Christopher Devereux - License: CC BY 2.0 |
If the voters will believe you, then a good way to get
elected is to promise them that your government will spend less of their money
and, at the same time, provide the people with more generous services. It is
hardly a novel approach. But, provided the voters are not convinced by any
alternatives they are offered, it can work. And in May 2015 at least in England
although not in the rest of the United Kingdom, it did.
Having promised
both things, how is the trick actually going to be done? And what will public
management in Britain be like for those running our public services over the
next five or even ten years?
The Conservative
government has committed itself to getting the annual public sector budget back
into the black by around 2019-20 or so. That promise includes the capital
budget. The annual deficit alone is around 5-5.5% of GDP, depending on which
method you use to calculate it. Although the deficit peaked in 2009, it was
actually slightly higher in early 2015 than it was 2013. And total accumulated
net public sector debt stands, again depending on just what basis you prefer to
use for measuring it, at around 80% of GDP. Luckily, for the moment, it’s
fairly cheap for the British government to service its debt. As the gilt
markets price in the uncertainties of a referendum on Britain’s remaining a
member of the European Union and of a second Scottish independence referendum,
those costs might rise a little. But most investors still think that even a
government of “rump UK” outside the EU with some kind of free trade deal with
Europe would still stand solidly behind its own debts.
Getting the
deficit down from 5-5.5% of GDP to zero requires tax increases or spending cuts
or both. The Chancellor has ruled out increases in the three taxes which
provide the biggest slices of the government’s annual income – Value Added Tax,
income tax and national insurance. Indeed, like Odysseus tying himself to the
mast as his ship sailed past the sirens, Mr Osborne has even promised to pass a
law to stop himself from raising these taxes, just in case he should have a
moment of weakness of the will. More than this, he has promised to increase the
pay threshold before which people pay any income tax to £12,500 a year, and to
raise the threshold for the 40% rate to £50,000 a year. Some tax reliefs will
be cut, although the money gained by cutting relief on private pensions has
been committed already to paying for a cut in inheritance tax, so that will not
increase revenues. So if national taxes are to rise, that leaves either the
“sin” taxes on alcohol and tobacco, which bring in rather modest proportions of
government income, or else corporation tax, about which the Chancellor has
previously boasted of Britain’s competitive low rate, and capital gains tax.
Leaving the government so little flexibility to respond to an economic downturn
is likely to worry the bond markets, and we might see that uncertainty push up
the costs of borrowing a little at some point.
So that leaves
spending cuts as the main way of eliminating the deficit and starting to pay
down some of the accumulated debt in five years’ time. Oh, but hang on…
The Conservatives
have made a list of promises that involve additional spending. Here is a
selection of some of the most eye-catching ones.
- £8bn more for the National Health Service, either by the end of the parliament or according to some statements by some ministers, in every year of the parliament;
- continuing the pledge that state pension will rise by the highest rate of wages, prices or 2.5 each year until 2020, which is expected to bring it to £7000 a year;
- a move to seven day working for the NHS, in local family doctors’ surgeries and in availability of consultants in hospitals;
- 600,000 additional free child care places;
- protecting from cuts the amount spent on 5-16 schooling per pupil, including accommodate the extra 7% of pupils who will enrol (but they will not uprate the amount per pupil to deal with inflation in costs of education); and
- an extra £13bn in transport infrastructure for the north of England.
Then there are
Conservative promises that affect the government’s balance sheet, rather than public
spending, at least in the medium term. Removing the cap on university places
presumably means loading more debt onto the student loans scheme. That has to
show up as one of the government’s liabilities, and would probably still have
to, even if the loan book were sold.
On top of all
this, there is a host of particular promises, none of which on their own will
cost huge sums, but taken together will put pressure on the plan. Giving all
employees, including those in the public sector, the right to a few days each
year of paid volunteering leave will cost money. The promised additional
efforts to control immigration will probably require additional resources for
the border force. The incentives to be provided to energy companies to expand
“fracking” will not come cheap. Trebling the numbers of apprenticeships in
food, farming and agri-tech is not hugely expensive given the low base from
which Britain starts and given that some of the costs can be placed on the
private sector, but there will be some costs to the public purse. Some of the
promised reorganisations such as the single farm inspectorate, the new
London-wide Land Commission will cost money. Most people expect more mergers in
police forces: that might save money in the long run but in the short term most
mergers are expensive. Recruiting and retaining the additional “super heads” to
foisted upon “coasting” schools will not come cheap. The new data surveillance
powers which the Home Office has promised for the security services will
require some pricey new technology and some expensive IT and decryption experts
who can normally expect better salaries in the private sector than the public
sector typically offers.
But let’s get
back to the big numbers. We know, because during the election the subject was
never off the air waves, that there are to be £12bn of cuts to welfare
programmes for people of working age. The Work and Pensions secretary, Mr
Duncan Smith, admitted just before the election that he hadn't worked out how
to find more than about £2bn of the £12bn of cuts promised. We know that old
age pensions are protected and the cuts will fall on programmes for people of
working age. Likely, there will be some cuts to Jobseeker’s Allowance. But that
is no longer the most expensive programme. Abolishing it altogether would be
difficult. Does that mean cuts to disability benefits? Under pressure, the
prime minister seemed to suggest that cuts there would be limited. Perhaps it
means child benefit? Pressed on the point, the prime minister insisted that the
benefit would “stay” but didn't commit himself to maintaining its present
levels. Perhaps it means housing benefit? That’s now a big ticket item. The
reason spending on it has risen is obvious. Rents have soared with the housing
boom. Indeed, the gentrification process which has transformed London has
pushed up rents dramatically to the point that people in many jobs on typical
salaries are paying huge proportions of their income in rent. For those not in
work, housing benefit has to bear much of the strain, even after the cuts which
have imposed ceilings on amounts in particular areas. Further cuts in housing
benefit look inevitable. But the effect will be push the poorest people out of
London and the south east, where most demand for their labour is to be found.
So the risk is that when pushed out to cheaper areas, they may struggle to find
work or at least to find well paid work, which could either push up the bill
for other benefits or for tax credits.
If the next recession
arrives in 2018-19, as it well might, this leaves no room to allow the welfare
budget to rise to deal with the unemployment to which it will presumably give
rise.
Without tax
increases, but with protection and even some extra spending for pensions, the
NHS and schools, and new money for the “northern powerhouse”, everything else
will face the axe. The fact that councils have already had their spending cut
by around a quarter as sector might mean that there is not much more to be
found by improved efficiency there. Forcing the transfer of the last council
housing to housing associations, schools over to academy status and some social
service functions over to the NHS mainly means a transfer of spending to the
national government account, rather than saving big sums. And those three take
up most of what local government currently does, although the new devolved
economic development and regional coordination powers across the public
services should mean interesting new roles for councils which don’t involve
running a lot of big labour-intensive frontline services. Further cuts in
policing are likely. But the police also need new, more modern and mobile IT
systems, which will show up on the balance sheet. Presumably, unlike in the
last parliament, there will be cuts in the science budget. Further defence cuts
will take Britain even further away from the 2% NATO target, which will offend
the US and could prove unsustainable anyway, as the Russian government is
ramping up conflict with the west again. Overseas aid will surely be cut, but
this is a very small part of the nation’s finances. One can say the same of the
Foreign Office and its embassies: probably embassies will have to merge and
there will be fewer staff in King Charles Street, but that won’t do a great
deal to bridge the gap which Mr Osborne has promised to span by 2020. So that
leaves support for farming and fisheries, the environment, business support and
promotion, culture and sport, justice and prisons, transport other than the
capital budget which the government has promised to increase and a cluster of
regulatory bodies and executive agencies ranging from the tax collectors
themselves in Her Majesty’s Revenue and Customs and big bodies like the
National Offender Management Service to small profitable bodies in defence
which are more likely to be privatised than have their small spending cut
further. Since few of the big programmes can be abolished – after all, taxes
have to be collected and prisons run – and because some programmes such as farm
support are politically very sensitive, the Chancellor will presumably have to
slice the salami thinly and carefully, department by department.
That leaves a
question about Scotland. Will the UK government effectively force the Scottish
government to accept fiscal self-reliance, ending subsidies from the rest of
the UK, as the price of more autonomy?
If it does, then within England, that might very slightly ease the
spending pressures in the short term, although it is worth remembering that for
many decades in the last century, Scotland paid more to the exchequer in London
than it took back in services. If there is a transitional arrangement to
continue subsidy from the rest of the UK on a declining basis for some years,
as Scotland takes on its new taxing and spending powers, then the increases in
public spending which voters in Scotland seem set to insist on will have
implications for the rest of the UK’s public expenditure too.
What can we
expect public management to be like under these conditions over the next five
years? Apart from “managing cutbacks” (or “taking redundancy”), perhaps the
simplest and clearest general answer is “finding efficiencies without using
much capital-intensive modernisation to do it”. If the government is serious
about eliminating the deficit on the whole of British government’s account
including the one for capital, then the scope for big IT projects and big new
data modernising systems to take advantage of emerging artificial intelligence
technologies, new energy sources and even some new data-dependent working
practices will be very limited. By 2020, citizen entitlements will take up a
bigger share of state spending and the money spent on the management systems
even for running those entitlement programmes, let alone for other things, will
take up a smaller slice of the pie. The gulf which has always existed between
public and private sector management practices is likely to grow wider, except
perhaps in the security services which will have to be given advanced systems requiring
capital investment. Mergers will be required in back office functions ranging
from finance and payroll to IT, from estate management to client record
management. Councils, police forces, hospitals, schools, universities will all
find themselves transferring their own operations to or just buying these
services from a few huge centralised bodies. For many of the labour intensive
public services such as local government, social care and policing and other
emergency services, we have to expect some degree of movement from reliance on
paid professional labour to volunteers. Anyone who has run an office
recruiting, training, retaining and managing volunteers and paying their
expenses and writing references for them will know that scaling up those operations
is not cheap, even though salaries are not being paid. But in many
labour-intensive services, there will be no alternative. Politically, this
substitution will be dressed up with the language of civil society and engaged
communities and good citizenship. But the fact of substitution will not be
disguised. One view of the charts
that the Institute for Fiscal Studies generated from the Conservative promises
about public spending suggests that in the last year of the parliament, around
2020, spending will – slightly oddly – rise again. Whether that happens,
remains to be seen. If the next recession has already arrived by then, so
bringing tax revenues down, that uptick may not materialise. But public
managers should not suppose that after surviving the next few years, they will
be able to relax much. By then, the demand pressures of the ageing population,
of growing demands for new infrastructure projects to deal with climate change
and of the gathering storm of middle class job insecurity arising from the new
automation, together with the continued pressures of competitiveness to keep
the lid on tax revenues will mean that well into the 2020s and 2030s managing
the public services in Britain will be about squeezing out efficiency without
all the capacity Britain will need for ambitious modernisation. In turn, that
will raise challenges of how to attract, recruit educate and train (that’s
where we come in) and retain the best management talent into the public
services. We can tell the next generation of young public managers that they
will have the challenge of working on fascinating management problems. But
we’ll have to own up to them that they will be cursed with living in
interesting times.
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