There has been one of those pointless and repetitious British debates about public spending over the last fortnight concerning health spending. The government says they will increase health spending every year in real terms. They mean by this they will ensure a cash increase in spending which goes up by a bit more than the GDP deflator, their chosen measure of inflation. They confess that the real increase might have to be small, given the financial problems the state faces.
Their critics say this means massive cuts. They argue that health inflation will continue to be faster than general inflation. It is true it has been in recent years, because there have been some large pay awards which have favoured public sector workers more than private sector ones, leading to a relative increase in the cost of providing public services. There has also been an inflation in the costs of equipment and range of treatments which the NHS can offer. Productivity in the NHS has not gone up. There is also an argument that as more people live longer, so in their final months they need more treatment because they are older and frailer than their predeccessors.
The government has three responses to this argument. They can point out that the big relative increases in public sector pay have now been achieved. Two years of pay freeze should mean health costs rise less rapidly than general inflation. There is also a strong feeling in government circles that the NHS, like the rest of the government sector, can buy things much more cheaply than in the past, by applying better management techniques to purchasing.
They can argue that the NHS has had a very poor productivity record in recent years. It should be possible to catch up some of the lost ground compared to the private sector, where productivity has powered ahead. That is why the Health Secretary wishes to harness more private clinics, not for profits and other health providers to offer treatment free at the point of use for the NHS, to get better value and higher quality.
The government can also claim that whilst the very elderly do indeed impose more strains on the NHS, younger people who take care of themselves with good diets and exercise, are now demanding much less of the service. Also under Labour more people effectively privatised themselves, going to private clinics to get things done which they found were subject to delay or difficulty in the NHS.
If you put all these claims on both sides of the argument together, I come up with the view that if the NHS does raise its management game as the government wishes it can handle the budgets. If it carries on being run as in the last decade, it will be very short of cash. As Mr Blair used rightly to say, you need reform to go alongside more finance, to make it work.
There is nothing new about these arguments. When I first entered the public sector as a County Councillor I was amazed at the extraordinary way the finances of a large public body were organised. It seemed designed to prevent sensible controls being placed on spending.
I joined the Finance Committee. I was working as a finance professional in my main job. I found the very long papers we were sent for each meeting also impossible to understand. They used all sorts of funny numbers to prevent you working out how much cash was being spent. They changed the year base for the budgets, they used inflation adjusted numbers without explaining properly how the inflation adjustment was judged, or where the future forecasts of inflation came from. They assumed that once an item had made it into a budget it would be rolled forward and augmented every year as an inescapable commitment. Figures were in “real terms” rather than cash.
Each year’s budget was an exercise in officer lobbying for more spending. Instead of showing you what was being spent and leaving you to decide what to delete and what to increase, they added all sorts of figures into the previous year’s budget to give you a “New base budget” for the following year. This added in sums for inflation, for “unavoidable commitments”, for “new functions required by Statute”, for “consequences of past decisions”, for “responsibility and age related pay allowances”, for “pension commitments” and the rest. By the time they has finished they normally reckoned that anything less than say a 7% increase would require “cuts”, as you were invited to assume the adjusted budget and then apply the knife at your peril if you were someone who clearly did not understand the remorseless arithmetic of more public spending. If you insisted on a lower budget they would then oblige with the parade of bleeding stumps, offering up a list of cuts that no sane person let alone a politician could possibly approve.
I asked for shorter cash budgets, with clear figures for the main spending heads so we could have an informed debate over what worked, what needed improving, and what could be removed. The officers called that “zero base budgets”, because we refused to accept that anything in the previous year’s budget automatically qualified for the following year. We also wanted to analyse all the so called unavoidable commitments, as these were often judgements or concealed “growth items” which otherwise appeared as a smaller different list for Councillor decision.
All these old tricks are still be played by public sector managers. No-one runs a successful private sector outfit like that. You need transparency over the spending. You need to strive to cut costs and do things better. Too many public sector bugets are compiled on the basis that more spending, more inputs are always good, and all cuts damage services. We need Ministers and Councillors prepared to challenge this nonsense, and aim to get better value for every public pound spent. As public spending is rising in cash terms there need not be any damaging real terms cuts in valued services. If there are, it is bad management. This year total cash spending goes up another 3.8% according to the Tresury figures. With a pay freeze at the same time, this increase should more than cover public sector inflation.