Now its back to business, by Karen Day

19 May 05
The prime minister has retained some familiar faces as the next phase of public sector reform gets under way. This will tackle pensions, choice and private provision. Karen Day assesses the tasks ahead for Labour

20 May 2005

The prime minister has retained some familiar faces as the next phase of public sector reform gets under way. This will tackle pensions, choice and private provision. Karen Day assesses the tasks ahead for Labour

So it's back to work for Labour. As the party celebrates an historic third term, the clock is already ticking on its public service reforms. Its past record and manifesto promises have created real expectations and the pressure is on for the government to match the rhetoric with reality if it is to be elected for a fourth term.

But it's been a shaky start. First, there were calls for Tony Blair's immediate resignation, followed just days later with a botched and controversial ministerial reshuffle. A stream of would-be Cabinet secretaries and ministers trooped into Number 10 to be told, Alan Sugar-style, 'You're hired', past misdemeanours conveniently forgotten.

Others had their loyalty rewarded with a snub. These chops and changes have been more exciting than the election campaign itself. Blair's mix of ministers, including several old hands returning from the back benches, indicates an attempt to tighten the reins and push ahead with reform under an uncompromising timetable.

Take local government. This might have been conspicuous by its absence in the manifesto but it has suddenly been elevated to Cabinet level along with 'communities', suggesting reform sooner rather than later despite a proposed ten-year plan. Plans to hive off these areas from the Office of the Deputy Prime Minister to a new department, to be run by a recalled David Blunkett, caused a political catfight between the former home secretary and Deputy Prime Minister John Prescott. The DPM got his way and communities and local government stayed in his department. But in the resulting mêlée, Blair overlooked the obvious candidate for the now ministerial post, local government stalwart Nick Raynsford. Stung by the snub, he promptly left government, taking an encyclopaedic knowledge of councils with him.

The job went instead to David Miliband, the former Cabinet Office minister who was widely tipped to replace Ruth Kelly at Education after Stephen Twigg's shock defeat. The rest of Prescott's former team has been cleared out, leaving only Yvette Cooper to take over housing and planning. Keith Hill, the happy face of housing, becomes Blair's parliamentary bag carrier.

Kelly refused to leave her department, turning down a return to the Treasury – this was eventually filled by third choice Des Browne. Perhaps she stayed fearing what former Number 10 policy adviser, now life peer and junior education minister Andrew Adonis has in store. Lord Adonis, however, might find his policies curtailed somewhat by the arrival of former Blunkett adviser Conor Ryan in the Number 10 Policy Unit.

But despite the fun of the 'who's in, who's out' reshuffle, Blair will have to navigate the larger, more thematic issues that will dominate public services in this term, notably the role of the private sector, choice and pension reform.

Labour has already made it clear that it will push the boundaries, creating a more mixed economy and injecting more contestability into the sector. The 2004 Gershon efficiency review will undoubtedly play a central part, with public bodies turning to the private sector to increase productivity and capacity to meet their £21.5bn annual savings target. Analyst Kable predicts that the outsourcing market will increase by 50% over the next three years, accounting for 18% of government spending.

In health, the government has made it clear that the use of alternative providers will increase from 10% of NHS activity to 15%. In education, new providers will be welcomed 'where they can boost standards'. The number of academies, controversially run by groups of businesses and not-for-profit organisations, will rise from 17 to 200 by 2010. The 'foundation' concept pioneered in health will be extended to primary schools, which can vote to be semi-independent, employing their own staff and managing their own assets.

It is this expansion of 'quasi-market' institutions such as academies that will demonstrate just how far the government is willing to open its doors to the market. The debate on contestability is won – but will the government really allow state institutions to fail and be replaced by other providers as competition bites?

The policies of choice and payment by results are designed to drive this competition, and former health secretary John Reid was adamant that trusts that couldn't keep up would be left to fail. But that was before Blair's majority was slashed to 67 in the House of Commons, inevitably denting his political will and power.

'You can envisage a situation where a trust becomes insolvent,' says John Williams, director of public services at the CBI. 'The question for government is: do you allow it to close and open it to a market franchise? It is a logical consequence – in these regimes, there are winners and losers.'

This could also be the consequence for some schools, with the expansion of academies likely to squeeze several out of the market. Sources maintain that the government will let this happen only in small numbers, where perpetually failing schools are unable to keep up with competition. 'A few schools will either have to react and get better or go under,' says a source. 'But this will be in deprived areas and on the margins, not across the sector.'

All this might be academic if the Treasury decides to flex its substantial muscle. Chancellor Gordon Brown, while a fan of public-private partnerships, is staunchly opposed to foundation trusts. But he has yet to show his hand on the latest reforms. If tax receipts fall, public spending gets squeezed and some of these reforms lead to better services, he might look at these institutions more sympathetically.

The issue of pensions will also return to haunt Labour this term. The government narrowly averted an all-out strike across the public sector in April, and in local government and Whitehall it has put the issue of raising the retirement age from 60 to 65 back on the negotiating table. Unions say they hope the government is 'true to its word' and that talks begin shortly. The Audit Commission is also expected to conduct an investigation into the Local Government Pension Scheme, but with liabilities topping £30bn, time is running out.

In health, we are now entering a period of 'bedding in'. Reforms such as Agenda for Change, foundation trusts and payment by results are just 13 months old and, in some cases, are not due to be rolled out nationally for another three years.

There might be some movement to improve the financial management of trusts, with the Audit Commission's delayed report, expected shortly, likely to show a significant increase in deficits. This will be crucial as foundations roll out PBR and it is expanded from 30% of services in other trusts.

There will be legislation to enforce higher hygiene standards across hospitals to tackle the MRSA superbug, an issue the Conservatives exploited during the election. Choice will also begin to make its mark, with patients who need non-emergency treatment being offered a choice of four or five hospitals by the end of this year. This will also be expanded to primary care, where the government will 'invite' other providers into the market in areas where GPs can't meet demand.

Patricia Hewitt, now the first female Labour health secretary since Barbara Castle in the 1970s, could prove to be more of a conciliatory figure than her predecessors Reid and Alan Milburn. Unison is already hoping that her record on equality issues will make her more willing to tackle some of the pending equal pay cases and might also work with her former department, Trade and Industry, to regulate the working conditions of private nursing providers. But the union was less impressed Hewitt's early announcement that an extra 1.7 million extra operation will be  carried out by private providers over the next five years.

In local government, the scene has already been partially set, with a number of consultation papers on a ten-year plan. With the new Cabinet post – which interestingly puts the 'communities' part first in the title – the idea of devolving powers to neighbourhood or parish-type bodies is likely to happen swiftly, over the next two to three years.

Added to Labour's long-standing policies on communities and antisocial behaviour will be a new emphasis on 'bringing back respect' into society, courtesy of the Home Office. This has apparently come straight 'off the doorstep' and appears to apply, so far, to the menace of teenagers in baseball caps and hooded jackets who hang around shopping centres. Blair is not 'afraid to legislate'.

Sir Sandy Bruce-Lockhart, chair of the Local Government Association, says the argument over new localism has been won, with local authorities assured of a central role to empower these proposed new bodies and act as the points of accountability. 'It's up to local government to build this role,' he says. 'Members could be the elected mayors of their own constituencies. But we have to start doing this now and show that we are in the business of empowering people.'

The reorganisation that was mooted, merging districts to create super unitaries, could be usurped by the creation of city regions, a concept Miliband is believed to subscribe to.

But in the short term, the hottest and most contentious topic will be the balance of funding. Sir Michael Lyons is due to report at the end of this year and maintains he is ruling nothing out. However, the loss of Raynsford could scupper the return of business rates to local control. Bruce-Lockhart is calling for action now. He maintains that without extra cash to ease inflationary pressures, put at £1.5bn, any changes to the balance of funding will be futile.

In education, legislation will set out the conditions that new providers must meet when establishing state schools. The level of prescription will indicate just how far the government will allow the market to edge into the sector. But the drive is on to continue to raise standards. There will also be a move towards 'parent power', although this has already irritated unions, which dubbed it 'patronising'.

David Blunkett will be facing a full in-tray at the Department for Work and Pensions. Unions are mourning the loss of Alan Johnson and they hope Blunkett will work in the same vein by 'asking questions and not believing everything the civil servants tell him'. He will undoubtedly prove tough on benefit reform and says he will rule nothing out on pensions, including compulsion, which could privately please the unions.

Labour's 'to do' list for public services is daunting, to say the least, and ministers will find it difficult to pause for breath. Whether the government retains the political will to implement its reforms remains to be seen. But, if it is successful, the shape of public services will be unrecognisable by 2009.

What now? Some thoughts on the future

'On the reform of public services there is now a broad degree of political consensus between the parties, so I'm not convinced that Labour's reduced majority is relevant.

'There has been an element of choice in the NHS since it came into being and we will work with the Healthcare Commission to make sure patients can make an informed choice.

'In local government, there is still some way to go before choice-based lettings are available to all, and councils will come under inevitable pressure to find other areas where choice can be expanded.'

Steve Bundred, chief executive, Audit Commission

'The government conveyed the impression that public services hadn't delivered what was expected, despite large sums of money. In four years, it will be even more difficult for Labour to say the record of health, transport, local government and schools is not their responsibility. Focusing so heavily on public services does ramp up expectations and the public finds it difficult to believe that services are improving. In education, it may be creating expectations that are impossible to deliver. The whole rationale of taking away direct control of school funding from councils will create an expectation that there will be more money. But there won't, and government will be more responsible.'

Tony Travers, director, Greater London Group, London School of Economics

'There is a real issue around trust and rebuilding people's interest in democracy. Too many people feel that government is not relevant to their lives. One way to stem this and to increase trust is to have stronger local government and democracy. This will move much more centre stage, and what the government has already said about neighbourhoods helps that.'

Sir Sandy Bruce-Lockhart, leader of the Local Government Association

'Social services will become a very old-fashioned term. It implies the marginalisation of users while the services they need are actually part of the mainstream business.

'We need to make sure that choice doesn't restrict the person-centred approach outlined in the green paper on adult social services.'

Tony Hunter, president, Association of Directors of Social Services

'People are just waking up to the impact of tuition fees as they sign up for 2006. We will have a population of students who will become more consumer-focused – they will be paying more and will expect more. It is a complicated mix of expectations and delivery, and those expectations might not be met. The numbers already don't add up. We need to pay staff more and have been told to invest in infrastructure but students want more learning resources. A quarter of the money for tuition fees will go on bursaries, which leaves us with just 75%. Selling that to students will be difficult.'

Kirsten Gillingham, director of finance, Brighton University