The annual deficit in public expenditure is 13 per cent of GDP. This cannot continue, but what should the next government do? It will have three main levers: increase revenues; reduce spending commitments; and achieve more for less current spending.
The good news is healthcare trends and the economic crisis are truly global, so a lot can be learned from other countries.
In Sweden during the 1990s, public debt hit 80 per cent of GDP and the government imposed “top-down” reductions of 11 per cent across all spending departments. The targets were achieved but the cuts did not reform or change the structure of the public sector. This suffocated innovation, reducing medium term capability to respond to the next fiscal crisis.
Debt peaked at 102 per cent of GDP in Canada in 1996. Public spending was reduced by 12.7 per cent after a general consensus was reached among the public that spending had to be curtailed. The government also established a programme review board, which was more discerning in targeted expenditure reductions across departments. This was led by politicians and the cuts did reverse the deficit position, but structural reform of public services was largely ignored, so further financial difficulties followed a decade later.
In Ireland – the first eurozone member to fall into the recession in September 2008 – the general budget deficit reached 12.1 per cent in 2009. The government established a special group to reduce targeted public spending by 9.3 per cent. Welfare budgets have been reduced and workforce reform has been grasped. A pension levy reduced public sector pay by an average of 7 per cent, and further pay cuts were aimed at both medium and high earners. Future pension reform will base entitlement on a “career average” rather than final salary.
The interesting thing about these reforms was that they used the national pay bargaining structure to impose solutions which local employers could probably have never achieved in the public sector. The government acted swiftly and, not surprisingly, met strong opposition from unions.
In the UK, the government will expect an increase in tax revenues through a return to economic growth. This will not be enough. There will need to be further stimulation of revenues through user charging in local government plus an enormous programme to sell government assets or the “family silverware”
However, the real trick is to see whether these assets can create enduring value.
Government is the biggest property holder in the UK. The asset base is fragmented and its governance uncoordinated. It would not be difficult to sell property and land, but a more sophisticated plan would be to establish large, public-private joint ventures which would release value over a longer period. In the NHS, this would suggest nothing short of a revolution in the way that assets and property are managed.
Second, evidence suggests a decrease in public spending should be prioritised and led by politicians. The problem is that it takes time and there may be a need for quick, across the board reductions. In this event, it is likely departments will introduce or refine tariff systems. In the short term, therefore, there is likely to be directed “top-down” action to renegotiate contracts in procurement, look at national pay bargaining, cancel non-essential programmes and avoid discretionary spend. Turnaround teams will find new life and centralised restructuring funds will be established.
This will only keep the wolf from the door for a couple of years. The real prize will be to embed a new culture of productivity. On the global evidence, it would appear four major levers need to be pulled to create self-sustaining systems which produce superior levels of productivity and cost reduction.
First, a politically led, prioritised programme needs to be set up. Second, a minimum level of departmental spending reduction needs to be set.
Third, new public-private partnerships need to move “cost centres” into “value creators”
Fourth, we need a bottom-up revolution for productivity. This will include a smaller number of commissioners who pay for outcomes, more diversity, contestability and autonomy for providers, more empowered consumers, greater transparency driven by a digital revolution and more commercialisation in the public sector.
Finally, public sector pay should be linked to achieving private sector sized productivity gain. If public sector productivity had kept pace with the private sector the UK would receive the same quality and quantity of public service for £60bn less.