08 December 2006
Halfway through its life, the government's efficiency programme is ahead of its targets. But with a fiscal squeeze on the way and no let-up in spending plans, the public sector is going to feel the pinch. Joseph McHugh reports
They're not quite turning off the heating and telling staff to wear an extra jumper to the office – yet – but Whitehall departments will certainly be stepping up their efforts to make savings and cut budgets in the wake of this week's Pre-Budget Report.
Gordon Brown used it to crow about progress on the government's efficiency drive, publishing a set of figures showing that exactly halfway through the three-year strategy, drawn up by the chancellor's wastefinder-general Sir Peter Gershon, the public sector is running ahead of target in its battle to cut costs.
But the good news masks an uncomfortable truth for the chancellor. To protect investment in public services – while staying within the tight spending limits he has already pencilled in up to 2011 – will require public bodies to wring ever more savings from budgets that are already feeling the squeeze.
Brown has made it clear that next year's Comprehensive Spending Review will ratchet up the pressure on the public sector to do more for less.
His declaration that all government ministries face 5% real-terms cuts in their administrative budgets, and will have to achieve efficiency savings of 3% per year from 2008 is just a taster of what CSR07 has in store for them. The language emanating from the Treasury over the past 18 months – talk of a tighter fiscal environment is now commonplace – leaves no doubt that before long everyone will be feeling the pinch.
In an interview with Public Finance in advance of the PBR, Stephen Timms, chief secretary to the Treasury and the Cabinet minister in charge of public spending, was candid that a big push on efficiency would be the cornerstone of the CSR.
'If you look at the next few years, there will continue to be real-terms increases in public spending, but the rate of increase is going to be much less than it has been. That creates challenges for departments going forward,' he said.
'But the great strength of this process is that there will have been time, by next summer, to think through very carefully how we transit to this tighter fiscal environment, while maintaining, and indeed building on, these improvements in public services.'
On current figures, that tighter environment translates into real-terms spending growth averaging 1.9% per year from 2008 to 2011, compared with 3.4% over the current spending period.
Against this background, Timms' comment that 'maximising efficiency is going to be critically important for a successful CSR' comes as no surprise.
So, as Gershon Mark II looms, what exactly has the programme achieved?
It was dreamt up by the chancellor, who commissioned Gershon to carry out a fundamental review of government and the wider public sector. First announced in the 2003 Budget, the results were fed into the 2004 Spending Review.
Gershon found potential for huge savings in public sector operations. He said that by the end of a three-year period, covering the financial years 2005/06, 2006/07 and 2007/08, £21.5bn worth of efficiency gains could be achieved each year. He also called for the number of civil servants to be cut by 84,000. At the same time, a smaller, parallel review by Sir Michael Lyons recommended that 20,000 posts should be moved from the Southeast to other parts of the country.
According to Gershon, cutting civil service numbers will save around £5bn. In addition, the health service is expected to generate £6.5bn of savings and local government £6.45bn. The rest will come from Whitehall departments. These savings are supposed to be achieved through major reform of public sector procurement; joining up back-office functions such as finance and human resources between organisations; and reductions in administration budgets.
The figures reported by Brown in the PBR show the state of play at the end of September 2006 – the programme's halfway mark. And the news is good. Annual efficiency gains now stand at £13.3bn, more than double the £6.4bn reported in this year's Budget in April. This includes £5.5bn of savings on procurement, £2.4bn on productive time; £1.5bn on funding and regulation; £0.9bn on corporate services; £0.5bn on transactions; and £2.5bn classified as miscellaneous.
On the jobs front, 54,963 civil service posts have now been scrapped, up from 40,391 since the Budget; and 10,574 jobs have moved from London to other parts of the country, up from 6,640 over the same period.
Timms is pleased with the progress so far, but he indicates his concern that staff might start to rest on their laurels. 'The numbers are looking good and we are on track to achieve the Gershon objectives, but it's not yet in the bag. There is a good deal more work to be done to maintain our focus on securing those gains, and make sure people don't start to get complacent about them,' he says.
In a recent snappy sound bite, Timms declared that efficiency was 'the friend of public services'. He reiterates the point, arguing that Gershon-style drives are essential to protect them in the future.
'I see this as a very important part of winning the argument for well-funded, high-quality public services,' he explains. 'It is absolutely essential, at a time when the fiscal environment is becoming more constrained, that we're able to show that we're achieving the best possible value for money for taxpayers.'
But this is as much about economic reality as the cut and thrust of national politics. The Organisation for Economic Co-operation and Development published its Economic Outlook, a biannual study of the world's major industrialised economies, a fortnight ago.
While broadly agreeing with the chancellor's latest prediction of 2.75% growth in gross domestic product, the OECD warned that for the UK: 'Spending restraint and achieving value for money will be the challenge for fiscal policy over the next few years.'
But Christine Frayne, senior research economist at respected think-tank the Institute for Fiscal Studies, says it will be tough for the government to marry spending restraint and a desire to avoid tax rises with continuing to invest in health and education and honouring other existing policy commitments.
Meeting the pledge to reduce and then eradicate child poverty, for example, will require further substantial increases in benefits to families, according to Frayne. At the same time, investment in education was the centrepiece of Brown's 2006 Budget and featured predominantly in this week's PBR, while cutting funding to the NHS – the big winner in previous Spending Reviews – is a political game with high stakes. In view of this, it seems unlikely that the axe will fall on funding to schools and hospitals.
However, something has got to give and Frayne says the chancellor – whoever that might be in the summer of 2007 – will have some tough choices to make in the run-up to the CSR.
'There is going to have to be a trade-off between social security and education, and all the other departments,' she says. 'Given the tax profile going forward, the government will need to establish whether it can afford to spend any more and, if not, whether it can deliver services within the existing spending envelope.'
She is sceptical about the ability of the efficiency programme to close that gap. 'It purely enables departments to do a bit more and deliver services better than they would have done in its absence. It can't be used as a way of quantifying savings and factoring them into budgets.'
And questions are not just being raised over how far efficiency savings can be stretched to fill shortfalls in departmental budgets. Business lobby group the CBI has this week produced a study casting doubt on the previous Gershon figures, which were published by the Treasury in the summer.
Neil Bentley, the CBI's director of public services, told PF that, using the same methodology, his organisation had calculated that the civil service head count had been reduced by just 13,000, rather than the 36,000 claimed. That's a discrepancy of 23,000 full-time equivalent posts.
Bentley, who is keen to stress that the CBI fully supports the aims of the Gershon programme, says there is a lot of political pressure to show that the efficiency drive is working and that, consequently, government claims need to be independently audited and verified.
'A survey of our members earlier this year showed that 90% had little or no confidence in the Gershon programme. We need good, reliable data to build confidence, but it is very difficult to verify the data from outside government, so the main thing is to have independent auditing of the figures coming out. This could be done by the National Audit Office.
'We need to know to what extent figures for existing programmes are being counted, and to what extent they are new and being counted against clear and consistent baselines across government.'
Naturally, Timms strongly rejects any suggestion that Gershon is an exercise in smoke and mirrors. He cites the NAO report from earlier this year, which highlighted the lack of baselines against which progress could be measured, and says he is confident the follow-up report, due out early next year, will verify that baselines are now in place.
'I share precisely the concerns of the NAO because my interest in this is about the contribution that this efficiency work can make to a successful outcome for the Comprehensive Spending Review. If the numbers aren't quite what they appear to be, that doesn't help me at all.'
He also, quite reasonably, points to the loud complaints about Gershon from the civil service unions as evidence that the head count reductions are all too real. 'When it started the criticism was “it's all smoke and mirrors, nothing is really happening”. It ought now to be clear to everybody that actually, something very substantial is happening and that's right, it needs to happen.'
As if on cue, Mark Serwotka, general secretary of the Public and Commercial Services union, last week issued a threat of strikes if the government pushes ahead with its intention to build the CSR around another efficiency drive.
'The government pats itself on the back about how many civil service jobs it has cut, but fails to recognise the disastrous impact it is having on the delivery of frontline services,' he warned.
'With additional job cuts looming as part of the next CSR... the government needs to wake up to the damage being done to public services by politically driven cuts, and engage quickly with unions on the issues of jobs and services. Otherwise it will be facing industrial action across the civil service in the New Year.'
That may be so, but Serwotka – and the other critics of the Gershon programme – are likely to find themselves being left out in the cold.
Efficiency in the public sector is no storm about to blow over. It is set to be the prevailing climate for years to come.
PFdec2006
