Magazine article Public Finance

Think Smart

Magazine article Public Finance

Think Smart

Article excerpt

GOVERNMENT IS FACED with a conundrum - how to manage even more debt at a time when demand for public services is rising. PricewaterhouseCoopers estimates that closing the current spending deficit by 2015/16 requires fiscal tightening of around 3% of gross domestic product (equivalent to £43bn at 2009 prices) on top of tine tax and spending measures announced in Budget 2009. Chancellor Alistair Darling's Pre-Budget Report on December 9 is likely to announce further tightening, or at least more details of potential spending cuts.

The chancellor has many potential tax and spending options available to him for bridging the fiscal gap. While further tax increases (on top of the postdated measures announced in the Budget) would be politically unpopular, it will be hard to make spending bear the whole weight.

Illustratively, on PwCs calculations, hitting the 2015/16 target to eliminate the current budget deficit would require a cumulative real reduction in departmental spending of around 17% in the three years to 2013/14 (or around 23% for other departments if health were to be protected from real spending cuts), assuming there were to be no further tax increases. Spending constraint on this scale would be unprecedented in the post-war era.

So it is more likely that there will be a mix of tax and spending measures. Even this will have serious consequences for the public sector. Dividing the required fiscal tightening evenly between tax and spending would still mean further, real public spending cuts, with total departmental spending down by around 13% in the three years to 2013/14 (or around 17% for other departments if health were to be protected), according to our estimates.

With any credible fiscal scenario, there will be a need for spending restraint. The challenge will be to make the savings while protecting frontline services as far as possible.

The obvious starting point is to focus on improving operational efficiency in the back office, where the business case for reducing duplication, sharing services and redeploying resources to help service users is clearest. PwCs response to the Treasury's Operational Efficiency Programme has already challenged the government to go further than it had planned. Indeed, it estimated that efficiency savings of around £28bn per annum, additional to those in the Budget 2009 plans, could be achieved by 2013/14.

Tactical efficiency savings will not be enough. There is a critical need for a more collaborative approach between organisations within government and the wider public sector - although this will be harder to implement - as well as greater simplification and standardisation of processes.

The scope for making efficiency savings is also underlined by recent data on public sector productivity. June 2009 figures from the Office for National Statistics indicate that productivity declined slightly in most public sector service areas between 1997 and 2007, while the total public services productivity index fell by 3.2%. Over the same period, private sector productivity is reported to have risen by 22.8%. While it is notoriously difficult to interpret data on public sector productivity (for instance, how should quality of service improvements be factored in?) the contrast between public and private sector productivity over this period cannot be ignored.

The government also needs to consider smarter ways to get best results. There are two themes, in particular, that will need to be pursued by the government over the coming years of fiscal constraint. One is getting more value from public spending by joining up different services and different funding pots. …

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