In October, Prime Minister Gordon Brown said that cuts were needed in ‘unnecessary’ public expenditure. What is to be done? What is ‘unnecessary’? We are told that we face either major reductions in expenditure by 2013/14 or large increases in taxation or both. Such changes are likely to involve much pain, many job losses, worse public services and less disposable income.
However, there might be another way to achieve major savings. We could start by combating fraud more effectively, in both the public and private sectors.
It is now eminently possible to calculate the financial effects of such losses. And, of course, once you can measure the cost of fraud you can treat it like any other cost – something to be reduced and minimised.
The extent of the problem is examined in a report published today by the Centre for Counter Fraud Studies and Macintyre Hudson LLP. The financial cost of fraud found the average level of losses to be 4.57% of expenditure.
Taken as a proportion of UK public expenditure of almost £600bn this year, 4.57% equates to losses of £27bn; applied to global gross domestic product for 2008, it equates to the total global cost of health care in 2008.
The issue is especially stark in the public sector. Losses due to error and fraud in health care equate to 5.59% of expenditure, while for social security the rate is 5.57%.
Fraud is one of the last great unreduced business costs. Public sector managers should now be making plans to pre-empt and minimise losses. The new approach might come as a shock to those brought up on a diet of cops and robbers TV shows such as The Sweeney, or more recently, Ashes to Ashes, but fraud needs to be addressed before a crime is committed, as well as after.
Yes, fraud is unethical, immoral and unlawful; yes, the individuals who are proven to have been involved should be punished; yes, the sums lost to fraud need to be traced and recovered. However, these are actions that take place after the fraud losses have happened – after the resources have been diverted from where they were intended and after the economic damage has occurred.
Examples in the report from around the world show that losses can be successfully and quickly reduced – by up to 50%. It is difficult to argue that fraud is necessary, so might one of the answers to public expenditure cuts lie in reducing this genuinely ‘unnecessary’ expenditure?
Jim Gee is director of counter fraud services at Macintyre Hudson LLP and chair of the Centre for Counter Fraud Studies. The financial cost of fraud is available here
