NHS scrambles to avoid underspend of ‘billions’ against bumper covid budget

Multiple senior NHS sources have suggested that — despite the additional costs to the service of dealing with the pandemic — it faces recording a substantial underspend from its total resource budget for 2020-21 as set by government, potentially running to “several billions”.

A significant budget surplus for 2020-21 could harm NHS England’s credibility with Treasury officials and provoke concern from other services which might have benefited from extra investment. 

Because of this, the sources said, local finance chiefs are now being encouraged to help mask the surplus using justifiable accounting treatments, for example by being “especially prudent” when estimating future costs.

Trusts holding “embarrassingly” large surpluses

NHSE negotiated around £18bn of additional funding to cope with the coronavirus pandemic in 2020-21, which was separate to almost £60bn made available in other health budgets for spending on measures such as the Test and Trace operation and personal protective equipment. But uncertainty about how long the pandemic would last and how severe it would be has made it harder than usual to forecast and control spending.

In the previous few financial years the NHS has narrowly balanced its books overall, after a decade of funding constraint and with widespread deficits in local NHS providers.

HSJ has spoken to several local finance directors, who asked not to be named, but who have been to meetings or had conversations with NHSE officials in recent weeks.

One said: “Midway through last year, the system was asked to forecast its outturn spending so the Department of Health could agree on budgets.

“Directors of finance assumed massive costs to do both covid care and restoration of normal services [but] you couldn’t do both at the same time because there’s not enough staff or equipment.”

He said this meant many trusts were holding “embarrassingly” large surpluses, which are now being minimised on paper by using various accounting treatments.

He added: “Our credibility with the Treasury would have been shot if we massively underspent against the funding that was agreed, so the only other way was to be prudent on expenditure like annual leave accruals.

“There are likely to be lots of trusts now with massive cash balances but limited surpluses, due to lots of accruals of estimated invoices or commitments.”

Finance directors encouraged to be prudent

Another finance director in a different region said that where in recent years trusts had been encouraged to be “aggressive” with their accounting treatments to help minimise a reported deficit, they were now being encouraged to be “especially prudent” in accounting for provisions.

The second and third waves of covid, through autumn and winter, stymied NHSE’ ambition for trusts to restore their normal elective services. It is unclear how large the potential underspend is, but the local sources suggested it was likely to be “several billions”.

A local finance director said: “We’ve all heard there’s an embarrassingly large underspend for 2020-21, even after this new emphasis on prudence encouraged by the centre.

“I think what we’ll find is people have used their judgment to maximise provisions in a whole host of ways. Julian Kelly [chief finance officer at NHSE] has stressed that everything has to be auditable. But it also wouldn’t surprise me if there were a few finance directors around the country sitting quite uncomfortably as their accounts are looked at.”

Another trust source said: “There is always a degree of subjectivity at the year end and this is influenced by the overall position. The question is whether these judgements exceed professional boundaries — I don’t think we are even close to that happening.”

One way in which accounting prudence has been incentivised has been for NHSE to tell trusts that accruals made in 2020-21 for carried-over annual leave (effectively an increased cost) will not score against their regulated financial performance for the year, and will be largely matched with cash payments. The local sources explained this encourages trusts to maximise their estimations of these future costs, leading to a smaller budget surplus, or underspend for this year.

Comfortable finance position “should not confuse the stark reality”

Sally Gainsbury, senior policy analyst at the Nuffield Trust, said “many of the balance sheet accruals will be entirely appropriate”, and suggested the annual leave accrual could total around £1bn.

She added: “That isn’t just free cash the trusts will have floating around. It will need to pay for cover when the staff do take their entitled carried-over holiday days over the course of 2021-22.

“The apparent comfortable financial position that will be depicted in the final NHS accounts for 2020-21 should not confuse the stark reality the NHS faces if and when it returns to the pre-pandemic funding settlement. It urgently needs bolstering with recurring additional funding rather than the sticking plaster non-recurrent funds so far offered by the Treasury.”

NHS Providers chief executive Chris Hopson said it had been “a difficult year for trust leaders to plan their finances” with the impact of covid on activity volumes, the loss of non-NHS income, infection control measures, and accruing for untaken annual leave.

He added: “It is difficult to know right now what the underlying recurrent financial position is for trusts. But trust leaders tell us they believe it is deteriorating even if the sector records an underspend for 2020-21.”

HSJ approached NHS England for comment about the issue last week, but has not received a response.