NHS providers have reported colossal deficits. The scale of the cash crunch is unprecedented in the history of the health service, amounting to around £2.5bn. At the Institute for Public Policy Research (IPPR) we believe – along with many others in the policy community in healthcare – that this may be a significant understatement of the financial problems facing the service. Our assessment is that the true underlying position is a deficit as high as £3.5bn. Why do today’s figures show otherwise?

NHS in England reveals £2.45bn record deficit Read more

The biggest explanation for the discrepancy is capital spending. Every year, the Department of Health receives two streams of money for the health service, revenue (to pay for care delivered this year) and capital (to pay for investment in buildings and expensive equipment such as MRI scanners and so on). The Treasury imposes tight controls on this money to make sure that long-term investment is not sacrificed for short-term gain. Earlier this year, capital budgets were quietly devolved and the controls on them lifted, and nearly £1bn was transferred from the capital budget to the revenue budget.

Furthermore, there have been multiple cases of trusts selling existing assets to raise cash to cover their deficits. Money that is supposed to be invested to deliver care over many years is being diverted to try to make it through the year. There are, of course, times when buildings that are no longer clinically appropriate should be sold. The crucial point is that the receipts from those sales should be reinvested in new capital assets for the NHS, whether they are buildings or new technology to improve the efficiency of care delivery.

What these crisis-driven decisions mean is that the capital intensity of the NHS is falling rather than rising: the result will be that the health service will be less efficient in the future, reducing its long-run sustainability. All of this just to limp through the year – these are short-term fixes not long-term solutions. It is worth remembering that the settlement from the last spending round was relatively generous this year and next, with an almost total freeze in the two years that follow. It looks like it can only get worse.

Other accounting tricks include re-scoring contingent liabilities on commercial contracts. We estimate that changing the scores on one major contract alone might have banked NHS England as much as £200m. Even savings on exchange rate movements are being banked against the deficits.

All of these tactics - switching capital to revenue, selling assets to raise cash, and re-scoring liabilities and banking exchange rate gains - share a common characteristic: the money can only be spent once. They improve the in-year cash position, but they leaving an underlying trading position that is much worse than it appears on the surface.

We believe that for the NHS to address its financial problems, the first step is to have a proper and accurate understanding of their magnitude. For that reason, we believe the health service would be helped by a National Audit Office investigation to uncover the underlying financial position. We then need an honest conversation about both health policy and funding. The single biggest cause of the current cash crunch is letting spending fall well behind demand for healthcare.

In this challenging environment, government policy certainly hasn’t helped. The 2012 Health and Social Care Act has proved to be precisely the catastrophe that most of those working in the health sector predicted. From fragmenting the system into smaller and smaller parts to wrecking the approach to workforce planning, the consequences are being felt across the NHS.

The Treasury’s worst fears were that the reformed health service would have no way to maintain financial control. Sadly, that has proven to be what has happened. Looking ahead, it is all too apparent that we need to have an honest conversation with taxpayers about the need to invest more in the NHS, and a serious plan to reform the health service and clear up the mess that is the legacy of the botched 2012 Act. It’s time to get a grip.