The Scottish NHS – more financially secure outside the UK?

Published: 11 September 2014

Paul Johnson and David Phillips of the Institute for Fiscal Studies ask whether the Scottish NHS is more financially secure within or outwith the union.

The future of the welfare state, and particularly of the NHS, has taken centre stage in the Scottish independence debate in recent days. Scotland’s Deputy First Minister Nicola Sturgeon has said that a 'Yes' to independence would free the Scottish NHS from an agenda of privatisation and public spending cuts. On the contrary, say the 'No' campaign: an independent Scotland’s precarious government finances would mean a need for 'austerity plus' that would put NHS funding at risk. Gordon Brown has said he wants to 'Nail the NHS lie' of the 'Yes' campaign.

Given this political rhetoric, there is a clear need for some impartial analysis. So, in this observation we try to set out some of the facts on both recent changes in NHS spending in England and Scotland, and the prospects for the future whether Scotland is in or out of the Union.

First some facts about what we know has happened in recent years:

1. Health is already a devolved matter – that is health policy and funding is the responsibility of the Scottish Government. This means the Scottish NHS does not have to make more use of private sector providers just because the English NHS is (and indeed, it hasn’t been). And the Scottish government decides how much money to allocate to the Scottish NHS from the overall block grant it receives from Westminster. To a significant extent then, the future of the Scottish NHS is already in Scottish hands.

2. Between 2009-10 and 2015-16 spending on the NHS in England will, on currently announced plans, have risen by about 4% in real terms despite an overall fall of 13% in English departmental spending.

3. Over the same period the vagaries of the Barnett formula mean that Scotland will have had to cut overall public service spending by less – by about 8% rather than 13%. But the Scottish government has chosen to protect the NHS in Scotland slightly less than it has been protected in England. Spending on the NHS in Scotland has fallen by 1%.

4. Analysis we published last year shows this is not a new pattern. Between 2002–03 and 2009–10 – years of plenty for public services rather than cuts – real-terms health spending per person grew by 29% in Scotland compared with a 43% increase across the UK as a whole. This was despite overall public service spending per person growing by a very similar amount in Scotland (26%) and the UK as a whole (28%).

So it seems that historically, at least, Scottish Governments in Holyrood have placed less priority on funding the NHS in Scotland (and more on funding other services) than governments in Westminster have for England.

Notes: 'English' Departments are defined as those where the bulk of that department’s work is devolved to the Scottish Government. English departmental spend includes Departmental Expenditure Limits (DEL) only, with the exception of the Department for Communities and Local Government where an adjustment has been made to account for the localisation of council tax benefit and business rates. Scotland spend includes the Scotland DEL (i.e. the block grant) and business rates revenues. Business rates revenues are added to the Scottish DEL to ensure greater comparability with figures for “English” departments (business rates revenues are counted as part of English DEL but as a separate item for Scotland). Ignoring Scottish Business rates revenues, Scotland’s block grant on its own is set to fall by about 10.5% in real terms.  

That is the past though. What about the future?

1. If Scotland remains part of the UK, the Scottish Government is likely to face continued cuts to its block grant until 2018–19 as the UK government continues with its efforts to eliminate the budget deficit (although again, the Barnett formula will mean those cuts are smaller for Scotland than for England). Further cuts in overall budgets will make it harder for both the Scottish and UK governments to continue to protect NHS spending – the cuts to other unprotected areas would need to be very large. But without such protection, managing the rising demand for and costs of health care would likely be difficult indeed.

2. A devolved Scottish Government could use the powers it will acquire under the Scotland Act to increase taxes to give it more money to spend. If it were to increase the Scottish rate of income tax by 1%, for instance, it would raise around £400 - £450 million a year. This would be enough to boost health spending by around 4%.

3. Independence would give the Scottish government more freedom to set spending and tax policies. It would also, in principle, have more freedom to borrow. That freedom would be constrained by the size of the debt it would likely inherit and the willingness of markets to lend. On most plausible scenarios it is hard to see how an independent Scotland could “end austerity” in the short run. In work published this summer we showed how, on the basis of the independent OBR’s oil forecasts, an independent Scotland would likely still have a deficit of 2.9% of GDP (borrowing of about £800 per person in today’s terms) by 2018-19 even if it followed current UK government tax and spending plans – plans that are forecast to lead to the UK as a whole actually having a small budget surplus by the same year. In this case an independent Scotland would need to implement bigger spending cuts (or more tax rises) than the UK as a whole or try to borrow more. This means it would likely be harder rather than easier to protect the NHS.

The Scottish Government is more optimistic about oil revenues than the OBR – hoping for £7 billion in 2016–17, instead of the £3 billion forecast by the OBR. It says this will allow it avoid further cuts to public spending after 2016–17, which could mean more money for the NHS, among other things. But in fact even with oil revenues at £7 billion a year, the Scottish government’s budget position would still be if anything slightly weaker than that forecast for the UK as a whole. If these more optimistic forecasts prove correct an independent Scotland would still need to borrow more or tax more than the rest of the UK if it wanted to increase spending on the NHS while protecting other services. It already has the power to tax more or divert resources from other spending areas. A new country inheriting a substantial debt might not find relying on additional borrowing either easy or conducive to longer run fiscal stability.

And of course, while oil revenues could turn out to be higher than forecast (as the Scottish government hope) they could also turn out to be lower than forecast.

In the short term, then, it is hard to see how independence could allow Scotland to spend more on the NHS than would be possible within a Union where it will have significant tax raising powers and considerable say over spending priorities. Previous IFS work on the longer-term outlook for an independent Scotland’s finances suggests that under a wide range of scenarios, a combination of the eventual fall in oil revenues and an ageing population could make for a tougher fiscal outlook for Scotland than the rest of the UK and hence less room for additional spending on things like the NHS. Faster economic growth in an independent Scotland would help square all these circles and allow more spending. It is possible that might happen and the Scottish Government says independence would give it the tools to do that. But such faster growth is not certain, by any means.