CUTTING public spending is the most pressing challenge the Government faces. Right now, we have the biggest budget deficit in the developed world and are accumulating debt fast. Put simply, the British government is borrowing about £18m per hour, every hour, all year long.
But we can't go on like this indefinitely. And the slower the political response to our fiscal crisis is, the more likely a Greek-style meltdown becomes.
Our latest research puts the task facing the Government in stark contrast. To balance the budget by 2015, they need to find more than 90bn in cuts over the course of this Parliament.
That works out at three per cent cuts every year.
And perhaps three per cent doesn't sound like much. After all, many households and businesses have had to make much bigger savings during the downturn. But politics is a tricky business, and we should be under no illusions about how difficult these spending cuts will be to achieve.
Fortunately, there are international examples they can look to. Canada and Sweden have both successfully turned big deficits into surpluses in a short period of time. But one of the main lessons from these
countries is that no area of public spending can be sacrosanct: as soon as you start making exceptions and putting up ring-fences, you undermine the whole process.
In Britain, this applies especially to healthcare. After social security, the NHS is our biggest expense, consuming more than 100bn of taxpayers' money each year. As such, any attempt to dramatically reduce expenditure without looking at the health service is doomed to fail.
It's not just that the NHS costs a lot, it's that its costs have skyrocketed in the last decade, doubling in real terms between 1999 and 2009. Yet over that period, productivity has fallen – in other words, we are getting less for our money.
It was Derek Wanless's 2002 review of the health system that paved the way for these spending increases. But when the King's Fund asked him to review the results several years later, he found that 43 per cent of the extra money had been absorbed by higher wages and price inflation.
This is hardly surprising when you consider that NHS pay increases have outstripped those in the wider economy by 15 per cent in recent years, or contemplate the fact that the number of managers in the NHS has risen by 84 per cent since 1999. We now have over 44,600 of them, earning an average 60,000 each.
So the place to start is payroll costs and bureaucracy. Reform, a think-tank, has calculated that a 10 per cent pay cut for the highest paid NHS workers – bringing their salaries back into line with private sector trends – would save 1.3bn a year.
Freezing salary levels across the NHS until the deficit is dealt with would deliver significant additional savings.
As for the bureaucrats, returning to the number of NHS managers we had in 1999 – a reasonable objective if the coalition Government makes good on its promise to free hospitals from red tape – would cut annual costs by more than 1bn.
Abolishing Strategic Health Authorities would save a few hundred million more.
But this kind of tinkering only takes you so far. Because one of the other lessons we need to learn from Canada and Sweden is that making spending cuts sustainable in the long run means completely re-thinking the role of government, what it does, and how it does it.
When it comes to health, the key question we need to ask is this: can we still afford to provide everyone with comprehensive healthcare, free at the point of use? Or should we focus scarce resources on those most in need, using government as a safety net and guarantor of minimum standards, rather than a provider of universal services?
Our answer will become increasingly important in the years ahead, as baby boomers age and technological advances drive a spiralling burden on taxpayers. And yet, in a way, the question is misleading.
The NHS has not been truly comprehensive and free at the point of use since 1951, when charges were introduced for prescriptions, dental care, and spectacles.
For now, we should take that precedent and run with it, gradually introducing user charges throughout the NHS. Britain is virtually unique in the world for not charging people to visit their GP, for instance, and even a modest fee of 10 would save the NHS around 1.5bn a year.
Direct payment would have a powerful effect on the way people
see the NHS. Realising that healthcare is never really "free" would make them use services more judiciously; knowing they would bear some
of the cost of their lifestyle choices might also encourage people to
take greater responsibility for their own health.
Eventually, most medical services could be paid for directly by patients, with various exemptions and spending caps in place to ensure that the disadvantaged do not suffer unfairly. The NHS would become a "people's insurance policy", covering Britons against unpredictable, big-ticket health expenses, and ensuring no one went without, but no longer providing comprehensive services itself.
Of course, there's no question that these are radical suggestions. But the Government has promised us a "once-in-a-generation" re-think of government. Will it be brave enough to think the unthinkable?
Tom Clougherty is Executive Director of the Adam Smith Institute, a leading think-tank which published a major reprot yesterday entitled The Party is Over – A Blueprint for Fiscal Stability.
A consultant's prescription
A leading Yorkshire hospital consultant offers his diagnosis.
"The Government could simply put a stop to many of the private sector initiatives which has seen good money thrown after bad for the past five years.
"The NHS pays these firms to perform health procedures. They then mess up so the patient has to come back into the NHS for further treatment.
"It's the same with PFI. It was used by Gordon Brown to build new hospitals and balance the books – but we will be still paying for it in 20 years' time.
"It's these examples where good money is being thrown away that need to be stopped. The total will run into the billions."
What the Coalition agreement says: "We will guarantee health spending increases in real terms in each year of the Parliament.
"We will cut the cost of NHS administration by a third and transfer resources to support doctors and nurses on the front line."