Thursday, February 04, 2010

But What Reforms?

Wrong type of deckchair

When we started BOM back in 2005, identifying government waste was still a minority sport. True, we'd had Gershon Mk I and the Tory James Review, but on the other side there were plenty of Big Government types arguing that overall, the public sector did a pretty good job at a very reasonable price.

We are now in very different times. Our fiscal crisis is concentrating minds all over. The world and his wife now agree that the public sector is bloated and inefficient, with huge scope for efficiency savings. Or to put it another way, we could cut public spending with no appreciable decline in the delivery of public services.

How big are the potential savings? Regular BOM readers will be familiar with some of the key evidence.

First, we have the international studies comparing public sector efficiency in the UK with that overseas. The best known study is that published by the European Central Bank (eg see this blog), and that suggests we could save 16% of total public spending, or around £110bn next year.

Second, we have the analysis of public sector productivity published by the Office for National Statistics (eg see this blog). The ONS says that since 1997, public sector productivity has been falling by between 0.3 and 0.9% pa (depending on whether you adjust the output figures for so-called quality improvements). Yet over the same period, private sector productivity has been rising by 2.2% pa. Over a decade that kind of difference mounts up to a total public sector efficiency shortfall of well over 20%.

Third, we have the various studies that are now underway in Whitehall itself. They are largely secret, but Tyler understands that several big spending departments are currently going through their programmes and identifying a considerable margin of duplication and inefficiency. Just last week, we got the results of one such exercise - 15% waste on public service spending in London (see this blog).

And on the detail of possible savings, Hammersmith and Fulham councillor Harry Phibbs has just posted this excellent analysis showing precisely how Mayor Boris could save £93m and cut his precept on London taxpayers by 10%.

Drawing it all together, we can quite reasonably assume that 15-20% of public spending is wasted - and it may well be more.

The real question though, is how do we put it right?

As the ludicrous deckchair rearranging Gershon "efficiency" programme has shown only too vividly, we cannot do it through "better management". We've been trying that for decades, and it hasn't delivered. And neither is it any good having yet another slice and dice Whitehall reorganisation. We have to reform the public sector far more fundamentally than that.

But how? What reforms exactly?

We have always believed that the critical reforms are those that make our public services much more directly accountable to their customers: school vouchers and many more independent schools; the NHS broken up and replaced by competing social insurers; and local authorities made to raise the bulk of their own funding from local taxpayers (ie fiscal decentralisation).

Such reforms would give public service suppliers the kind of incentives that private service suppliers already have. And that's a key point - a point that's so obvious it often gets overlooked. Reforms that don't link the public sector's incentives to customer satisfaction are most unlikely to deliver improved efficiency. There has to be a direct pay-off in order both to stimulate new thinking, and to persuade managers to take the tough decisions on things like staff numbers and working arrangements.

Just one small problem - reforms like that mean breaking the power of Westminster and Whitehall. They mean reversing an entire century of centralisation.

Absent military defeat and occupation by a foreign power, HTF do we do that?

PS Tyler finally found out that BOM's comments provider, Haloscan, is heading for the scrapheap. So we've had to switch to a new provider called Echo. We'll see how it goes.

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