The UK government’s latest budget reveals a truth many European politicians would rather avoid: the current model for financing public services, including healthcare, is creaking. Chancellor of the Exchequer Rachel Reeves’ decision to loosen fiscal rules to enable greater borrowing is an admission that something has to give.

While the rises in tax on carried interest (the percentage of a fund’s profits that a manager receives as compensation, you can see our coverage on that here), and capital gains tax, were more modest than feared by some in the City pre-budget, the this was the UK’s largest tax-raising budget since 1993. 

With EU tax-to-GDP ratios (the ratio between tax and social contributions to national GDP) down nearly a whole percentage point in 2023 now averaging 40%, and with the UK reconfiguring its fiscal rules to allow £50 billion in additional borrowing despite such a significant scouring for tax revenue, it is clear that post-covid European governments are having to navigate an increasingly more restrictive spending environment.

It is within this environment that countries with large public health systems, such as the UK, are having to cut their cloth. While the UK’s new government has calculated, with a degree of approval from the Institute for Public Policy Research (IPPR) and International Monetary Fund, that the alternative of austerity represented the greater long-term fiscal risk to the public finances due to the snowballing impact of failing public services, this boost in revenue and spending, while providing a short term boost, is not expected to make a significant long-term impact on growth.

Meanwhile, Europe’s ageing population and insufficient healthcare workforce mean fewer workers supporting more elderly citizens, just as healthcare demands surge.

European officials, including the EU Commission’s Health Chief, Stella Kyriakides, rightly insist that health spending is an investment, not merely a cost, and the UK has indeed framed its new fiscal rules around this investment paradigm. However, good intentions don’t balance budgets, and although EU and UK taxpayers have shown a willingness to absorb tax increases in the name of better public services, governments may, nonetheless, find they reach a tolerance limit.

The messaging from Labour has, until the budget, been one of ‘tough choices’, even regarding the NHS, which is traditionally one of the UK’s more favourably viewed institutions. For many people in the UK, when faced with waiting lists in excess of 7.7 million, they have already made their own tough choices, with a surge of private hospital visits, and utilisation of private diagnostic providers.

When public systems are subject to strain by spending pressures, those who can pay seek alternatives, creating opportunities for the private sector. Equally, reduced healthcare spending will also, in likelihood, decrease spending by public systems with private providers and suppliers. 

Anyone investing in or operating for-profit healthcare services needs to be increasingly mindful of these current and long-term trends in, and pressures acting upon, government revenue-raising and spending, and its wider market impact.