With the FT and IFS reports this week it is abundantly clear now to everyone what some of us have been saying for ages – this election is being fought with a big void where the truth about the public finances and spending cuts ought to be. But if what they are telling us about efficiency is anything to go by, we might not be much better off if they did start talking about “the cuts”.
‘Efficiency’ has become a sort of Harry Potter magic wand which is being waved by all the main parties in the election in the hope that they can magically shrink the public sector deficit without any visible impact on services.
The must egregious example is the Tories' claim to be able to save £6bn in efficiencies in order to ‘stop the jobs tax’ – the National Insurance increases proposed by Labour. (They actually propose £12bn of additional savings, but £6bn are ‘non-cashable’ in areas like the NHS and international development).
The simple problem is that the ‘remedy’ for the jobs tax would almost certainly lead to far more public and private sector job losses than the NIC increase would itself.
I have already pointed out, and been widely quoted as saying, that a freeze on public sector jobs – as proposed by the Tories – that would ‘save’ £1bn – £2bn would be equivalent to 20,000 to 40,000 jobs. That is already probably more job losses than the NICs increase would create.
Firstly, let’s be clear that this is not an efficiency saving. It is only an efficiency saving if the output – the services delivered – of the organisations from which these 20-40,000 jobs are taken don’t decrease. Or put it another way, productivity has to increase to compensate for the lost jobs. Unless and until that happens this is simply a cut.
But secondly, that is only £1-2bn of the Tories' proposed savings. The rest of the total £12bn is proposed to come from things like reduced spending on IT (£2bn -£4bn), on procurement (£3bn), through outsourcing back-office jobs, by cutting ‘discretionary spending’ (£2,5bn – mostly on external staffing), and reduced property costs. (Figures in brackets from Sir Peter Gershon via the FT).
Some of these ‘savings’ will clearly have an impact on private sector jobs – but how big an impact? The “public services industry” – the private companies that service the public sector – is a significant part of the economy. The 2008 Deanne Julius review for the government put it at £79bn and employing 1.2 million staff – or about 15,000 staff per billion of turnover. According to Julius, it is over 50% of procurement spending – the rest being “goods”
Although some of the £12bn ‘savings’ in areas like the NHS will not result in reduced spending by the government, because it will be re-allocated to other areas of spending, these will still be cuts for the public services industry. On Gershon’s figures this looks like it would very conservatively be a reduction of government spending into the public services industry of £4-5bn.
Is it possible to calculate the jobs effect from this revenue loss? The Julius Review appears to use a 1:1 basis for revenues to employment when estimating the impact of increased government outsourcing on the growth of the public services industry. Certainly, because these are “services” companies not “goods” their main product is people. But I think we should be cautious and assume only a 1:0.75 ratio between reduced income for this sector and job losses, as for most of these firms, personnel is 75% of their outlay. This means that reduced government spending into the public services industry would equate to 45,000 – 56,000 jobs.
Add this to the (at least) 20,000-40,000 jobs lost in the public sector and you get the Tories ‘savings’ equating to between 65,000 and 106,000 jobs in total. This also doesn’t account for potential layoffs in goods suppliers.
As I said in a previous post, the NICs increase, according to an authoritative source - Rupert Harrison, the Conservatives’ chief economic adviser - “would cost just 23,000 jobs – so roughly a half to a third of the Tories efficiency savings.
So the ‘cure’ for the so-called ‘jobs-tax’ turns out to be far more costly for jobs than the ‘problem’. And of course that is all assuming that the ‘efficiency savings’ really are efficiencies. In order to know that we’d need to know if the £12bn cuts in spending on all the aspects proposed resulted in a loss in quantity and quality of services. To the extent that they do affect services, they are not efficiencies at all – just cuts, plain and simple. And no amount of magic wand waving can alter that.
All parties should be clear that efficiencies will mean some job losses. And if the Tories main concern is jobs, as opposed to tax cuts, they need to look again at their plans.
None of which avoids the central issue that spelling out how to fill the really big gap between the spending and income of government is still not being properly addressed – the efficiency magic, even if it was real, only scratches the surface of that problem. But perhaps we should be grateful they haven’t started on the Hogwarts version of public spending yet.
Colin Talbot is professor of public policy and management, Manchester Business School. This post first appeared on <http://whitehallwatch.wordpress.com/>
