Fiscal Health: The Economics of UK Health Care

Article excerpt

The global debate on fiscal austerity measures seems to be lost on one nation. The United Kingdom has convinced itself that the time for macroeconomic stimulus is over. The budget unveiled by David Cameron's Tory-Liberal Democratic coalition in June plans to slash UK[pounds sterling]40 billion in deficits over the next five years. The government seems to see the quarterly GDP growth figure of 1.1 percent released for the second quarter, the best since 2006, as a vindication of their efforts to restore austerity to the country, rather than as a response to Labour's approach to the crisis. The country seems to fear that the risks associated with burgeoning government debt loom much larger than the possibility of fiscal pullback taking Britain into a double-dip recession. That fear is justifiable, if not necessarily correct, because extremely high public debt levels relative to GDP can trigger concerns about default, in turn raising interest rates. Higher interest rates depress investment and hamper long-run growth.

Economists such as UCLA's Brad DeLong, however, have cautioned the United Kingdom against implementing austerity so soon. With interest rates near zero, monetary policy is tapped out. In such times, expansionary fiscal policy can be a powerful economic stimulus. Disturbingly, however, on top of the austerity measures, reform of the National Health Services (NHS), Britain's famous public health care system, is being simultaneously instituted. While many of the suggested reforms are reasonable and much overdue, the proposal is still problematic. Most fundamentally, the cutbacks in employment associated with this scheme would add to the unemployment expected to result from austerity. The time to institute such a reform is in the future; the economy in 2010 is far too precarious.

At the heart of NHS reform is the handing over of 70 percent of its budget, approximately UK[pounds sterling]80 billion, to the country's General Practitioners (GPs) and allowing them to purchase care and treatment for their patients. This scheme would replace the existing system, in which 10 Strategic Health Authorities (SHAs) give budget allocation power to the 152 Primary Care Trusts (PCTs) they oversee. The GPs, it is argued, have a better idea of what their patients require than PCT bureaucrats. A patient can now sign up for the GP she wants, though she may have to see members of his GP's team for care rather than the GP himself. The elimination of bureaucracy in the form of the Authorities and the Trusts could lead to efficiency gains. As another positive, the Tory government has pledged not to cut aggregate health spending. The government has sold the plan as one that would improve the quality of care citizens receive; the white paper proposing reform was entitled "Equity and Excellence: Liberating the NHS." There is a lot to like in the proposal, which could improve a system that costs the United Kingdom an excessive UK[pounds sterling]105 billion a year. Indeed, the government projects that the reforms will save UK[pounds sterling]20 billion by 2014.

But there is a question of necessity. The United Kingdom enjoys a life expectancy of just below 80 years, one of the highest in the world. …