08 June 2007
The need to base public service reforms on market disciplines has been an uphill battle for the Labour government. But there really is no practicable alternative, argues Anthony Browne
For anyone interested in the state of the NHS and our schools – and that should be everyone – we are at a fascinating and historically unprecedented turning point. A popular prime minister with a strong mandate, committed to public service reform, has been in power for ten years, and is about to step down. From where we stand, we can look back over the past ten years and learn the lessons of what works and what doesn't. Only if we do so can we make sure things move in the right direction in future. As Karl Marx – a better historian than economist – said, those who fail to learn the lessons of history are doomed to repeat them.
There is clearly much that needs learning. On the eve of the 1997 election, Tony Blair warned that there were just 24 hours to save the NHS. Voters were concerned about the state of public services, and he romped to victory. But, ten years later, he is the first to admit that under his tenure the pace of reform has been disappointing. There have clearly been improvements – for example, in health service waiting times and in the state of hospital and school buildings – but the results have not been transformational. Blair has made clear that he wished he had done more, admitting with laudable frankness that every time he made a reform he later wished that he had gone further.
So what are the lessons of the Blair era? In short, that there is simply no alternative to market-based reforms of health and education, based on choice, competition and diversity of supply. Everything else has been tried and shown to fall short. Instilling market discipline into public services raises many problems – and there certainly need to be checks in place to limit them – but it is the least bad system there is. Like capitalism and democracy, it might not be perfect, but it is better than the alternatives.
The government's role should not be to manage public services centrally on a day-to-day basis – however good a manager you are, top-down control simply doesn't work for an organisation such as the NHS, with more than a million employees and an annual income equivalent to the gross domestic product of Denmark.
The role of the government should be to create a system that ensures that you get the outcomes you want and that the incentives are right – by rewarding the sort of activity you want more of and punishing the sort of activities you want to avoid. It must ensure that sufficient checks and balances are in place – without resorting to ministerial interference – so any deficiencies are self-corrected. It must ensure flexibility, so the system can evolve with changing technology, user demand and working practices. The government should regulate and ensure equity and that the vulnerable are not trampled on. It should be responsible for financing public services, not micro-managing their delivery.
What Blair has proved conclusively is that you can only achieve such a system through market mechanisms – that financial incentives (with the right checks and balances) have the same beneficial effect in public services as they do in the wider economy.
Public services will only really focus on and respond to users' needs if the power lies clearly in users' hands. That doesn't happen through the ballot box every five years, but through money clearly following patients or pupils, and through patients and pupils having a meaningful choice about where they are treated or educated. It is not meaningful if there is a local monopoly of providers – one hospital or one school. It is only so if there is a diversity of providers, and competition between them – it doesn't matter whether it is a private company doing the hip replacement or a local general hospital, so long as the patient experience and quality of care is good, and patients don't have to pay.
In education, in particular, loosening up the supply side is essential, so more schools can be set up, and so good schools can expand. At present local education authorities have too much of a stranglehold on new schools entering the market, fearing that their own schools will lose out. As only Deputy Prime Minister John Prescott could warn, the trouble with good new schools is that people will want to go to them. Any community group, charity or private company that wants to set up a state-funded (as opposed to state-owned) school should be entitled to do so, so long as they meet quality criteria. Only by increasing the supply in this way will parents be able to choose schools rather than schools choosing parents.
It is this thinking that informs our work at Policy Exchange on public service reform – making sure the systems are in place to create the right incentives, to improve efficiency, to raise standards, and to help the disadvantaged. We are looking at ways to ensure that the market works efficiently in education, rather than considering ways to ration places in the few good schools that exist. One policy we have proposed is the disadvantage premium, whereby pupils in failing schools will bring extra money with them to any other school that accepts them.
The reforms Blair has introduced and accelerated – including academies, payment by results for hospitals, foundation hospitals, and the use of private health care providers – are welcome, but are just a start. The challenge for his successors, of whatever political hue, is to ensure that the lessons continue to be learnt, and that market-based reforms continue.
The Blair era has in effect been a nationwide trillion-pound experiment testing out, and disproving, the theories about public services that were once very fashionable on the Left – that it is just a question of money, or of effective command and control. For those, generally on the Right, who were arguing from the beginning that market discipline – creating and ensuring proper incentives – was the only way forward, it has been a frustrating time. But at least they have had the ultimate consolation that they have been proved correct: those who once tried to smear them have come to agree with them.
Health services reform is most illustrative of this, but much the same lessons can be learnt, in muted form, from education. Before 1997, the Labour Opposition mounted a successful campaign against the Conservatives' NHS internal market. Labour's first health secretary, Frank Dobson, who so hated private medicine that he made a show of refusing to shake the hands of managers of private medical providers, scrapped it. Instead, the NHS was to be run by its founding ethical principle – he appealed to doctors and nurses to pull together for the good of the nation. But it soon became clear that the NHS was going nowhere.
The answer, everyone agreed, was more money. Lots of it. It was perfectly plausible – the crumbling hospital buildings and shortages of equipment and staff showed how underfunded the NHS was compared with its European counterparts.
In 1999, Gordon Brown turned on the cash. I remember speaking to Department of Health officials at the time who were delirious about the wall of money hitting them after the tough spending years.
But then not very much happened. Alan Milburn, when he was health secretary, was bemused to find that the activity lines were flat despite the money pouring in. The truth was that the money couldn't have much effect because financial incentives throughout the NHS were outrageously perverse: treating patients cost hospitals money rather than generating it. NHS managers could balance their budgets by refusing to treat patients (putting them on long waiting lists), and the best patients from a manager's point of view were those who saved treatment costs by dying.
The general manager of a top London hospital once showed me a wonderfully equipped, but empty, orthopaedic ward; his problem was not lack of patients or trained staff, but that running the ward would take him over budget (as opposed to bringing in revenue).
Initially, the government decided that if it wasn't just a question of money, the solution must be tighter control from the centre, imposed through myriad targets. At first, many targets were badly designed, but even better-designed ones can have enormous drawbacks. One target proliferates into many, and leads to unintended consequences as managers game the system to tick the right boxes. The NHS's obsession with targets meant it rather lost sight of treating patients.
When targets backfired, it was back to the drawing board. A lesson had been learnt that you should worry about how the system worked and the incentives within it. It was back to the market-based reforms that Conservatives had started introducing a decade earlier. A Labour minister said to me that the government had reintroduced the internal market 'with knobs on'.
The interesting thing about these reforms is how relaxed the public are about them, as polls show – they really don't care who is providing a public service, or how the system operates, so long as the service is good. These reforms are controversial only among Labour backbenchers, Labour deputy leadership candidates, the comment pages of the Guardian and the BBC.
But the unanswerable intellectual and empirical case for such market-based reforms created the politically unusual phenomenon of the Opposition positioning itself as the natural heir to government policies. In a speech last month to Policy Exchange, shadow chancellor George Osborne said there was now a consensus between the prime minister and the Conservatives on the need for such reforms – although the Conservatives would take them much further. It is only because of the Blair decade that the Conservatives can dare do this without being accused of wanting to privatise the NHS – they can say, quite plausibly, that they are just following through the Blair reforms.
It means also that they must be committed to the mainstream rather than the elite – as the row over grammar schools shows – and that their aim should be to make public services so good that the middle classes want to use them, rather than introducing policies to help the middle classes escape public services by going private.
Blair has wasted years and billions of pounds trying to modernise Britain's public services. His legacy won't so much be what he achieved in his tenure, but what he started and made politically possible for those who follow him. It means that the divide on public reforms is no longer really between Left and Right, but between those who believe in what works and those who don't.
Anthony Browne is director of think-tank Policy Exchange. He will be speaking on 'Options for change' at the CIPFA conference in Bournemouth on Thursday, June 14
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