Why Deteriorating Healthcare Is A Macroeconomic Issue

By Simon Wren-Lewis, May 2, 2023

Simon Wren-Lewis is Emeritus Professor of Economics and Fellow of Merton College, University of Oxford.

“Healthy People, Prosperous Lives” is the first interim report of the IPPR’s Commission on Health and Prosperity. (I am a member of the Commission, but not an author of this report.) This analysis could not have come at a more topical moment, as suspicion mounts that there may be a link between the worsening state of our health services and the dire state of our economy. This report uses research to quantify that link.

Let me start by looking at the contraction of labour supply since the pandemic that has persisted in the UK, while in other countries it has largely or completely disappeared. This chart is taken from an earlier FT article by John Burn-Murdoch.

There has been some debate about whether this deterioration in UK labour supply is a result of poor UK health outcomes, or whether it represents a post-pandemic increase in early retirement. As the report points out, early retirement may well be the result of poor health. The chart below looks at pre-pandemic exits from employment following the onset of chronic or mental ill health. Among those under 50, the most common outcome is unemployment, but for all ages the most common result is retirement. So retirement since the pandemic may in part reflect the consequences of ill-health.

UK relative economic decline did not start after the pandemic. As my comparison with the US showed, GDP per capita grew at similar rates in both countries from 1955 to 1990. In the 90s and 2000’s UK GDP per capita grew more rapidly in the UK than the US. Some of this may have been due to an expansion in the UK financial sector that came to an end with the Global Financial Crisis, but another important factor could have been service sector growth as a result of the EU’s Single Market. Towards the end of the 2010s, however, US growth catches up with the UK, and overtakes it during and after the pandemic. Between 2010 and 2021, US GDP per capita grew by 16%, but UK GDP per capita grew by only 8.3%.

There is no doubt that there are many reasons for this reversal of fortunes for the UK relative to other economies since 2010, with Brexit being the most obvious. However poor health caused by a deterioration in healthcare could also have been an important factor. The IPPR report looks at the impact of poor health from the bottom up, by calculating the earnings lost as a result of the onset of chronic illness or mental illness. The main reason for earnings loss is employment exit. In addition, the research suggests that the onset of either form of illness on a household member has a large impact on the earnings of other members of the household.

The report estimates that those that became chronically or mentally ill between 2015 and 2021 led to a reduction in GDP of about 2% in 2021. Of course how much of that could have been prevented as a result of better health provision is unknown, but it does suggest that a steady or sharp deterioration in health provision will have noticeable consequences on the performance of the aggregate economy. As these two charts shows, in the UK we have had both a steady (from 2010) and then a sharp deterioration (since the pandemic) in health provision, with over 7 million people currently waiting for treatment.

Not only will this deterioration in health provision have had a significant impact on the overall prosperity of those in the UK, it also increases regional inequalities. The report shows that because chronic and mental health problems are greater in regions other than the South East England, any improvement in health provision is likely to reduce regional economic inequalities.

One final chart on waiting lists, from John-Burn Murdoch at the FT, illustrates the clear correlation between how well the NHS is performing and the party in power.

Health provision gets worse under the Conservatives and better under Labour. Some see the squeeze in NHS and social care funding since 2010 as part of some grand plan to end the NHS, but I’m not convinced the Conservative party will ever have the political capital to do this. The dynamics work the wrong way. As long as the NHS improves under Labour, then a prolonged period of worsening services under the Conservatives is required to motivate NHS abolition, but by that time the Conservatives will be much less popular and will not want to risk losing further votes by ending the NHS.

Instead I think the clear empirical association between Conservative governments and an increase in weighting times is just a by-product of these government’s desire to reduce taxation. What this IPPR report shows is that this deterioration isn’t just bad for patients, but is bad for the economy as a whole.

There has since 2010 been a clear plan to increase the farming out of NHS services to the private sector (which started before 2010), and as this map from EveryDoctor shows that plan has been very successful. However because the NHS is relatively efficient, privatisation for profit is likely to either raise costs or reduce the quality of care, thereby intensifying the deterioration in healthcare that comes from a political obsession with tax cuts.

With Labour leading in the polls and a general election not too far away, thoughts are naturally turning to how Labour could turn the tide on NHS performance. The Commission report has plenty of ideas on that front (as have others), and I cannot do justice to these ideas here. Labour in opposition talk a lot about reform, but at best this is a political device to avoid saying the truth out loud before an election. The reality is that the most obvious and effective way to improve health outcomes in the UK is to spend more money on health and social care, and that in turn requires higher taxes. What this report shows is that doing this would improve the economy as well.