In 2010 British public sector borrowing will be £175bn—more than the health and criminal justice budgets combined. The "structural gap" in our finances, after spending on the recession, is £90bn a year. And government figures now imply that reducing this gap will have to come mainly from cuts, not tax increases. The rows over public spending have barely begun.
Britain has been here before. The Institute for Fiscal Studies thinks our late 1970s fiscal hole was larger than today's. Back then, our debts were eased by inflation and the windfall of North sea oil. Yet even these didn't stop the winter of discontent, the defeat of Callaghan and Labour's breakdown into open warfare. Chris Hood, professor of government at Oxford, also sees parallels with the early 1920s, when a recession led Lloyd George to cut budgets bloated by war and liberal welfare policies, slashing roughly £100bn in today's terms.
In both cases some areas, such as health, were protected. Defence bore the brunt in the 1920s; capital spending, education and local government did worst in the 1970s. Yet even if history says belt tightening is possible, can a Whitehall machine accustomed to year-on-year funding increases suddenly deliver savings? As one senior Treasury figure put it: "I am confident that we can deliver any given number…. but I am much less confident that the right things will get cut."
Whitehall's response to the squeeze is predictable. The first strategy will be to ignore pressure. When that doesn't work, the second line of defence will likely be "bleeding stumps"—where dutiful civil servants offer to cut only programmes precious to their ministers, who are then unlikely to authorise them. Because departments tend to have the best information on their own programmes, they should in theory figure out where to save. But this leads to a "protect the core" strategy of defending favoured areas. The result? Spending on problems that fall between departmental boxes—like obesity, climate change or social exclusion—gets cut instead.
This is made worse if cuts are spread evenly over several years. As public services expert David Albury has said, the response of a leader "faced with a few percentage cuts each year for ten years is very different to one who is presented with the whole cut in one go." Year-on-year "salami slicing" of tiny cuts won't change how services are run.
In the early 1990s, Canada's budget deficit was 9.2 per cent of GDP, about the same as Britain's today. Its debt was also high. But in 1994, a brutal process called "programme review" was introduced, in which a panel of ministers worked through a wide-ranging list of possible cuts. These were not evenly spread: transport and agriculture subsidies were slashed along with international aid. Some areas, such as care for the elderly, were even increased. The process broke away from salami slicing, and moved ministers beyond their departmental interests by focusing on a running savings total, rather like a Blue Peter appeal. This created a collective drive to add to the pot. One of the politicians involved, speaking at a recent seminar in London, said: "There was blood on the floor everywhere, but at least everyone could see that others were hurting too." And as one voter in his own constituency put it to him, "this is butchery, but I voted for you as at least you seem a good surgeon."
Can the same thing happen in Britain? One barrier, identified in new OECD data, is the strength of our departments. British ministers have unusual discretion over spending. While our government is over-centralised, within Whitehall it is too decentralised, leaving No 10 with little room for manoeuvre. A decade of reforms has aimed at joining-up departments, but even this limited progress is vulnerable to being swept away in the first round of cuts.
Yet there is a great opportunity if such things can be overcome. Mark Moore, a public management expert, spent last year at Harvard Business School. He says the most striking thing he learned was how great leaps in productivity often come from bankruptcy—one of the very rare moments when companies are forced to think about things afresh. The same could happen in the British public sector. There are stacks of promising ideas for reimagining our public services. Billions can be saved, for instance, if services for those with chronic conditions like diabetes are redesigned around self-care. Similarly, some big welfare programmes have huge deadweight costs: funnelling money to get people to do things they would have done anyway, especially among the more affluent. Big ticket items—such as big military hardware or shiny new schools—are nice to have, but deliver relatively poor value for money.
More ideas are already available in the unpublished "Fundamental Savings Review" conducted during the Blair government. Ministers should dust off such lists, swallow hard and act. They need to use tough decisions as a way of expressing their values—by switching cash out of fighter planes into stimulating our fledgling electric car industry, for example.
Most importantly, we must overcome our longstanding lack of interest in evaluating what works: the quiet scandal of public policy where billions are spent but not unspent if they don't deliver. One hard lesson from history is that reviews focusing just on efficiency gains don't deliver what's needed when your budget deficit is heading towards 10 per cent. The Canadians introduced 15 initiatives to control or reduce expenditure in the 1980s and early 1990s, but their debt still tripled. If we aren't careful, we are in danger of following them.
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