In March 2018 the government reached a significant economic milestone. It eliminated the deficit on its day-to-day budget. Tax revenues will exceed public spending. Public sector net debt will fall for the first time since 2001-02. It took eight years rather than five. But the primary target set by government in 2010, as the UK struggled to recover from the financial crisis, had finally been met.
The chancellor declared the nation was at a turning point in its recovery. He could see ‘light at the end of the tunnel’. Some commentators suggested the light might be an oncoming train, pointing out that economic forecasts rely on the government following through on ambitious plans for further spending cuts.
What does the economic evidence tell us?
We recently asked the National Institute for Economic and Social Research (NIESR) to help us understand if the upbeat economic message was justified.
They told us that if government is to achieve its ambitious target of a balanced budget by the middle of the next decade, public spending as a share of Gross Domestic Product (GDP) would need to fall to 36.6% in 2022-23. The post-war average is 39.3% of GDP.
Since 2010, significant savings have been made by transforming how government works, through commercial reforms and reducing the costs of major projects. However, the evidence is that public sector pay restraint and relatively low levels of public spending, rather than widespread productivity gains, explain the vast majority of deficit reduction.
What future do public services face?
We then asked NIESR to suggest how sustainable these savings might be. They told us government faces a daunting challenge. Why?
First, continued pay restraint is unlikely to have the same impact. The across-the-board 1% pay cap has already been lifted. And there are signs in health and education of recruitment and retention problems. Second, there are signs that low levels of public spending might be affecting the quality of public services. For example, the Institute for Government have noted a marked deterioration in key government targets for health and public safety. And third, most significantly, the pressure from further ageing of the population is gradually building. Significant extra resources will be needed to cover raising health and care costs and serve a larger number of pensioners.
NIESR used a series of scenarios to reveal the economic strain that government might experience over the next seven years. They warned that a public spending gap of up to £300bn could emerge, created by the cumulative impact of an ageing population and the cost of easing austerity.
Of course, it is possible that the economy will improve significantly, lifting tax revenues and providing an opportunity to increase public spending and reduce debt (the government still owe more than £1.6 trillion). But this cannot be counted on and it would be better to consider other options.
What options are open to government?
To meet this challenge, the government will need to embark on a transformation programme on a scale unprecedented in the post-war era. The combination of fiscal consolidation and rising expectations for service delivery represents both an opportunity and an imperative to radically redesign the services government provides to the public.
Government have already started digitising front-end interfaces, processes and workflows to improve cost efficiency and user experience. The next step is to reduce duplication of structures and resources between and within levels of government. And this requires a change of mindset – from government and industry. Rather than simply implementing bits and pieces of technologies on their own, there is a need for equally necessary organisational and service design changes. And this means joining up and trying to de-silo processes, creating new processes that do things once rather than many times.
In launching a new strategy for the government business last week, Sopra Steria commits to using our understanding of the public sector and emerging technologies to introduce a series of platforms for government, focussed on core government activities, which are standardised and repeatable. They will enable government to re-engineer, streamline and automate policy processes (including those enabling the UK’s exit from the EU).
Further information on the strategy launch and the NIESR research can be found on the Sopra Steria website. As always, I would be grateful for your thoughts and suggestions on how public services should be reformed.