HMRC faces a colossal task

The National Audit Office published a report yesterday expressing some doubt about HMRC’s ability to achieve 25 percent cost savings over the next four years. Tax expert Richard Murphy put it more bluntly:

They might just as well have said they can’t do it – because that’s the reality.

It’s certainly a tall order. To put this in perspective, manufacturing firms achieved an average of 4 percent per year over the last decade and private sector service firms achieved 2 percent annually over a similar period. 

As the NAO notes, HMRC’s record of cost cutting is quite good. Many of the savings it claimed since 2005 have been achieved. The NAO reckons it managed around 18 percent efficiency savings over the past three years.  But that is also part of the problem. A lot of the most obvious savings have already been made.

Taking the previous savings and those for the next four years together, the HMRC will, by 2014-15, need to have made 6 percent efficiency savings every year for seven consecutive years. At the same time, the government also expects HMRC to improve customer service and do a few other things as well:

HMRC is also required to reduce expenditure on Child Benefit and Tax Credits by £8.3 billion over the period. Its other main priorities are to reduce tax credit error and fraud by £2 billion a year; stabilise its National Insurance and PAYE Service; and reform the PAYE system.

Finding big efficiency savings while maintaining services is hard enough. Trying to do so while improving services at the same time is extremely tough. Companies don’t usually attempt to do both at once.

There are few organisations that have managed to achieve productivity improvements on this scale over such a short time. If the bosses at HMRC manage to do it they may well find themselves in demand elsewhere in the public sector and quite possibly in the private sector too.

There’s a long way to go, though, and the NAO’s report hints that the achievement of these targets may require a completely new operating model. Which would almost certainly take more time to develop than HMRC has.

My heart sank when I read this too:

It now plans to implement 54 change projects, of which 24 are intended to reduce running costs.

Initiative overload is a blight suffered by many organisations. The more projects you have, the more time and energy you spend trying to manage and co-ordinate them. You end up having to set up a project just to co-ordinate all the others. No, I’m not joking, this really happens.

One hot summer, when I was a kid, I saw a stream bubbling out onto a beach. Once the water got onto the sand it had no channel so it spread out over the beach. The sand was so hot that all the water evaporated before any of it reached the sea. Had it kept to its single channel, the stream would have had enough force to reach the sea. As it was, its energy was dissipated and the sun gobbled it all up. I’ve since found out that this can happen to big rivers too. That’s what initiative overload is like. Having so many projects disperses the energy of the organisation and that energy evaporates. Eventually, the initiatives ‘run into the sand’.

Before passing judgement on HMRC’s managers, though, if they have been told to make massive efficiency savings and cut welfare payments and increase revenues and reduce fraud and and and…. – is it any surprise that they have so  many initiatives underway?

Piling so much pressure onto the organisation responsible for collecting the taxes seems like a strange thing to do. The government needs increases in revenue to reduce the deficit. Demanding unprecedented organisational improvements at the same time puts that increased revenue at risk.

I wish the HMRC managers well but they face a colossal task. Few organisations anywhere in any sector have met targets like these.