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.