Governments around the world are navigating a perfect storm of economic pressures. The lingering effects of COVID-19, Russia's war in Ukraine, the resulting energy crisis, and global trade tensions have all contributed to rising inflation, uncertainty, and fiscal stress. The result has been public budgets stretched thin, with governments forced to make difficult trade-offs.
At the end of 2024, global public debt hit 93 percent of GDP, surpassing $100 trillion. In the United Kingdom, public debt stands at 96 percent of GDP, with debt interest reaching £107 billion in 2023/24. That's nearly 9 percent of government spending—money no longer available for essential services.
At the same time, health needs continue to mount. Over the past three decades, UK health spending as a share of GDP has doubled—from under 6 percent to over 11 percent by 2024 and from well below to now slightly above the advanced economy average. Despite this, the NHS faces persistent backlogs, and pressures from an ageing population and chronic disease burden are only intensifying. The result is a widening gap: rising demand for health and preventive services, but shrinking fiscal space to respond.
The NHS faces persistent backlogs, and pressures from an ageing population and chronic disease burden are only intensifying.
Getting More Out of Less: Efficiency and Capital Innovation
This fiscal squeeze has reignited interest in delivering 'more with less'. The UK's Government's newly established Office for Value for Money (OVfM) has been tasked with rooting out inefficiencies across government spending (PDF). It builds on previous efforts, such as the National Audit Office's Value for Money (VfM) audits and the Cabinet Office's Sourcing Playbook, which provides detailed guidance on structuring public service contracts to maximise value and accountability.
Alongside this focus on efficiency, appetite is growing for innovative financing which mobilises private capital to achieve public goals. The United Kingdom has arguably been a world leader in impact investing for some years, with many organisations—such as Big Society Capital and the Impact Investing Institute—championing this approach. What is new here is that in late 2024 the UK Government itself launched a new Social Impact Investment Vehicle. This initiative builds on the earlier, smaller-scale Life Chances Fund and is co-led by HM Treasury and the Department for Culture, Media and Sport. Its goal is to crowd in investment from private investors, philanthropies, and public agencies for programmes that deliver positive social impact. As HM Treasury put it, investors are ready to “deliver a better Britain” through partnerships with government.
This trend is not unique to the United Kingdom. Canada's Social Finance Fund and Portugal's Social Innovation Fund are part of a broader global movement experimenting with new financing models for social outcomes.
Innovative Financing Tools for Health
Among the most discussed innovative financing mechanisms are impact bonds—also called social outcomes partnerships. These instruments combine elements of public-private partnerships with outcomes-based contracting. Private investors provide upfront funding for programmes and government repays the investment, with a return, only if agreed outcomes are achieved.
Impact bonds are particularly appealing for preventive health interventions, where results can take time to materialise. By tying payments to outcomes, they aim to encourage innovation, reduce risk to the public sector, and focus spending on what works.
Another tool is blended finance, where public or donor funding is used to attract private investment. This could involve guarantees, concessional loans, or tax incentives to make high-impact projects more attractive to private investors. A prominent example is the European Fund for Strategic Investments, which combines European Union budget guarantees with private capital to fund infrastructure, innovation, and health initiatives across the continent.
In the United Kingdom, there have been proposals for a “Blended Prevention Fund” to bring pension funds into local preventive health programmes. These efforts reflect an ongoing search for ways to mobilise new capital without immediately increasing public spending.
Promise and Pitfalls
Done well these models can unlock new resources, especially for prevention and early intervention—areas which are often underfunded in traditional budgets. They can also promote long-term thinking in systems too often driven by short-term pressures. For countries like the United Kingdom, where fiscal constraints are the new normal, these tools offer a way to pilot and scale promising approaches without overburdening public finances upfront.
But there are important caveats. Most innovative financing initiatives remain small in scale and complex to implement. Impact bonds, for example, account for less than 1 percent of the global impact investment market. High transaction costs, lengthy contract negotiations, and the need for rigorous evaluation all act as barriers to growth. Many programmes also suffer from limited transparency, insufficient evidence on effectiveness and value for money, and the appropriateness of using public funds to underwrite private returns—particularly for essential services that rightly fall within the state's responsibility.
Critics argue that these models can shift public risk to future taxpayers, especially when returns to private investors are guaranteed regardless of long-term impact. In the worst cases, they risk creating perverse incentives: focusing attention on easily measurable or low-risk outcomes, rather than addressing deep-rooted public health challenges like health inequality or the social determinants of health.
Moreover, these mechanisms do not generate 'new' money. They simply reallocate costs over time, often at a higher price (PDF) due to investor premiums. In times of tight budgets, it is essential that governments remain clear-eyed about when and where these tools truly add value.
A Complement, Not a Cure-All
Innovative finance should be seen as a complement, not a substitute, for robust public investment in health. When used strategically and transparently, instruments like impact bonds, outcome-based contracts, and blended finance can play a valuable role—particularly in catalysing prevention and improving long-term outcomes.
Innovative finance should be seen as a complement, not a substitute, for robust public investment in health.
But they are no silver bullet. Their use must be carefully targeted, evaluated, and aligned with broader system goals. Without proper oversight, they risk distracting from the more urgent and structural reforms health systems need: workforce development, digital transformation, and more equitable funding models.
As governments look for ways to navigate economic uncertainty while meeting rising public health needs, innovative finance offers promise—but only if used wisely, transparently, and in service of the public good.
