Rachel Reeves has been warned that a deepening NHS productivity crisis could blow a £20bn hole in the UK’s public finances, threatening the Chancellor’s ability to meet her fiscal rules and forcing difficult choices on tax and spending.
According to a new report by the Centre for Policy Studies, failure by the health service to meet government productivity targets would leave borrowing far higher than currently forecast and could require tax rises equivalent to a 2p increase in the basic rate of income tax.
Productivity Targets at Risk
The government has set the NHS a target of increasing productivity by 2% a year by the end of the current parliament, viewing efficiency gains as central to funding improvements without raising taxes. However, years of sluggish performance mean the health service is still struggling to recover output lost during the Covid pandemic.
The review, authored by Lord Redwood, a former Conservative cabinet minister, warns that if NHS output does not return to pre-pandemic levels by 2028–29, public borrowing would be £20bn higher than current projections.
Sluggish Output Despite Rising Spending
The NHS is the largest employer in the UK, with around 1.5 million staff, meaning even modest improvements in productivity could have a significant impact on the wider economy. Yet Lord Redwood said productivity has continued to lag despite successive years of rising health budgets and major recruitment drives.
“There’s been a substantial recruitment of staff, but there hasn’t been a meaningful increase in output in order to prevent a fall in productivity,” he said, warning that this trend risks undermining the government’s wider economic plans.
Pandemic Impact Still Lingering
During the pandemic, NHS productivity fell sharply as routine appointments and elective procedures were cancelled or delayed. Official figures show that the service has yet to fully recover. In 2024, NHS productivity remained around 8% below its 2019 level, despite record funding allocations.
Lord Redwood said the prolonged slump was particularly concerning given the scale of investment in digital systems and new technology across the public sector.
Technology and AI Under Scrutiny
Over the past 25 years, billions of pounds have been spent on NHS computer systems designed to reduce administrative burdens and replace manual processes. However, the report argues that many of the expected efficiency gains have failed to materialise.
“We haven’t captured all the gains, or in some cases any of the gains, from the last 25 years of spending money on perfectly good computer systems,” Lord Redwood said. He warned that future public investment in artificial intelligence must be clearly linked to measurable improvements in efficiency.
Government Push to Cut Bureaucracy
Health Secretary Wes Streeting has made boosting NHS productivity a central priority, pledging to cut bureaucracy and improve frontline delivery. Last year, he announced plans to abolish NHS England, described as the world’s largest quango, and return greater control of the service to ministers in an effort to reduce duplication and administrative costs.
However, Lord Redwood said more fundamental reforms are still required to improve public sector efficiency.
Calls for Better Management and Oversight
“The Government is overstocked, it has too much property, it often has too many staff with the wrong jobs to do,” Lord Redwood said. He argued that significant savings could be achieved without compulsory redundancies by improving how resources are deployed.
“There are billions of pounds of savings to be made in the public sector without unfair demands on staff,” he said, adding that stronger managerial and ministerial oversight of the NHS is essential.
Staff Turnover and Efficiency
The report also highlights frequent staff movement within public services as a drag on productivity. Keeping employees in roles for longer, it argues, would allow skills and experience to develop more fully.
“Moving staff around all the time is a very bad idea,” Lord Redwood said. “As soon as they start to get good at a job, they’re moved up and sent on to something else.”
A Long-Running UK Productivity Problem
The NHS challenge sits within a broader UK productivity slowdown that has persisted for more than 15 years. Since the 2008 financial crisis, average annual productivity growth has been just 0.4%, compared with 2.1% in the decades before.
The Centre for Policy Studies estimates that if productivity returned to pre-pandemic levels, the public sector would be around 5.7% more efficient than it is today, easing pressure on public finances.
Government Response
A government spokesperson said ministers were already driving efficiency improvements across Whitehall.
“Taxpayers’ money must be spent wisely,” the spokesperson said. “That’s why we are expecting all government departments to deliver nearly £14bn of efficiencies.”
The spokesperson added that NHS productivity rose by 2.6% in the first half of this year and that waiting lists had fallen by 312,000 since July 2024, suggesting early signs of progress.