This week Deloitte LLP and Reform published their fourth report on the State of the State Recalibrating Government (link). This report analyses material from a wide range of public sources, including the government's accounts, public spending data, departmental reports and official economic figures; augmented by insights from roundtable discussions and interviews with leaders from across the public services, collectively responsible for £16billion of public spending. The result is a compelling report that highlights the realities of our public finances, summarising a wealth of data in an accessible manner to present a thought-provoking and independent view of the UK public sector. This week's blog considers the main finding in the report and the implications and outlook for the NHS.

The State of the State 2015-16 report

This year's report finds the UK in the middle of a decade-long recalibration aimed at lowering levels of public spending. The fiscal consolidation programme, begun in the wake of the 2008 global financial crisis, is now half-way through and, by 2020, the UK's spending on public services is likely to be at its lowest level for 50 years. As a result many public bodies across the UK have experienced austerity and cost reduction with a reduction in the size of the public sector workforce and pay restraints for those remaining. The key findings from this year's report are:

  • over the course of this decade, UK Government spending is forecast to decline by a fifth
  • the deficit – the difference between what the Government earns and what it spends over a year – is expected to be £69.5 billion this financial year
  • public sector net debt is at £1.5trillion which equals £23,428 for every UK resident
  • this year, debt interest will cost the Government more than it spends on the police and criminal justice system
  • for the local public services, continued austerity measures and demand pressures have begun to trigger signs of financial distress – more than 200 NHS trusts, councils, police forces and further education colleges could face serious financial difficulties in the course of this Parliament
  • productivity gains can help the public sector maximise its efforts, focus on the impact it delivers and make the most of its funding. Every hour of public sector staff time saved through productivity is worth £72million to the UK's public purse.

Asked to reflect on their challenges since 2010 and outlook to 2020, interviews with more than 40 local public leaders found:

  • their organisations were more efficient and productive as a result of budget pressures however the next five will be challenging
  • morale has suffered as a result of redundancies, pay freezes and reduced promotions
  • ongoing public sector transformation has made the need to keep talented, skilled people greater than ever
  • technology is seen as critical to a more productive and customer-centred public sector, but funding and cultural change are seen as the key barriers to harnessing it more effectively.

The report also considers the next five years for the UK's governments and public sectors through the lenses of productivity, talent and the balance sheet. In doing so, it provides recommendations for the UK's central governments and acknowledges that whilst reshaping government will be challenging, the potential is there to create a more cost-effective, citizen centred and mission focused public sector by 2020.

The report findings in relation to the NHS – a 100 or so organisation in financial distress

While all of the report's findings and recommendations are relevant to the Department of Health, its non-departmental public bodies and NHS organisations, the report acknowledges that the NHS faces a unique set of challenges, largely due to a growing mismatch between supply and demand for its services.

The report identifies that more than 200 front line public sector organisations in the NHS, local government, police and further education in England could be at risk from financial distress and require intervention; around half being NHS trusts. Indeed, England's NHS ended the financial year 2014-15 with a record deficit of £822 million, driven by a combination of high costs for agency staff, rising patient demand and financial plans that proved inaccurate. Despite exhortations from the centre to reduce spending and tackle the predicted deficit, NHS trusts are already reporting a £930 million overspend in the first three months of 2015-16 alone.

How has the NHS got itself in this position? As previous blog's have discussed, although NHS funding, unlike much of the rest of the public sector, has been ring-fenced, with year on year increases of around 1 per cent; demand has been growing at between four to five per cent a year. As a result, although the NHS managed to largely balance its books for the first five years of the austerity decade, this was only possible by picking all the low hanging fruit –involving pay restraint, controlling spend on consumables and improving procurement. There were also cuts in central budgets and the abolition of some tiers of management.

What's different now, compared to the past five years, is that the NHS is increasingly affected by cuts in social care while facing shortages of key staff groups (GPs, primary/community care nurses, emergency care staff etc) leading to increasing (rather than decreasing) reliance on much more expensive agency staff. There are also a host of other demand and supply challenges, not least the increasing volume and complexity of demand from an ageing population, at one end of the spectrum, and an increase in birth rates at the other, both groups, heavy users of NHS resources. As a result hospitals are caught between a rock and a hard place in trying to meet the requirements of both the financial and quality regulators.

The NHS appears to have all but exhausted its options for becoming more efficient without radical transformation in the way that services are delivered. This will require smarter ways of working, including using new digital technology to improve the efficiency of staff. But this needs time and upfront investment. There is also a need to reduce unwarranted variation in clinical practice and the overuse, underuse, and misuse of different aspects of care. Again difficult to achieve in the short term and will take time undermining the Department of Health's requirement to balance the books by April 2016. Indeed, the NHS will need a significant proportion of the £8billion extra funding promised in the spending review sooner than later.

If the NHS is given the time and space and the upfront investment needed to seize these opportunities then, and only then will its books be balanced. The alternative is to think radically about how services are funded. I have ended this week's blog with some of the quotes from NHS leaders responding to the State of the Sate survey which together with the above, provides a glimmer of optimism that our highly valued NHS services can be should be safe for future generations.

"We need to look at the efficiency of how we deploy the workforce and align supply and demand. It is a struggle to recruit new clinicians and we have to start deploying new roles. For example, rather than asking nurses to work 'harder' we have to train them to work in a different way." 
  - Strategic Director, NHS Foundation Trust

"We've got a legal responsibility to provide primary medical services to the population but it may not be GPs in the future. It may be hospital consultants working more in the community. So there's a whole mind shift needed in the NHS. I don't think the NHS will survive if it tries to carry on being the way it is for the next five years."
 - Chair, NHS Trust

"One challenge is going to be retaining and motivating top quality directors and senior management because it's a fairly thankless job being a director of a hospital trust, and with no money being put in to the system it's going to get increasingly tough."
 - Chair, NHS Trust

"I think that it has worsened. I think that the motivation of staff has significantly deteriorated. They see the NHS as completely focussed on finance, and that wasn't what they signed up for. It really gets to them and annoys them. They see every decision that we make as detrimental."
- Finance Director, NHS Trust

An NHS official described his trust's technology as "not good", adding that "if I had a magic wand, technology is what I'd throw all the money at".

"If I was honest, I think [the main barrier] is the will and the commitment of the people... it is getting the motivation and the culture change."
- NHS Trust Finance Director

"It's a difficult conversation but it's a public one we need, which is: what is the healthcare people really expect us to do for them at different stages in their life?
- Chair, NHS Trust

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.