The Future of UK Public Services - Nottingham Trent University

The Future of UK Public Services

Professor Malcolm J Prowle Nottingham Business School November 2009

Copyright Malcolm J Prowle 2009. This electronic copy is provided, free, for personal use only

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The Future of UK Public Services

Copyright 2009 by Malcolm J Prowle All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the permission of the author


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Professor Malcolm J Prowle Malcolm Prowle is Professor of Business Performance at Nottingham Business School and Visiting Professor at the Open University Business School. He is a professionally qualified accountant and a member of CIPFA and ACCA. His career has combined extensive practical and academic experience. As well as periods of time working at several UK universities he has held senior finance posts in public sector organisations and for over fifteen years, he held senior positions with two major international consulting firms (KPMG and PWC) where he worked with a wide range of public and private sector clients in both the UK and overseas. Malcolm has extensive experience of public services both in private and public sector organisations and his experience is wide ranging covering: education, local government, central government, economic development, health and social care. He has worked at the highest levels of government and has advised Ministers, Ambassadors, senior civil servants, public service managers and service professionals on a variety of public policy development and implementation issues. He has held a series of prestigious external positions including that of financial adviser to the House of Commons Health Select Committee, adviser to two shadow ministers and a visiting consultant to the World Health Organisation on health economic and financial matters. He has spoken and presented papers at a wide range of events and conferences including that of: the Prime Ministers Policy Unit, the Government Accounting Service, the CBI, the World Health Organisation and the Karolinska Institute (Sweden). While pursuing a consultancy career he maintained strong academic links and was a visiting member of academic staff at several universities He has substantial research experience and has either led or participated in a large number of funded research projects. He has also taught research methods to a variety of audiences. He has over forty publications to his name including five books and many research reports and papers in both academic peer refereed and professional journals. His latest book entitled “Managing and Reforming Modern Public Services: The Financial Management Dimension” is due for publication on 25 November 2009. Malcolm has also had substantial international experience and has worked on major consultancy projects concerning public service reform for the Governments of Brazil, India and Cyprus. He has also undertaken a number of study tours of public services in overseas countries (Sweden and USA) and has presented papers at several international events. Professor Malcolm J Prowle Professor of Business Performance Nottingham Business School Burton Street Nottingham NG1 4BU Tel: 07774 005873 or 0115 8488686 E-mail: [email protected]


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Introduction Much has been written about the current state of public services and public finances in the UK but there is a danger that the current crisis is seen as one which will simply “go away” such that in a few years we will be back to a situation of real terms increases in public expenditure each year. Instead the current crisis might instead be seen as something of a watershed in our social and economic history and one which requires considerable thought about, among other things, the role of the state in public service provision, the balance between individual and collective responsibility, the structure of public services, and how such services are paid for. This paper aims to contribute to this discussion on the future of public services in the UK and it considers the following issues:• • • • • •

The development of UK public services The current context of UK public services Public service futures Requirements for change Some public service examples Conclusions

The development of UK public services In all countries, including the UK, public services have developed in size and composition over a long period of time. Consider first figure 1 which illustrates the growth in public expenditure in the UK. Figure 1


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It will be seen that over the last hundred year’s public expenditure as a percentage of GDP has grown substantially with strong peaks during the times of the two world wars. If we look internationally we see the following situation shown in figure 2. Figure 2

Country

Public Expenditure as % GDP (2008)

UK

48

USA

39

Sweden

52

Australia

34

France

53

Germany

44

Total EU

47

Total OECD

42

Source: OECD: http://www.oecd.org/dataoecd/5/51/2483816.xls

It can be seen that although the size of UK public services has grown substantially in recent years, it is still somewhere in the middle in terms of international comparisons. This upward trend in the size of UK public services needs some broad explanation and identification of the main causal factors. This is discussed below Historical At the start of the20th century, and for many centuries previous, the involvement of government and the state, in the UK and most other developed countries, was largely limited to three areas of activity, namely: • • •

Defence of the realm - expenditure on armed forces Maintenance of law and order - police, courts, prisons etc Trade - regulation and promotion of trade matters

For example, examination of the 18th century UK Prime Minister, William Pitt the Younger shows that his working life was dominated by issues of trade, war and raising of tax revenues to finance those activities (Hague 2005). This is very different from today where Prime Ministers will also have to regard to health, education, and pensions as being key political and social issues. Given this limited range of activity described above, not surprisingly public services, in the UK and other developed countries, were much smaller and restricted in range than it is today.


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First half of twentieth century During the first half of the twentieth century both the size and scope of public services started to grow substantially. They key factor here was the growth in the involvement of the state in promoting the welfare of its people. Partly this was for altruistic reasons but partly for the achievement of other aspects of government policy. For example, in the early part of the century, poor nutrition and poor housing were impacting negatively on the health status of poorer people in society. In turn this was impacting on the productivity of employees in industry and on the fighting effectiveness of conscripts in the army. During the First World War, recruiters had uncovered a dismaying fact that almost two in every five volunteers for the British Army were entirely unsuitable for military service on the grounds of health (Wikipediaa 1). Not surprisingly in the light of these facts, Government came under pressure from industrialists and generals to do something about this situation. This was not always the case and within the UK, major welfare reforms took place in the early part of this century, which resulted in an increase in the size, and scope of Government involvement in social welfare issues. The main aspects of this were determined by two key pieces of legislation passed by the then Liberal government of the day. These were the Old Age Pensions Act of 1908 which provided for a non-contributory but means tested pension and the National Insurance Act of 1911 which provided a contributory but non-means tested cover against sickness and employment for some classes of worker. Between the two World Wars the development of the welfare state was somewhat limited although there were key developments in the fields of social housing, pensions and education. Second half of twentieth century In the second half of the twentieth century, there were three factors, during this period, which contributed to the upward trend in public expenditure leading to public services being much larger and complex and having a greater direct impact on the life of the average citizen. These three factors were: Increasing need for services Once Governments had become involved in various aspects of social welfare they had virtually committed themselves to responding, to a lesser or greater extent, to increases in the need for services. Unfortunately, at the time of initial involvement, it was not always perceived that the needs and hence demands for services would grow substantially. Take, for example, the NHS. At the time the NHS was formed, there was a strong belief that the pool of sickness, and hence the need for health services, was finite and the provision of a certain level of resources to the NHS would meet all the health needs of the population. With the benefit of hindsight, that view now seems naive and current conventional wisdom is that the demands for health services are virtually unlimited. Creeping Involvement in Social Welfare There is a general recognition that in a modern state, governments needs to be actively involved in many aspects of social welfare (e.g. education, health, pensions etc). Politicians of the left and right may argue and debate the extent of that involvement but few politicians of the right would suggest that the welfare state be contracted back to pre-World War I levels.


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The Beveridge Report (Beveridge 1942) paved the way for the foundation of the modern welfare state as it is currently known. Beveridge made recommendations for the development of comprehensive systems of social security and the development of a national structure of health services. Following the end of the World War II the new Labour Government embarked on a huge programme of improvements in social welfare, which basically involved the implementation of the Beveridge recommendations. The social security developments were underpinned by the passing of the National Insurance Act of 1946 and the National Assistance Act of 1948. However, perhaps the flagship policy of this period was the creation of the National Health Service (NHS) in 1948, which brought into public ownership large numbers of what were previously private or voluntary hospitals. Relating back to the comments made above, it is interesting to note, however, that the provision of what are now termed family health services (general practitioners, dentists, community pharmacists and opticians) all remained in the hands of private practitioners. However, even though the services were provided by these private practitioners the funding for the services was public and the practitioners obtained most of their income through the means of contractual arrangements with the NHS. This somewhat strange arrangement was basically the political compromise that had to be made by the Government to get the NHS formed. In the area of education the critical development to be noted was the passing of the 1944 Education Act. This provided for the provision of universal free state secondary education and provided the framework for the education services we have today. State Involvement in Economic Management During the period 1935-45 there was an increasing international acceptance that Governments needed to have a much larger involvement in the management if their economies. This was the period of Keynes, the development of macroeconomics and the use of large scale public spending in the USA and Germany to boost flagging economies. Also, in the period immediately following the end of the Second World War, large parts of the UK economy passed into public ownership through the large scale nationalisation of industries such as coal, steel, electricity and gas. These policies reflected the view of the then Labour government that public ownership of such strategically important industries was essential for economic management purposes. Subsequently, all of these industries were de-nationalised through the privatisation policies of Conservative governments in the 1980s and 1990s. Since that time it has been generally accepted that Government should have a strong role in economic management. However, the extent and nature of that involvement is open to political and ideological disagreement as the debate between the merits of monetarism and Keynesianism in the 1980s illustrated. In the modern world, Governments are involved in economic management in a number of ways and the following are current examples of how public service organisations in the UK are involved in and have a role in economic management:• • •

Government Departments - several departments are concerned with aspects of economic management and economic development. Regional Development Agencies - these have responsibilities concerning social and economic development within UK regions. Office for National Statistics – ONS collects and collates a wide range of economic information


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•

Local Authority Economic Development Departments – these have substantial roles concerning the economic development of their areas.

Start of the 21st century In 1997 a Labour government came to power after eighteen years in opposition. Initially the new Government abided by the public expenditure targets set by its predecessor but in subsequent years it presided over a substantial growth in the percentage of national income devoted to public services. To some extent, much of this growth in public spending might be regarded as “more of the same”. For example, in the period 1999-00 to 2007-08 spending on the NHS in England grew on average by 6.4 per cent a year in real terms well in excess of the rate of NHS growth in previous decades and well in excess of the average growth in public spending (4%) for the same period (IFS 2008). However, some available evidence (Appleby 2007) suggests that a significant part of this growth in funding was not used wisely and led to a substantial reduction in the overall productivity of the NHS. However, much of the growth in funding clearly went in improving the range of health services and the ease of access to those services. A considerable proportion of the growth in public expenditure has also been devoted to what might be regarded as “new” areas of government activity. These are often controversial areas and may people would argue that the state is now getting too involved in areas of activity that have traditionally been private matters or that the state is involved in forms of social engineering. Some examples of these controversial activities might include:•

•

•

Parenting – concerns about the health status, educational outcomes and behaviour of many children and young people have led government and local authorities to become heavily involved in the parenting agenda since effective parenting is seen as a key means of improvement. This can involve the provision of information, parenting training courses etc. Traditionally this has not been an area of state involvement and parenting has been regarded as a private issue. Promotion of equality of outcomes – today most political commentators from any political party would probably accept that equality of access and opportunity (by different geographic areas, different groups in society etc) to services such as education, health, employment etc is an essential prerequisite for a fair and just society. However, it seems that in the last few years matters have gone beyond the equality of access and opportunity to promoting equality of outcomes via state involvement or intervention. One example of this would be higher education where a regulatory regime to monitor access to HE has been introduced and large financial incentives have been offered to certain dis-advantaged groups in society to encourage them to enter higher education. Dilution of mission – several examples can be quoted of situations where, arguably, the key activities or mission of a PSO has been diluted or diverted as a consequence of a requirement to promote another aspect of public policy. One example of this might be schools where as well as promoting educational achievement, schools are now also asked to pursue a range of objectives concerned with, for example, healthy eating, citizenship, ant-bullying, racial awareness etc.

Clearly such a large scale involvement of the state in non-traditional areas has significant financial implications.


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The Current Context of UK Public Services In considering the future of public services in the UK, it is important, initially, to outline the context in which public services need to be viewed. One key aspect of this concerns UK public finances but there are also other issues as shown in figure 3. Figure 3

2. Economic Context 1. Public Finance Context 3. Societal Context

PUBLIC SERVICES

3. Energy Context 5. Political Context 4. Environmental Context

Public Finance Context The normal Keynesian principle is for a government to generate budget surpluses during a period of economic growth and subsequently to incur deficits during a period of recession. However, as shown in figure 4, the UK government was already running large budget deficits during a period of economic growth and the impact of recession has been to worsen that deficit alarmingly.


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Figure 4 Year

2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999

Growth/Contraction in GDP (1) % -5.25 0.55 2.53 2.85 2.15 2.98 2.80 2.13 2.45 3.90 3.70

Government financial balances as % of GDP (2) £bn -12.8 -5.5 -2.7 -2.7 -3.3 -3.7 -3.7 -2.0 0.6 3.7 0.9

Source (1): http://www.tradingeconomics.com/Economics/GDPGrowth.aspx?Symbol=GBP Source (2): http://www.oecd.org/dataoecd/5/51/2483816.xls

There are two reasons for this worsening budget position during the recession. Firstly there is a substantial decline in Government tax revenues illustrated in figure 5. Figure 5 Tax Source

% fall in tax revenues 2008 (HI) to 2009 (HI) Income tax -6.5% Corporation Tax -25.4% VAT -15.5% National Insurance Contributions -3.5% Source: Office for National Statistics, “Statistical Bulletin”, Public Sector Finances June 2009 Secondly, economic recession inevitably leads to greater demands for public expenditure. At the direct level this is consequence of the need to pay additional social benefits as a consequence of increased unemployment. At the indirect level it is often claimed that economic recession and associated unemployment places greater demands on public services such as the NHS. The current UK budget deficit is the largest (in terms of % of GDP) of any OECD country. Moreover the budget deficit figures contain an element which is termed a structural deficit. This needs some explanation. With any such budget deficit, part of that deficit may be regarded as being cyclical in that it is incurred during the downswing of a normal business cycle and will be compensated for by a budget surplus generated during the upswing of the business cycle. However, a structural deficit, by definition, is not cyclical and is not something which will be eradicated by the movement through the normal business cycle. Hence Government action, through increased tax revenues and/or reduced public expenditure, is needed to eradicate that structural deficit which it is estimated (Institute of Fiscal Studies 2009) will approach 9.8% of national income or £140 billion.


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To finance this budget deficit it is necessary for the Government to borrow money and the sums now being borrowed are enormous and are adding to the national debt at an alarming rate. Official Government estimates are that in 2009/10 the Government will borrow a record sum of £175 billion to fund that deficit. However, the latest public finance statistics for September 2009 (Office for National Statistics 2009) are so appalling that they suggest even this large borrowing figure will be exceeded. Some will argue that the UK borrowing and debt levels are not the highest in international terms but the reality is that the cost of servicing such high levels of debt is significant. The National Institute of Economic and Social Research has said that costs of servicing government debt will rise from £25.6bn this fiscal year to £50.7bn in 2013/14 which would exceed the entire budget allocated to the defence programme (Institute of Commercial Management 2009). This warning underlines the cost facing taxpayers as the Government debt rises at the fastest rate in peacetime history. Clearly this financial situation is unsustainable in the longer term and needs to be resolved. However, there is also a potential short term problem. At the time of writing, the UK still posses the prestigious triple A rating but the situation is being kept under review by credit ratings agencies such as Standards and Poors. A ratings downgrade or a shift to "negative watch" could be devastating for the UK since it could imply the Government being unable to borrow to finance its budget deficit or being forced to pay much higher interest rates implying yet higher interest payments. It would seem that a perceived failure by Government to seriously address the budget deficit could trigger such a downgrade. Nor should such a threat of a credit rating downgrade be dismissed as unlikely since Standards and Poor have downgraded ratings in many countries including, most recently, the Republic of Ireland. Economic Context Economic performance has a great bearing on public services since economic growth fuels personal wealth and growth in spending on public services. Some months ago, the UK economy formally entered a period of economic recession defined as a reduction in economic output for two successive economic quarters. Such recessions are characterised by a variety of phenomena such as reduced consumer demand, falls in house prices, and increasing unemployment. They are seen as an inevitable part of any normal business cycle which take place every ten years or so. However this recession has some distinguishing characteristics from other recessions. . First, there is the impact of the credit crunch which did not exist in previous recessions. This is a squeezing of business credit and a contraction in banks’ liquidity positions and has as its genesis the losses incurred by several US and UK banks in the sub-prime mortgage market with the consequent and uncertain exposure to risk of financial institutions worldwide. The consequences of this credit crunch are extensive and have involved runs on some banks and a general reluctance by banks to lend to businesses and individuals, as well as to other banks. Second, is the global impact of the recession? Until fairly recently, the impact of a recession in one country on other countries was fairly limited. However, the globalisation of business and finance has significantly altered that. Thus a recession in one country, particularly if it is a large country, will have big impacts on other countries. The UK is still formally in recession but there was strong speculation that the recession would formally come to end in 2009 with an increase in GDP. However, Copyright Malcolm J Prowle 2009. This electronic copy is provided, free, for personal use only

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economic figures released by the Office for National statistics in October showed that the UK economy contracted by a further 0.4% between June and September 2009 and so the UK remains in economic recession. This news will have come as a huge blow to a Government, which has to fight an election prior to June 2010, and is desperate to be able to claim that the “worst is over” and that the economy is on the mend. It is not obvious why this further decline in economic output should have come as such a great surprise. Although many city analysts, business organisation etc were predicting the end of the recession, there were clear pointers to the opposite. For example, the Governor of the Bank of England recently implied that the UK economy is still in a fragile state which justified the Bank’s continued policy of quantitative easing. Just a week earlier a survey, the British Chambers of Commerce of more than 5,500 firms cast doubt on whether the UK would emerge from recession between July and September. For some time the author has argued that we should take a much more realistic (or pessimistic) view of the future of the UK economy and his own research among a range of companies suggests little optimism, in the near future, of large scale increases consumer demand which might be brought about through economic growth. Indeed a recent survey, by the Economist Intelligence Unit (EIU), of the global financial community (e.g. hedge funds, investment banks etc) showed that 60% believe corporate profit margins and/or returns on capital will not return to pre-crisis levels for at least five years. Overall this seems to be a case of the media, encouraged by Government, promoting optimistic scenarios and ignoring much of the contrary evidence. A recent item in a major UK newspaper commented that “the condition of the US construction industry was improving because the rate of decline has slowed”?! Furthermore, even if the UK had come out of recession and had grown by the expected 0.2% this would only mean we had turned a corner. The end of a recession is defined as the point when contraction in GDP ceases and the issue being missed here is that since the UK recession has resulted in a sharp drop in GDP it may take many years to recover the ground lost. At this rate of economic growth it could take 4-5 years to get back to the situation we were at six quarters ago. This figure of 4-5 years seems to chime with the figure referred to in the EIU survey. Furthermore, there would still be serious dangers that such limited economic growth was the result of companies re-building stocks of goods which had been run down and the economy could easily re-enter recession at a later date (the so-called double dip recession). .Although similar economic problems are encountered in many countries there are several specific problems in the UK which may hamper economic recovery:• • • •

High levels of personal debt and high levels of personal savings which will inhibit consumer demand High levels of government debt which inhibit future counter-cyclical responses to the recession A continued inability or reluctance by banks to lend to businesses Instability in the housing market inhibiting consumer confidence

Thus the overall message is that we cannot just assume economic growth will return quickly to pre-recessionary levels in a short period of time. Since Government plans to deal with budget deficits are predicated on a quick return to robust economic growth, and increasing tax revenues, the latest news on the economy must cast doubt on these plans and may reduce the confidence of potential lenders to the Government.


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Societal Context Under this heading there are three issues to consider:• • •

Population growth Population structure Family trends

Over the last 100 years, human populations have grown across the globe as illustrated in figure 6. Figure 6 1950

2000

2025

million million million China

2050

% change over 100 year period

million

%

545

1267

1453

1417

160

68

82

79

70

3

372

1043

1431

1614

334

Indonesia

77

205

263

288

274

Japan

82

127

121

102

24

Pakistan

41

148

246

335

717

Russia

102

147

132

116

14

USA

157

288

359

404

157

51

59

67

72

41

812

1195

1277

1275

57

Germany India

UK

More regions

developed

Less regions

developed 1717

4920

6735

7875

359

2529

6115

8012

9150

262

World

Source: United Nations: World Population Statistics http://esa.un.org/unpp/


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These figures show increases in population in all countries but clearly there are huge variations between developed countries and developing countries. In the UK the population growth is projected to be relatively modest by international standards but there are implications for public services nonetheless. Key aspects of this concern the balance between:•

•

Increased demand for public services deriving from a growing population taking account of such factors as the age structure of the growing population and the level of employment and economic activity of the growing population. The potential for greater economic growth to be derived from having a larger labour pool in the country. Increased economic growth can fuel increased public spending

There is no simple answer here since it depends on such factors as the source of the growing population, the age and skill base of the people involved and their potential for aiding economic growth. In the UK, until recently population growth was fuelled by immigration from other countries and such immigrants often brought much needed skills to the UK economy. However recent evidence suggests that population growth is now fuelled by increasing birth rates in certain parts of UK society. This is a very sensitive political and social issue but, in these circumstances, it does seem possible that the demands of this growing population for public services may not be compensated for by increased economic growth deriving from population growth. However, the key societal change concerns the ageing of the population. In the UK and most other countries the population is getting older as more and more people live into their 90s and beyond. This phenomenon is illustrated in figure 7 published recently in the Economist. Figure 7

It can be seen clearly that across the globe the percentage of the population represented by elderly people is growing substantially particularly in the developing world. Although the impact of the ageing population on public services is well known it is perhaps the case the magnitude of the impact is not fully appreciated. This is starkly illustrated in figure 8 published recently in the Economist.


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Figure 8

This graph shows, starkly, that in all countries (to varying degrees) the financial impact of the recent financial crisis is dwarfed by the longer term impact of the ageing population. Finally there are a number of what are termed family trends. In recent years these have included the following (Prowle 2009):• • • •

High levels of family breakdown Virtual loss of extended family Increasing numbers of persons living alone (young people as well as elderly people) High levels of family poverty

There seems little to suggest that these trends will do anything other than continue into the future and evidence suggests that all likely to have implications for public services demand. Thus, overall, all of the various societal trends in the UK are likely to increase, continually, the demands for public services for the foreseeable future.

Energy Context Energy is important to public services for two main reasons. Firstly, public services are big users of energy and secondly energy supply and cost affects economic performance which in turn has knock on effects for public services. Put crudely, energy is running out. The International Energy Agency recently indicated (The Independent 2009) that the decline in production in existing oil fields is running at nearly the double the rate of just two years ago. While new fields may be discovered the marginal cost of production and thus the price of the oil is certain to be higher. As a consequence, it seems likely that energy costs will continue to rise and there are also some concerns that shortfall in supply may lead to disruptions sometime in the period 2012-2015. There are several issues which have implications for public services:•

Energy costs of public services may rise disproportionately compared to other costs


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• •

Public investment in new energy sources (e.g. the Severn Barrage at £23bn) may squeeze out other public services investment Rising energy costs and insecurity of supply may inhibit economic growth and growth in public spending

Environmental Context The key international environmental issue concerns carbon emissions and in the UK, the 2009 Budget set a target of a 34% reduction in carbon emissions (on 1990 levels) by 2020. Such a policy aim has wide ranging impacts for companies and individuals and also will have a number of impacts for public services:• • •

Public services will have to make their own contribution towards the achievement of carbon reductions The large scale public investment needed to achieve the carbon reduction targets may squeeze out alternative public services investment Achievement of the carbon reduction targets may inhibit economic growth

Political Context Prior to the recent expenses scandal the UK was in the lowest quartile of EU countries in terms of confidence in its national Parliament. Also, electoral turnout in the UK was among the lowest in Europe and the job of MP had one of the lowest levels of public esteem. What would the picture be like today? Such low levels of distrust in politicians can inhibit policy development and implementation as examples such as road pricing and MMR vaccination have shown. Furthermore, nationally (and to some degree locally) politics is largely professionalized and concerns are frequently being expressed about the calibre of persons becoming MPs, and ultimately Ministers, and the potentially negative impact this is having on public policy decisions. Contextual Conclusions Thus although the public finance situation in the UK is serious and will take several years to resolve to a satisfactory position, it is important to realise that the other contextual factors will have serious and long term implications for public services. This can be summarised as:• • • •

The ageing population has enormous long term implications for public services for the next 40 years Energy and environmental issues will place fresh and significant challenges on public services Low levels of public trust in politicians may inhibit implementation of new policies The condition of the UK economy may be such that economic growth will be weak for many years to come and may not be able to generate historical levels of increases in public spending.

Thus the long term future of public services needs to be considered from this standpoint. Public service futures Some take the view that the passage of time will lead to what might be termed “Business as Usual”. This is based on an assumption that economic recession ends soon and GDP recovers quickly to pre-recession levels. Subsequently Copyright Malcolm J Prowle 2009. This electronic copy is provided, free, for personal use only

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economic growth would mean that the budget deficit and national debt would start to reduce sharply. The housing market would recover and unemployment would begin to fall. The ongoing growth could be used to finance ongoing growth in public spending at pre-recession levels. Quite frankly this is a naïve assumption not least because of the issue of the structural deficit referred to earlier. Whereas the cyclical component of the current budget deficit may be eliminated by an upswing in the business cycle, the structural deficit will, by definition, not be eliminated in this way. Consequently the focus of government attention (whichever party wins the next election) must be on the elimination of this structural deficit and various perspectives on this need consideration. Basically the approaches adopted could comprise two main themes which are outlined below:•

Raising more public revenues Increased taxation Alternative funding patterns

•

Reducing public expenditure Death by a thousand cuts Strategic withdrawal from certain front line services Innovation and design in public service delivery Effective control of public sector staff costs Reconfiguration of public service organisations Quantum efficiency improvements

Each of these will be discussed in turn. Raising more public revenues Increased taxation Additional government revenues could be raised by increasing taxation. However, this would increase the tax burden on a population which has already been experiencing an increasing tax burden for some years. Evidence shows that the public are reluctant to pay more tax and this probably is due to a number of factors including; a lack of trust in the Government, a dis-satisfaction with public services (Cabinet Office 2001) and a belief that taxpayer’s money is being wasted. However whichever political party wins the next election and in spite of the dangers of increasing the tax burden still further, it seems almost inevitable that the severity of the fiscal crisis and the difficulties of making radical cuts in public spending make it likely that taxes, in one form or another, will rise further to bridge the fiscal gap. It is possible that some forms of increased taxation might be seen as acceptable to all of the main political parties (BDO 2009) and some examples of these are illustrated in figure 9.


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Figure 9 Tax increase

Additional tax revenues raised £1 billion

Increase fuel and road duties by 3% above inflation Increase insurance premium tax by £2 billion 4% Increase alcohol and tobacco duties by £1 billion 12% above inflation Avoid increasing income tax £5 billion allowances in line with inflation Total £9 billion Source: HM Treasury, Tax ready reckoner and tax reliefs, November 2008 It seems possible that these tax increases might be implemented in such a way that the general public fails to notice the event (e.g. stealth taxes) or they may be sold as taxes which are “green” or are designed to support better health. However, such tax adjustments will only produce £9 billion which although a very large sum of money will only make a slight dent in the budget deficit. Other sources of additional tax revenues are more controversial and there will be a number of serious issues that will need to be considered including the following:• • • • • • •

The impact of increases in the marginal rates of income tax on incentives to effort and entrepreneurship. The impact of increases in income tax on the rich may be to lead to enhanced tax avoidance practices and only a limited increase in tax revenues The impact of increases in corporation tax on foreign direct investment in the UK and UK business competitiveness The impact of increases in national insurance contributions on unemployment rates The relatively small tax yield that would be obtained from increasing such taxes as capital gains tax, stamp duty etc The impact of VAT increases on consumer demand for goods and services Electoral unpopularity from raising basic rates of income tax or VAT

If the Government of the day wishes to raise additional tax revenues then in spite of the problems described above choices will have to be made. Inevitably such choices will be informed by political and ideological considerations as much as economic considerations. In the light of this, it has been suggested (BDO 2009) that the three main political parties might consider the following tax policies shown in figure 10.


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Figure 10 Labour Tax

Abolish all higher rate income tax relief on pension contribution s

Conservative

Tax revenue s £6bn

£10bn

Raise NIC by 1% for employers and employees

Tax

Raise VAT by 2.5%

Tax revenue s £12bn

Apply full VAT to books and magazine s

£2bn

£1bn

Increase VAT on domestic fuel from 5% to 9%

£16bn

£1bn

Increase green taxes by 25% over inflation

Liberal Democrat Tax

Apply CGT at 10% in principle private residence Charge full VAT rate on domestic fuel Increase green taxes by 25% over inflation

Tax revenue s £3bn

£3bn

£1bn

£6bn

£3bn

£16bn

£16bn Total

Reduce capital allowances by 25% Abolish relief for savings and investmen t

Total

Total

Of course it remains to be seen if any of the above taxes would be implemented if the relevant political party gained power. However, it should be noted that even if we combine the tax increases in figures 9 and 10 the total tax revenue increases would still only amount to £25bn. This leaves the bulk of the structural deficit to be addressed through public expenditure reductions. However, we might also ask ourselves whether it is now time to consider more radical taxation options including:•

•

The implementation of some hypothecated taxes (e.g. a tax the proceeds of which are dedicated to the NHS). With such a tax, at least taxpayers may be reassured that the proceeds of a particular tax are being spent on a specific programme of activity. The implementation of new locally levied taxes (e.g. local income tax). With such a tax, at least local taxpayers may be reassured that their money will be spent on local people in their local area.


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Although these ideas are not new, perhaps now is the time for them to be looked at again.

Alternative funding patterns Figure 11 shows the pattern of funding for UK public services for 2008-09 and it will be seen that this is dominated by a wide range of different sorts of taxes. Figure 11

These taxes are levied on a number of bases such as: the ability to pay of the person liable for tax (e.g. income tax, corporation tax), the consumption of individuals of the goods and services being taxed (e.g. VAT, fuel duty) or the value of property (council tax). In none of these cases is the level of tax related to the cost of providing the service. Charges for public services are a small part of public funding and are lost in the “other” category shown above, Charges are different from taxes in that the level of charge will be linked to the type and volume of public services being obtained and the cost of providing that service, even if the charge levied is not a full economic cost but contains some form of subsidy. One approach might be to move away from such a dominant tax-based system of public funding by introducing a much wider range and scale of charges and cocharges for public services and at higher levels. Such charges would not have the deterrent effect to effort and entrepreneurship as is the case with taxation and should, if designed properly, have the following features in that they would:-


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• • • • •

maximise the revenue collected minimise administrative costs avoid deterring those service users who, if not seen, will generate extra costs to the national exchequer in future years. ensure that charges do not impose the heaviest burden on those who are most in need have exemptions designed so as to avoid weakening incentives to work. However, it is also important not to get to a situation where a large part of population become exempt as is the case with NHS prescription charges

Furthermore, as will be mentioned later, it is important that the power to levy charges and the level of charge should be at the discretion of the local authority or local agency rather than by centrally imposed dictat. Pricing is a complex and multi-faceted issue (Prowle 2009) and it is impossible for civil servants in Whitehall to assess what the optimal charge should be in a particular area. There are of course, other means of raising additional revenues other than increased taxation or charges. One which is often spoken about is revenues from the sale of existing government assets.. There are of course many limitations to this approach the biggest one, as any accountant knows, is that these sales represent a non-recurring source of income and can only be used in one year only. Thus they make no contribution to reducing the structural deficit.

Reducing public expenditure Experience elsewhere (e.g. Canada, Sweden) suggests that where major fiscal consolidations are necessary the thrust of the solution must come from cutting public expenditure. Such measures have been proved feasible and out of 28 OECD countries:• • •

In the past 15 years seven countries have reduced public spending by at least 10 percentage points of GDP. 23 have reduced public spending as a share of GDP since 1992. Sweden, Norway, Canada, Finland and Ireland have all reduced their spending to GDP ratios by at least 10 percentage points over the past 15 years.

Achieving such reductions requires a change in mindset and the there are a number of key questions to be addressed when considering public expenditure programmes. In relation to the Canadian experience, which resulted in an almost 20% reduction in public spending, a key element in was the operation of a process called Program Review which aimed to identify:• •

What actually needs to be done by Government? What can be afforded by Government?

Program Review required government departments to identify a long list of programmes and activities as prime targets for cuts or transfer out of central government. A committee of permanent secretaries reviewed submissions and coordinated the process. Next, a group of ministers chaired reviewed the recommendations and final proposals were endorsed by the prime minister and cabinet. It is important to note that cuts were not evenly spread. Transport subsidies, international aid and agricultural subsidies were cut especially hard, but this allowed other kinds of spending to be protected or even increased. For example, benefits for the elderly were increased by more than 15%.


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The author would also suggest that in addition to these two questions a third and fourth question might be added:• •

what is the opportunity cost of undertaking a particular activity (in terms of other services foregone)? what are the real implications of discontinuing or not initiating a particular service?

The rest of this section discusses various approaches to making such expenditure reductions under the following headings:• • • • • •

“Death by a thousand cuts” Strategic withdrawal from certain front line public services Innovation and design in service delivery Effective control of public sector staff costs Reconfiguration of public service organisations Quantum efficiency improvements

Death by a thousand cuts When governments tighten the financial belt they usually adopt an across-theboard approach, known in the current parlance as ‘salami slicing’ or as the author prefers to call it – “death by a thousand cuts”. This is, in many ways, the opposite of the Canadian approach described above, Such an approach which is often the symptom of a top down command and control approach to the management of public spending manifests itself by across the board “real terms” reductions in funding coupled with some attempt at protecting front line services. Often there are only limited attempts at prioritisation of cuts since this is sometimes (bizarrely) seen as “unfair” to losing departments. Such an approach is, of course, easier to implement than other approaches since it enables politicians to avoid making hard priority decisions. Strategic withdrawal from certain front line public services Political scientists have often talked about the idea of the “Small State” or the curtailment of the role of the State in public life. To a large degree this has only rarely happened and in the UK (and the other countries) the range of State activities has grown. Moreover the activist tendencies of many politicians (from all parties) suggest this might be a difficult idea to sell. However, the crisis in public services might force a re-think and lead to suggestions for reducing the scope of the State. At one level this could involve the cancellation of prospective and large scale projects/initiatives such as ID cards, the Trident replacement, extending the school leaving age to 18 etc. At another level it could involve a withdrawal from (or substantial reduction in) State involvement in certain existing activities. Just a few examples of this might include:• • • • •

A reduction in the mission and size of the UK armed forces Withdrawal from various social programmes such as Surestart Withdrawal or reduced state funding for higher education Reduction in State involvement in regional economic development Reduction in business regulation activities etc


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In all cases the expectation would be that such actions would involve large scale reductions/savings in public expenditure and may also have substantial capital expenditure implications.

Innovation and design in service delivery Innovation is often seen to be the key to recovery in commercial organisations and the same might be true of public services. Here, innovation would involve the development of new models of service provision which result in lower costs while maintaining an adequate standard of service provision. Put simply this might be thought of as the public service equivalent of flying with Ryan Air with the frills removed instead of British Airways. An alternative might be that the basic service is provided free with enhancements being paid for by a supplementary payment. Such innovative practices could involve changes in:• • • •

The The The The

location of service delivery (e.g. community based premises) composition of the service method of service delivery skills mix of staff

The development of such innovative practices is not easy and requires openmindedness and a focus on what is really needed and can be afforded. Also, a willingness to take note of what other public service organisations are doing. An alternative theme might be to consider seriously the relevance and applicability of preventative approaches. Such approaches will involve some form of upfront investment but might lead to substantial savings in public expenditure downstream. Some possible examples of such preventative activities include:•

•

•

Preventative health activities designed to improve health status and reduce ongoing NHS expenditure on treatment and care. For example, diabetes in children (which is increasing in prevalence) is a condition which has long term cost burdens for health systems and is a condition where effective prevention measures are available. Preventative criminal justice activities designed to decrease the likelihood of previous young offenders from offending again and possibly entering the adult prison system with the implications for the costs of the prison service and society at large. Preventive children’s services activities focussed on children and young people and their families designed to stop children falling into the “looked after” system at enormous cost to the state.

The problem is that critics often claim that many preventative services are not proven to be truly effective and there is sometimes some truth in these claims. However, such claims often refer to preventative projects where the conceptual idea behind the project is sound but the projects are badly planned, managed and evaluated. To overcome these problems preventative services, firstly, require robust project design incorporating many features such as:• • • • • •

Effective strategy and commissioning of preventative services Early identification of clients in need Comprehensive and common assessment processes A focus on priority cases covering both need and likelihood of success Multi-agency inputs but with a single key worker Ongoing reviews of individual client progress


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• • •

Exit strategies for clients – clients cant stay on such programmes for ever Clear output measures and indicators Performance management systems

Also required is strong project implementation management coupled with effective change management since such projects often involve major changes in culture, working practices etc. A comprehensive and intelligent evaluation of such preventative projects is also important. Sometimes it is the case that evaluations are not robust enough and in other cases evaluations fail to distinguish between failure of design and failure of implementation. In implementing preventative projects two other issues might be considered. Firstly such projects might be subject to pilots involving a mixed economy. Competing pilot projects could be undertaken by public sector, private sector and third sector organisations with the project evaluation identifying the most successful. Secondly, funding for the projects could be geared to the performance of the project in terms of preventative actions being achieved.

Effective control of public sector staff costs Staff costs are obviously the most important element of public sector costs and any attempt at reducing public expenditure will need to address staff costs especially since public sector pay costs have been increasing while private sector pay costs have been reducing. Some key issues to be addressed in the public sector would include • •

•

the merits of having incremental scales for some staff in addition to annual pay increases, the costs associated with such matters as pay restructuring, job evaluation etc. Such exercises are usually inflationary in nature and are not always fully financially evaluated the need for affordable annual pay increases linked to the state of public finances.

Also in need of urgent consideration is the costs associated with public sector final salary pensions schemes. Some commentators have suggested that a £900bn funding ‘black hole’ exists, which will have to be paid for in the future. Furthermore, the gap that now exists between pension’s provision in the public sector and that in the private sector is also a cause for concern. While it is unthinkable that any government would attack the historic pension benefits of any existing public service employee other options could include: • •

curtailing the final salary benefits for future service of existing public service employees shifting to a less generous pension arrangement for new employees.

However, whatever is done, the reality is that it would probably take many years to realise significant savings. Reconfiguration of public service organisations Under this heading could be included a whole range of themes concerning the structure of public service organisations which could be implemented without necessarily affecting the delivery of front-line services to service users. Some examples would include:


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•

•

•

•

•

Mergers - organisational mergers of public sector organisations such as NHS Trusts, local authorities, colleges, universities. However, experience has shown that the way such mergers are often conducted actually leads to very little savings being made. This must change and such mergers must be implemented quickly and with large cost savings being generated. Shared services - greater use of shared services. This is usually thought of in terms of back office functions (e.g. finance, personnel) but it is also possible to apply this concept to frontline services as well. An example might be one district council providing consumer protection services to other district councils in the same area. While there has been some progress ion this area it is probably the tip of the iceberg compared to what could be achieved. Management arrangements - quite often managerial infrastructures in public sector organisations seem over-elaborate and expensive and one option for savings would be to cut a swathe through these arrangements across the public sector. Regulatory bodies and QUANGOs - at all levels of government, central or local, there are a plethora of inspection and regulation services delivered by a range of state organisations. Just a few examples chosen at random include: local authority planning, health and safety executive, healthcare commission, OFSTED etc. Also, within the UK state there are a large number of Quasiautonomous government bodies (or QUANGOs) which are found in virtually all areas of public life. One option may be to consider whether all of these regulatory bodies and QUANGOs are still affordable in their present form or whether certain QUANGOs could be merged together to produce an overall lower cost. One example here might be a merger of the Learning and Skills Council and the Higher Education Funding Council. These comments are not intended to be derogatory about the contribution being made by all such organisations but while such services might be nice to have when times were good, one must question whether they can all be afforded in the current/future economic climate Mixed economy – this could involve greater use of the private sector and the third sector in various aspects of service delivery.

Quantum efficiency improvements For many years, UK public service organisations have been required to make annual efficiency savings but the challenge now is to make efficiency savings of a much higher magnitude. It is probably an exaggeration to suggest that all of the necessary reductions in public spending can be achieved through true efficiency savings and it seems a little strange that politicians suddenly seem to find efficiency savings only when a financial crisis is upon us. However, with sufficient vision and application a significant and increased contribution from efficiency savings can probably be made. Such potential large scale efficiency improvements might concern: • • • •

Improvements in staff productivity and flexibility of working Changes in the skill mix of staff Reduction in fixed asset base (especially buildings) through alternative working patterns such as home working Improvements in procurement

To be worthwhile such efficiency improvements need to be significant but are unlikely to be achieved through top-down command and control approaches as traditionally practised in the UK. The process of political game playing whereby public bodies put forward all manner of things to contribute to their Gershon efficiency targets is a distraction from the real task at hand. What is required is a


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combination of: decentralisation, empowerment, leadership and true accountability, all focussed on real efficiency and cost savings

Requirements for change In 1992, the then Leader of the House of Commons, Robin Cook, stated that “Britain was the most centralized state in the EU”. Many will argue that the UK is one of the most centralised states in the world and that its public services are planned and managed via a top-down command and control process which is outdated and ineffective. Looking at experiences elsewhere it seems unlikely that the sorts of changes discussed above could be achieved through such an overcentralised approach. Thus a new approach is needed. In one sense, strategic withdrawal from services and reconfiguration could be seen as relatively easy approaches – you decide what to do and then implement the decision. However, in practice there would be a range of political and practical problems. On the other hand, achieving significant innovation and efficiency improvements are extremely difficult because they require major changes in organisation and culture throughout the public sector. What is required is a major overhaul of the planning and management of public services in the UK and it should not be thought that the changes necessary are purely technocratic. They would involve moving away from this top-down centralised approach to an approach involving delegation, empowerment, leadership and accountability to the regional and local level. Such an approach may have consequences such as an increased post-code lottery situation but local choices need to be respected. In summary, it is suggested that a number of key changes are required:•

•

Constitutional reform – as the UK does not have a written constitution it is not possible to talk about formal constitutional reform. However, what is necessary is the need to establish new working arrangements between central government and local authorities and local agencies whereby local priorities and choices are respected and central government avoids micro-management. A starting point here might be a re-reading of Sir Michael Lyons 2007 report and recommendations on local government. Another option would be to give local government a statutory ‘general power of competence’, instead of legislating for local government powers and freedoms on specific issues. The present government does not seem sympathetic to this idea but the Conservative leader David Cameron has promised this if his party wins the general election. Some in central government will see ‘dangers’ in giving local government and local agencies too much freedom. However, we must remember that it was central government not local government that got us into such a fiscal mess. Reform of Government and Civil Service – there are many issues to be considered and addressed here such as: Why does the UK need five ministers in (say) the Department of Health when other countries manage with a much smaller numbers of Ministers? Does this encourage too much micro-management? What should be the optimal relationship between Ministers and civil servants and should civil servants be more concerned with protecting Ministers (as some may claim they are) or formulating robust policy? How can we get Ministers and MPs to stop interfering in detailed operational aspects of service delivery at the local level and leave this to local elected representatives or local agencies? In Sweden, for example, the National Board of Health and Welfare is a government agency sitting under the Ministry of Health and Social Affairs, with a very wide range of


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activities and many different duties within the fields of social services, health and medical services, environmental health, communicable disease prevention and epidemiology. Such an arrangement provides a degree of separation between the operational and political and reduces the amount of political interference in operational matters. Such arrangements have, in the past, been suggested for the UK but never pursued. However, to work effectively, it would seem likely that such Boards would need some form of statutory protection from central political interference. Are civil servants suitably skilled for the future? This question has already been asked on several occasions (Talbot 2009) and some may go even further and question to what extent (apart from cosmetic changes) the civil service has really changed in cultural terms since the Fulton Report in 1976. The author has already emphasised that the top down command and control approach will not deliver the improvements in public services described above and alternative approaches involving greater empowerment and accountability at the local level are required. Thus it is important to have a civil service which has the necessary skills in promoting and facilitating improvements through a more decentralised approach. Fiscal responsibility – both of the main parties have put forward proposals for promoting greater discipline regarding public expenditure and fiscal policy. The Labour Government has proposed the enacting of a Fiscal Responsibility Act which would aim to limit, by statute, the size of any future budget deficits while the Conservatives have proposed the creation of some form of advisory expert panel (which seems to have some similarities to the Monetary Policy committee) which would advise or even direct the Government as to the size of any permissible budget deficit. It is early days and clearly the effectiveness of such approaches would seem to lie in the detail of the proposals actually developed. However, at the risk of being facetious, it does appear that the politicians no longer trust themselves to handle taxpayer’s money and need either an act of parliament or an expert panel to ensure they do the job appropriately. What reforms might be necessary in local and regional government. Should regional government in England be pursued once again – albeit with a corresponding contraction in the size of central government? What changes are needed in local government – should the model of elected mayors become the universal model for all local authorities?

These are only examples and there are many other issues to be considered. •

Integrating levers of public policy - Governments have several levers at their disposal to implement public policy. Public expenditure on services or public subsidies are two of these but there are other levers which don’t necessarily involve large scale public expenditure. These might include: Exhortation and leadership by politicians and professionals Statute law Regulation Targeted taxation In recent years, there have been substantial increases in overall public spending which implies increased use of those levers of policy which require such spending. Given future difficulties of obtaining funding for public expenditure, governments will need to consider how they might better use the other levers of public policy in such a way as to make public expenditure more effective and efficient. This might involve greater authoritarianism in public policy whereby public expenditure decisions are supported by more authoritarian measures. Thus, for example, welfare benefits might be denied (or reduced) to unemployed young people who refuse to undertake some form


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•

•

of retraining course.Alternative policy approaches might include such measures as soft paternalism which unlike 'hard' paternalism, which might ban some things and mandate others, the softer kind aims only to influence individual decisions without infringing greatly on individual freedom of choice (Wikipedia 2). Thus you might be strongly encouraged to stop drinking strong alcohol (soft paternalism) rather than have it banned (hard paternalism). This approach has also been described as “nudging” people into better decisions (Thaler and Sunstein). Consider, for example, doctors needing organs for transplant. In persuading people to commit to donation after their death they might ask them to tick a box opting into organ donation or they might arrange for opting in to be the default condition and ticking the box means you opt out. The results of each approach are markedly different. In one experiment, ticking to opt in resulted in 42% of people agreeing to donate; ticking to opt out resulted in 82% agreement. The default condition nudges people to conform with the desired outcome. Reform of public finance arrangements – if we are to have greater local responsibility and accountability for the effectiveness and efficiency of public services at the local level a key issue here would be to develop locally based revenue raising powers to enhance local accountability for the use of those resources and the achievement of efficiency and effectiveness. This has already been discussed in the earlier section on taxation but it seem unlikely we can have a healthy local democracy until local elected representatives have significant revenue raising powers and can be held accountable for their use of such funds. Management Reform – hand in hand with the above changes would need to be large scale improvements in a wide range of managerial areas in such a way that locally based managers and service professionals would be incentivised to identify and deliver large scale innovation and efficiency improvements. Some examples of this might include:

An approach to leadership which focuses on and values innovation and efficiency in an organisation An adequate range of information (especially cost information) about public services which aids the search for efficiency Management processes (e.g. budget systems) which empower local managers and service professionals within public service organisations and incentivise local managers to search for efficiency The use of proven approaches such as “Lean” and “TOC” (Goldratt and Cox 2007) which aids managers in adding value, eliminating waste and improving flow in public service delivery systems Change management and project management skills to implement the changes needed to improve efficiency etc

Some Public Service Examples This section just looks at a few specific public service programmes and considerer some of the actions which might be taken to reduce levels of public expenditure. In considering these specific services the following four questions raised earlier still need to be borne in mind:• • • •

What actually needs to be done by Government? What can be afforded? What is the opportunity cost of undertaking a particular activity? What are the real implications of discontinuing or not initiating a particular service?


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Defence The defence programme is one of the largest UK public service programmes with total expenditure running at around £35 billion and with around 180,000 military personnel. Hence it might be thought that considerable reductions in public spending might come from this programme. However, until recently the UK armed forces were actively involved in two major wars in Iraq and Afghanistan and also had various other responsibilities including UN peacekeeping, Northern Ireland etc. In addition, the Royal Navy is operationally responsible for the UK’s nuclear deterrent via Trident submarines. Hence, it is clearly the case that defence spending must take account of the responsibilities placed on the armed forces. Looking ahead, one scenario for the defence programme, which might produce greater efficiency and economy, concerns the procurement of defence equipment. A report commissioned by the Government and undertaken by Mr Bernard Gray has been kept secret. However, various leaks of this report have made damaging comments about existing procurement regimes. It has been alleged that the Ministry of Defence does not really know the price of any kit, and project management does not exist in the Department. It is also alleged that the top 40 programmes annually expect an 80% overrun on time, and 40% on cost because the Ministry of Defence can’t afford to pay for these projects on schedule. Clearly this suggests huge scope for improvement. Other scenarios could envisage major strategic changes to the size and configuration of UK armed forces. This might first involve •

• • • •

formally recognising that the UK is no longer a major power and, in future, must concentrate its defence activities on the defence of UK territory and population a much reduced involvement in distant wars. a much smaller involvement in various UN activities abandonment or contraction of the nuclear deterrent. greater integration and cooperation with other EU defence forces

Such changes could result in defence forces which are much smaller in size and scale and a changed balance between the different services recognising the changed defence landscape. Clearly these changes will have major political and diplomatic implications but again a key question must be whether the UK can afford its current diplomatic and military status and the size of armed forces needed to maintain that status. Social Protection Benefits Total expenditure on such benefits amounted to £176 billion in 2007/08 and thus constituted some 27 % of total public spending. A programme of this size must be a target for expenditure reductions not least because a small percentage of savings will generate large reductions in spending. Probably five options will present themselves:•

Reduce rates of benefit – for certain benefits this could involve reducing the rate of benefit being paid to recipients. This would be a politically contentious issue and one fraught with practical problems but clearly there is potential for huge savings. Other countries are considering such an approach and currently


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the Government of Ireland is looking at the option of either reducing child benefit as recommended in the McCarthy report, taxing it as recommended by the Commission on Taxation or subjecting it to a means test. Eliminate some benefits – there are a few benefits which are little more than political gimmicks. Examples would include winter fuel payments and free TV licences to the elderly. Means testing – there is always a tension between whether benefits should be universally available or selectively available via some form of means testing and the present structure of benefits has both types. Thus one option for reducing spending might be to shift certain benefits from being universal to being means tested. The most oft-quoted candidate for this is child benefit which is currently a universal benefit. Eligibility criteria – this would involve tightening the criteria for eligibility for certain benefits or enforcing existing criteria more strongly. One example of this could be disability benefit. To illustrate the problem it was reported last year that in the South Wales town of Merthyr Tydfil one in five of the working population of 55,000 is claiming disability benefit (2008). Reduce benefit take-up - An example would be helping and encouraging the least advantaged into work thus reducing their take up of unemployment benefits.

•

•

•

•

Health and Social Care It is well known that in recent years the NHS has obtained record amounts of real terms growth in resources. This is illustrated in figure 12. Figure 12 Average real increase per year

Percentage annual change in UK NHS real spending Thatcher

Thatcher/Major

10 2.0% pa

3.8% pa

Major 3.8% pa

Blair 3.8% pa

Blair 7.6% pa

Blair 6.8% pa

Brown 4% pa

Real change: Per cent

8

6

4

2

0 83- 84- 85- 86- 87- 88- 89- 90- 91- 92- 93- 94- 95- 96- 97- 98- 99- 00- 01- 02- 03- 04- 05- 06- 07- 08- 09- 1084 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 -2

As already noted there are concerns (Appleby 2007) that this growth in resources was not used properly and that productivity in the NHS actually declined during this period. In any event the reality is that, even with some protection, the growth in resources to the NHS will be much lower than the growth achieved during the Blair years.


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At the same time the factors which generate increased demand for more health resources still exist and these are:• • •

Demographic change – the ageing population Medical science and technology developments Increased societal expectations

In the light of the above it seems that there are certain key themes which must be addressed within the NHS. These include:•

•

Focus on prevention – in his first report (Wanless 2002), Derek Wanless emphasised the importance of individuals taking greater responsibility for their own health if healthcare costs in the UK were to be contained. This implies a much stronger emphasis on health education and preventative health and initially this seemed likely to happen. However, concerns about the effectiveness of such approaches and a financial crisis in the hospital sector seemed to take much of the steam out of this policy since funds were diverted to other purposes. Maybe the answer is for such activities to be funded outside the NHS and even outside the Department of Health in order than funding for preventative activities might be protected. Also, improvements in the effectiveness of prevention need to be achieved along the lines discussed earlier. Innovation – the NHS is crying out for greater innovation regarding models of service delivery especially whereby effective services can still be delivered but at lower cost. Indeed the former health minister, Lord Darzi, consistently placed strong and prolonged emphasis on identifying and promulgating innovative practices in the NHS. However, it is sometimes suggested that the risk averse culture of the NHS is such that innovation is sometimes difficult to achieve because of the risks of failure. Hence a key issue for the NHS is how to create a culture where innovation is valued and rewarded and in line with the rest of this paper it is suggested that the solution lies in a reduction of command and control and micro-management and a shift to greater local empowerment and accountability.

Conclusions This paper aims to emphasise the severity of challenges that public services in the UK now face in the short, medium and longer term. At one level there is the challenge of how to deal with a structural budget deficit of £140 billion and at another level the challenge of dealing with the ongoing and long term pressures of an ageing population and other factors. The Wanless Report referred to above was a brave effort to address this latter point in relation to health services. Also, because of the impact of a variety of other factors such as energy, environment, international competition etc these challenges may need to be faced in an era of sluggish economic growth. The author suggests that this situation represents a watershed in our social and economic history and one which needs careful thought about the future of public services. The author is strongly of the view that the way ahead must be based on a process of decentralising the UK state and enhancing delegation and empowerment at the regional and local level. This implies a major programme for change which is necessary to deal with the long term challenges facing public services. Is it likely to happen? Only time will tell but it would require a huge paradigmatic change in attitude and practice which only a radical government would be prepared to countenance.


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•

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