17 April 2009
Making public sector efficiency savings requires tough choices, but the recession provides opportunities for reviewing spending policies. Mike Turley argues that, as long as the changes benefit those most in need, public support will follow
The unprecedented rise in public debt that the chancellor and his successors must confront will require a major rebalancing of public sector revenue and expenditure. When addressing this challenge in next week’s Budget, the government is faced with three broad choices: raise taxes, reduce the cost of services or cut services. Savings in the range of tens of billions of pounds a year are likely to be needed. Providing this will require a steady nerve to impose an austerity programme. Two principles of fairness will influence the public perception and accessibility of this programme.
First, the government must ensure that savings emerge from the better targeting of social welfare spending, focusing on those who need it most, for the time they need it most. Secondly, austerity measures imposed on the public sector must replicate the belt-tightening already prevalent in the private sector.
A perception of fairness for any changes is essential to receive public support and minimise disruption to services. In one sense, the severity of the crisis presents an opportunity – everyone knows that change is essential.
The first and most immediately attractive opportunity for the chancellor involves sacrificial measures such as freezing projects, reprofiling programmes and recruitment freezes. A number of simple objective measures can be used to inform such decisions.
These include: imposing a stronger requirement for a return on investment – in the private sector, projects and programmes that do not give an in-year payback or cost saving are being halted – and revisiting business cases to ensure that investment passes this test; applying a freeze on recruitment, with any new requirement being justified; and introducing the concept of yield – for example, for every £1m of expenditure, how much is actually spent on frontline services to the citizen?
Against a background of ‘big government’, the need for services to be provided by the public sector should be challenged. Again, this should be through a series of objective tests, such as the level of trading income, the number of alternative providers and a new round of market testing.
Although we could rethink how projects and programmes are initiated and monitored, the big opportunities for cuts might lie in direct public services. Here, in common with the private sector, radical moves might be needed. The first of these is a shift from universal to targeted provision. A perennial candidate is the £11bn child benefit budget. Here, the need for better targeting is recognised by the political Left as well as the Right – means testing could be palatable if accompanied by increases in benefit to those who really need it. Further, to avoid the accusation that children are bearing the brunt of economy measures, the change in principle from universal to targeted provision must be made across the welfare state.
An obvious example, though again requiring a steady nerve, might be eligibility for unemployment benefit. Here, the nature of the immediate crisis creates opportunities for new ideas. Many of the newly jobless might have no immediate need or expectation of traditional channels of government support or be the subject of other targeted help such as mortgage protection. Again, this support could be directed to the most needy and excluded.
We could also consider NHS charges, such as for bed and board for short-term elective inpatients.
In the machinery of public administration itself, there are many opportunities for savings. The most obvious is shared services. Almost five years on from Sir Peter Gershon’s report, Releasing resources to the front line, the approach of merely encouraging public bodies to share services has not been as effective as hoped. The chancellor could take steps to make sharing mandatory, in front-office as well as back-office services.
Part of the problem is that, today, few chief executives see shared services as a top priority. But this could be changed with the appointment of a government-wide chief operating officer with clear targets to achieve back-office savings on a scale equivalent to that expected in the private sector, rather than the relatively modest Gershon efficiency targets. Creating the necessary infrastructure would be subject to the tests outlined above.
In addition, the government still has a long way to go to become a more rigorous purchaser of goods and services. In project procurement especially, the chancellor should look again at the idea of creating a small, crack team of procurement specialists – and to take on new challenges only when capacity is available.
At inception, private sector thinking must apply; in the austerity regime, no project without a clear, cash-releasing return on investment should go ahead.
Ongoing projects, meanwhile, must be subject to more rigorous controls to deal with a tendency endemic to the public sector – a reluctance to pull the plug on failing initiatives. This could be achieved through the existing Gateway review process by adding an additional ‘gateway black’ rating, indicating that the project should be shelved. To head off political embarrassment, and the temptation to press on regardless, the prime minister could ensure that cancellation decisions have the weight of the whole Cabinet behind them. This would also signal to ministers that they will be rewarded for their ability to stop projects as much as to start them.
For all this, we must beware of short-term thinking. The chancellor’s austerity regime should not grab at every opportunity for cuts but look for those that will have long-term influences on the way citizens interact with the state, and their expectations of it. For example, it might be tempting to levy an extra ‘convenience charge’ on electronic transactions, such as applications for road fund licences, which would be a false economy if it delayed migration to channels with lower transaction costs.
Real savings will require longer-term thinking, and the courage to take on professional lobby groups, including doctors, lawyers and teachers, again appealing to notions of fairness and efficiency. We could start by asking how much of every pound allocated to a particular public service actually reaches the recipient or the front line. Creating some simple metric of yield could enforce a new discipline on public sector managers, as well as making efficiency gains more palatable to professionals and consumers.
Finally, the austerity regime needs to ask the fundamental question of every pound spent: does the government need to spend it at all? No such exercise has been undertaken in a generation – and arguably not even before then. The outcomes might be counter-intuitive.
For example, in a time of growing unemployment, should the state be providing Jobcentre Plus? Is building new school estates the right way to raise educational attainment, when education and training elsewhere is moving away from face-to-face contact towards virtual contact? Rather than investing piecemeal in transport infrastructure, would it not be better to pick one mode as worthy of state investment, build it properly, and leave the rest to the market?
Such choices will be tough. But they will be sweetened by the fact that they all have the potential to save large sums of money. As long as the austerity regime is shared, and any available largesse is targeted efficiently at the most needy, the electorate should be on side.
