Think smart

4 Dec 09
In the Pre-Budget Report, the chancellor must consider cutting non-essential public services and make sure others are being provided efficiently – even if this means outsourcing, argues Jon Sibson
4 December 2009

By Jon Sibson


In the Pre-Budget Report, the chancellor must consider cutting non-essential public services and make sure others are being provided efficiently – even if this means outsourcing, argues Jon Sibson


Government is faced with a conundrum – how to manage even more debt at a time when demand for public services is rising.

PricewaterhouseCoopers estimates that  closing the current spending deficit by 2015/16 requires fiscal tightening of around 3% of gross domestic product (equivalent to £43bn at 2009 prices) on top of the tax and spending measures announced in Budget 2009. Chancellor Alistair Darling’s Pre-Budget Report on December 9 is likely to announce further tightening, or at least more details of potential spending cuts.

The chancellor has many potential tax and spending options available to him for bridging the fiscal gap. While further tax increases (on top of the postdated ­measures announced in the Budget) would be politically unpopular, it will be hard to make spending bear the whole weight.

Illustratively, on PwC’s calculations, hitting the 2015/16 target to eliminate the current budget deficit would require a cumulative real reduction in departmental spending of around 17% in the three years to 2013/14 (or around 23% for other departments if health were to be protected from real spending cuts), ­assuming there were to be no further tax increases.  Spending constraint on this scale would be unprecedented in the post-war era.

So it is more likely that there will be a mix of tax and spending measures.  Even this will have serious consequences for the public sector. Dividing the required fiscal tightening evenly between tax and spending would still mean further, real public spending cuts, with total departmental spending down by around 13% in the three years to 2013/14 (or around 17% for other departments if health were to be protected), according to our estimates.

With any credible fiscal scenario, there will be a need for spending restraint.  The challenge will be to make the savings while protecting frontline services as far as possible.

The obvious starting point is to focus on improving operational efficiency in the back office, where the business case for reducing duplication, sharing services and redeploying resources to help service users is clearest. PwC’s response to the Treasury’s Operational Efficiency Programme has already challenged the government to go further than it had planned. Indeed, it estimated that efficiency savings of around £28bn per annum, additional to those in the Budget 2009 plans, could be achieved by 2013/14.

Tactical efficiency savings will not be enough. There is a critical need for a more collaborative approach between organisations within government and the wider public sector – although this will be harder to implement – as well as greater simplification and standardisation of processes. 

The scope for making efficiency savings is also underlined by recent data on public sector productivity. June 2009 figures from the Office for National Statistics indicate that productivity declined slightly in most public sector service areas between 1997 and 2007, while the total public services productivity index fell by 3.2%. Over the same period, private sector productivity is reported to have risen by 22.8%. While it is notoriously difficult to interpret data on public sector productivity (for instance, how should quality of service improvements be factored in?) the contrast between public and private sector productivity over this period ­cannot be ignored.

The government also needs to consider smarter ways to get best results. There are two themes, in particular, that will need to be pursued by the government over the coming years of fiscal constraint. One is getting more value from public spending by joining up different services and different funding pots. The other is encouraging, educating and ‘nudging’ people to change their behaviour in such a way as to avoid or reduce significantly future calls on public spending.

The causes of problems such as educational inequality, obesity and antisocial behaviour are complex and go beyond the remit of individual service providers. Tackling these difficult problems requires a range of interventions and actions from the public, voluntary and private sectors, as well as from individuals, communities and families. The Total Place pilots are pushing in this direction by providing a better understanding of how much is spent in a single policy area.

Smarter provision also demands that  the government enables people to help themselves more. The whole area of personal responsibility and behavioural change is one that has become central to the public service reform debate –  ­framing citizens’ decisions so they are more likely to make the right choice for themselves without large-scale government intervention. The present government has already moved in this direction, with policies on pensions and health. This is bound to become a more important set of policy tools over the coming years.

Doing the same things, just more efficiently and smartly, is unlikely to be enough to address the scale of the problem. The government will also need to stop doing some things so it can focus on higher priority areas. In particular, it must prioritise ruthlessly and ensure spending is rationalised and not wasted because ‘we’ve always done things this way’. This is, of course, easier said than done. It is far too easy to develop lists of activities to cut, programmes to stop and organisations to cull, without thinking through the systemic consequences.  These approaches risk incoherent decisions where some high priority frontline services are cut and less ­important ­activities continue.

A consistent and evidence-based approach is the best way to achieve lasting consensus and success, and ensure a coherent approach to new, lower cost ­public services. PwC recommends separating two important elements of decision ­making: the relative priority of different areas of spend (which is subjective and often needs to be determined politically); and the relative performance of the public sector in providing the service (as determined by an objective cost/benefit analysis), compared with its performance in providing other services that are ­competing for the same money.

Services that are both lower priority and inefficient are candidates to be stopped; if they are provided effectively, there might be cause for privatisation, or possibly for providing the service to a lower standard at a lower cost. In contrast, higher priority services should continue to be provided, but with radical redesign (for example, outsourcing) if the public sector provides them poorly at the moment.

Irrespective of who wins the next general election, fixing the public finances will be critical to steering the economy back to sustainable growth in the longer term. Failure to do so would risk persistently high interest rates, a more volatile currency and a less certain economic environment. This would be a bad outcome for public services and for the more ­vulnerable citizens who rely on them most.

Jon Sibson is government & public sector leader at PricewaterhouseCoopers

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