Doing the maths, by Joseph McHugh

4 Oct 07
The Comprehensive Spending Review is imminent but Chief Secretary to the Treasury Andy Burnham still has some juggling to do not least to find the funding for the PM's new plans for public services. It's a tough job but he can do it, he tells Joseph McHugh

05 October 2007

The Comprehensive Spending Review is imminent but Chief Secretary to the Treasury Andy Burnham still has some juggling to do — not least to find the funding for the PM's new plans for public services. It's a tough job but he can do it, he tells Joseph McHugh

When Gordon Brown used his speech at last week's Labour Party conference to rally the troops in Bournemouth, his chief secretary to the Treasury, Andy Burnham, could have been forgiven for not joining in the celebrations afterwards.

The new prime minister used his inaugural outing as party leader to unleash a blizzard of policy initiatives designed to tempt the denizens of middle England to stick with Team Gordon in the election that, according to the current fevered speculation, might be looming.

But, as the man charged with making the government's spending sums add up, Burnham is responsible for finding the finance to underpin Brown's fine words about treating service users 'not as a number, but with respect'.

The C word that has caused such trouble at previous conferences – choice – might have been missing from Brown's pledges on public services, but his vow to usher in a new era of 'personalised public services' has equally profound implications for the bottom line.

Burnham is currently putting the finishing touches to the Comprehensive Spending Review, which will set out the government's spending plans for 2008/09, 2009/10, and 2010/11, and determine its strategic policy direction for the next decade.

In the 'tighter fiscal environment' – to use the Treasury's favoured phrase – that the public finances are now entering, finding the funding to match Brown's aspirations is no easy feat.

Burnham acknowledged the nature of this challenge when he spoke to Public Finance in his first major interview since taking his seat around the Cabinet table, in the wake of the Blair-Brown transition.

'This is a tighter spending round, and there are areas where pressures are growing,' he said. 'But, overall, the story for me in this CSR is that the step change in public investment that was made over the past decade is being maintained and it's being taken forward further still. We're talking about a picture of growth in public spending over the next three years.'

That might be so, but the strictures facing Burnham and the chancellor, Alistair Darling, were made painfully clear by the latest public finance figures, which were published by the Office for National Statistics as the prime minister was addressing the party faithful last week.

These showed that in August the government borrowing requirement was £9.1bn, instead of the £6.6bn target set out in the March Budget, and £2.3bn higher than in the same month last year.

If the trend continues over the remainder of the financial year, government borrowing could overshoot the £34bn target for 2007/08 by £3bn.

But that's not all. Corporation tax receipts fell dramatically last month, by £575m to £704m, compared with August 2006. The recent turmoil on the markets and the credit crunch caused by the Northern Rock crisis could damage tax receipts – and therefore the projected state of the public finances – even further.

The respected independent think-tank, the Institute for Fiscal Studies, thinks it detects some rather jangled nerves among the residents of Horse Guards Road. 'In previous years the government has always topped up spending plans in subsequent reviews,' research economist Gemma Tetlow tells PF.

'But the danger over the next few years is that receipts might be less buoyant than expected. The Treasury will doubtless be concerned that the recent problems in banks and financial markets will reduce the tax payments it receives from the financial sector, an unusually important source of revenue for the UK.'

Burnham, though, is resolutely upbeat, insisting that any services requiring additional investment over the coming years will get it. 'We have made a paradigm shift in terms of how public services are funded,' he says. 'This CSR maintains that but builds on it as well, particularly in those areas deemed to most need the extra support.'

But public sector professionals shouldn't breathe a sigh of relief just yet. The overall 'spending envelope', in Treasury-speak, has been set at 1.9% real-terms growth a year from 2008 to 2011. That compares with average real-terms growth of 4% between 1999/00 and 2007/08.

In addition, a number of Whitehall departments have already been given their CSR settlements – and things are certainly not what they used to be. The Home Office has had its budget frozen in real terms; the Ministry of Justice's budget will be reduced by 3.5%; and the Department for Work and Pensions will have to cut its administrative budget by 5% annually. A number of smaller departments face cuts of a similar order to their overall budgets.

The big winner so far has been education, which gets a settlement of 2.4% a year – but this hardly compares with the average of 5.6% the sector has enjoyed since 1999.

According to the IFS, this leaves the government with some difficult choices about which policy priorities to fund in the next spending period. If Brown wants to protect investment in the health service – and his speech in Bournemouth suggests he does – then a 4.4% annual rise, as recommended by Sir Derek Wanless in his assessment of future NHS funding requirements, leaves just 0.3% to share out among the remaining departments.

That means there will be no substantial new funding for the drive to reduce child poverty, which has been a key government pledge. And against such a backdrop, areas such as transport, the environment and local government can expect only loose change to add to their existing funding pots.

No wonder Sir Simon Milton, chair of the Local Government Association, has written to council leaders in the past fortnight telling them to prepare residents for cuts in local services.

Burnham refutes the suggestion that cuts are the inevitable consequence, however, and places responsibility for any such decisions squarely on the shoulders of service providers.'That's a judgement that principally and rightly people on the ground have to make. This isn't a box-ticking exercise where you can make changes without thinking through the long-term consequences.'

He argues instead that the efficiency agenda, first drawn up by Sir Peter Gershon in his 2004 report and set to step up a gear in the CSR period, can close the financial gap. All Whitehall departments and local authorities will have to make cashable efficiency savings of 3% a year on their overall budgets.

'I make no apologies for saying there is a very real edge to the efficiencies agenda and that will continue, indeed it will be accelerated in many ways in this CSR. People may not find that reassuring, but that is a fact of this spending review,' Burnham says.

'The targets are incredibly important, because if people take them seriously rather than paying lip service to them, the levels of growth that they have become accustomed to can be sustained. The savings will be cashable and they will be able to redeploy them on new and emerging priorities.'

He also dismisses the notion that the savings generated by Gershon existed largely on paper, and that relying on more of the same to balance the books is fantasy economics. 'An incredible amount of progress has been made on this agenda since Sir Peter Gershon's report. That was a real moment of change within government, and difficult, challenging decisions have been made to release those resources.'

The government's hard-headed approach has garnered support from those concerned that, as the financial pressure increases, so too will the tax take.

Neil Bentley, director of public services at business group the CBI, is backing the government's belt-tightening exercise. 'It's good to keep a tight rein on public sector spending and the settlement should be seen as an opportunity rather than a threat,' he tells PF. 'There is no need for cuts to services. What you've got to do is see how you can do things differently and more efficiently. The private sector has to do this, so the public sector needs to step up to the mark as well.'

But those at the sharp end of the spending decisions are rather less sure of the calculations that underpin them.

Stephen Jones, the LGA's director of finance and performance, has told PF that the new 3% cashable savings target is twice as much as the cashable element required under Gershon, and way beyond what councils themselves believe they can achieve.

'It's fair to say there is not a meeting of minds here, but the chancellor has confirmed these targets.'

Jones says that, rather than relying on cashable efficiency gains that might or might not materialise, ministers need to face up to some tough decisions. 'The government needs to think very carefully about what it funds local government to do, given the expectations it has already set,' he says.

In particular, local authorities want a proportion of the NHS's budget for acute services for elderly people to be switched to councils' adult social care funds. This is an audacious bid that would give local government a 4% real-terms annual increase. Without it, the sector is expecting anything from 0% to 2%.

'The government wants people to have a reasonable standard of adult social care, although it is leaving where the line is drawn up to local authorities. Given the demand, it's going to be enormously difficult for local government to deliver,' Jones says. 'We think the case has been heard and it's quite well understood.'

Weighing against such a move, however, are recent memories of NHS trusts in deficit and the significant political damage it caused. It seems unlikely that government will risk a rerun, even if the funding switch does make sense in terms of service provision.

Certainly, Burnham's thinking does not seem to be moving in that direction. Rather than a radical reordering of financial priorities, his focus is on finding new mechanisms for promoting that holy grail of recent years – joined-up government.

In particular, he is placing his faith in a new, smarter version of Public Service Agreements, the targets that were introduced as part of the first CSR in 1998 and are supposed to stipulate the key objectives that ministries are expected to meet in return for their funding allocations. Critics, however, have long argued that they are too vague and aspirational to serve any useful purpose.

'Everyone looks at the budget for individual headings and that becomes the story, but we are trying to do something different with this spending review,' Burnham says. 'If you can align social care and health, for instance, around the same public service delivery objectives, then I'm really confident you can make much greater use of the public resources available. That will be the hallmark of this CSR.'

Under the new improved PSA regime, according to Burnham, the existing tangle of targets will be replaced with 30 key national objectives, and responsibility for meeting many of these will be shared by departments across Whitehall. Having this 'sharper focus' will improve accountability, he argues.

The revamped PSAs will also allow local service providers to establish local priorities – dare one say it, targets – in response to local needs. But Burnham does not accept this could give rise to the 'postcode lotteries' in services that have haunted politicians in the past.

'A postcode lottery is not the same as services being delivered in a different way with a different emphasis, which I think is acceptable,' he says. 'We should empower local communities to have a greater say over how they want services to be delivered.'

More importantly, the new framework will apparently do away with the perverse incentives generated by contradictory or competing targets, which many in the public sector have identified as the most pernicious aspect of the existing regime.

'I'd describe it as an evolution in the PSA regime, rather than a renunciation,' he says. 'But it's an evolution that shows we have listened to professionals in the front line. We do understand how, if overused, targets can be disempowering and demotivating, and we do understand that if you give people more ability to influence them, then you do create more of a sense of shared enterprise.'

Burnham speculates that the targets culture might have hindered joint working, with each organisation concentrating on dancing to its Whitehall master's tune. But he is convinced that PSA II, together with the funding decisions that are being finalised, will usher in a new era of renewal across the public sector.

'This CSR should move us a long way towards removing the artificial barriers to improving services,' he declares boldly.

Let's hope Burnham is right. Gordon Brown is depending on him.


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