Tuesday, 5 October 2010

Reducing Public Spending: The man from Whitehall knows best – or does he?

In 1992, the then Leader of the House of Commons, the late Robin Cook, stated that “Britain was the most centralized state in the EU”. Many will also argue that the UK is one of the most centralised states in the world. Indeed some months ago the Economist journal suggested that the UK was the second most centralised country in the developed world after New Zealand which is, after all, a tiny country. As a consequence of this, English public services are planned and managed via a strongly top-down command and control process driven from Whitehall and Westminster with limited regional or local discretion.

The coalition government is engaged in a policy of making unprecedented reductions in public service expenditure over a four year period. I would suggest that the magnitude of public expenditure cuts being looked for can only be achieved through a limited number of broad approaches, namely:

1. Salami slicing or “Death by a thousand cuts”
2. Strategic withdrawal from certain front line services
3. Control of public sector staff costs
4. Reconfiguration of public service structures
5. Innovation in service delivery
6. Quantum efficiency improvements

The top-down command and control approach is capable of delivering savings in relation to: strategic withdrawal from services, control of public sector staff costs and reconfiguration of public service organisations. Indeed it is clear that all of these approaches are being (and will continue) to be deployed by the government. However, it is naïve to think that innovation and large scale efficiency improvements
can be imposed by the same top down approach. Experience, worldwide, in the public and private sectors indicates that to achieve savings such as these there are a number of pre-requisites including: local empowerment, internal cultural changes, management capacity and skills, and time. The top-down approach precludes that and it can even make things worse. The 2007 Nobel Prize for economics was awarded to Hurwicz, Maskin and Myerson for their work on mechanism design. One of the key points of their complex ideas was that governments seem to fail to understand that people will change their behaviour in response to new rules and targets imposed from on high. NHS targets are a good example. Some aspect of the service is thought by the centre to be inadequate, and so a central target is set without taking into account the fact that a manager will thereby have a strong incentive to move resources from other services in an effort to meet the target. In doing this wrong decisions are sometimes made. The departing manager of the Maidstone and Tunbridge Wells Hospital Trust attributed the C-difficile outbreak that resulted in 90 deaths to this cause.

Unfortunately the top-down approach still seems to hold sway with conversations taking place, behind closed doors, in Whitehall and Westminster about how the cuts should be implemented with only limited consultation with the rest of the country. We all wait with baited breath for the decisions to be announced in the CSR on 20 October. Ministers can pretend to the public that the cuts are going to be achieved, largely, by “efficiency savings” but in my experience they will not. There just isn’t the time for reflection and large scale and real cuts in service are likely to take place. This is not scaremongering by a politician but a judgment from an academic and finance professional based on evidence. Medium term financial projections from local authorities that I have seen suggest to me that salami slicing is extremely prevalent in their future expenditure plans.

The man from Whitehall does not know what is best. It is absurd to think that correct decisions about public services in Barnsley, Bradford, Birmingham or Bristol can be made from an office in London. When will Whitehall and Westminster realize this?

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