The NHS and Not State Pensions to Blame for Looming Fiscal Crisis

The Office for Budget Responsibility said as much last week, in its latest gloomy Fiscal Risks and Sustainability Report. On unchanged policy, health spending is projected to rise from 8.3 per cent of GDP to 13.5 per cent within half a century, accounting for three fifths of the total growth of the state relative to GDP.

For all that’s written about the unsustainability of the state pension triple lock, rising healthcare spending will be more than twice as costly over that period. Government healthcare spending is the single biggest force pushing debt towards 300 per cent of GDP in the OBR’s baseline, absent serious retrenchment elsewhere.

Sure, the NHS did not cause the financial crisis, Covid or the energy-price shock that helped lift public debt to around 100 per cent of GDP today. But these projections expose just how much pressure health spending alone will put on the public purse in future, and how this is not primarily about demographics.

The OBR reckons real health spending will grow by 2.5 per cent a year, of which just 0.4 percentage points reflects population ageing and all the expensive end-of-life care that entails. The rest comes from two structural forces colliding. As we get richer, people tend to want to spend relatively more on scans, drugs and novel treatments. And healthcare is stubbornly labour intensive, meaning it is difficult to eke out productivity improvements.

There’s a name for the biggest cost pressure: Baumol’s cost disease, named after William Baumol, the economist. As innovation and automation raises productivity and wages in other sectors, doctors and nurses cannot churn out more operations and care at the same clip. Yet NHS pay growth must at least broadly track the rest of the economy to attract workers regardless, meaning the relative cost of healthcare goes up compared with everything else.

That results in healthcare spending rising relative to national income. Under a tax-funded, pay-as-you-go system like ours, taxes must rise, other public services must face cuts, patients must endure tougher rationing, or else debt must spiral to pay for it.

Britain’s fiscal fate therefore turns heavily on whether the NHS can achieve a productivity miracle. That is, if we can find ways for artificial intelligence, automated diagnostics, better testing and new ways of delivering care to allow clinicians to treat far more patients, with any gains outweighing how extending lives or making previously untreatable conditions treatable might raise costs elsewhere.

Achieve that miracle, so eliminating these additional cost pressures, and the OBR says government health spending could remain near 9 per cent of GDP. But that requires sustaining something like the government’s own 2 per cent annual productivity growth ambition, more than triple the NHS’s historic rate, not just to overcome post-pandemic weakness, but for decades to come.

Is that remotely plausible? The government’s own ten-year plan admits that central command has disempowered the front line, left “few rewards” for entrepreneurial leaders and produced weak incentives for NHS innovation. When the government owns hospitals, controls pay, and is deemed responsible for reorganisations or trusts failing, efficiency gains yield diffuse savings while creating well-organised opponents.

That is not to say the NHS cannot improve. English NHS reforms to promote patient choice delivered competition that improved outcomes without raising costs, while other research links greater hospital competition to better management. The question is, can a nationalised system ever possibly provide incentives powerful enough to deliver the revolution in care our fiscal arithmetic demands?

To ask that question, I fear, is to answer it. Yet without that rosy outcome, the NHS will continually tighten its grip on chancellor’s budgets, squeezing taxpayers and crowding out other services, unless we engage in a fundamental rethink of how we do healthcare.