’s 2019-20 budget of between £2.8 billion if the United Kingdom was to join the European Economic Area, and £4.6 billion if it relied on World Trade Organisation rules.

Infrastructure financing

Declining capital budgets have added to pressures on the NHS in recent years, with a report by the Health Foundation warning that ageing infrastructure and a growing backlog of repair and maintenance work is likely to undermine ambitions to transform the health service. In real terms, the DHSC’s capital budget, which is used to fund long-term infrastructure investment, has declined by 21% over the past eight years. Nevertheless, £2 billion of new capital funding as outlined in the September 2019 Spending Review, starting with an upgrade to 20 hospitals, is expected to provide a boost to infrastructure spending in the current year. However, the long-term scope of capital funding for NHS infrastructure is somewhat dependent on the United Kingdom securing a long-term relationship with the European Investment Bank (EIB) following its exit from the European Union. Since 1973, the EIB has provided funding of €118.3 billion to the United Kingdom for major infrastructure projects in the transport, education and health-care sectors, with the United Kingdom receiving more than €480 million towards the construction of hospitals in 2015 alone. However, figures produced by the EIB show that lending to the United Kingdom has decreased dramatically since the EU referendum. If the United Kingdom were to permanently lose access to EIB funding, a number of large-scale infrastructure projects would likely be delayed or cancelled unless funded by the UK public or private sector. This would further limit the amount of capital available for the maintenance and improvement of NHS infrastructure, hindering efforts to reform health-care services.

For a printable PDF of Unhealthy Outlook: Part Two, click here.

IBISWorld industry reports used in this special report:

Q   -   Human Health & Social Work Activities

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