If Liz Truss and Therese Coffey really wanted to grow the economy, they’d spend more on the NHS.

We’ve all probably heard the miserable arguments from politicians, right-wing think tanks and self-styled experts that the NHS is a sort of ‘bottomless pit’. The story goes that it eats up too much public money, that it’s not ‘affordable’ or sustainable, and that drastic cuts to curb the large NHS budget are inevitable. It’s a drag on our economy, they say.

But this view is back to front. 

It is false because it is embarrassingly incomplete.

It leaves out the significant positive impact the NHS has on the economy, and it assumes the NHS absorbs money but gives nothing back – and this simply is not true.

What is a ‘fiscal multiplier’?

In the terminology of economics, there’s a phenomenon known as the ‘fiscal multiplier’.

It describes (and measures) the effect that government spending has on a nation’s economic output. Studies that assess these fiscal multipliers always show that spending on healthcare produces a very positive boost to any nation’s GDP – ie, investment in health grows the economy rather than shrinking it.

How does this work? How does public spending turn into growth?

1. It is partly because one of the most precious assets any nation has is its workforce. By keeping the workforce healthy (and therefore productive), it boosts productivity and brings about economic growth. It’s a win-win situation: the people have happier, healthier lives and the economy is strengthened by spend on health.

For example, the Work Foundation reports that “in 2009, in the region of 11,000 people in England were enabled to return to work by hip replacement surgery, saving the UK welfare system £37.4 million each year of their working lives.”

2. Healthy people who are in employment also tend to have disposable income. They spend their earnings in the economy, generating yet more growth and therefore improving GDP. This should not be underestimated – money circulating in local economies keeps businesses afloat and people in work. It’s a virtuous circle.

3. They are also taxed on their income, putting yet more money into the economy; the money flows to the Treasury who will (if they are a good government) reinvest that money into our public services. So there are three ways that public spending on health creates economic growth.

How big is the economic boost the NHS creates?

Estimates vary, but the fiscal multiplier on the NHS is around 4.

In 2014, the King’s Fund judged that the multiplier effect of health spending is 3.6, which means that for every £1 spent, £3.60 of new economic activity is generated. Another study from 2022 (featured here in the Financial Times) set the multiplier at 4.

In other words, every time the government spends £1 on the NHS, the economy grows by £4. Most government spending has a lower multiplier than this.

So NHS spending boosts the wider economy in excess of the money spent – and to quite an impressive degree.

Why don’t we hear about this in the news?

The most likely reason is that journalists aren’t very well informed, and so they ask the wrong questions. Or maybe they think the multiplier effect is too complicated for people to understand, even though it’s actually very logical and simple.

Another reason might be that it is suppressed because it is an inconvenient truth for those who want to shrink the NHS and grow the private health sector.

There are in fact numerous economists, accountants and tax experts that do speak about the value created by the NHS (and other forms of public spending) and about the significant boost to our country’s productivity that is generated by having a universal and publicly-owned healthcare system. But sadly they are not the sorts of voices that get invited on to the BBC very often.

A video made by the Labour Party in 2019 called It’s just common sense explained the value of public spending and/or diverting money to benefit ordinary people. The short film shows how money circulates and creates new growth when in the hands of ordinary people – and how money tends to be hoarded (and is therefore unproductive) when handed to millionaires and billionaires. Informative media like this were given a wider platform during the election coverage of 2017 and 2019, and though those time slots were rather brief, the ideas expressed began to change perceptions of public spending.

What’s fascinating is that despite this logic being mostly absent from public discourse, the majority of the UK’s population instinctively ‘get it’ anyway. They know it through personal experience. Narratives that paint the NHS as a burden to our economy still haven’t been able to erode the public’s solid support for the NHS because most people know that pricing people out of healthcare would clearly be very unproductive to our society. 

The majority understand the crucial work the NHS does, and by extension how it clearly keeps the country moving.

If only those who work in our popular media were as perceptive.

– Carly Jeffrey, 14 October 2022.

SOURCES: The fiscal multiplier, a list of articles and reports

-The Kings Fund estimate the fiscal multiplier on healthcare spend to be 3.6: Tackling poverty: Making more of the NHS in England

– ‘Is world-leading NHS healthcare an affordable proposition?’, Positive Money (see section 4).

– ‘More funding isn’t just good for the NHS – it’s good for the economy’ from the TUC.

– A simple definition of economic multipliers, Cambridge Dictionary

‘The multiplier shows that not all government spending is equal’ by Political Economist Richard Murphy.

– Even the IMF (a politically conservative institution) conceded in 2012 that harsh austerity was stifling economic growth, stating that George Osborne’s cuts were costing the UK £76 billion because he had underestimated the impact of fiscal multipliers.

– A professor of political economy explains that investing in productive public spending will grow the economy far more than Kwarteng’s tax cuts due to the more rewarding multiplier. He suggests green investment.

– ‘Normal people spend most of their money on everyday things and this has a greater multiplier effect on the economy than tax cuts for the rich’, Prem Sikka, Professor of Accounting.

UPDATE: Two days after this blog piece was published, additional confirmation that NHS spend delivers growth in the wider economy was published in the Financial Times, and I amended this post to include it. The report referred to can be downloaded here.