Don’t bank on efficiency savings

The Conservatives say they can get £12 billion more efficiency savings out of the public sector than the government has claimed. They have recruited Martin Read, the author of the Operational Efficiency Programme (OEP), to tell them how.

The politicians’ claims about efficiency savings seem to be having some effect on public opinion. Recent research by Ipsos MORI for the RSA found that 75% of those surveyed believed efficiency savings alone will be enough to reduce the public deficit and that it will not be necessary to cut frontline services.

This could be seen as a victory for government spin. Perhaps the soothing words about protecting frontline services and making huge efficiency savings have convinced people. Then again, it could be due to the influence of the shouty right-wing in the Daily Mail and elsewhere. Maybe people believe that most of the public sector is made up of paper shuffling bureaucrats who could be axed tomorrow without anyone noticing.

Unfortunately, neither of these claims stands up to any scrutiny. To reduce the deficit, even to the level of the government’s current target, will require either serious cuts in public services or large tax increases. It will probably be a mixture of both.

There are two reasons why efficiency savings alone will not do the job. Firstly, the scope for savings identified so far will not be enough to meet the deficit reduction targets. The Institute for Fiscal Studies has crawled all over these figures. IFS Director Robert Chote said that 46bn would need to be cut from public services spending. So far the government has only offered up £20bn in efficiency savings.

So should the government simply go back to the various departments and public bodies and tell them to save more?

That brings me onto the second problem with efficiency savings – even those that have been offered up so far are probably unachievable. The IFS and the National Audit Office are sceptical about the government’s efficiency savings so far. Here’s Robert Chote again:

The NAO still disputes the Government’s claimed savings from the Gershon Review in the 2004 spending review. And, of the £35 billion of savings it is seeking in the three years from April 2008 to April 2011, even the Government claims in the Budget to have found only £10.8 billion – less than a third – over the first half of this period.

As I said when it was first announced, the £11bn savings promised under the Operational Efficiency Programme and the Smarter Government Report will be extremely difficult to achieve. The Treasury has won round one by getting departments to commit to specific numbers. That is an achievement in itself. But, at the moment, these savings are only on paper. They are rather like those pledges that people make to charity appeals on TV. No-one knows how much of the money pledged will actually materialise.

Just making these efficiency savings will cost money. Some government departments have already identified headcount savings but don’t have the funds available to make people redundant. The PCS may moan about the recent reduction in civil service redundancy entitlements but, even after these changes, the Civil Service Compensation Scheme is among the most generous in the country. It is expensive to make civil servants redundant and many departments and agencies will have to ask for extra funding to do so.

There is some doubt about capacity and capability of public sector managers to make efficiency savings. It is so long since the last cuts in central government departments that there are very few civil servants with experience of re-structuring and downsizing organisations. Those that have such experience are usually recruits from elsewhere. The CIPD’s John Philpott suspects that even basic improvements in performance management may be beyond the capability of many government departments:

What really stands in the way of making public-sector workplaces more productive are too many managers who aren’t up to the job and a centralised system of employment relations that enables powerful trade unions and other professional producer interests to squeeze as much as they can from taxpayers’ money. Failure to confront these barriers to improved public-sector performance outcomes will derail efforts to do more with less whenever the inevitable cuts in public spending finally kick in.

The public sector is over-managed in numerical terms (the “too many pen-pushers” view has merit) but seriously under-managed when it comes to management quality. Too few doctors, nurses, social workers, teachers or police officers receive sufficient training to manage people productively. Public-sector line management capability is cripplingly poor in a range of areas that have a direct impact on service delivery, including absence, stress, conflict management and especially performance management.

The OEP’s assumption that big savings can be made through partnership working and shared procurement runs into similar difficulties. In theory, if government departments, local authorities and NHS trusts worked together they could save millions. However, most public sector organisations have cultures that promote and reward silo behaviour and empire building. All too often, a senior public servant’s status is measured by the size of his budget. Moving from this to a culture of co-operative working will take some time and a considerable amount of money. As the Local Government Workforce Strategy says:

Partnership and integrated working encouraged by the ‘Total Place’ approach, has major implications for the workforce involved. If these approaches are to be successful, many people in the workforce need to adopt new attitudes, take on new roles, and behave differently. Well established professional disciplines and practices will need to be reviewed and updated. Challenging issues need to be addressed to bring together different organisational cultures and different performance management regimes, and to address any terms and conditions issues. Pooled budgets will raise issues about who employs the staff involved, and the need for careful working through of any staff transfer arrangements.

It may indeed be possible to develop cheaper and better public services by empowering citizens, the approach championed by the 2020 Trust, but this too will require a major shift in culture and attitudes among managers and service users. Once again, this will be expensive.

To improve the quality of public sector management means developing the skills of the existing managers and recruiting new people from outside the public sector. Management training is not cheap and it takes time to deliver results. Non-public sector recruits will almost certainly cost more than the public servants they replace. At the same time, reductions in staffing levels will cost a fortune in redundancy payments.

None of this is to say that it is impossible to make efficiency savings in the public sector. There are already some initiatives under way which should reduce costs with little or no impact on frontline services. But to squeeze out billions in savings will require major changes to the capability, culture and composition of the public sector workforce. This will take time and will need a considerable up-front investment which is not being factored into the massive savings being claimed by politicians in all parties. Such changes are almost certainly not achievable by 2014, the target date for halving the public deficit.

With the greatest respect to the people interviewed in the Ipsos MORI survey, efficiency savings alone are not going to reduce the UK’s deficit. The politicians claims are ridiculously extravagant and fail to factor in the investment needed to make such savings. Sorry folks but, whatever the politicians say, tax increases and cuts to frontline services are inevitable.

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4 Responses to Don’t bank on efficiency savings

  1. The whole idea that money saved from efficiency savings can be used to reduce the deficit is poppycock.

    Suppose efficiency improves in the public sector to the extent that £X is saved and Y employees are then surplus to requirements. That means the deficit can be cut by £X. But hang on: what about the Y former employees? They cannot just be left unemployed. So the deficit has to be expanded again to employ them. Now were up sh*t creek.

    What WILL reduce the deficit is the decision by the private sector that, for example, it is holding sufficient or excessive net financial assets (i.e. government debt and monetary base). The private sector will try to dissave money, which will raise demand, which means an end of any need for a deficit. Alternatively demand from the private sector may rise for some other reason, e.g. more “animal spirits”. Indeed if the private sector gets sufficiently confident and “spendthrift”, the public sector might even need to run a surplus, and begin paying off the national debt.

    But EFFICIENCY SAVINGS have NOTHING to do with reducing the deficit.

  2. mkeeffer says:

    Efficiency is just a way to get people’s hopes up that the budget can be balanced without cuts. Ridiculous and ineffective. Also rather gutless of the elected officials and bureaucrats.

  3. Bina says:

    I fail to see how ‘efficiency savings’ can be applied to services that have to deal with, for example, increasing numbers of the elderly and the unavoidably sick. We know we have an aging population, we know we have a growing unemployment situation – how precisely are ‘efficiency savings’ going to get us out of the hole NewLab have got us into? We’ve seen what cutting road maintenance has done for us…undermining our transport infrastructure, causing severe damage to everyone’s vehicles and necessitating special measures to try to address the most appalling messes at inflated cost. is that what we have to look forward to re out economy?

  4. Bina says:

    Sorry about the spelling mistakes – my last sentence was to have said:

    Is that what we have to look forward to regarding our economy?

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