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Debt: just what the doctor ordered? NHS mulls markets

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The UK's National Health Service, frustrated by a lack of funding and a mounting backlog of maintenance, is seeking a capital injection from wherever it can find it. The government must swallow its balance sheet concerns and provide one, rather than allowing the private sector to step in.

The NHS has resigned itself to the fact that it can expect no more cash from the government for the foreseeable future. 

But years of penny pinching in the name of ‘efficiency savings’ have left it with a backlog of what NHS Improvement calls “outdated hospital facilities and ageing equipment” in sore need of modernisation.

NHS Improvement want the Treasury to provide a loan, but present rules mean that a loan would appear on the government’s balance sheet as spending — and the government won't allow it.

If the government does not relax these rules, the NHS will seek permission to look for funds elsewhere and has already engaged in “exploratory discussions”, according to NHS Improvement, with financiers keen to bankroll the NHS’s activities.

This is a canny political move from NHS management, effectively snookering the government.

Refusing to respond to the NHS’s demand for funding, refusing to provide a loan and refusing to allow the NHS to seek capital elsewhere is unlikely to come across well for Theresa May’s government.

Fiscal conservatives concerned about the UK’s level of public debt may like the idea of the NHS taking money from private sources, but this is a short-sighted strategy. If the NHS is going to borrow money, rather than simply be given more funding, a loan from the Treasury is surely the least bad option.

The UK DMO’s syndications continue, as they have for years, to reliably provide the UK with cheap funding. The UK certainly does not seem like a borrower scrabbling for every morsel of willing investor cash. It has the fiscal breathing space to borrow on behalf of the NHS at excellent rates.

And the alternative? 

The NHS, with no credit rating, no curve and an income derived almost entirely from government funding enters capital markets, burdening itself with the cost of servicing debt to private companies unlikely to offer any relief if the hoped-for savings take longer than expected to materialise.

The NHS has an obligation to spend taxpayers’ money as efficiently as it can. It must think very carefully if the improvements it wishes to finance with debt will save enough to more than cover the cost of servicing the debt.

But one thing is certain: if the NHS is to raise debt at all, the government must make the burden as light as possible.

Even if the government offers an explicit guarantee of any future NHS issues, thanks to liquidity and other matters, it would certainly sell at some spread over Gilts. If the NHS is to raise finance, the best way for taxpayers is for the NHS to go to the Treasury, not to the market.