This article – by Steve Freer, Chief Executive, CIPFA – was published in
Public Finance
(November 2012 edition), and is based on
The Long Downturn
.
It is a chilling thought that the global financial crisis is now in its sixth year with few, if any indications that normal service is about to be resumed. On the contrary, there is still significant concern that things may get a great deal worse before they get better. Notwithstanding Mario Draghi’s “...whatever it takes...” intervention in London back in July, the crisis in the Eurozone remains centre stage with acute fears for the financial health of governments and financial institutions across the continent as well as the potential implications of resulting tremors for global financial stability.
While we are not as severely exposed as members of the common currency, the practical implications of a full scale crisis in the Eurozone would be extremely serious for the UK. Trade with European partners would diminish. Lending by banks would become much more difficult and expensive to secure. Banks with significant exposures in the Eurozone would require emergency support. The UK economy would fall deeper into recession with significant adverse implications for business confidence. Either Government borrowing would need to increase to finance an increased deficit or public spending plans would have to be cut back sharply. Public bodies would face significant budgetary, treasury management and demand challenges.
It would be very hard to rehearse a more depressing backcloth to George Osborne’s Autumn Statement – apprehensively rather than eagerly awaited on 5 December. The pressures on the Chancellor are immense. Plan A now looks increasingly battered and politically difficult to sustain. His fiscal target to see aggregate public debt falling in 2015-16 is in jeopardy. Austerity and growth were intended to be the twin engines of the Coalition Government's strategy for recovery. In the event only one engine, austerity, has fired. Economic growth has remained disappointingly elusive.
Helpfully, however, spending reductions are firmly on track - although there remains some considerable distance to travel before they are fully delivered. The cumulative nature of the challenge means that, inevitably, the hardest part of the journey lies ahead.
Over the four years from 2011-12 to 2014-15, departmental spending on public services is set to be cut in real terms by 11.1%, after accounting for economy-wide inflation. 2011-12 saw a 5.2% real terms cut in public service spending, meaning that 5.9% is to come this year and over the next two. On top of this, further cuts to public service spending are also likely to be required in the two years beyond the current spending review period. Based on current official forecasts, if no further cuts to other areas of public spending are found, a further 7.5% real terms cut to resource public service spending would be needed over 2015-16 and 2016-17.
In practice it is increasingly clear that the Chancellor is determined to deliver £10bn of these reductions from further welfare benefit cuts. However, it is less clear that this will be the top priority of the Liberal Democrat half of the Government.
Public bodies can take a great deal of credit for managing the funding reductions to date so effectively. They have been helped by the fact that public opposition has, on the whole, been relatively muted. Whether this continues to be the case remains one of the critical variables in the equation. The scale of forecast cuts to departmental spending is eye-watering. By 2016-17 real terms spending (illustrated in fig 1) is likely to reduce to approximately 85% of 2010-11 levels.
As we have seen in Athens and Madrid recently, public support cannot be taken for granted. Public disquiet and the risk of dissent are bound to increase as public bodies are forced to consider cuts to sensitive services which have direct implications for the quality of people's lives and their life chances.
Figure 1: Forecast cuts to departmental spending (nominal and real terms)
Source: Institute of Fiscal Studies
The Government is acutely aware of the importance of "fairness" in formulating austerity plans. The Deputy Prime Minister is a particular proponent of this argument. However, this is easier to address in public speeches than in public policies. We have seen from the Treasury’s own figures that spending, tax, tax credit and benefit changes made to date by the Government have had an above average impact on the bottom quintile of households. And inevitably, further benefit changes will impact disproportionately on less well off households.
A great deal will also ride on the skill with which cuts continue to be selected, fashioned into coherent policies and implemented. Since the election in 2010 we have seen action by Government and individual public bodies in several key areas which were highlighted in the 2009 CIPFA/SOLACE report “After the Downturn”.
First, there have been concerted efforts to readjust the relationship between and the respective responsibilities of the state and the citizen. We can see that in many of the welfare benefit reforms which aim to reduce dependency and incentivise work. It is also vivid in service areas where fees and charges have been introduced or increased significantly. University fees are an obvious example. Initial expectations that "Big Society" initiatives and organisations might emerge, enabling Government to shrink the scope of its activities without adverse impact on communities and users of public services, have to date failed to materialise on any significant scale.
These are some of the areas in which questions of fairness, including inter-generational equity, are apparent. There are obvious resentments associated with being the first generation to pay for a previously free service or to make higher contributions to a pension scheme which offers less generous benefits.
Secondly, we have seen a number of policy initiatives which aim to ‘delayer’ the public sector, simplifying structures and reducing costs. Efforts to reduce the number of quangos, abolish regional development agencies and to change the structure of the NHS are examples. Frequently these involve significant one-off costs of change as well as the need to reassign responsibilities to other continuing organisations. In many cases this leads to additional costs and disruption to services in the short term in pursuit of medium term improvements and savings.
‘Delayering’ is also being widely practiced in smaller scale settings as the vast majority of public bodies adjust their organisation structures in pursuit of savings. A recurring theme is the removal of tiers of management and the shortening of chains of command to effect economies.
The Government has also espoused a strong commitment to ‘localism’, placing more confidence in decision making at local level, free from or subject to minimal oversight. However, it is too early to draw the conclusion that this model will necessarily be implemented on a sufficient scale to drive significant efficiency gains.
Thirdly, ‘collaboration’ initiatives have also been encouraged. Organisations have experimented with shared top management structures, shared front- and back-office services, pooled budgets and a number of other forms of cooperation. Many have taken longer to put in place than originally anticipated, and some have been abandoned along the way. A proportion also seem to have worked well and to have delivered reasonably significant savings, usually from rationalisation of staffing structures. In general, savings appear to be delivered with greater certainty where organisations or elements of them are formally merged, as compared to arrangements which rely upon softer, more informal collaborative working between separate entities.
Additionally, we have also seen concerted action to restrain public sector pay and to reform public sector pensions, as well as a relentless emphasis on measures to ensure the tightest possible stewardship of resources and the elimination of waste. Pay and pensions are critically important because of the people-intensive nature of many public service organisations.
Over the six year span 2011 to 2017, nearly 0.75m public sector jobs are expected to be lost. This is a significant counterbalance to any growth in private sector jobs, and in the short term contributes to relatively stagnant levels of total employment in the economy. Regional variations are significant, however, creating major hurdles to the restoration of growth in, for example, the North East of England. For many commentators this is the real contradiction in the strategy – the drag which austerity places on growth.
The Chancellor will no doubt reflect on all of this experience in reviewing spending plans for the period ahead and determining any adjustments which may be required in the Autumn Statement. One possible scenario is that we may see pressure for deeper cuts in some programmes in order to free up resources to direct to carefully targeted pro-growth investments.
Based on feedback from Chief Finance Officers across the public services a number of learning points emerge increasingly clearly from the experience of deploying the strategies outlined over the past two years. The Chancellor would do well to bear these in mind too in formulating his plans for the next period.
It is clear that there are no easy "silver bullet" solutions. The business of reducing public spending is more marathon than sprint, requiring very careful planning and rigorous attention to implementation detail. High profile transformation programmes are particularly difficult to mobilise and sustain on a whole organisation, let alone a sector-wide basis. Though the theory may be compelling, the practice is sometimes slow and frustrating.
Initiatives which require collaboration between separate entities – whether public-public or public-private - pose their own distinct and significant challenges including alignment of agendas, calibration and assignment of risks, rewards and incentives, and integration of processes.
Many ‘unfashionable’ stewardship or housekeeping measures like tight cost control, reduction of overhead spending, and freezing of specific categories of spending, such as use of temporary staff or consultants, continue to play an important part in organisational strategies. Whether these have any longer term downside consequences such as failure to invest appropriately in the maintenance of assets remains to be seen.
Control of staffing costs, by reducing headcount, removing layers of supervision and freezing or tightly controlling pay levels, has been critically important because of the labour intensive nature of most public services. Again, however, there may be a negative longer term effect in relation to the recruitment and retention of high quality staff. This includes the challenge to recruit and retain staff with skills in disciplines such as commissioning and contract management.
Maintaining good communications with, and managing the expectations of stakeholders, are critically important activities especially in the area of gaining acceptance for significant changes to services. However, this task becomes more rather than less difficult over time, as cuts are contemplated in increasingly sensitive areas and tolerance of austerity is eroded. Perceived fairness remains a critically important performance measure.
Public sector organisations and their leaders will be under no illusions about the challenges they will face post the Autumn Statement. The prospects for the short, medium and perhaps even long term are unrelentingly more of the same. A return to stability and previous growth norms remains almost unimaginable for some time to come. Austerity and managed retrenchment – deploying the same strategic options identified in After the Downturn in 2009, underpinned by very tight stewardship – will continue to be the order of the day.
Increasingly leaders of public bodies will face pressures to bias their strategies towards initiatives which are likely to stimulate growth. This will particularly be the case in local authorities where leaders will be expected to prioritise economic development activities, in part incentivised by national policies such as retention of local business rates, and in part naturally responding to their responsibilities for the general well-being of the area and communities within it.
Finance leaders will focus their energies on four key activities: leading innovation, adding value, managing risk and cutting costs.
All of the learning points from the past two years will be highly relevant to the strategies and detailed plans which organisations develop. Major transformative projects – in some cases undertaken with partners – will grow in importance and prevalence. Very few public bodies are likely to manage through this unprecedented transition without recourse to radical ‘game-changing’ initiatives. But proper resourcing, detailed and realistic planning, robust forecasting and excellent project management will be required to ensure their successful delivery. Organisations which are unable to provide these ingredients will fail to achieve the financial and/or service outcomes to which they aspire and some will experience difficulties which threaten their viability.
At the same time stewardship or housekeeping initiatives will remain critically important for all public bodies. As well as helping to contribute to efficiency savings, such initiatives will play an important role in maintaining the tone of austerity within organisations in line with public expectations. Tight cost control including close control of staffing numbers will remain a high priority. The most successful organisations will be those which can embed this practice within their culture and embrace it as a distinctive and positive hallmark of modern public services.