The inside track

1 Jul 10
Ahead of the Spending Review, government departments face the tough task of making deep savings while protecting frontline services. Steve Freer offers ministers some timely advice
By Steve Freer

1 July 2010

Ahead of the Spending Review, government departments face the tough task of making deep savings while protecting frontline services. Steve Freer offers ministers some timely advice

The speculation about the scale of funding reductions facing UK public services over the next four years has finally been confirmed. There is more detail to come in the Comprehensive Spending Review on October 20, but Chancellor George Osborne painted the big brush strokes on spending in his emergency Budget.

There will be real increases in NHS spending throughout the Parliament and international aid obligations will be honoured. Thereafter, the Budget figures imply that other departments and public bodies will face an average real cut of around 25% over four years. Not everyone will face the same level of reduction. The chancellor referred specifically to the particular ­pressures on our education system and on defence, with the clear implication that these services will experience less than the average level of cuts.

CIPFA and the Society of Local ­Authority Chief Executives and Senior Managers had rehearsed very similar forecasts to these in our joint report, After the downturn, published in December 2009. Focusing at that time on the three years following this general election (2011 to 2014), we rehearsed two scenarios reflecting contrasting levels of ambition for rebalancing the public finances. The gentler of the two options anticipated real-terms funding reductions of 7.5% or approximately 2.5% per annum over the three-year period. The more aggressive scenario considered reductions of 15% or around 5% per annum.

Although not explicitly labelled as such, the first scenario was intended to be close to the course Labour would pursue while the second was considered to be the ­Conservatives’ more likely course.
In both scenarios, we stressed that we were initially rehearsing funding reductions at ‘headline level’, before any decisions about protecting or prioritising specific budgets, enabling the report to discuss the potential impact of decisions to protect favoured services. For example, we estimated that a 5% per annum cut might be stretched to between 5% and 7.5% depending upon the precise details of the Cabinet’s decisions to protect sensitive budgets. Interestingly, the coalition government’s own estimate of an (after protection) average reduction of 25% over four years, equivalent to approximately 6.25% per annum, sits perfectly at the mid-point of this range.

Importantly, After the downturn went on to consider the effect of local priorities on these national decisions. Local public bodies will not apply average cuts indiscriminately to all their services. Like the Cabinet nationally, they will exercise judgement about which services require a degree of protection and which, perhaps by default, must carry a heavier share of the burden.

We estimated that this ‘second tier’ of prioritisation decisions would deepen cuts to unprotected budgets further – a 5% ‘headline reduction’ potentially now being stretched to somewhere in the range of 5%–10%. In practice, we will see this ultimate level of cuts emerging by degrees as local public bodies announce their spending decisions – many through the instalments of annual budgets – over the four-year period.

The big question, of course, is whether cuts on this unprecedented scale can be made without decimating vital public services. The government’s plan is ambitious and poses the obverse of the arguments about inter-generational equity. Just as it would be unfair to the point of irresponsibility to bequeath a large deficit to future generations, so it raises questions of equity to expect one group of taxpayers and citizens at a point in time to bear all of the pain of eliminating such a large deficit.

Prospects for success will, of course, be considerably brighter if everyone is rowing in the same direction. But maintaining solidarity will clearly be a significant challenge. Protest and opposition seems inevitable – most obviously from lobby groups and the public at large seeking to protect threatened services, and from trade unions seeking to protect public sector jobs. Depending upon its scale, such opposition is likely to lead to significant stresses within the coalition government, particularly if the results of local elections reveal a diminishing public taste for the bitter medicine.
A great deal therefore hangs upon the skill with which ministers can steer these reductions along without affecting the most sensitive frontline services.

After the downturn identified three key strategic options which were expected to loom large in these deliberations: first, redefining the relationship between the state and the individual; secondly, a significant de-layering of the public sector with many more decisions taken locally with minimal oversight; and thirdly, a major initiative to maximise economies by much more effective ­collaboration ­between public bodies.

Although still early days, we can ­already see some of these themes underpinning the government’s policy thinking. For example, welfare reform is, as expected, a major strand of policy. The intention it seems is not only to reduce expenditure in this area, by £11bn by 2014/15, but also, through the interplay with tax policy, to create greater incentives for independence and self-sufficiency.

Not surprisingly, the government’s approach in this area is carefully calibrated. In the Budget speech, for example, the chancellor was very clear that Child Benefit would remain a universal benefit. Similarly, he was very keen to emphasise the restoration of the earnings link for retirement pensions, albeit while increasing the state pension age. The implication seems to be that the government does plan to adjust the relationship between the state and the individual but in a carefully managed, pragmatic way, which recognises significant red lines around particular features of the current contract.

The Budget speech itself was rather less vocal on option two, taking more decisions locally with minimal oversight from government and other agencies acting on its behalf. However, the coalition programme for government has set a very fast pace in this area, saying: ‘We will promote the radical devolution of power and greater financial autonomy to local government and community groups.’
Additionally, we have already seen a number of announcements in this direction such as abolishing regional development agencies, discontinuing the Comprehensive Area Assessment and giving councils a general power of competence.

One key issue in this area will be the fortunes of the political parties in local elections over the course of the Parliament. It is easy to rehearse the possibility that changes of political control in local government might lead to greater opposition and resistance to implementing cuts. It is hardly polite to mention the parallels, but the current conditions are similar to the 1980s, when the Thatcher government was intent on constraining public expenditure and large parts of local government took on the mantle of defenders of local services. Let’s hope that those particular chapters of history are not repeated.

The third option – driving out savings by maximising collaboration and efficiency across the public services – is perhaps the least visible one. It is not yet clear whether there will be major new policy initiatives in this area. It might be that ideas are taking longer to formulate and engineer into solutions. For obvious reasons, this is an area in which consultation across Whitehall – which always takes time – is essential.

Alternatively, it might be that the ­government takes the view that money – or rather, the lack of it – will automatically provide a new impetus and urgency, forcing departments and public bodies to collaborate where previously commitment has been half-hearted.

That just might be the triumph of hope over experience. It also misses the need for a more joined-up public sector to focus on best value for the public purse as a whole rather than the narrow interests of individual departments or bodies.

Hopefully, all three strategic options – and perhaps others too – will continue to develop and take shape over the coming weeks. Given the scale of the challenge, we are definitely going to require a number of effective weapons in the armoury.

Steve Freer is chief executive of CIPFA

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