Is world-leading NHS healthcare an affordable proposition?

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Re-posted with kind permission from Progressive Pulse 14th October 2014

Authors:

David Laws, Consultant Anaesthetist, City Hospitals Sunderland NHS Foundation Trust, Sunderland, Tyne & Wear, SR4 7TP

Professor Charles S. Adams, Department of Physics, Durham University, Durham, DH1 3LE

Introduction:

The unquestioned assertion that a highly developed currency-issuing nation cannot afford high quality healthcare [1] is based upon a set of inter-related and almost universally-held false assumptions:
  • Money is in limited supply (as there is no ‘magic money tree’).
  • Taxes fund government spending.
  • Private banks lend out pre-existing savings.
  • NHS spending is a burden on the economy rather than a boost to the economy.

 

1) Money is created ‘out of nothing’ on bank computers

In 1973 the Bretton-Woods international exchange rate system, where currencies were ultimately pegged to the price of gold, was formally ended. Since that time we have used an international fiat monetary system where the value of each currency is determined by the workings of international financial markets. Fiat (Latin: ‘let it be made’) money is created from nothing on the basis of a promise – a promise to deliver goods or services in the future. Only if we believe in these promises and the systems that support them, does money have value.

The following description of the monetary system and its components is highly schematic to aid elucidation of the underlying principles. Money is created either when the government spends or when a bank makes a loan.[2] We can think of government spending and bank loans as the beginning of two interconnected money circuits. The government and bank circuits form the duopoly of money creation, rather like the pulmonary and systemic circulations of the cardiovascular system only in this case the circuits work in parallel. Both circuits are supported by the central bank which creates a unique type of money held within the bank known as electronic reserves (Figure 1). To extend the analogy of the cardiovascular system, the central bank is akin to the heart, individual bank accounts would be equivalent to the capillaries and the wider economy would be the working cells of the body.

The two monetary circuits commingle through banking transactions so bank money and government money become indistinguishable to bank account users. After money is created it flows through the economy and eventually returns to the issuer.

 

Figure 1: Schematic diagram of the monetary system of a sovereign nation. Bank account users cannot distinguish the origin of their deposits.
.

 

2) The government money circuit – taxation removes money from the system

In the government circuit, money is spent into the economy and is effectively cancelled when it returns to the government via the payment of taxes. The collection of taxes is not a prerequisite for government spending as many people assume, but exists at the end of the government money cycle when taxes removed prevent too much money being created. Taxation mainly helps to control inflation and alter peoples’ behaviour in a way that should be beneficial to all. The net result of deficit spending is to leave savings in the form of Government Bonds in the hands of the private sector (Figure 2).

Figure 2: The government spend and tax circuit with a deficit. The difference between spend and tax equals private sector saving and is known as the deficit.

 

Conversely a government surplus (where taxation exceeds spending) would destroy these savings. The superficially sensible idea of running a balanced government budget simply prevents saving in the private sector. This is illustrated in models a) and b) within Figure 3. In a) the government injects money via a fiscal stimulus in year zero. Taxation means that over time all this money is returned. In b) the public choose to save a fraction of their income which leads to the deficit. Savings simply delay the return of money in the circuit. In other words, the private sector is only able to save money because the government supports this activity by running a deficit. The government circuit is leaky by design. For example, people are encouraged through tax breaks to save for their future (e.g. pensions & ISAs). Therefore, the national debt is not what we currently owe but what we currently own.

Figure 3: (a) model which shows that after government spend (fiscal stimulus) if people do not save then all the money comes back as tax, whereas if people save this leads to the deficit (b).

 

3) The private bank money circuit – banks create credit and don’t lend out savings

Most of our money is created in the form of bank loans (credit). When a loan agreement is signed the bank creates a new bank deposit to the value of the loan in the borrower’s bank account. Money is returned to the bank by the repayment of the loan plus interest (Figure 4). Similar to government spending, bank lending influences private sector behaviour but the allocation of money creation is not democratically controlled. The primary purpose of bank lending is to enable individuals and businesses to function and to generate profits for bank shareholders, both over the short and long-term.

Figure 4: The bank circuit where loans concurrently create bank customer deposits and private debt leading to bank profits.

 

Banks must have a licence issued by the government to create money in this manner and aspects of their activities are regulated. However there are no formal economic, social or environmental responsibilities associated with the creation and allocation of bank credit despite the significant influence these decisions have over our lives. Bank credit creation is predominantly distributed towards land (property) and financial asset speculation which dwarfs their support for entrepreneurship. The majority of UK small businesses are actually self-financing.[3]

As the proportion of unproductive private debt increases in an economy a correspondingly increasing proportion of economic output is directed towards servicing this interest-bearing debt. Consequently the private bank money circuit tends to be inherently destabilizing as it drives assets towards the already wealthy making the economy increasingly fragile.

What are the outcomes when the two circuits combine?

If all the money was returned to the issuers the quantity of money would go back to zero (the balanced budget illustrated in Figure 3a). In practice the rate of new money creation is usually higher than the rate of money cancellation and the total amount of money in the economy grows over time to support economic growth (Figure 5). Ideally growth in the money supply should match the growth in economic activity, such that prices remain roughly stable and we maintain confidence in the value of our currency unit. Control of the rate of money creation and destruction in the government and banking circuits are known fiscal and monetary policy, respectively.

Figure 5: UK Money (M4) Supply 1987 – 2017. Source: Bank of England.

 

The money supply increased significantly in the decades prior to the Global Financial Crisis (circa. 2007) primarily through bank credit expansion. In contrast, between 2009 and 2014 net credit was negative.[3] As bank credit creation wavered from 2008 onwards, government deficits rose to prevent a deflationary depression. The actual sector balance data for the UK is shown in Figure 6 and there is similarity with the simple model we presented in Figure 3. Note that the rest of the world is a net saver of UK money (these savings have to be spent in the UK ultimately). Note also that when these three sectors combine, the balance is near zero as this is nothing more than an accounting identity.

Figure 6: UK sectoral balances data from the ONS. The inverse correlation between Private and Public sectoral balances. Private sector savings mirror the public sector deficit as illustrated by the model in Figure 3.

 

Why two circuits?

Why do we need this duopoly of both a government circuit and a banking circuit? Why do we need both fiscal and monetary policy? As money is a collective good, should we transfer all money creation powers to government and demote private banks to the role of intermediaries as some propose? Or could we hand over all money creation to private banks as free-market fundamentalists would prefer?

Put simply, the commercial bank circuit serves private needs while the government circuit serves collective needs. The bank circuit exists to serve individuals and ‘capitalism’, while the government circuit exists to deliver on democratically controlled promises.

Economists often call our collective interests public goods. The failure of the private interest bank circuit to provide public goods is easy to understand by exploring healthcare. The market solution is to cater for the patient offering to pay the most. Even worse, the market may deliberately create a scarcity in order to charge a higher price. A market cannot operate effectively in matters of life and death. Kenneth Arrow a highly-respected pioneer of neoclassical economics and winner of the Nobel Prize in Economics in 1972 wrote ‘the laissez-faire solution for medicine is intolerable’.[4] In situations where competition is not viable, where demand is unlimited like health, and supply delivers societal benefits, then collective democratic control is the optimal solution. The House of Lords Select Committee on the Long-term Sustainability of the NHS report in April 2017 reaffirmed that the principal method of funding the NHS should be via government spending.[5]

What has gone wrong?

The art of economic management is to balance fiscal and monetary policy. An over dependence of one or other is doomed in the long term. The core failure over recent history lies in the inability of politicians and central bankers to regulate the banks and to use fiscal policy appropriately. There now exists UK Department of Health data to support the assertion that government austerity may be the primary underlying cause for the deterioration of health inequality measures in England.[6]

‘In her present condition, Great Britain resembles one those unwholesome bodies in which some of the vital parts are overgrown…and through which an unnatural proportion of the industry and commerce of the country has been forced to circulate, (which) is very likely to bring on the most dangerous disorder upon the whole body politick’. When one considers the unhealthy dominance of the financial sector within the UK and global economy today, it may be surprising to discover that Adam Smith wrote these prescient words in the Wealth of Nations over two hundred and forty years ago.[7]

In a similar vein, using central bank monetary policy alone to rescue the global economy has been misguided. In 1969, the world-famous economist, Milton Friedman said ‘The available evidence . . . casts grave doubts on the possibility of producing any fine adjustments in economic activity by fine adjustments in monetary policy’.[8] More recently, Mark Carney, the Governor of the Bank of England, reinforced this point in his ‘The Spectre of Monetarism’ speech published in December 2016 where he stresses that monetary policy needs to be in ‘better balance with fiscal and structural policies’. [9] The sudden change to no money growth after 2010 in Figure 5 is evidence of the complete failings of recent monetary and fiscal policy.

 

4) NHS spending boosts the wider economy in excess of the money spent

Fiscal policy is very powerful but needs to be carefully managed. The NHS was conceived and built in times of high national debt. This could occur because creation of money is not an inherent constraint. Thanks to the government spend and tax circuit, the NHS nurse, doctor, physiotherapist or pharmacist need not cost anything as long as (they serve a useful purpose and) the money spent on them is also spent. In fact, it is more likely that society will profit through ‘crowding in’ more economic activity through NHS employees’ subsequent spending and a healthier public.

It is estimated that the fiscal multiplier for UK healthcare spending currently lies between 2.5 and 6.1. This means for every £1 spent on the NHS approximately £4 of economic activity results.[10] If you had a cash-back card that gave you £4 back for every £1 spent, you would not cut back on your spending! Only when we reach a position of over supply when NHS staff wait forlornly for patients to present do we reach a point where the multiplier falls to below one. We are, at present, an unsafe distance from a workforce oversupply scenario.

As a sovereign nation, the UK can always afford high quality universal NHS healthcare. Money is essentially an accounting system designed to facilitate our collective activities and development. Fiscal policy needs to be activated to meet the needs of our society as there is now observable failure of the prevailing reliance on monetary policy and preservation of rent-seeking private interests. It is evidently wrong to assert that healthcare access and quality is limited by the availability of money. The constraint, in truth, has never been the potential availability of money, but the desire to resource the NHS appropriately. In the words of John Maynard Keynes, ‘Anything we can actually do we can afford’. [11]

References

[1] Department of Health annual report and accounts 2016 to 2017 https://www.gov.uk/government/publications/department-of-health-annual-report-and-accounts-2016-to-2017 (accessed August 2017)

[2] Money Creation in the Modern Economy. Bank of England Spring Bulletin 2014

http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf (accessed August 2017)

[3] Bank of England interactive database

http://www.bankofengland.co.uk/boeapps/iadb/newintermed.asp (accessed August 2017)

[4] Uncertainty and the Welfare economics of medical care. Kenneth J. Arrow. The American Economic Review December 1963. http://www.who.int/bulletin/volumes/82/2/PHCBP.pdf(accessed August 2017)

[5] House of Lords Select Committee on the Long-term Sustainability of the NHS. The Long-term Sustainability of the NHS and Adult Social Care Report Published 5th April 2017. p44. https://publications.parliament.uk/pa/ld201617/ldselect/ldnhssus/151/151.pdf (accessed August 2017)

[6] David Buck, King’s Fund  https://www.kingsfund.org.uk/blog/2017/08/reducing-inequalities-health-towards-brave-old-world (accessed August 2017)

[7] Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations. p468-9. Edited by S. M. Soares. MetaLibri Digital Library, 29th May 2007 (accessed August 2017)

[8] Milton Friedman and Walter W. Heller, Monetary vs. Fiscal Policy, W. W. Norton and Company Inc., New York 1969.

[9] ‘The Spectre of Monetarism’. Speech by The Governor of the Bank of England. December 2016. http://www.bankofengland.co.uk/publications/Documents/speeches/2016/speech946.pdf (accessed August 2017)

[10] Does investment in the health sector promote or inhibit economic growth? Aaron Reeves et al. Globalization and Health 2013. https://doi.org/10.1186/1744-8603-9-43

[11] The Collected Writings of John Maynard Keynes. Vol. 27 p270. Activities 1940–1946: Shaping the Post- War World: Employment and Commodities ISBN 978-1-107-65156-2

If I were Chancellor …. My Health of the Nation Autumn Statement (part 1)

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If I were Chancellor…Part 1 of my Autumn Statement

First posted 5.12.2013 by tantalusredux at Stuck Between the Democratic Deficit and the Abuse of Power

INTRODUCTION

Over the past several decades, successive Budgets and Statements have become a rather monotonous charade in which a pre-set agenda is tweaked at the margins.  Will the tax on beer and spirits be raised above inflation?  Will corporation taxes be raised or lowered?  Each year there is a guessing game as to the ‘main event’, this year stamp duty is number 1 in the charts, as the pressure is apparently on to make the housing ladder more accessible without stoking another property bubble.  Afterwards there will be an analysis of ‘winners and losers’ in the media.

Every Budget has an issue on which it is ostensibly focused, this year being about ‘Living Standards’.  Since every Budget raises and lowers the relative affordability of everything then every Budget is, in fact, about living standards.  Affordability issues are perhaps rather more pertinent this year as the Chancellor has outlined his concerns about the affordability of the Welfare State.

I believe it is time for a new kind of Budget.  A Budget that not only addresses the underlying malaise of the country, but which seeks to address it in a more fundamental manner than 2p on a pint of beer or a reduction of stamp duty ever could.  A Budget is also a manifesto, a statement of intent.  And so I present to you for consideration my ‘Health of the Nation’ Budget.

Why call a Budget on matters fiscal ‘Health of the Nation’?  Health and wealth are closely bound and a Budget which ignores this reality has a hollow core.  A Budget is a time to reflect on the values of a nation and to ensure that the Common Wealth; that amalgamation of income, purchase and corporate taxes collected for the Common Good; is spent in a way which enables a healthy, equitable, just and dynamic society to prosper.

Part 1: HEALTH

The Problem:

In order to speak with authority and clarity about the health of the nation, we do need to examine its financial basis.  At its foundation, the principle per se of a National Health Service was welcomed overwhelmingly by the people of this country.  They had lived through times of war and great hardship frequently made intolerable by ill health.  Doctors had to be paid for and only those in relatively steady employment could afford insurance.  To know that from the cradle to the grave anyone could see a doctor without fear of the ‘collector’ at the door come to get payment was, in 1948, a relief it is hard to imagine in 2013.  And yet one issue we now face is whether we should decide that the NHS is no longer affordable on a free to all at the point of delivery for all services basis.  Should it be the case in the more affluent 21st century that those who can pay should pay from their own pocket, leaving the State to pay the bill only for those in reduced circumstances?

We must look at the truth behind some of the figures then and now and ask: what is a reasonable approach to the very real financial crises being faced by some Hospital Trusts and to the general funding of the Health Service.  Much has been made of the size of the National Debt but it is not a ‘crisis’ in itself, as the borrowing rates are long term and low and the bonds issued by the Government are safe investments for pension funds, for example. In other words our National Debt is of benefit to the economy. This makes it fundamentally different from private household debt.

The Background

Looking at these problems of debt and deficits is not a distraction from the issue of the NHS and the Hospital Trusts in financial difficulty.  It is crucial to forming a decision about the spending plans in relation to that service and others.  Overall, since 1945, the economy has grown at an average rate of roughly 2.6% a year (ONS figures).  This is relatively consistent regardless of who is in Government.  Between 1948 and 1973 there were a few monthly contractions, but not significant enough to create an annual downturn.  It is worth noting that the ‘3 day week’ in January to March 1974 caused very little contraction in the economy and was followed by rapid recovery.
There have been downturns approximately once a decade since the 1970s, with the banking and financial sector crash of 2008 being the worst. It has also taken approximately 3 times longer for the economy to recover from that than from previous downturns.

These figures appear to suggest that our state expenditure may well be constrained by present economic circumstances.  But they do not give the whole picture.  In 1945, at the birth of the Welfare State, the National Debt was 215% of the country’s GDP.  This enormous debt did not stop the government of the day investing in a massive spending programme, building publicly owned housing, investing in infrastructure, including the national railways, and creating the NHS. With the aims of universality, equality, accessibility, the highest standards of care, and a system of payment free at the point of delivery to the patient, funded through the general tax contributions of all, the NHS sits as the foundation stone on which Britain was rebuilt in the post war years.  This expansive programme of state funded works did not expand the National Debt in the way one might have predicted. It increased slightly in 1946 and 1947 then fell steadily until 1992. Since then it has fluctuated in the 30 and 40% range until the 2008 banking and financial sector crisis.

The consequence of the banking bailout, that was agreed across all parties and which followed the 2008 crisis, is an increase in the National Debt as a percentage of GDP.  It is currently over 50% and is expected to rise over the next few years, for the first time since 1961, to over 100%.

This bears repeating.  A destroyed and exhausted post war Britain, with a National Debt of 215% rebuilt the country with public funding AND reduced the debt.  A country brought to the brink of disaster by the banking sector bailed it out with public funding and the debt RISES while the social security network built 65 years ago has had its funding systematically reduced.  What is the fundamental difference and how does it influence our current spending decisions?

Between 1945 and 1979, there was a broad political framework common to all political parties known as the ‘post war consensus’.  The guiding principles of this consensus included the idea that it was in the interest of the country as a whole that certain infrastructure organisations were best held in the common good.  These were seen as ‘natural monopolies’.  They included transport links (road, rail and airports), communications (telephony, postal service) health (NHS) and utilities (gas, electricity, water).  The economy contains a mix of private, public and voluntary sector organisations: all of these contribute to and benefit from publicly funded infrastructure.  A second tier to this framework was the belief that full employment was a proper objective of government, but that a social security net was crucial to prevent periods of unemployment reducing people to destitution.

Since 1979 successive governments have worked within a different political framework, known variously as neo-liberal, monetarist, or free market economics.  The guiding principles of this framework are that on the one hand the market is the best regulator of supply and demand and that the process of competition provides the best balance of price and quality, and on the other that the role of the state in the marketplace should be limited.  ‘Natural monopolies’ do not exist in this economic model and therefore the liberalisation agenda included selling some state assets into the private sector (some transport, all utilities, all communications) and sectioning off parts of the NHS to create private service providers.  This latter action has fundamentally redefined the principles of the NHS, leaving for the moment one core principle that the services provided are free at the point of delivery and funded by central taxation.  This excludes those NHS services which are already paid for at the point of delivery, dentists, opticians, prescription medicines.

There is, however, a significant debt which is absent from the nation’s balance sheet.  Since 1992 loans in the form of Private Finance Initiatives (PFI) have been used as a way of allowing money to be raised for public expenditure by different governments without that expenditure appearing as a debt.  These loans have come in various guises, but essentially they have been delivered from a politically almost universally accepted standpoint that the private sector is better at management than the public sector.  The truth is more likely that the public sector has different management criteria than the private sector.  These loans are extremely expensive.  By 2011 the NHS owed £121.4 billion for infrastructure which was valued at £52.9 billion, and as PFI repayments are rising at approximately 18% a year this figure will continue to escalate.  Because these repayments are being made from NHS annual budgets, rather than from capital, they are diverting money from front line services.  Before PFI when budget restraint was imposed on the NHS the costs of maintenance and renovation of buildings would have been a lower priority than patient care.

The Proposal

Given that the focus of this Budget is the health of the nation and that health is better served by patient care than by buildings maintenance the first spending priority must be to recapitalise the infrastructure costs of the NHS and to cancel all existing PFI debt.  These financial arrangements have largely been the product of successive mechanisms to divert public monies into private profit.  It should be unthinkable that private capital should benefit at the cost of patient care when the service in question is the health of the nation.

What then of more general funding issues affecting the NHS?  The cost of the NHS as a percentage of GDP is increasing.  Until 1992 it had never exceeded 5%.  Early costs did not include health centres, health visitors, ambulances, vaccination and other services which were in the remit of local authorities and only transferred to central government in 1974.  Since 1992 PFI agreements have been in place and growing in terms of their cost to the service.  It was also around this time that the market principle of a purchaser/provider split in the service was implemented, leading to an increase in administration costs.  All fragmentations of the service and reorganisations carry substantial administration costs.  By 2010/11 the cost of the NHS had climbed to 8.2% of our annual expenditure.  Of course modern developments in healthcare are far more costly than the treatments available 65 or even 15 years ago, but it is also true that the NHS is now subjected to more non-core activities and costs than prior to 1992.  The current privatisation agenda, involving further fragmentation of services and complex tendering processes focus resources away from patient care.

We cannot ignore the relationship between private funding, fragmenting services and private provision and the overall growing cost to the NHS.  These issues have added more to the cost of the service than all the additional responsibilities which were transferred to it from local government in 1974.  To pretend otherwise will lead to further chaos within the service.

These issues are the reason this Budget has addressed historical changes of service and finance in the NHS.  Budgets and Governments are notoriously short term in their objectives.  History is used as a means to score points off the opposition and future goals are limited by the horizon of a General Election.  In addressing issues of Health the political process needs to be more grown up.  If we allow perceived short term financial constraints to control far reaching decisions about who can access services, when the evidence indicates political rather than service driven financial problems then future generations suffering ill health and unable to afford a doctor, repeating the experiences of families pre-1945, will curse us and rightly so.

Therefore the recommendation on revenue funding for the NHS must be to maintain it at current levels for the current period and to focus activity on restoring the service to full public ownership.  Removing competition will reduce costs significantly and enable a proper audit of resource allocations to be made in future Budgets.  With so many cost streams currently not accountable to Parliament it is not possible to properly forecast service provision.  To announce further budget changes with such a range of variables and a service under such pressure would be irresponsible in the extreme.