13 January 2006
Hospitals, schools and councils are all facing radical reform, but the funding systems imposed to achieve this are far from joined up. Tony Travers points out the contrasting philosophies and calls for a common, long-term approach
Public service reform looks increasingly like a battleground that will be much revisited during Tony Blair's twilight years. The new year dawns with the promise of a protracted struggle over the future of schools, a continuing NHS financial 'crisis' and with local government increasingly bypassed in the search for better local service providers. As always, money underpins much of the debate.
The year 2006/07 is the year when Labour's medium-term boost to Britain's public expenditure finally starts to slow down. Although the NHS and schools are protected from the start of the downward tilt, there is no doubt that the years of plenty are drawing to a close. The 2004 Spending Review marked the end of Gordon Brown the big spender.
According to Carl Emmerson and Christine Frayne from the Institute for Fiscal Studies, the chancellor's Pre-Budget Report suggested real-terms increases in public spending of just 1.8% per annum from 2007/08 to 2010/11 ('Cutting it fine', Public Finance, December 9–15, 2005). This figure would be well below those in each year since 2000/01. Moreover, if the NHS, education and international development were to continue to receive relatively large spending increases after 2007, the additional real resources available for other services would be just 0.8%.
However, there is no certainty that any particular service will be protected in future years. Simply pushing additional cash into hospitals and schools has, at best, produced debatable results. The lack of trusted productivity measures (the government has aggressively attacked existing official measures as 'flawed') means there is no real way of knowing how well the extra post-2000 resources have been spent.
There is evidence from ministers' approach to the distribution of resources that public services are thought to require powerful incentive systems to secure value for money. The introduction of 'payment by results' in the NHS and pupil-based school funding formulas suggest the government wants to use 'quasi-market' mechanisms to drive the efficient use of public money.
During 2005, highly publicised financial deficits affecting NHS trusts became a regular feature of the news. Much of the commentary on these budgetary failures suggested that the government's decision to move to a funding system where money follows patients had begun to expose poor quality (or poor financial management) within a number of institutions. Suddenly, providers were reimbursed according to the number of patients treated and a fixed national tariff. Although awkward for Heath Secretary Patricia Hewitt, it could be argued that the market was exposing problems that would otherwise have been hidden.
The decision to introduce this market-style arrangement into the NHS links Labour directly back to the Conservatives' system of GP fundholding in the 1990s. The logic is the same: the efficient and effective are rewarded while others can – in theory – go to the wall. John Reid, Hewitt's predecessor, made it clear he would have been willing to see NHS bodies go bankrupt as a result of the new funding system. Given the near-sanctified status of hospitals in Britain, this stance was radical indeed.
The government's determination to force a greater degree of productivity on the NHS must have derived in part from a suspicion within Whitehall that the additional billions of pounds poured into health have not produced pound-for-pound benefits. Despite ministerial bravado in defending the huge funding injection since 2000, questions are undoubtedly asked within the core of government as to whether or not each pound is being well spent.
Compare the approach to the NHS with the picture in schools. Although the level of resource increase within education has been rather less generous than in health, schools have nevertheless enjoyed a far larger real-terms rise in funding than most public services. But recent reforms to schools' financing have been aimed at smoothing the amount received by each institution from year to year. Market signals will be significantly weaker than in the health service.
The new funding arrangements for 2006/07 give each local authority a ring-fenced Dedicated Schools Grant set at their 2005/06 schools spending plus an additional cash sum of 6.4–9% per pupil. Such increases are only slightly below those given to primary care trusts for the next financial year. With inflation running at 2–3%, both services are being shielded from pressures that, say, the fire service or local environmental provision will have to cope with on the basis of cash rises of 1–2%.
But the allocation of resources from councils to schools – via the local funding formula – will take place in a way that appears to protect schools far more effectively than NHS institutions are shielded within the 'payment by results' system. It is clear from the Department for Education and Skills' approach that ministers' overriding concern is to ensure that every school receives additional cash, even if rolls are falling sharply. The full impact of the schools funding 'market' is very significantly blunted.
Education ministers remember with horror the disastrous events of spring 2003, when then secretary of state Charles Clarke discovered that because of a government redistribution of local authority grants, many councils were not in a position to allocate large amounts of money to schools. Crazily, a generous national total of education funding translated into a local distribution where some institutions faced cash reductions.
Clarke immediately conceded that each school should be given a binding guarantee that, regardless of its circumstances, it would be able to predict a real increase in resources for each future year. A 'Minimum Funding Guarantee' for individual schools was instituted from 2004/05. The new Dedicated Schools Grant has taken this process further and now ensures that councils cannot tamper with the cash the government wants schools to receive.
Thus, although the schools' funding arrangements still include the notion that money follows pupils, the impact of changes in rolls – particularly downwards – from year to year is heavily damped. Small schools in particular cannot receive less than a fixed percentage rise in resources from one year to the next.
Schools now appear far less exposed than NHS bodies to the vagaries of year-to-year funding. It is not entirely clear why this should be the case. After all, the health service received the lion's share of additional public spending in recent years. Education lagged by comparison. Yet at the level of the individual institution, it now appears that ministers are far more concerned to protect schools than hospitals. Perhaps head teachers and their doe-eyed charges are better lobbyists than hospital administrators and sick patients. Perhaps the government thinks hospitals are more in need of market discipline than schools. Schools are certainly smaller, in terms of budget and employment.
The more likely explanation, of course, is that different parts of Whitehall evolve policy separately from each other. Even though New Labour concepts such as 'contestability' and 'money following clients' are common to the government as a whole, their manifestations on the ground are radically different. The approach taken to funding local government suggests each department operates in a different way.
In parallel with the new schools' funding system and the NHS 'payment by results' arrangements, the Office of the Deputy Prime Minister has radically reformed the revenue support grant. Lest we forget, the RSG contributes towards the funding of social services, police, fire, environmental provision, planning and most other council services. The changes introduced to this third major stream of public money have created a new grant system that is radically different from the other two.
In future, authorities will receive shares of the national total of grant based upon a complex set of calculations that take account of different spending needs and council tax yields, and which also allocate a per capita sum. Formula Spending Shares – explicit measures of how much should notionally be spent on each service – have been banished. The new shares-based system is opaque, even compared to the complex method that preceded it.
The new RSG involves no 'payment by results' arrangement of the kind now in operation within the NHS. Councils will have protection akin to the schools' Minimum Funding Guarantee – a minimum of 2% extra formula grant for 2006/07. But the degree of protection given to councils is much less generous than that provided to schools. The RSG is vastly more complicated and difficult to understand than the new Dedicated Schools Grant.
Modern government in Britain appears content to reform both funding systems and structures within the NHS, education and local government on a regular basis. What is odd about the three different funding systems considered here is they have emerged from a 'joined-up' government that is trying hard to ensure that public services deliver additional benefits in exchange for the resources allocated to them. Yet the arrangements are significantly different and appear to have dissimilar philosophical underpinning.
The new NHS funding system is primarily concerned with driving efficiency and effectiveness. Next year's schools arrangements are designed to provide smoothness and certainty to each school – there is little effort to drive productivity gains. The RSG is still supposed to be 'fair' as between areas, but it is no longer clear what else it is intended to achieve.
What can be predicted with certainty is that these different approaches will all be changed again within the next few years. The DfES is already consulting on a longer-term system for schools funding for the period after 2008/09. Sir Michael Lyons is reviewing the whole of local government finance. NHS funding and governance systems are relentlessly reformed.
Underlying all this change is the belief within central government that funding systems can be used to drive public service improvements. It is, of course, possible that different services require different funding mechanisms. But it is curious that incentive systems that are thought to benefit some parts of government are not used elsewhere. Or that 'general' grant arrangements are the correct solution to local government, but not health. Or that hospitals can cope with radical year-on-year resource changes but schools can't.
The time has come for the prime minister to ask his senior departmental colleagues to decide what they are attempting to achieve with their different public sector resource allocation arrangements. If they did this, they might be able to evolve some common principles that could be used to underpin a more secure and longer-term approach to the funding of local institutions. Consistency, stability, efficiency and effectiveness can be achieved at the same time. That would indeed be a legacy to be proud of.
Tony Travers is the director of the Greater London Group at the London School of Economics
PFjan2006
