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The recent Budget appeared to show the government's determination to tackle underfunding in the NHS and social services. But on closer inspection one half of that commitment seems lacking - guess which half. Rachel Downey reports.

New Labour has taken a gamble. By raising taxes and linking the move directly to improvements in the health service, the government has linked its political future to the reform of the NHS.

Chancellor Gordon Brown had little choice. He didn't need the findings of Derek Wanless' review of health funding to tell him the service was severely underfunded and that improvements could not be made without substantial investment. Wanless argued for a sustained rise in resources. And the chancellor provided it - £41.5bn over five years.

The review contained crucial recommendations for social care funding. Wanless went beyond his remit by including social care, arguing it is inextricably linked with health. His report recommends an immediate study of the trends affecting social care. He points out that demographic change and, in particular, the ageing of the population, places more pressure on social care services than on the NHS. He concludes that social services budgets need to double over the next 20 years.

The chancellor's response was an additional 6 per cent a year in real terms from April 2003. If this continued for 20 years, it would have met Wanless's recommendation. But the increase is only guaranteed for three years.

The government is betting that the public will accept an increase in national insurance contributions to sort out a struggling NHS. It's an evens bet. But when it comes to social care, the government's plans are looking even less certain. There are three fundamental problems: the increased funding for social services will not meet the spending requirements of overstretched departments, the money will all be used to solve the bed-blocking crisis, and none of it will improve pay or conditions for the social care workforce.

Although the headline figure was £3.2bn over four years - the largest rise social services departments have seen in a decade - social services chiefs argue it falls short. The £3.2bn included £800m that had already been announced for 2002-3. After deducting what social services departments estimate they will spend from 2003-4 to 2005-6, the headline figure drops dramatically. The extra money amounts to an increase of just under 20 per cent over three years - the Local Government Association's submission for social services for the same period called for an increase of 30 per cent. In cash terms, this means a shortfall of £550m.

While welcoming the additional resources as "an acknowledgement that sustained funding is required for social care", Liz Railton, chairperson of the Association of Directors of Social Services resources committee, says: "It is not enough, and we say that in terms of the scale and the size of the holes we have to fill. A lot of the increases will drop into the existing hole we have already."

The holes in social services funding are beginning to look like craters. It is estimated that since the mid-1990s, about £1bn annually has been either siphoned off from other local authority services, particularly environment and transport, or obtained via council tax increases to bail social services departments out of severe overspends on the standard spending assessments - the amount the government estimates they need.

Last year, the debt crisis worsened. In February, social services directors predicted further overspends totalling £200m on the financial year to April - and that was after the bail-out. A survey by the ADSS and the LGA found the bulk of the projected overspend - 69 per cent - was on children's services, 19 per cent on services for people with learning difficulties, and 12 per cent on those for older people. Directors put the overspend down to the increase in the number of children coming into the care system.

In the week of the budget, the ADSS released a further survey revealing that almost all directors believed a lack of resources had hindered the implementation of the Carers and Disabled Children Act 2002. Less than one-fifth of local authorities have been able to find resources to implement the new legislation that came into force last year and only 5 per cent expected to find additional resources in this financial year.

Inflation in some social care services is significantly higher than the overall rate of 2.5 per cent. In Railton's authority - Cambridgeshire - the cost of nursing home places has risen by 15 per cent. Local authorities have had to spend more money on care home places just to get a service and have been mounting up debt, saying they will pay it off next year. In Middlesbrough, care home providers have just turned down the offer of a 24 per cent increase. The 6 per cent bonus money pales beside these demands.

Social services departments are also losing funding from other sources. From April 2003, they will lose the promoting-independence grant, which was used, among other things, to develop intermediate care services. The abolition of preserved rights will result in further costs to local authorities, as will the removal of the residential care allowance.

On top of all this, new systems will bring additional costs. For example, some departments are finding the costs of the financial assessment under the fairer access to care arrangements high. "We have very little in terms of real new money to invest in new services for older people, children, and people with learning difficulties," says Railton.

Whether or not social services departments will see any increase in the first year is debatable. The extra money will come from higher national insurance contributions by both individuals and employers. In total, the public sector will have to fork out an additional £1.2bn to pay the increased national insurance bill. The LGA argues that the increase for social services in the first year, which it puts at £280m, will be wiped out by the higher NI bill.

But the bargaining for money is not over yet. The results of the latest comprehensive spending review will be announced in the summer. One of the seven cross-cutting reviews that are feeding into the announcement for further spending plans covered children at risk. Railton and her colleagues are cautiously optimistic that this will bring additional money.

But Brown's budget bonus was never intended to be a bail-out for overspent social services departments. The focus of the government's plan is the NHS and freeing up some of the resources it is spending keeping older people languishing in hospital beds.

Health secretary Alan Milburn's document on how the money would be spent outlines a three-pronged approach: more care home places; an expansion of intermediate care places; and an increase in home care packages. "The extra resources will allow local authorities to increase care home fees where this is necessary, to stabilise the care home market and increase choices for older people," it states. "We expect the expansion in intermediate care to increase provision by about 30 per cent by 2005-6." The sting in the tail was the news that local authorities would be fined if they failed to end delayed discharges.

Fiona Campbell, co-ordinator of the democratic health network at the Local Government Information Unit, does not believe the plan will work. "It seems very unlikely that social services departments will be able to reverse the trend and increase the number of care home places, which is what the health secretary is demanding. It's very difficult to believe that would increase the intermediate care market by 30 per cent in four years. Even if it is possible to do that with a 6 per cent real-terms increase, there's a huge need for additional funding for mental health and children's services."

Although the extra money will allow local authorities to increase care home fees where it is necessary to try to stabilise the market, social services departments will be at the mercy of the intermediate care providers, she adds.

Care home market analysts and providers are even more pessimistic. The care home market shrank by 10 per cent in the three years to 2001 - more than 50,000 care home beds across all sectors were lost during this period. Care home owners are leaving the business. Health and care service market analyst William Laing says £1bn annually is needed to stabilise the market by paying "a fair price for care home costs". And the chancellor has not come up with anything near that level. There is no compromise position, says Laing. "Local authorities will be forced to pay a fair price because if not, the capacity will cease to exist. Whether they get it from children's services or from fire brigades, ultimately they will have to pay it."

Shelia Scott, chief executive of the National Care Homes Association, agrees. "I don't think it will work - too many homes have gone already in specific parts of the country, particularly the south east. I do not want to deride what the government has done by saying it is not enough. But it isn't enough. In many parts of the country we are moving to under-capacity. The message needs to be getting through loud and clear to homes that there will be more money, and directors of social services need to be saying that to homes."

Milburn acknowledges the government needs staff to be on board if the reforms are going to work. The new star-rating performance assessments will include measures on how well each NHS organisation is supporting and involving staff. He anticipates pay reform in the health service and changes in working practices. But there is not one mention of social care staff in the implementation. "The fact that many changes in the social care system are included in an NHS Plan document has alienated social care staff - we do not consider ourselves a subdivision of the NHS," says Owen Davies, Unison's national officer for social services.

He adds that Milburn has already annoyed social care staff by ruling out using the extra money to improve terms and conditions. "For ministers to rule out increasing pay before discussing it with us seems to be just very bad planning." He maintains that any plan to modernise services will fail unless the government comes some way on increasing pay. "If government's fundamental policy is to improve the quality of services, then they will fail to achieve that without being fair to the workforce. There is a united front between health workers and social care workers on this."

Unison general secretary Dave Prentis earlier this month offered only conditional support for the plan to improve the NHS, saying staff wanted some of the extra money to filter into their pay packets. Two weeks ago, social workers and other local government workers in London voted in favour of strike action because local authorities are refusing to meet their claim for a flat rate of £4,000 for London weighting.

The government cannot ignore these concerns, warns Janice Robinson, director of health and social care at the King's Fund think tank. If it wants to build capacity in the social care market for older people stuck in hospital beds, it will have to tackle recruitment and retention across both health and social care.

"If you look at the care workforce, some of the low-capacity problems are because of the fact that staff receive appallingly low wages," she says.

The government's gamble may pay off and it may be able to make significant improvements by the time of the next election. However, its plans to expand alternatives to hospital care for many older people are looking less certain to succeed.

What is clear is that the government cherry-picked the advice of the Wanless review. It ignored his crucial argument that demographic changes will have a greater impact on social services than on health and that therefore social services departments need significantly more funding to expand older people's services, ensure they can meet their other demands, and keep the workforce on board. It may have done so at its peril.