Wages, Baumol and the NHS budget

It’s a standard claim over to the left of us that the National Health Service requires a 4% real increase in budget each and every year. This is just to stand still, d’ye see? This is because of Baumol’s Cost Disease. Wages rise according to changes in average productivity, it’s easier to increase productivity in manufacturing therefore services, as a country gets richer, rise in price relative to manufactures. The labour embedded in each rises in price along with that increased richness of the country - that’s what it actually means, higher wages are getting richer, getting richer means higher wages - but the services are not reducing their labour content as much as the manufactures are.

One advantage of this argument is that it is indeed true. A disadvantage of it is that it just shrugs and assumes that we’ll never be able to improve productivity in services and thus, inevitably, the NHS will swallow the entire economy. As we’ve noted before the other half of Baumol is that competition in markets improves productivity - yea, even in services - better than planning within a monopoly. Therefore Baumol both says that the NHS will get more expensive and also that the way to moderate this is to drop the National part.

So far so well known. Except. We’ve a fairly large amount of shouting going on that wages have not, in fact, risen very much these past 16 or 18 years. Thus the NHS has not required that 4% increase all these years. But the shouting still has been that it must and that real - after inflation - budget has certainly risen considerably. The 2008 budget was £96 billion, that would be £161b with inflation, the actual budget this year is £215b. Which is a 33% real rise over the period. Or from the starting number, 56%.

Which does leave us with that interesting little problem, doesn’t it? We could say that wages have indeed risen and that’s impacted on the NHS and that would make the argument add up at least. Except it would negate much of the complaining about wages of course. Or we can stick with wages haven’t risen in which case why is the NHS shrieking for ever more money when it’s had that substantial real increase in funding without facing those Baumol wage costs?

We’d suggest getting shot of the National part ourselves but other solutions to the above logic are welcome.

Tim Worstall