Even after 17 years of Conservative government, the fundamental problem of public expenditure-its tendency to spiral out of control-has yet to be tackled.
The challenge of public expenditure control is often presented as analogous to that confronting every household or company in the land. A family must live within its available resources. Furthermore, it must balance competing demands: for rent, food, fuel, clothes, toys, cars, books, CDs, beer, holidays and so on. The Chancellor of the Exchequer is likened to a frugal and prudent housewife.
But the analogy is bogus in two respects. First, most households have some control over their income. They have the choice at the margin of working extra hours, taking casual work, or changing jobs. Second, households that are having trouble making ends meet are generally prepared to take quite radical steps to eliminate unnecessary expenditure. They often sell their cars, stop eating meat, share bath water, or heat only one room. What they do not do is trim across the board. It would not occur to them to attempt to follow the Treasury approach of aiming to cut 5 per cent off expenditure in every area.
Similarly, if we look to companies for a model, we find that each set of costs is reviewed regularly for its contribution to output. If the product changes or the technology for producing it changes, then the expenditure on raw materials, equipment and people will be adjusted. No area of expenditure has the right to continue unchallenged, even in large and profitable organisations such as oil companies.
In the public sector, things are different. The Treasury claims that the "fundamental review" process addresses this problem. That is nonsense. Departments treat the review as a sporting contest. The Treasury is the opposing team; the strategy is to ensure that it scores as few goals as possible, while at the same time demonstrating the home side's sportsmanship.
Take an example. All the evaluation evidence on government training schemes for the unemployed suggests that their impact is at best marginal in developing skills, improving participants' chances of getting a job, or increasing their earnings. This has been consistently true for some time and is widely recognised by those who are concerned with improving the level of skills available in the economy. Yet when the then department of employment underwent its fundamental review in 1994, there was no question of recognising reality and abandoning these schemes altogether.
The problem is that within any spending department, officials' careers are bound up with delivering effectively the policy that ministers have decided to follow. It is possible to give up areas of expenditure that are not dear to ministers' hearts, even when they contribute effectively and efficiently towards their objectives; the enterprise allowance is a case in point. However, areas of expenditure where ministers have made claims and staked political capital are not susceptible to open discussion.
The market driven disciplines that apply to households and companies simply do not apply to the public sector. If an activity was undertaken last year, there is an implicit assumption that it will continue this year, next year and every year into the future. If a service has been delivered in a particular way, there is no automatic mechanism to challenge the method of providing the service, let alone its right to continued existence. There is no reward for improving efficiency, as the status of individual managers is related to the size of the budgets under their control.
There are times when the public sector resembles nothing more than a sheltered employment scheme for a significant share of the nation's well educated middle classes. The ethos is still producer control, not pride in providing high quality services to the public at a reasonable price. The high-minded people who run our public services know what services we should get and how we should get them. And we should never be expected to have less of any one of them, even if we have more of others.
There is a belief that the public sector has suffered big reductions in employment because of "cuts." This is not true. The reduction in public sector employment has been minuscule compared with that in manufacturing. Much of it has come about because of the transfer of activities into the private sector under contracting out. Moreover, the staff cuts that there have been are concentrated on relatively low paid manual workers (home helps, school dinner ladies, park keepers, street sweepers and the like). The armies of white collar workers in our town halls and government offices have emerged virtually unscathed. Indeed in local authorities they have grown. In our hospitals they have exploded in number to the point that even government ministers recognise that there is cause for alarm.
Practices that to the private sector seem merely quaint survive in the public sector. In much of the private sector, for example, developments in technology have led to the establishment of small teams of secretaries working for a group of managers. The one thing these secretaries rarely do is type, except documents drafted on their own initiative. The managers themselves type much of their own material. In the public sector the traditional one to one (or one to two) relationship is more likely to persist. Indeed, it is quite likely that there are places where the typing pool still exists.
When I first joined the civil service in 1974 as a senior economic assistant, I was a reasonably competent touch typist and was used to drafting at least part of my work directly on to the keyboard. I therefore asked those responsible for office equipment for a typewriter. I was refused one on the grounds that only typists were allowed to type. I would not want to claim that extreme examples such as this persist today, but the ethos that underlies it is still alive.
Those responsible for stewardship of public sector resources should be reminded at regular intervals that income tax is payable on earnings of less than ?100 a week; that VAT is payable on a wide range of essentials; that some families are driven into debt to pay their council tax. Public expenditure is paid for by the poor as well as by the well-off and by companies. Indeed, the contribution by the poor to public expenditure makes a greater difference to their standard of living than the far larger contribution made by those on higher incomes.
There are areas of public expenditure that we all know are a complete waste of money. My own local authority had a plan not so long ago to deploy council staff hiding behind trees to catch adults cycling on the pavements. Fortunately they had the sense to scrap the plan once it had been exposed to public ridicule. Everyone has their own stories.
Yet the Treasury does not have the information to pinpoint where such waste occurs. There can never be effective central control of all items in ?200 billion of public expenditure. Instead of recognising this and taking account of it, the Treasury tries to exercise excessive control over those items of expenditure that it knows about. Until the recent cuts in Treasury staffing, departments had to go to the Treasury for approval of very small sums (sometimes less than ?10,000), even when the expenditure was covered by money voted by parliament and was clearly being incurred for an appropriate reason. Every proposal for new expenditure, however small, is scrutinised in detail. Existing expenditure is never challenged in the same way.
The incentive to save is simply not strong enough in most of the public sector and there is institutional bias against spending now to save later. To a normal human being, it makes sense to spend money on education and social support mechanisms such as the youth service if that expenditure makes it less likely that young people will become criminals. However, there is no incentive at all for any public sector manager to incur expenditure which will yield savings for somebody else's budget, particularly if those savings will take ten years or more to become apparent, and there is no mechanism within the Treasury to make those trade-offs more explicit.
Some forms of spending are inherently difficult to control; social security provides the best example. Demographic influences are powerful and changes in rules to limit demand have a habit of encouraging people to qualify under another category. Yet given the importance of such spending in the overall scale of things, it is surprising that the Treasury rarely considers evidence other than that derived from economic modelling.
One area where there does appear to have been genuine progress towards challenging what is provided and how, is the much maligned National Health Service. The current system is evidently not perfect. There are problems with accident and emergency services, and with intensive care bed availability. But the opening up of the NHS through the internal market has made decisions about the allocation of scarce resources more transparent, and provides an inbuilt challenge mechanism.
The remainder of the public sector continues to function in the old way, confounding the household analogy. As children grow, households discard cots, prams and tricycles in exchange for video games, replica football kits and Barbie dolls. In the public sector prams and tricycles go on being produced because their producers have good jobs. There are no rewards for people who point out that public demand for trikes and prams seems to be falling off. The persistent failure in most local education authorities to eliminate surplus school places is a case in point. Public sector managers are naturally reluctant to abolish the jobs of their own staff, and staff are, of course, the most important element of public expenditure. In the market sector, changes in customer tastes and shifts in demand take the responsibility for change out of managers' hands. In the public sector, it is patently in their hands. Their responsibility to anonymous taxpayers, however poor, rates less highly than their responsibility for their known colleagues, however well paid. This is why "producer capture" remains a very real problem in the public sector. Its roots lie in sociable human behaviour and there are no countervailing forces.
