By Steve Freer | 1 November 2012
Halfway through its term in office, the coalition is still looking for a route map to recovery. The chancellor’s Autumn Statement must offer some way out of here
It is a chilling realisation that the global financial crisis is now in its sixth year and there are few, if any, indications that normal service is about to be resumed. On the contrary, there is still significant concern that things might get a great deal worse before they get better. Notwithstanding European Central Bank president Mario Draghi’s ‘whatever it takes’ intervention in London in July, the crisis in the eurozone remains centre stage. Fears are growing for the financial health of governments and financial institutions across the continent as well for any repercussions for global financial stability.
While the UK is not as severely exposed as members of the common currency, the practical implications of a full-scale crisis in the eurozone would be extremely serious for the country. Trade with European partners would diminish. Lending by banks would become much more difficult and expensive. Banks with significant exposures in the eurozone would require emergency support. The UK economy would fall deeper into recession, with significant adverse implications for business confidence. Either government borrowing would need to rise or public spending plans would have to be cut back sharply. Public bodies would face significant budgetary, treasury management and demand challenges.
It would be hard to rehearse a more depressing backcloth to George Osborne’s Autumn Statement – apprehensively rather than eagerly awaited on December 5. The pressures on the chancellor are immense. Plan A now looks increasingly battered and politically difficult to sustain. His fiscal target for aggregate public debt to fall by 2015/16 is in jeopardy. Of the coalition government’s twin engines for recovery, only one, austerity, has fired. Growth has remained disappointingly elusive as we stand halfway through this Parliament.
However, ministers’ spending reductions are firmly on track – although there is still some distance to travel before they are achieved. The cumulative nature of the challenge means that, inevitably, the hardest part of the journey lies ahead.
Over the four years from 2011/12 to 2014/15, departmental spending on public services is set to be cut in real terms by 11.1%, after accounting for economy-wide inflation. In 2011/12, the cut was 5.2%, meaning that 5.9% is to come this year and over the next two. On top of this, further spending reductions are likely to be required in the two years beyond the current Spending Review period. Based on official forecasts, if no further cuts to other areas of public spending are found, a further 7.5% real-terms reduction in resource public service spending would be needed over 2015/16 and 2016/17.
The chancellor has said he is determined that £10bn of these reductions will come from further welfare benefit cuts. However, it is less clear that this will be the top priority of the Liberal Democrat half of the government.
Public bodies can take a great deal of credit for managing the funding reductions to date so effectively. They have been helped by the fact that opposition has, on the whole, been relatively muted. Whether this continues is one of the critical variables in the equation. The scale of forecast cuts to departmental spending is eye-watering. By 2016/17, real-terms spending is likely to reduce to approximately 85% of 2010/11 levels.
As we have seen in Athens and Madrid recently, public support cannot be taken for granted. Disquiet and dissent are bound to increase as public bodies are forced to consider cuts to sensitive services that have direct implications for the quality of people’s lives and life chances.
The government is acutely aware of the importance of ‘fairness’ in formulating austerity plans. Deputy Prime Minister Nick Clegg is a particular proponent of this argument. However, this is easier to address in public speeches than in public policies. We have seen from the Treasury’s own figures that spending, tax, tax credit and benefit changes made to date by the government have had an above-average impact on the bottom quintile of households. And, inevitably, further benefit changes will have a disproportionate effect on less well-off households.
A great deal will also ride on the skill with which cuts continue to be selected, fashioned into coherent policies and implemented. Since the election in 2010, the government and individual public bodies have taken action in the main areas highlighted in the 2009 CIPFA/Solace report, After the downturn.
First, there have been concerted efforts to readjust the relationship between – and respective responsibilities of – the state and the citizen. We can see this in welfare benefit reforms that aim to reduce dependency and encourage people to work. It is also obvious in service areas where charges have been introduced or increased significantly, with university fees being a notable example.
However, initial expectations that ‘Big Society’ initiatives and organisations might emerge, enabling government to shrink the scope of its activities without adverse impact on communities and users of public services, have to date failed to materialise on any significant scale.
These are some of the areas in which questions of fairness, including inter-generational equity, are apparent. There are obvious resentments associated with being the first generation to pay for a previously free service or making higher contributions to a pension scheme that offers less generous benefits.
Secondly, there have been several policy initiatives that aim to ‘delayer’ the public sector, simplifying structures and reducing costs. Examples include efforts to reduce the number of quangos, abolish regional development agencies and change the structure of the NHS. Frequently, these involve significant one-off costs as well as the need to reassign responsibilities to other continuing organisations. In many cases, this leads to additional costs and disruption to services in the short term in pursuit of medium-term improvements and savings.
‘Delayering’ is also being widely practised in smaller-scale settings as the vast majority of public bodies adjust their organisation structures to achieve savings. A recurring theme is the removal of tiers of management and the shortening of chains of command.
The government has also espoused a strong commitment to ‘localism’, placing more confidence in decision-making at local level, free from or subject to minimal oversight. However, it is too early to draw the conclusion that this model will necessarily be implemented on a sufficient scale to produce significant efficiency gains.
Thirdly, ‘collaboration’ initiatives have also been encouraged. Organisations have experimented with shared top-management structures and front- and back-office services, pooled budgets and a number of other forms of co-operation. Many have taken longer to put in place than anticipated, and some have been abandoned along the way. A proportion also seem to have worked well and to have delivered savings, usually from rationalisation of staffing structures. In general, savings appear to be achieved with greater certainty where organisations or elements of them are formally merged, compared with softer, more informal, collaborative working between separate entities.
Additionally, there has been concerted action to restrain public sector pay and reform public sector pensions, as well as a relentless emphasis on measures to ensure the tightest possible stewardship of resources and elimination of waste.
Pay and pensions are critically important because of the people-intensive nature of public services. Over the six years from 2011 to 2017, almost 750,000 public sector jobs are expected to be lost. This is a counterbalance to any growth in private sector jobs, and in the short term will contribute to relatively stagnant levels of total employment in the economy. Regional variations are significant, however, creating major hurdles to the restoration of growth in, for example, the Northeast of England. For many commentators, this is the real contradiction in the strategy – the drag that austerity places on growth.
The chancellor will no doubt reflect on all of this experience in reviewing his spending plans for the period ahead and in determining any adjustments that might be needed in the Autumn Statement. One possible scenario is that there might be pressure for deeper cuts in some programmes to free resources to direct towards carefully targeted pro-growth investments.
Based on feedback from chief finance officers across the public services, a number of learning points emerge increasingly clearly from the experience of the strategies deployed over the past two years. The chancellor would do well to bear these in mind, too, in formulating his plans for the next period.
It is clear that there are no easy ‘silver bullet’ solutions. The business of reducing public spending is more marathon than sprint, requiring very careful planning and rigorous attention to implementation detail. High-profile transformation programmes are particularly difficult to mobilise and sustain on a whole-organisation basis, let alone on a sector-wide basis. The theory might be compelling but the practice is sometimes slow and frustrating.
Initiatives that require collaboration between separate entities – whether public-public or public-private – pose their own distinct and significant challenges. These can include: alignment of agendas; calibration and assignment of risks, rewards and incentives; and integration of processes.
Many ‘unfashionable’ stewardship or housekeeping measures – including tight cost control, reducing overhead spending, and freezing categories of spending such as temporary staff and consultants – continue to play an important part in organisational strategies. Whether these have any longer-term downside consequences, such as failure to invest appropriately in the maintenance of assets, remains to be seen.
Control of staffing costs, by reducing head count, removing layers of supervision and freezing or tightly controlling pay levels, has been critically important because of the labour-intensive nature of most public services. Again, however, there might be a negative longer-term effect in relation to the recruitment and retention of high-quality staff.
Maintaining good communications with stakeholders and managing their expectations are critically important activities, especially in the area of gaining acceptance for significant changes to services. However, this task becomes more, rather than less, difficult over time, as cuts are contemplated in increasingly sensitive areas and tolerance of austerity is eroded. Perceived fairness remains a critically important performance measure.
Public sector organisations and their leaders will be under no illusions about the challenges they will face after the Autumn Statement. The prospects for the short, medium and perhaps even long term are unrelentingly more of the same. A return to stability and previous growth norms remains almost unimaginable for some time to come. Austerity and managed retrenchment – deploying the same strategic options identified in After the downturn in 2009, underpinned by very tight stewardship – will continue to be the order of the day.
Leaders of public bodies will face increasing pressure to bias their strategies towards initiatives that are likely to stimulate growth. This will particularly be the case in local authorities, which will be expected to prioritise economic development activities. They will be encouraged to do this partly as a natural response to their responsibilities for the general wellbeing of the area and communities within it, and partly by national policies, such as retention of local business rates.
Finance leaders will focus their energies on four main activities: leading innovation, adding value, managing risk and cutting costs. All of the learning points from the past two years will be highly relevant to the strategies and detailed plans that organisations develop. Major transformative projects – in some cases undertaken with partners – will grow in importance and prevalence.
Very few public bodies are likely to manage through this unprecedented transition without recourse to radical ‘game-changing’ initiatives. But proper resourcing, detailed and realistic planning, robust forecasting and excellent project management will be required to assure their success. Organisations that are unable to provide these ingredients will fail to achieve their desired financial and/or service outcomes, and some will experience difficulties that threaten their viability.
At the same time, stewardship and housekeeping initiatives will remain critically important for all public bodies. As well as helping to contribute to efficiency savings, such initiatives will play an important role in maintaining the tone of austerity within organisations in line with public expectations. Tight control over costs and staffing numbers will remain a priority. The most successful organisations will be those that can embed this practice within their culture and embrace it as a distinctive and positive hallmark of modern public services.
Steve Freer is chief executive of CIPFA. This article, which was first published in the November issue of Public Finance magazine, is based on a report, The long downturn, which will be published on October 29
