Public expenditure on health and care services - Health Committee Contents


3  Expenditure on the NHS in 2011-12

A real-terms increase?

32.  In our two previous reports we discussed whether the Government's commitment to increase cash funding on the NHS by £12.5 billion between a 2010-11 baseline and 2014-15 represented a real-terms increase in funding. In 2012 we concluded that "what real-terms growth there may be in the settlement is negligible at best", and recognised that "at the same time demand is increasing due to demographic pressures, public expectations and medical advances".[23]

33.  The reorganisation of the NHS Commissioning and management structure prompted by the Health and Social Care Act also has an impact the NHS budget; the Department's latest estimate is that the transition costs of these management changes will be £1.5 to £1.6 billion[24].

34.  In the Spending Review 2010 the Government included in the settlement for the Department of Health "real terms increases in overall NHS funding each year to meet the Government's commitment on health spending, with total spending growing by 0.4 per cent over the Spending Review period".[25] In its response to our report of January 2011, the Government set out the Department's projections for expenditure on the NHS in each year of the Spending Review period, including its calculations of average annual real-terms growth in the sums budgeted for spending on health services: this showed a year-on-year increase in the total departmental expenditure limit (DEL) of 0.1% in each financial year to 2014-15.

35.  There has been considerable debate recently over the Government's commitment to increase real-terms funding for health services: the Treasury's Public Expenditure Statistical Analyses 2012, published in July 2012, appeared to show that, in real terms, actual expenditure on the NHS had in fact decreased between 2010-11 and 2011-12.[26]

36.  The Chair of the UK Statistics Authority (UKSA), Andrew Dilnot CBE, wrote to the Secretary of State on 4 December 2012 to invite him to clarify his statement made in the House of Commons on 23 October 2012 that "real-terms spending on the NHS has increased across the country".[27] While UKSA had determined that, on the basis of Treasury figures published in the Public Spending Statistics series, real terms expenditure on the NHS was lower in 2009-10 than it was in 2011-12, Mr Dilnot acknowledged that the changes were small and that different official publications quoted differing expenditure figures. He considered that "it might also be fair to say that real terms expenditure had changed little over this period."[28]

37.  Richard Douglas CB, Director General of Policy, Strategy and Finance at the Department of Health, suggested to us that the Treasury figures of July 2012, which indicated a small real terms reduction in actual expenditure, were based on provisional returns, and that when the Department's accounts were audited and approved "the numbers had changed, and it was then a small real-terms increase".[29] Elsewhere, however, Mr Douglas indicated that the Department was "holding spend at, broadly, flat real terms".[30]

38.  We have previously pointed out that the real-terms increase in annual budgets for health expenditure in each year of the Spending Review period cannot be guaranteed.[31] The calculation of such increases is dependent upon the GDP deflator, which is now determined by the independent Office for Budgetary Responsibility on the basis of its assessment of economic performance. Similarly, calculation of real-terms changes in actual expenditure are also dependent on the GDP deflator.

39.  Based on this evidence our working assumption is that annual spending on health services in real terms will show little if any variation above or below the 2010-11 baseline.

Budgetary underspends and accounting rules

40.  In 2011-12 the Department of Health was authorised to spend £106.8bn (£102.4bn in revenue expenditure and £4.4bn in capital expenditure), but in fact reported outturn expenditure (by the central Department and NHS bodies) of only £105.4bn (£101.6bn revenue and £3.8bn capital). The difference between budget limit and outturn expenditure was £1.4bn, or 1.3% of the total; it was reported in some quarters that, since this amount had not been spent in-year, the Department had 'handed it back' to the Treasury. Given the tight financial settlement faced by the Department, the underspend in 2011-12 attracted adverse comment.

41.  We examined the issue with the NHS Chief Executive and Deputy Chief Executive, Sir David Nicholson and David Flory, as well as with the Secretary of State for Health and Richard Douglas. The Secretary of State told us that a proportion of the underspend had been carried forward to 2012-13 by the Treasury accounting procedure known as 'budget exchange', whereby Departments anticipating DEL underspends in one year can agree to an effective reduction in DEL in that year and a corresponding increase in DEL in the following year.[32]

42.  The Department has set out the accounting principles in greater detail.[33] Put simply, the Departmental Expenditure Limits (DELs) assigned to the Department by the Treasury prescribe the maximum level of expenditure permitted for revenue and capital expenditure across the range of NHS bodies for which the Department of Health is responsible.

43.  NHS providers - trusts and foundation trusts - received around £61bn as payments from NHS commissioners of acute services. Annual surpluses and deficits generated by NHS providers are credited or charged to the Provider's reserves, and counted as, respectively, underspends and overspends against the Department's DEL for that year. Subject to the regulations operated by Monitor, Providers' reserves provide them with working headroom in future years. Capital expenditure by NHS providers, whether funded out of reserves or from capital allocations or borrowing, will also count against the Department's DEL.

44.  Whatever the movement of reserves within individual NHS bodies (either commissioners or providers) the Department must maintain overall NHS expenditure in each financial year within its separate DEL allocations for revenue and capital. The system of budget exchange, introduced in the 2011 Budget to replace the system of end-year flexibility, allows departments which have foreseen larger than necessary DEL underspends by December in a financial year to seek to transfer a proportion of the DEL for expenditure in the next financial year.[34] The Department of Health is permitted to transfer up to 0.75% of its revenue DEL and 1.5% of its capital DEL from one year to the next.[35] In 2011-12 the Department chose to transfer £316 million from its DEL — £250 million of its resource DEL and £66 million of its capital DEL — for expenditure in 2012-13. The RDEL transfer was based on "a prudent assessment of the forecast underspend in December 2011" and the CDEL transfer was the maximum sum permitted for transfers of capital DEL.[36]

DEPARTMENT OF HEALTH POLICY ON UNDERSPENDS AND BUDGET EXCHANGE

45.  The Department considers it "prudent to plan for a modest underspend [of DEL] to mitigate against unexpected cost pressures, while balancing at the same time against excessive underspends".[37] It considers that an underspend on DEL of around 1.5% at year end is "consistent with an appropriate level of prudential financial management", and points out that underspends in the three years prior to 2010-11 averaged £2bn.[38] 1.5% of the Department's total DEL in 2011-12 (£106.4bn) is equivalent to £1.6bn.

46.  Richard Douglas told us that NHS organisations which had made surpluses in one financial year would be entitled to draw them down in subsequent financial years. The principles governing the operation of surpluses in NHS commissioning bodies in 2011-12 were set out in the NHS Operating Framework for that year:

During 2010/11, the PCT/SHA sector has continued to deploy the revenue surplus, which has built up over the last few years, while maintaining a strong financial position.

As we move forward into a period of significant change, the emphasis of the NHS financial strategy will be to ensure that PCTs and SHAs are in the best possible position to implement the objectives of Equity and excellence: Liberating the NHS. This will mean that PCTs and SHAs should continue to maintain a strong financial position underpinned by demonstrable financial flexibility.

In line with current policy, the aggregate surplus delivered in 2010/11 by SHAs and PCTs will be carried forward to 2011/12 and continue to be available to those organisations. In 2011/12, the expected drawdown of surplus will be up to £150 million with the additional expectation that this drawdown will come from the PCT sector surplus. SHAs will determine and agree with the Department of Health the level of aggregate PCT/SHA sector surplus for their area to be delivered in 2011/12 and how that agreed surplus is distributed between their PCTs and themselves.

The Department continues to require that no PCT will plan for an operating deficit in 2011/12. NHS trust operating deficits will only be accepted where this is part of a planned recovery path agreed with the relevant SHA and the Department.[39]

47.  Surplus policy for clinical commissioning groups (CCGs) in operation from 1 April 2013 is more prescriptive. The operating framework for 2013/14 published by the NHS Commissioning Board requires commissioning organisations to "plan to make a cumulative surplus at the end of 2013/14 of at least 1 per cent of revenue, including any historic surplus [from predecessor PCTs] not drawn down", to be carried forward into 2014/15.[40] Commissioning bodies are required to be in 2 per cent recurrent surplus by 31 March 2014.[41]

48.  As the Secretary of State has pointed out to us, NHS budgets were underspent "in the previous four years under the previous Government . . . that is a normal part of what happens."[42] Richard Douglas confirmed that the Department continues to adopt this approach: "when you cannot overspend, it is inevitable that you will underspend".[43]

49.  We do not however accept that this is the end of the argument. Excessive inflexibility, in particular around year-end controls, runs the risk of re-introducing a perverse incentive to spend budget against a year-end deadline rather than seek the optimal outcome. This is particularly damaging at a time when the health and care system faces the need to invest in service change to respond to the Nicholson Challenge. Greater flexibility, in particular for NHS Providers, to use reserves to invest in service change would represent a small but significant step to enable providers to facilitate change.

50.  The introduction of new arrangements for allocating and distributing funds to commissioners in April 2013 seems to us to present an opportunity for the Department to revise its approach to financial planning and budgeting.

51.  We recommend that the Department of Health, the NHS Commissioning Board and the Treasury review the operation of accounting policies and rules which apply to revenue and capital expenditure on health services.

52.  The Committee is particularly concerned that the rules around budget exchange for NHS Providers are unnecessarily inflexible. Provided NHS Commissioners are subject to effective expenditure control, and provided also that Monitor is able to exercise effective control over recurrent deficits in NHS Providers, the Committee believes that the controls on the use of reserves by NHS Providers should be abolished to encourage Providers to invest in necessary service change.


23   Health Committee, Public expenditure, HC 1499, paragraph 14. Back

24   Ev 69, Table 3. Back

25   Spending Review 2010, Cm 7942, paragraph 2.10  Back

26   HM Treasury, Public Expenditure Statistical Analyses 2012, Cm 8376, table 1.8 Back

27   Letter from Andrew Dilnot CBE, Chair of the UK Statistics Authority, to Rt Hon Jeremy Hunt MP, Secretary of State for Health, 4 December 2012, published at www.statisticsauthority.gov.uk  Back

28   Ibid. Back

29   Q 276 Back

30   Q 225 Back

31   Health Committee, Second Report of Session 2010-12, Public expenditure, HC 512, paragraph 52 Back

32   Q 252 Back

33   Ev 72, paragraphs 17-23 Back

34   HM Treasury, Budget 2011, HC 836, paragraph. 2.9 Back

35   Ev 72, paragraph 31  Back

36   Department of Health Annual Report and Accounts 2011-12, HC 66, paragraphs 3.8 and 3.18 Back

37   Ev 72, paragraph 10 Back

38   Ibid., paragraphs 12-13 Back

39   NHS Operating Framework 2011/12, paragraphs 5.1 - 5.4. Back

40   NHS Commissioning Board, Everyone Counts: Planning for Patients 2013/14, December 2012, paragraph 3.19 Back

41   Ibid., paragraph 3.23 Back

42   Q 275 Back

43   Q 252 Back


 
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Prepared 19 March 2013