Public sector reform is long overdue but that’s no reason to rush it

Peter Ridell had an article in Public Finance a couple of weeks ago in which he warned that the rush to cut public spending may prevent reform of the public sector. His observation is similar to point I made in this post last month; it takes investment to reform any organisation and it’s easier to do it when times are good.

In the arguments over spending cuts, two separate issues, the deficit and reform of the public sector, have become conflated. We need to get the deficit down and we need to reduce the amount we spend on public services. It’s far from clear, though, that we need to do both at the same time

Drastic and immediate cuts might not reduce the deficit. They might even make it worse if the result is a fall in GDP and tax revenues. There is also some evidence that increased growth might reduce the deficit more quickly than reduced spending.

Likewise, even if we could reduce the deficit by growing the economy, in the longer term we would still need to reform the public sector and make spending cuts.

We needed to reform the public sector in 2007 and we will still need to reform it in 2016 when, hopefully, we will have eliminated the deficit. The financial crisis has just made this reform more urgent.

A report by the 2020 Trust published last week makes this clear. Public services, it says, are facing a triple crisis – severe fiscal constraints, increasing demands and falling productivity. Even if the UK can eliminate its deficit it will still be left with a substantial long-term debt. With demographic pressures and the increasing demands on the public sector, to maintain current levels of public services would, says the 2020 Trust, require public spending to rise to more than 50 percent of GDP by 2028.

The prognosis may be even worse than the 2020 Trust’s estimate. The report does not mention the unfunded pension liabilities of at least £700bn and PFI payments of £200bn which will have to be found over the next few decades. Whatever happens, the welfare state as we have come to know it can’t go on for much longer.

Much of this could have been predicted in 2007. The aging population, PFI liabilities and unfunded pensions were no secret even then. The severity of the banking crisis was not foreseen by most people. That there would be another recession eventually, however, was a near certainty. If it hadn’t been triggered the banking crisis, something else would have caused it.

It is unreasonable to blame the last government for a global financial crisis, as the Coalition is now trying to do, but the charge that Labour failed to fix the roof while the sun was shining has some basis in fact. Despite all the cash it pumped into the public sector, it failed to prepare public services for the challenges of the next two decades. The 2020 Trust concludes:

Attempts to tackle inadequate outcomes from public services during the New Labour administration saw significant increases in spending. The difficulties of precise measurements of productivity in public services are widely acknowledged. However, data from the ONS suggests that the level of outputs has failed to keep pace with the rate of spending increases, particularly since 2002. Between 1997 and 2008, public sector productivity declined every year (except for 2006) and experienced an average annual fall of 0.3 per cent.

With a booming economy and money available for investment, the mid-2000s would have been the ideal time to restructure the public sector. Now, with public spending being cut by amounts not seen since the Second World War, it will be extremely difficult to design and create the sort of organisations and models of delivery suggested by the 2020 Trust and other advocates of social innovation.

As the Independent’s editorial put it last week:

Times of plenty, rather than those of austerity, are more suited to radical restructuring exercises.

The public sector is unsustainable in its current form. The organisation and delivery of public services will need to be re-designed and if they are to deliver anything even close to what we have been used to. But it is extremely unlikely that we will be able to make public services fit for the future at the same time as slashing their funding by 25 percent. If the government is really serious about wanting a radical redesign of the public sector, it should hang fire until we can afford to do the job properly.

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7 Responses to Public sector reform is long overdue but that’s no reason to rush it

  1. I really like what you have to say here, Rick.

    Just wondering, did you happen to read Julian Glover’s interesting piece in the Guardian last week (http://www.guardian.co.uk/commentisfree/2010/sep/12/coalition-smash-state-cuts-ideology)? His take on the planned public spending cuts is that “the government is staging a cultural revolution against social democracy. […] The coalition feels a revolutionary duty to be brave. It should be proud of that.” In his view, the goal of the cuts is to create a permanently reduced, decentralised public sector (“Cameron’s friends were decentralisers long before the deficit became an issue,” he says).

    He puts forward the view – certainly an unusual one to see in the Guardian – that the Coalition should to some extent be admired for its willingness to take unpopular decisions. He argues: “Offering a view of reform is not the same as guaranteeing success – but it is more effective than offering no opinion at all.”

    But as you rightly note, the planned cuts could post serious risks to recovery, and “the mid-2000s would have been the ideal time to restructure the public sector.”

    It’s going to be very interesting indeed to see how this all plays out, and I for one look forward to being able to continue to read your unique take on things!

    Kind regards

    Michael

  2. Oh dear… here’s the link to Julian Glover’s article as it should’ve appeared!
    http://www.guardian.co.uk/commentisfree/2010/sep/12/coalition-smash-state-cuts-ideology

  3. Pingback: Public sector reform is long overdue but that’s no reason to rush it - Rick - Member Blogs - HR Blogs - HR Space from Personnel Today and Xpert HR

  4. Rick says:

    Thanks for this Michael. I think Julian Glover is the Guardian’s token Tory. An excellent article from him and I don’t disagree with the need to seriously change the way the state works.

    My issue with it is, as you say, the timing. I’d rather we waited until the economy is on the up again. I’m not being a dove here – more a delayed hawk! Or maybe an owl – don’t do the hunting now; wait until later!

  5. A thought provoking post. I think I’m in your Owl nesting box too.

    I have recently heard the ‘why waste a good crisis’ line trotted out a few times in various public sector organisations.

    It’s used to justify ‘thinking the unthinkable’ which usually boils down to ‘at least we can use the cover of the national cuts to do what we should have done years ago.’

    The risk with fundamentally reshaping public services in the middle of the largest public spending reductions of modern times is that short term fiscal expediency will drive out genuine innovation and reform that would deliver better and more cost-efficient public services. A senior manager I spoke with recently said that systems thinking was all very well but not when your roof was on fire and you just needed someone to put it out. I think many will be sharing that philosophy.

    I had an elderly relative once who shopped almost exclusively at Poundland. Not because it sold what he wanted but rather it sold what he could afford. I fear that the public have become convinced that it’s possible to deliver a Waitrose on a Poundland budget. The CSR will come as a very rude awakening for many particularly as no party talked about what the fiscal tightening might mean apart from the meaningless ‘difficult decisions’.

    Best wishes

    RPS

  6. SimonF says:

    Much of this could have been predicted in 2007. The aging population, PFI liabilities and unfunded pensions were no secret even then.

    Except that the hated Thatcher was going on about the aging population and unfunded pensions in the ’80s, but nobody wanted to know. Many of her reforms were aimed at trying to address the these issues.

    As for PFI, weren’t we supposed to get the benefits of the “investment” over the period to cancel out those unfunded liabilities?

    The severity of the banking crisis was not foreseen by most people.

    Quite. And those that did predict it, and made a lot of money by betting it would happen were at first laughed at and then derided for “speculating”. Politicians of course were amongst those doing the laughing and deriding, when it was their policies that fueled the housing boom.

    That there would be another recession eventually, however, was a near certainty.
    Unless you were a member of New Labour or one of its acolytes that believed that boom and bust had been ended. Unfortunately New Labour was in power and its was about to become PM.

    Anyway, to the main thrust of your argument that we should reform public services when times are good; it is a well put rational argument. The problem is that it doesn’t stand up to politics. Do your really think that any party could get away with the type and depth of cuts needed when times are good? It would be electoral suicide. The only time that we can get away with root and branch reform is when people see things are bad and accept limits to what we can afford for the state to do.

  7. Pingback: In which I wrestle with the meaning of redundancy … | A redundant public servant's blog

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