I spoke recently at the CIPFA Scotland annual conference - about the challenge to our public services in a recession.  With a nod to its location in Dundee, the conference was heralded as a ‘Voyage of Discovery’.  That seems appropriate for the spirit of adventure we will need in the next few years.  But I am not sure how many of the delegates were really ready for a journey into the unknown.

Back in 1997, Gavin McCrone, former chief economist at the Scottish Office, warned me that sooner or later Scotland would have to adjust to a shrinking public sector budget.  He suggested we should learn lessons from the deep spending cuts of the early 1980s so that when the time came we could make the transition in Scotland more intelligently and with less collateral damage.

I tested the idea with others, including potential funders for such a study.  There was no interest.  The most we managed was a report on how to perform the Treasury Functions in a devolved administration, including how to control public spending.  The report attracted attention from Parliament but gained no traction in government.

On the eve of devolution, with emotions riding high and a new Labour government just elected, planning for darker times held no appeal.  It still doesn’t.

In the event the anticipated squeeze on public spending in Scotland never came.  The Scottish budget has doubled since devolution with average real term increases of just over 5% per annum.  Spending on the NHS has more than doubled to over £2000 for every man, woman and child in the country.  Spending on education has increased by 50% over ten years.  We really have never had it so good.

But the hour of reckoning is now at hand.  Even Audit Scotland’s best case scenario involves spending cuts of 7% over the next three years.  In a period of rising demand, where so much of the budget is relatively locked in (over 50% is staff costs, a further 10% capital costs), they conclude that efficiency savings and incremental budget reductions will not be enough to bridge the gap.  Something more radical will be needed.

And this is where the ghost of the 1980s enters the room.  A small army of management consultants is now on hand to offer solutions to public agencies struggling to make ends meet.

In the first phase, they suggest, we need to make efficiency and cash savings:  a hiring freeze, a pay freeze, renegotiate supplier contracts, consolidate purchasing, cut out unnecessary spending on entertainment, travel etc. This is a ‘bridging’ strategy:  tide things over until growth resumes.

In the second phase we might have to go further:  cuts, means testing, charges, shared services and outsourcing.  Or if we are feeling bold, take on some ’sacred cows’, too difficult to challenge in good times:  terms of employment, pension rights, hospital closures, enforced redundancies.

The third phase involves positioning for recovery.  For businesses this is about taking advantage of prevailing market conditions:  snapping up talent at low rates, taking over competitors.

It is much more difficult to see how this aggressive ‘invest in the future’ approach applies in a public sector context.  Typical strategies are therefore much stronger on cost cutting than on providing any credible promise of future viability.

My concern in Scotland, at least in the public debate, is that we are still only talking about a phase one, bridging strategy.  It is going to get much tougher than that - and we are woefully ill-prepared.

My wider concern is that even the more ‘radical’ strategies so far on offer will prove inadequate.

Take the example of the NHS, which accounts for nearly a third of the Scottish budget.  IFF’s forthcoming report Costing an Arm and a Leg shows that healthcare costs have risen inexorably for decades, throughout the developed world.  There has never been a sustained period of zero growth in NHS history, even in economic downturns.

Yet now the Department of Health is warning the NHS in England to prepare for up to 20% cuts in the next three years. History suggests that this simply cannot be done by any of the means currently being discussed (efficiency, competition, prevention etc).  Nothing but trouble lies ahead for any politician who promises otherwise.

At least the English debate recognises the scale of the challenge.  By contrast, heads in the sand, the Scottish Government has awarded an above inflation rise in NHS spending for 2010/11 and issued a press release trumpeting record funding levels.  With a Scottish election looming in May 2011, there has been no hint whatsoever of the troubles to come.

The cuts of the 1980s were driven by the abstract targets and arcane measures that underpinned monetarist economics (remember M3?).  They inevitably manifested as crude, divorced from real lives and blind to human consequences.  The danger is that the cuts of the next few years will be equally crude and damaging - because they will be driven by nothing other than rising panic as the relatively painless bridging strategy fails.

The only way to frame an alternative passage through that dark night is to light a candle at the end of the tunnel.  We need to know where we are heading, what the pain is for.  We need a values-based vision of the future, not simply an accounting formula.

I have been impressed in recent conversations inside and outside government - about health, inequality, community safety, prisons, education - by how many people are genuinely up for this kind of discussion.  There is a readiness to acknowledge that some existing spending actually makes matters worse, that much of it involves propping up fundamentally unsustainable systems, and that top down control is both costly and increasingly ineffective.

In all these spheres part of the shift towards longer term viability is from a service logic of ‘trust the government’ to ‘trust the professional’ and ultimately ‘trust the user’.  Yet this is in direct opposition to the trend in a recession - towards tighter performance management and central control.  The innovative head teachers I talk to, for example, are worried that the little room they have at present for financial autonomy and professional discretion will be clawed back in the name of austerity.

Yet it is the dynamism, vision and commitment of such individuals that we must encourage in our public services in order to come through this recession stronger.  IFF calls them ‘pioneers’, and Scotland is full of them.  These people are redesigning the plane whilst flying it.  We need to support them.  If instead we deny the scale of the challenge, or rely on the 1980s menu of responses, I am afraid the plane will crash - with devastating consequences for us all.

Tags: devolution, Financial Crisis, governance, management, policy-making, public spending

This entry was posted on Tuesday, April 20th, 2010 at 12:19 pm and is filed under Financial Crisis, governance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.