ICAEW 3 April 2020: Surprise move puts NHS trusts into a much stronger financial position, saving them hundreds of millions in interest payments every year.
The Health Secretary Matt Hancock has announced that he is writing off £13.4bn of debts owed by NHS trusts at 1 April 2020.
These write-offs will save the NHS trusts concerned hundreds of millions in interest each year, providing an immediate financial boost to hospitals across the country. It will also put them on a sounder footing for the long-term, without the need to find cash to repay these debts in the future.
Although the transaction is described by the Government as neutral to the public finances because the loans concerned are all internal within the Department of Health & Social Care, it will increase the £130bn annual cost of the NHS going forward to the extent that interest charges and debt repayments no longer flow back to the Exchequer.
The department also announced that it is introducing new funding arrangements for the NHS with a ‘simpler internal payment system’ to help NHS trusts in responding to COVID-19.
The loans being written off principally relate to borrowing to fund deficits (interim revenue debts and working capital loans) and borrowing to finance shortfalls in capital funding (interim capital debts). ‘Normal course of business’ loans and external debts embedded in private-finance initiative (PFI) contracts will continue as liabilities of the NHS trusts concerned.
The debt write-offs will take the form of a capital contribution with outstanding loan balances at 1 April 2020 converted into equity, adding £13.4bn to the net assets of the 107 NHS trusts affected.
The pressures that the NHS is under from the coronavirus have highlighted the problems with the existing funding model and the Health Secretary has also written to NHS trusts letting them know that should they need extra cash during the coronavirus emergency that this will also be provided as an equity injection, rather than building up new debts.
Martin Wheatcroft FCA, adviser to ICAEW on public finances, commented:
“Although writing off debts owed by the NHS has no net effect on the public finances in theory as the balances are all internal to government, it will have very real-world effects on the ground. By relieving NHS trusts of a significant financial burden, the Government is putting each of them into a much better financial position to deal with the coronavirus and to invest in services for patients.
The news that funding arrangements for the NHS are being revisited is also welcome. Many of these debts arose because of an overcomplicated system of funding that meant that many hospitals were not receiving sufficient income to cover their operating costs. A simpler funding model will make a big difference to the ability of NHS trusts to manage their finances effectively and hence the quality of the health care that they can provide.”