Opening the second front

30 Oct 09
The scale of the public sector deficit demands no-holds-barred solutions. So could Total Place – the latest weapon in the government’s armoury – help to lower costs without damaging vital services? Tony Travers predicts turf wars ahead
30 October 2009

By Tony Travers

The scale of the public sector deficit demands no-holds-barred solutions. So could Total Place – the latest weapon in the government’s armoury – help to lower costs without damaging vital services? Tony Travers predicts turf wars ahead 

The hundreds of pages written about the oncoming public spending squeeze have been in inverse proportion to the willingness of national politicians to address the medium-term problems of expenditure control and taxation. There is a sense of inevitability about the need to cut spending on most state provision in the years from 2011/12. Yet, apart from a few generalised statements about ‘challenges’ and ‘difficult times ahead’, there is little of substance to guide public service planners.

The Institute for Fiscal Studies has adopted a Cassandra-like tone in its many interventions on the issue. Its mixture of accurate prediction and pessimism recently won it Prospect magazine’s ‘Think-Tank of the Year’ award. Steve Bundred, chief executive of the Audit Commission, has also been willing to describe the likely pressures facing spending and tax. The King’s Fund, jointly with the IFS, has been open about the pain that lies ahead. But from politicians there has been virtually no leadership and no willingness to ­explain what lies ahead.

Conversely, the government has continued to come forward with new spending ­programmes. At the Labour Party conference, it was announced that care charges for elderly people at home would end; hospital car parking charges would be abolished; and there would be new care homes for 16 and 17-year-old single ­mothers.

More recently, a number of major arts projects have been given the go-ahead, such as the expansion of Tate Modern and the British Museum. Benefits are to rise by 2.5%, not held down in line with the negative retail price index.

The Conservatives struck a more sombre note at their conference. Shadow chancellor George Osborne went further than Labour in accepting the explicit need for change, making commitments to a wide public sector pay squeeze and raising the retirement age. However, there is little evidence that the public was ­grateful for Osborne’s honesty, and neither party has been willing to propose tax increases.

Opinion polling suggests the public accepts there might be a need for expenditure cuts and/or tax rises. However, the polls also show that people want other people’s services cut and other people’s taxes to rise. Entirely rationally, we all want to keep our treasured services while ensuring someone else pays for them. So, what is to be done to address this conundrum?

Last week, Communities Secretary John Denham stepped into the breach with a speech that gave much prominence to the role of the Total Place initiative in producing efficiencies and thus avoiding some of the problems of reduced spending.

This simple idea, which was given its name by the Treasury’s Operational Efficiency Programme report, is intended, according to Denham, to ‘map all of the public service spending going into a local area. And then to ask hard questions about the best use of that money.’

There is little doubt that Total Place, – the brainchild of former mandarin and Institute for Government executive director Sir Michael Bichard – has the potential to both bring significant benefits to the quality of public services and reduce costs. The communities secretary cited the initiative as an element in Labour’s commitment to localism.

The difficulty with Total Place is not the concept or Denham’s undoubted willingness to develop it. The newish secretary of state is one of the keenest thinkers to occupy his office for some time. But he arrives very late in the day, when adopting the best opportunities offered by Total Place will be fraught with difficulties.

For a start, the ‘mapping’ of spending, while a good idea, is not at all the same as giving councils the freedom to bring all the money together and use it coherently. Indeed, the current pilot exercise has been presented as part of a bidding ­process to ask Whitehall for greater freedoms rather than moving directly to the consistent use of local resources.

Secondly, major problems lie elsewhere in Whitehall, where ministers and permanent secretaries, like First World War generals, jealously guard their territory. Unless there were to be a radical change in the behaviour of the Home Office, the Department of Health and the Department for Children, Schools and Families, they would be most unwilling to allow ‘their’ resources to be brought together with those of local authorities. But without full agreement to merge budgets to allow efficiencies and genuine joint provision, Total Place will not produce the impetus for savings on the scale possible.

It will also have to face down the threat from the non-executive board members of the quangos and other organisations that provide local public services. Local authorities, which enjoy the magic ingredient of electoral legitimacy, lead Total Place. Any suggestion that councils might take the lead in the use of, say, primary care trust resources is bound to face ­opposition from board members.

The Conservatives have a policy similar to Total Place. However, the party’s desire to scrap regulatory burdens, including the Comprehensive Area Assessment, would make it less likely that this kind of joint action by local public service providers would pay dividends. The CAA, if gently achieved, could be the spur to efficiency and effectiveness in local services.

Unless Total Place or something similar achieved major efficiencies, the only option for the public finances would be to raise taxes more generally and/or make substantial reductions in public ­expenditure. The difficulty with the ‘higher taxes’ route is that virtually no mainstream British politician will argue for it. This year, government receipts from taxation will be around 33% of gross domestic product. In recent years, the tax take has rarely exceeded 38%. Yet public expenditure has grown to almost 50% of GDP.

Last week, the National Institute of Economic and Social Research produced ‘shock horror’ headlines by observing that an increase in basic income tax rates of 7p in the pound might be needed to help bring down the deficit – equivalent to £1,844 per household. In addition, the NIESR suggested that VAT could also be levied on previously excluded items. No politician rushed to agree that higher taxes might be a good thing to support.

Of course, the end of the recession – ­assuming it leads to several years of decent growth – would start to restore the tax yield while reducing public spending as a share of GDP. The gap between the two, largely filled by borrowing, would shrink naturally. But it would take five or more years of ‘trend’ growth to achieve this. At present, no-one can be certain such continuous growth will occur. Moreover, a significant proportion of the additional GDP would have to be taken in tax for public borrowing to shrink and debt to stop growing. Even then, public borrowing would be almost £100bn in 2013/14.

Thus, the best the public can now look forward to is a period of years when disposable incomes grow only sluggishly. This, of itself, might limit GDP growth. In effect, we will have to forgo personal income increases for many years to pay back part of the huge public borrowing that will have been racked up between 2008 and the middle of the next decade.

There will, of course, be a trade-off between the size of disposable household income and public expenditure reductions. The greater the reduction in public spending, the less the need for tax rises. In this sense, the public sector is locked in a struggle with disposable incomes in the years ahead. Because politicians will feel the need to allow the electorate some of the benefits of economic growth, it is inevitable that public spending reductions will be needed even if GDP starts to grow at trend from 2011/12.

Many possible ways of trimming public expenditure have been rehearsed in recent months. Efficiency savings, asset sales, procurement improvements, social security cuts, delayed public sector retirement, increased pension contributions and pay freezes are among the proposals put forward for reductions that would not affect ‘frontline’ services. Total Place, in fairness, would be the most beneficial and benign way of lowering spending.

Britain, almost uniquely, must face the need to cut public expenditure and/or put up taxes within a political system that is itself in an enfeebled condition. Opinion polling has for years shown MPs to be among the least trusted of all professions. The drawn-out parliamentary expenses scandal has unquestionably made things worse.

This weakness causes a serious problem. Many commentators state that the government, or politicians more generally, should spell out the complex choices facing the electorate and then get agreement to take a particular course of action. Yet in a country where the political class is largely discredited, it is increasingly difficult to see how national politicians could get a powerful mandate to cut the size of the state or put up taxation significantly.

The electorate might simply want to maintain public expenditure at 45% or more of GDP, while refusing to allow politicians to increase tax above, say 38%. This would be the political equivalent of those MC Escher drawings that show water apparently flowing uphill. For years, there have been light-hearted remarks about Britain wanting ‘European services with US tax levels’. Looking ahead, it appears that unless the major political parties can bring themselves to come clean about the choices that lie ahead, the next government will have ­little mandate for radical change.

One thing is clear. Britain will find itself living with far higher national debt levels from now on. It is virtually ­impossible to imagine any government enduring the political agony of bringing down annual borrowing and then attempting to reduce overall debt back to the 40% level set by Gordon Brown as chancellor in his sustainable investment rule. Britain’s national debt will rise to 90% or more of GDP and stay there, probably for many years.

As long as interest rates remain low and the markets have confidence in the UK economy, the costs of servicing this much bigger national debt would remain acceptable. If at any point the holders and purchasers of UK government debt lose confidence, the public spending ­implications would be dire.

For public service managers, the above analysis means they are in the dark as they attempt to plan spending programmes for 2010/11 and beyond. The chancellor has said he will publish spending plans for 2011/12 to 2013/14 in this autumn’s Pre-Budget Report. Total Place and other efficiency initiatives will not produce anything like the necessary savings in this three-year period. If there is a change of government, it seems likely there will be cuts to public spending ­during 2010.

Many public sector finance chiefs will plan on the basis that there are likely to be sharp spending reductions in 2010/11. If this happens, the chancellor will find it a bit easier to bring down spending in mid-year. 2011/12 will be a year of major spending cuts whichever party wins the general election.

These are extraordinary times. ­Britain’s economy, public finances and political system are all, simultaneously, under threat. No-one can predict the ­future with certainty. Consequently, public servants are likely to take precautionary actions that, to some extent, run ahead of the government’s willingness to spell out its public expenditure and ­taxation plans.

By far the most important requirement is that the country’s political leaders pull themselves together and start to gain ­legitimacy for the steps they will need to take. If they do not do this, the ­implications will be ominous indeed.

Tony Travers is the director of the Greater London Group at the London School of Economics

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