The summer, if such it could be called, is over and our political leaders are returning from their post-Olympic holidays to see what can be salvaged from the wreckage of the coalition after its August implosion. The spectacular (if predictable) falling out of the Conservatives and the Liberal Democrats over Lords reform and boundary changes has transformed their relationship.
The question is no longer whether they can last until 2015 but rather at what point in the next year or so they will go their separate ways. The most likely option is a ‘confidence and supply’ deal, whereby the LibDems keep a minority Tory government in office without triggering a general election. But with the bad blood caused by the Conservatives’ scuppering of Lords reform and the tit-for-tat response of the LibDems certain to dominate this autumn’s conference season, the future trajectory of the coalition is now impossible to predict.
Nonetheless, Tory Prime Minister David Cameron and his LibDem deputy Nick Clegg remain committed to keeping the arrangement intact to deal with an issue far more urgent and important than constitutional reform: the failure of the economy to respond to any of the levers pulled by the Treasury or Bank of England. What should the response be to the continuing bad news: more of the same or a major change in course? At the moment, the chancellor’s answer seems to be Plan A+, perhaps bringing forward the Spending Review from 2014 to next year to engineer deeper cuts in public spending.
But does the coalition still have the heart and conviction for something more radical and far-reaching? In early August, while Horseguards Parade resounded to the cheers and razzmatazz of beach volleyball, Chief Secretary to the Treasury Danny Alexander and Cabinet Office minister Oliver Letwin sat in an office overlooking the venue negotiating the early stages of a new coalition agreement. This could go two ways. They will either spawn a bland, lowest-common-denominator document to get them through another 18 months without a break-up – or come up with a truly visionary attempt to do something the coalition has started but not finished – a proper rethink of the state and what it does.
To begin with, even if the coalition was essentially a marriage of convenience, the two parties did share one important conviction: before the 2010 election they were ardent supporters of a smaller state, both as an end itself and as a necessity. The aggrandised public sector that burgeoned under Labour was no longer affordable. As Liam Byrne, the outgoing Treasury chief secretary, said in the notorious letter he left for his successor, there was no money left.
For the Tories in opposition, reducing the size of government was an article of faith. They struggled to find a name for it but alighted on the Big Society, which failed to inspire because it sounded so vacuous, even if the sum of its parts deserved a better response. To begin with they anticipated what Tory thinkers such as Letwin called the ‘post-bureaucratic age’ – a decisive break with a 50-year trend that had seen government become excessively intrusive, interfering and statist.
They calculated, correctly, that the assumptions of the age of Big Government – that the centre knows best and has a monopoly of information – had been smashed by access to the internet. Now, people search out the cheapest or the best option in a matter of minutes. Yet when it comes to public services, choices are not so easily available.
Cameron’s difficulty was that he had to send out two conflicting messages. He was anxious to deny that the Tories wished to ‘trash the state’ or undermine public services; and yet he wanted to give the impression that he favoured smaller government. The trick was to convince the public that it was possible to have a smaller state and better services. ‘More for less’, they called it.
This also suited the instincts of the LibDems, which, despite their drift Leftwards over the years, began life as a free market party. In 2004, a group within the party –including Nick Clegg, David Laws and Chris Huhne – sought to revive this tradition with the publication of a collection of essays called the Orange Book. Its aim was to return the party to its liberal roots – a belief in small government, the free market and civil liberties.
But while this accorded with the liberal tradition it was less attractive to the approach bolted on to the party after its marriage to the Social Democratic Party in the 1980s. For the SDP, the free market was a way for a government to organise the economy – rather than absence of the state from decision-making beyond the provision of sufficient funds to ensure education and health care.
The main reason why the leading LibDems still believe the coalition is worth preserving (apart from naked self-interest) is that they purport to share the Tory ambition of a smaller state. To that end, they have supported some of the more radical policies championed by the Tories, notably Education Secretary Michael Gove’s free schools and Work and Pensions Secretary Iain Duncan Smith’s welfare crackdown.
The problem is that neither party has shown the strength of its convictions to take this to its logical conclusion. Principally, this is because they have been knocked off course by the persistence of the recession and the seemingly intractable nature of the deficit. But this could have been an opportunity rather than the millstone it has become had the Tory hierarchy not started to show ambivalence about their ideological commitment to, and appetite for, a small state.
Even Philip Hammond, who in opposition was the high priest of small-state Conservatism, seems to have lost the faith, judging by his response to the G4S Olympic Games security debacle. He says this has changed his view about the efficacy of private sector involvement in public service provision.
The government is therefore left with one policy: more austerity. As Cameron said in an interview with The Daily Telegraph earlier in the summer, there will be no respite until 2020 at least. In a speech to the Institute for Government, Cabinet secretary Jeremy Heywood reinforced the grim message: ‘Spending cuts could last seven, eight, ten years.’
But this is a counsel of despair. Instead of just cutting from the bottom up, the government needs to be more aggressive in reducing welfare and public-sector wage costs, making space for income and business tax cuts to stimulate growth. Small states grow faster than big ones; yet progress towards a more affordable public sector is far too slow.
Better systems management and partnerships with the private and voluntary sectors have been urged on successive governments for years with only modest success. This should have been done in times of plenty since the impact would have been lessened by growth; but necessity now demands action in lean times. The question now, however, is whether the coalition parties any longer have the will to carry it through.
Orange Book LibDems say they still aspire to a small state. David Laws, the former chief secretary to the Treasury, recently called for state spending to take no more than 40% of gross domestic product. But the high tide of small state liberalism appears to be receding. Persuading LibDem activists of the need for supply side reforms, when they are making no progress on the constitutional changes they want, is now almost certainly a fruitless task.
Some more far-sighted Tories see this as an opportunity for rebooting the coalition, which otherwise risks foundering on the rocks of constitutional reform. Dominic Raab, Tory MP for Esher, says: ‘Why not draw on LibDem thinking? David Laws suggested cutting state spending by 14% of GDP and LibDems previously advocated abolishing the Department for Business, Innovation and Skills (saving £8bn). Reshaping the bloated state would pay for the shot in the arm our entrepreneurs sorely need.’
But Laws no longer necessarily reflects general LibDem opinion. Richard Grayson, a former
LibDem director of policy, says: ‘Simply creating a state of a particular size will not solve all the policy challenges we face.’
The opportunity that two parties wedded to the idea of small government have missed is to redefine what the state does and turn over more public services to the private and voluntary sectors. Politically this has become even more difficult to sell as an idea because the G4S security fiasco did so much damage to the concept of outsourcing. But the pressure on the public finances means there is little choice but for an expansion of outsourcing right across the public sector, nationally and locally.
In Opposition, the Conservatives were keen to pursue the approach adopted in Canada in the mid-1990s when its budget deficit spiralled out of control. This involved a comprehensive re-evaluation of what functions government should be undertaking and jettisoning anything non-essential. The policy reduced federal spending by almost 10% in two years, leaving room for tax cuts that helped boost economic growth.
More recently, government officials have been looking to another Commonwealth country for ideas, New Zealand. While its economic problems are clearly on a smaller scale, the lessons from Down Under on transforming the public sector over the past three decades can be applied here. In an article for the Reform think-tank, Ruth Richardson, the former New Zealand finance minister, said: ‘The UK government faces the same urgent imperatives that New Zealand did – a crippling fiscal position; an inefficient and unaccountable public sector; and a bureaucracy incapable of innovation.
‘Rather than succumb to the status quo and reform at the margins of what the bureaucracy was already doing, we transformed both the conduct of public finances and civil service employment.’
This is an approach that conforms to the instincts of coalition ministers, yet they seem to be heading towards another round of draconian cuts in programmes that will cause maximum damage with minimum benefit.
There have been some tentative moves in the right direction. The early success of the Circle group in turning around Hinchingbrooke Hospital in Cambridgeshire shows what can be done. The company says waiting times have been cut, care improved and savings made just six months into the ten-year contract. This is a key test of the ability of the private sector to transform struggling public services right across government.
In light of the G4S fiasco, supporters are desperately trying to keep the concept alive. Sean Worth of the Policy Exchange think-tank wrote in The Daily Telegraph: ‘We need more reform, not less: more transparency over contracts; more independent oversight of markets; more interventions to make people’s choices a reality.’
But, again, the totemic nature of the NHS (look at the public reaction to the way it was depicted by Danny Boyle at the Olympic opening ceremony) makes it impossible to argue for greater private sector involvement or the expansion of co-payment without the roof falling in.
Moreover, Labour intends to use the G4S shambles to drive home its opposition to more private sector involvement in state services, even though ministers under Tony Blair pioneered the idea of greater market involvement in hospitals and schools. The political case for a smaller state is becoming harder to make just when it should be at its most persuasive.
The fact is that all the easy cuts have been made yet spending must be reduced further. Cabinet Office minister Francis Maude is eager to sell off more state assets and improve central government systems. But even the most straightforward tasks have been botched. A recent report from the Commons Public Accounts Committee found that efforts to save money by pooling back-office functions had failed to deliver the expected benefits. Some shared service centres have actually cost the taxpayer more than they have saved. If a basic efficiency drive does not work, what are the chances of a fundamental rethink of what the government should and shouldn’t be doing actually happening?
The next Spending Review needs to be much more than just another exercise in salami slicing. It must focus much more on redefining the state’s role and making big inroads into areas of spending that have got out of hand, notably welfare. But is there an appetite in the coalition for the political battle this will entail? Even if ministers are trying to keep the coalition flame alight, activists on both sides show signs of weariness with the concessions each has made to hold together a government that has delivered little of what they both wanted.
On the other hand, if they don’t do something dramatic, and soon, they will spend the rest of this Parliament preparing for Opposition in the next.
Philip Johnston is assistant editor of The Daily Telegraph. This article first appeared in the September issue of Public Finance