IFS warns of 'unprecedented squeeze' on NHS

The Institute for Fiscal Studies warns against "false sense that all is now well"

Government spending on health care is facing an “unprecedented squeeze” over the next Parliament despite the NHS ring-fence, the respected Institute for Fiscal Studies warned today.

The think tank said that even if spending on health continues to keep pace with inflation, real per capita age-adjusted spending per person will be 9 per cent lower in 2018-19 than it was when the Coalition came to power in 2010.

Four years ago the Coalition threw a protective cloak around spending on the NHS and the global aid budget, ensuring they would not face real terms cuts, while other departments endured their deepest budget reductions on record.

The IFS said that the sharp projected shortfall in spending per person on health, despite the ring-fence, was a consequence of the growing pressures of the ageing population, with the average 80-year-old requiring seven times more health spending than the average 30-year-old.

To keep pace with the ageing of the population, spending needs to grow by 1.2 per cent a year in real terms, it said. And to rise in line with growth in the wider economy, spending needs to increase by 2.4 per cent a year.

The IFS pointed out that the NHS, experienced average annual real spending growth of 6.3 per cent between 1998 and 2008. The think tank added that the likely short-fall in health spending per person was an area of “particular concern” in the context of the Coalition’s wider programme of spending cuts over the next five years.

Departmental budgets have only been set by the Coalition up to 2015-16, the first year of the next parliament, but George Osborne has laid out plans to run a current budget surplus by 2018-19, which will entail three further years of severe fiscal consolidation.

The Chancellor has said that if the Conservatives win the next election he will seek to limit the squeeze on departmental spending by cutting 12bn from the welfare budget.

But the IFS warned that even if Mr Osborne achieved these welfare cuts, some Whitehall departments would be facing budget cuts of more than 30 per cent on 2010 levels.

And thanks to various spending commitments made by the Chancellor in last year’s autumn statement, such as increasing spending on childcare and university access, departments could face even bigger reductions to meet his budget surplus target. “The question is whether that level of spending will be acceptable to voters” said Rowena Crawford of the IFS.

However, a separate analysis by the Oxford Economics consultancy on behalf of the IFS yesterday, suggested that the large spending cuts pencilled in by the Chancellor might not be necessary, even to meet his own deficit goals.

Oxford Economics estimates that the amount of slack in the economy is currently more than twice as big as the estimate of the Government’s official forecaster, the Office for Budget Responsibility (OBR).

This implies that the deficit will naturally fall quickly as the economy grows rapidly over the coming years. If this optimistic view is correct, much of the austerity presently planned by Mr Osborne for the next Parliament to clear the deficit would be unnecessary, said the IFS.

Oxford Economics estimates that the so-called “output gap” of the British economy is 5 per cent of GDP. The OBR judges the degree of slack to be just 1.8 per cent of national output.

Andrew Goodwin of Oxford Economics also said that the Chancellor’s controversial spending cuts and tax rises since 2010 had depressed the economy more than initially expected, contrary to the view of the OBR which said that the weak economy until last year was a consequence of high inflation and the turmoil in the eurozone.

In an analysis of the tax proposals of the Coalition and the Labour Party, the IFS said neither further hikes in the income tax personal allowance nor the re-introduction of a new 10p starting rate of tax would do much to help lower-income workers, with the benefit mainly flowing to wealthier people. “It is hard to find a coherent economic rationale for it” said the IFS.