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Richard Humphries: The two tales of NHS and council funding

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As the long hot summer slides into the shortening days of autumn, prospects for the NHS and local government look as uncertain as ever.

Developments in Northamptonshire – and fears that despite local circumstances it is an omen for many other councils – invite comparisons with how health services and town halls are expected to deal with their financial challenges.

Although driven largely by the same socio-demographic pressures – rising demand for services, increasing complexity of needs, and climbing costs – the contrast the two could not be starker.

Whereas future local government spending will have to wait for attention until next year’s spending review, a new five year funding settlement for the NHS was announced to much fanfare in June. It is a real terms average increase of 3.4% a year over the next five years, amounting to an extra £20.5bn by 2023-24.

Few doubt the NHS needs the money. Last year 44% of NHS trusts, mostly hospitals, were in deficit. Waiting times are continuing to rise and key targets routinely missed.

But envious local government readers should not kid themselves that the new money will transform the NHS. The increase falls short of the 4% increase called for by the King’s Fund, the Nuffield Trust and the Health Foundation needed just to stand still. There will be tough choices and trade-offs about the priorities for this new money.

The prospect of continuing deficits and rising demand is one reason the NHS is getting more money. Unlike with councils there is no legal requirement that most NHS organisations set an annual balanced budget. There is also no equivalent to a section 114 notice, prohibiting any new expenditure, in the NHS.

Instead, for a mix of historical, political and cultural reasons, the service has tried to strengthen control and manage down deficits by creating what one finance director described as a ‘Frankenstein mishmash of financial management rules’.

These include provider and commissioner sustainability funds, provider control totals, system control totals, section 42A loans, public dividend capital, marginal tariff rates, financial special measures, financial improvement programmes, and capped expenditure processes.

Arguably these have enabled the NHS, and especially its national political masters, to dodge some of the tough decisions on money and services commonplace in local government. Northamptonshire has attracted attention because the notion of a historic deficit in local government is so unusual – and illegal.

For all the rhetoric about integration and partnership, local government and the NHS remain firmly in separate universes when it comes to financial management. This is a real obstacle to local government’s engagement in evolving local integrated care systems. Whether talk of a simplified financial architecture for the NHS will change this remains to be seen.

Richard Humphries, senior fellow – policy, The King’s Fund

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