Richard Douglas, Senior Counsel at Incisive Health and former Director General for Finance, Strategy and the NHS at the Department of Health, reviews the NHS financial accounts and what they mean for the health service.

Accounts day has come around again for the NHS, with the publication of the Department of Health (DH) Resource Accounts, the NHS England (NHSE) Accounts and the consolidated Foundation Trust Accounts.

Although not nearly as confusing, nor as interesting – at least to accounting nerds – as last year’s, what do they tell us about the financial state of the NHS?

The 2016/17 financial plan put together by DH, NHSE and NHS Improvement broadly worked.

First, because unlike last year the DH lived within all of its Treasury financial controls and met its Parliamentary controls without the benefit of a windfall from national insurance or what the head of the National Audit Office referred to as “significant one off accounting adjustments”. This must have led to an audible sigh of relief from inside Richmond House.

The underspend on the key measure of current expenditure was just £55 million or 0.05% of the entire budget. On capital expenditure it was £60 million or 1.3% of the budget. Now you may think this is tight – and it is. But last year the current expenditure control was breached and in the year before the underspend was £1 million, so things have moved in the right direction. The capital underspend was pretty similar to the previous three years.

Second, expenditure was targeted on protecting the front line of day to day hospital delivery. Now bear with me on this because the numbers get complicated.

Current expenditure across the DH increased by 2.1% in cash terms, but NHSE’s current expenditure increased by 4.5% and their expenditure on services by NHS providers (NHS trusts and foundation trusts) increased by 7.3%. How was this possible?

There are two reasons.

The first reason is that financial support for providers was moved from the DH to NHSE. In 2015-16, the provider deficit of £2.5 billion was partly covered by an underspend in the DH of nearly £2 billion. In 2016-17 £1.8 billion of this was transferred to NHS England to create the Sustainability and Transformation Fund (STF). This transfer of responsibility explains about 2% of NHSE’s growth.

The second reason is that both the Department and NHSE constrained spending growth in areas other than NHS hospital provision. For example, commissioner spend on prescribing and pharmaceutical services fell and spending on primary care services increased by just 2%.

The plan for the year worked. But, what do the accounts tell us about financial sustainability for the years to come?

There is clearly some better news than last year. Not only did the Department meet all its financial targets but also the provider deficit fell from £2.5 billion to £0.8 billion and this was covered by an NHSE underspend – so the NHS as a whole delivered in-year balance.

However, although the position has stabilised, there remains a long way to go before the NHS is back on a sustainable footing. Operational performance has slipped further. Capital expenditure has been constrained further. And, despite best efforts, the provider sector is not yet in run rate balance and the reduction in deficit was only delivered after a boost in income through the STF.

Income growth for providers will be significantly less this year and consequently their expenditure will have to grow by much less than the 4% recorded in 2016-17, even though demand and inflation continue to rise. And, performance cannot continue to slide.

So expect another tough year ahead.