Public service cuts
As the public sector landscape changes, the Public Policy Editor of the Financial Times examines the impact on public services
In the first 100 days of Britain’s first peace-time coalition since the 1930s, the Conservatives and Liberal Democrats produced a programme for government in just five days. In-year cuts amounting to £6.2 billion were announced within three weeks of the general election. The spending envelope for the rest of this Parliament was outlined within seven weeks. There are changes being made to all areas of public policy.
Schools? Hand more control to parents and charities. Healthcare? Give it to family doctors to commission. Defence? Launch a strategic review. Welfare? Aim to have more than two million people on active welfare to work programmes within two years while devising a single benefit for people of working age. Pensions? Make plans by the year-end to restructure public service pensions and a decision on how much faster to raise state-pension age. Police? Create elected police commissioners. Civil service? Cut its redundancy pay. Government efficiency? Despite a pledge to devolve, create a tight central unit to handle back-office functions, procurement and property. Private sector? Tell it that, when dealing with government, it must cut its cloth to match the threadbare nature of public spending to come – that is, it must reduce prices. The list goes on. So why such a hurry?
Despite the promise of fixed-term parliaments and their public belief in a five-year government, both David Cameron and Nick Clegg know this coalition might not work. If they want something to show for it, they need to get moving. Early talks saw both parties’ desire to devolve away from a centrally managed state reinforced by their discussions, not weakened. That may not hold true for all Liberal Democrat MPs and party members, but it does for those who currently hold the power in the party. Then there’s the fiscal deficit. Government debt needs to be dealt with swiftly to convince those who pay for the British deficit to go on doing so at a reasonable price. Furthermore, if it is not handled swiftly then there will not be enough gain to offset the pain by the next general election in 2015.
Chancellor George Osborne says he has learnt from successful ‘fiscal consolidations’, like those of Sweden in the 1980s and Canada in the 1990s (see case studies overleaf). He has gone for a roughly 75/25 split, with the bulk of the £156 billion deficit being reduced by cutting spending.
Cameron has warned that decisions on spending will affect every person in the country and “our whole way of life… perhaps [for] decades to come”. What will this mean for public services?
The outline is plain enough. Public services are to face the longest and deepest period of cuts since the second world war. The coalition has pledged to protect NHS spending and international aid; all other public programmes face around a 25% cut in budget by 2014-15. Some may face more, as the government has indicated it would like to make smaller reductions in defence and education. That percentage might fall marginally if the benefits and pensions budget is reduced beyond the £11 billion cut (5% reduction) announced in the emergency budget. There is limited room for manoeuvre, especially if the coalition sticks to its plan to protect the poor as the deficit is reduced.
But what might the repercussions be? For a start, the word ‘protect’ will have a relatively narrow meaning. Even the National Health Service will feel its budget squeezed as demand from an ageing population and technological advance continues. Some of its budget will be siphoned off to the unprotected area of social care to prevent unnecessary admissions and allow prompt discharge of patients. The Education department would like to slough off Sure Start (the initiative intended to give all pre-school children a good start in life) and push at least some, preferably all, of its budget on to the Department of Health. It will be a surprise if the Ministry of Justice has not had the same idea for prison health. Already, hospitals and health authorities are shedding staff and more than 100,000 NHS jobs could easily go.
Conservative estimates
Across the public sector, on the evidence of previous recessions and on the (probably conservative) estimates of the Office for Budget Responsibility, at least 600,000 public sector jobs are likely to go. On top of that are the million people working in the private sector but still, in practice, working directly for government through the £80 billion public service.
Is it likely to be slash and burn? The hope has to be not. There is nothing like a crisis to stimulate innovation, or to do the things that should have been done before.
Central and local government procurement, the sharing of back-office functions and the public sector’s use of property – which between them consume many billions of pounds of expenditure a year – have been repeatedly targeted for savings, although to date with limited success. It seems that considerable force rather than gentle persuasion may be necessary.
The government could choose to get out of particular areas of provision entirely, rather than merely indulge in ‘salami slicing’. On a tiny scale, it has already done so, for example by scrapping the UK Film Council and Child Trust Funds.
Innovation can provide ‘more for less’. In the NHS, for example, there is evidence that at least some care, including high-tech care such as cancer chemotherapy and intravenous antibiotics, can be shifted out of hospitals and done both better and cheaper in the community. Programmes that support patients with long-term conditions can prevent unnecessary admissions and provide a better quality of life. The big unanswered question is whether this can be done on a sufficiently large scale to allow not just hospital facilities but also whole hospitals to close to release their resources. And whether, for example, groups of commissioning GPs will be able to achieve what health service managers have been unable to.
In criminal justice, it should at least be possible, as Kenneth Clarke proposes, to halt the inter-party ‘arms race’ of building ever more prison places by relying more on community service,particularly as evidence suggests it reduces reoffending. In this area, and in welfare-to-work, new payment mechanisms that pay private and voluntary providers for the outcomes of their activity – getting people into sustained work or reducing reoffending – have been under development for some years and are going to be given a big push
by this government.
The Big Society may allow facilities such as libraries, leisure centres and playing fields, which will all experience large spending cuts, to remain open by recruiting volunteers. But there are issues of timing – how long it would take to achieve – and the need for upfront investment in some of these ideas. Neither time nor money are to hand.
So what might this mean for the private and voluntary sectors? In some areas there is clear potential for growth. If the banks are prepared to stump up the investment to allow welfare-to-work to be run on outcome-based payments (from the benefit savings made once people are in sustained work), there could be a huge expansion in the private market for work programmes. If the sums add up, more than two million people at a time could be involved in active work preparation or job-seeking programmes within a couple of years. The same could apply in criminal justice, with more service providers being employed as work for construction shrinks. There might also be more outsourcing of back-office functions.
Testing times
But there will be cuts as well. Secretary of State Michael Gove’s decision to throw out much of the Building Schools for the Future programme has already taken effect, and Contact Point, the mighty government database set up to track every child in the country, has already been shrunk. ID cards have gone, even if much of the infrastructure behind them, needed for electronic passports, remains. Connaught, the maintenance provider for social housing, has already run into trouble. And the government has a deep suspicion of big IT projects. Added to that, Francis Maude, the former Party Chairman, is seeking price reductions on existing contracts, talking one by one to the biggest suppliers about what they need to do to retain government business.
Capital expenditure is going to take a hammering. George Osborne may have boasted in his emergency budget that he is not cutting it further, but Labour had already reduced spending for the next few years by 60% from its peak.
In health, private hospitals may gain from patients choosing a provider for their care. They may gainfurther if Secretary of State for Health Andrew Lansley’s desire to abolish NHS targets sees waiting times rise. But allowing patients to make these decisions could threaten the viability of local hospitals, so GPs might not encourage the exercise of choice.
The picture for the private sector is complicated. Significant growth in some areas; cuts in others. With around 25% reduction in spending across most departments, and a squeeze even in protected areas, one possible outcome is that the private and voluntary sector will be taking a larger share of public services by 2015, but amid a much smaller total spend that could leave their market static or even shrinking.
Persuading the public
There is also the issue of public acceptance of all this. Throughout the election campaign, when none of the main political parties were spelling out the cuts, opinion polls showed public majorities unconvinced of the need for any cuts.
Since Cameron’s warning and the emergency budget, George Osborne and Danny Alexander, his Chief Secretary at the Treasury, have been heartened by the fact that the polls show that the public now accepts the need for cuts. Accepting the need and accepting the cuts, however, are two different things.
As the fiasco over Michael Gove’s list of which school projects are to be cut demonstrated, even Conservative MPs are up in arms over their cherished schools projects going, some threatening to march on Downing Street. And the government will be dealing with a public sector workforce that is facing a minimum two-year pay freeze – a public sector that will also soon be told that it will have to pay more towards its pensions at the same time as thousands of public sector jobs disappear.
The level of resentment will be huge, as employees might not be prepared to commit to these cuts or to readily accept the massive structural changes taking place across the public sector, affecting the way schools, police and healthcare are run.
The full impact of all this will only become clear in the next couple of years. The autumn Spending Review will set departmental budgets and provide some headlines about what is actually to be cut.
What lies ahead
But only in the succeeding year will the details emerge. Some clues can be found in a poll of senior local authority officers who face spending reductions equivalent to abolishing the whole of adult and children’s social care. It suggested that discretionary spending on libraries, museums and leisure would be their first target; then street cleaning and street maintenance, followed by budgets for social care that do not cover the full cost of assessed needs.
Austerity Britain is not an appealing prospect. Undoubtedly some innovation and some improved services will emerge. But will this happen fast enough so as not to leave public services in 2015 feeling as threadbare as they were at the end of the 1990s.
Sweden
Former Swedish Prime Minister Göran Persson’s model is known to be harsh but it brought national debt to zero within four years
In the early 1990s, Sweden’s deficit exceeded 12% of GDP. Its debt climbed to almost 80% of national income. This was due to a banking crisis combined with an overheated economy.
Its answer to the problem was, initially, an instant reduction of government spending with an 11% cut across the board. Permanent cuts to unemployment and sickness benefits were also introduced, along with big cuts to housing subsidies and a switch to a funded pension system. There were large reductions in public sector employment. Schools and hospitals were reduced in number, even though both sectors were relatively protected.
By the end of the 1990s the economy was growing by 3.6% each year and inflation remained low.
Sweden tried to emphasise the fairness of what it was doing by spreading the pain across society and by acting swiftly, both of which Canada did later on. These are hallmarks, the OECD says, of successful consolidations.
Neither Sweden’s (nor Canada’s) experience, however, took place at a time when many other countries were also acting to cut deficits.
Canada
Often hailed as the model for public spending cuts, Canada turned around its debt within four years
Canada had a long history of failing to tackle its rising deficit. At the height of its crisis in 1993, national debt had topped 9% of GDP, with the total approaching 70% of national income.
Fierce public spending cuts followed, ranging from a less than 5% cut for health to 50% for transport and industries where big subsidies were reduced or eliminated.
Federal government spending was cut by around 20% over four years, with a similar reduction in the number
of federal employees.
However, some of the cuts, for example spending on ports, involved privatisations of the type the UK had already undertaken in the 1980s and early 1990s. And Canada was helped by both a weak Canadian dollar and the newly minted North American free trade agreement, which produced an export boom.
But the cuts did lead to the removal of duplication between federal and provincial government, and they helped Canada become a cutting-edge user of the internet to provide government services.
