Magazine article Public Finance

Stand and Deliver

Magazine article Public Finance

Stand and Deliver

Article excerpt

In medieval times, monarchs seeking to finance foreign wars or ambitious crusades would, if times were tight, visit the wealthiest barons in their land, starting naturally with any to whom they bore a grudge, and would raise loans. These loans were non-negotiable, documentation was rudimentary, and it was grudgingly accepted that in such circumstances, lending and giving cost about the same. Like any modern mugger, the king's agents would unfailingly pick on those who appeared to have the ability to pay, and had fewer men at arms than the crown.

A raid on the accumulated NHS surplus in the current financial climate is therefore not hard to predict.

For the benefit of anyone who's spent the past few months somewhere else - in solitary confinement, say, or undergoing rehab in a private clinic - economic growth is now a memory, the banking sector is in what's politely called 'turmoil', and an old friend, inflation, has been starting to rear its ugly head.

Governments that oversee falling growth face financial as well as electoral challenges as tax revenue quickly begins to dry up. Job losses and a slowdown in trade mean less income tax and national insurance coming in: these sources alone had been expected to provide £258bn (44%) of tax income in 2008/09. Consumer caution suggests significantly less VAT than the forecast £86bn. And so on. Before long a government must borrow, cut government expenditure, increase tax - or all three.

If many of the headlines about the Pre-Budget Report concentrated on taxation and borrowing, there were also clear messages about severe cuts in public spending. From 2011 onwards, many billions of pounds have been trimmed from projected expenditure levels across government: annual growth levels of between 1.3% and 1.1% fall well short of the previously planned 2% per year.

And in the interim, pressure for efficiency savings and asset disposals will grow. We don't yet know how this will affect individual spending programmes, but an extra £5bn between now and 2011 is, to say the least, challenging. The message that runs through the PBR is of urgency: hence the decision to accelerate £3bn of capital investment programmes in the hope of reviving the moribund building industry.

From a health sector perspective, the outlook appears gloomy. In the case of capital, only around £100m of the speedier capital spend appears destined for the NHS, in the form of improvements to GP premises. This reflects expedience, but also the legacy of the Private Finance Initiative. For well over a decade the government has relied on the PFI to fund capital investment and asset renewal, especially in the health and defence sectors. In practice, this leaves its more ambitious plans, such as the polyclinic' commitments in Lord Darzi's recent review, heavily reliant on the support of the banks. But the banks are no longer lending, as anyone attempting to raise a mortgage soon finds out.

Meanwhile, over the course of the past three years, the NHS in England has turned around its financial affairs to create a considerable financial reserve. The deficits of 2004/05 and 2005/06 have been eliminated, at least at aggregate level. In 2006/07, the net NHS surplus was £510m; last year the NHS surplus reached more than £2bn - £1.66bn in the NHS, plus a further £514m in the quasi-independent foundation trust sector.

Actually it could have been a lot more. Chris Calkin, former chair of the Healthcare Financial Management Association and finance director of the University Hospital of North Staffordshire NHS Trust, acknowledged in May that NHS trusts had been managing their surpluses down to control totals set by the Department of Health. John Appleby, chief economist at the King's Fund, suggested an apparent rush to spend NHS money might reflect a fear that it would otherwise be lost. The Treasury had previously clawed back some £2bn from unspent capital budgets.

And the pattern has continued into the current financial year, complying with a requirement in the NHS Operating Framework for 2008/09 - the Department of Healths annual priority-setting document - that: 'The aggregate resource accounting and budgeting surplus delivered in 2007/08 by SHAs and PCTs will be carried forward to 2008/09. …

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