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Get set for hard times

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Efficiencies alone will not protect services from potentially brutal spending cuts. Steve Freer and Mike Bennett describe how a study is mapping the way ahead.

A glance at last week’s press cuttings paints a very clear picture: “Brown admits it: we face tough choices on spending”; “Top civil servant warns of deep cuts in public services to pay for the big issues”; “We’ll squeeze
spending for ten years, says Mandelson”. It’s official: get ready for the age of austerity and for significant cuts in public spending.

But where will the cuts bite and how significant will they need to be? Recent press coverage has bandied around benchmarks from zero (or marginal growth for potential priorities like the NHS and schools) to 20% reductions.

At one extreme these have the ring of little more than a return to ‘business as usual’ for experienced public sector managers; at the other they evoke much more daunting prospects and a scale of challenge which few can claim to have experienced.

Protection of NHS and schools funding comes at a cost

Steve Freer and Mike Bennett

And for how long will the cuts need to apply? Should we expect a relatively shortterm, one-off correction to rebalance the public finances or a much longer run of grinding incremental reductions? Some commentators have seemed to suggest that Efficiencies alone will not protect services from potentially brutal spending cuts.

The way ahead

Steve Freer and Mike Bennett describe how a study is mapping the way ahead this is a challenge for the next (three-year) spending round, while others are clear that this is the unrelentingly tough financial backcloth for the public services for the next decade and more.

All of this raises big questions about how public sector leaders and managers should react to these new circumstances. Of particular significance is the question of timing: when should we confront these new conditions
and respond to them?

One option is to wait — almost certainly until after the general election — for further detailed information to clarify some of the unknowns and give sharper definition to the scale of the challenges faced by individual organisations.

The alternative approach is to act now, to plan carefully, based on best-estimate assumptions, and to execute
an intelligent organisational response.

Both the Chartered Institute of Public Finance & Accountancy (CIPFA) and the Society of Local Authority Chief Executives & Senior Managers (Solace) are firmly in the latter camp. Waiting for perfect information (and perhaps hoping that something will turn up!) is not a good strategy.

Facing up to the new, radically different environment, addressing it and refining strategy as we make progress makes much more sense. Overridingly, early implementation of a well thought-through response is, we believe, in the long-term public interest.

This is the common ground on which CIPFA and Solace have joined forces to cosponsor a new project.

Difficult waters

Our objectives are to research and better understand the new landscape; to make sensible, informed judgments about its implications for the future funding of local public services and to explore some of the strategic options for
leaders and managers charged with steering their organisations through these difficult waters.

Our starting point is to consider carefully some of the different scenarios which might result from the economic downturn. Despite all the column inches of commentary and conjecture there remains significant uncertainty surrounding the two key variables: how long and how deep?

The health of the public finances and the quantum and duration of future expenditure cuts will vary significantly, depending upon whether recovery is relatively early and rapid (broadly speaking, the assumptions in the chancellor’s Budget) or whether it is much later and more sluggish.

And the trajectory of that recovery will also depend significantly on the impact of future events, for example the impact of swine flu on economic output, the confidence of the markets in future spending plans and levels of interest rates on government debt.

In practice we are likely to focus our work on two scenarios: one at the more optimistic end of the spectrum of possible outcomes, the other more pessimistic.

Next, we want to consider the strategic options open to decision-makers at both the national and the local level. Many will, by instinct, look to pull harder on the lever marked ‘efficiency’.

Most organisations will be able to make some further improvements in this area but it is critically important that judgments about scale and speed of delivery are reasoned and realistic.

Wildly optimistic assumptions of future efficiency gains will come back to haunt organisations with a vengeance. Significant shortfalls might lead to financial deficits or hasty, ill-considered service cuts, or both.

Tough choices

Further important options lie in the territory which we often label ‘tough choices’. Organisations should always be clear about priorities but all the more so when resources are heavily constrained. They have the option of reining back spending on lower priority, non-essential activities to assure the continued supply of essential services.

To do this effectively, however, public bodies need greater freedom to make these choices based on local need. If ministers continue to intervene to protect every single government initiative local bodies will be unable to take the right decisions.

Many recent press articles have featured quotes from leading politicians promising to protect particularly sensitive services. This has obvious appeal, but again is not straightforward. The key is to understand what such promises imply for the two categories of services concerned: those which are ‘protected’ and those which are not.

Take, for example, a promise to avoid cuts in NHS or schools’ expenditure. Remember, these are services which have enjoyed unprecedented spending growth for the greater part of the past decade.

Reducing growth to a fraction of former levels might satisfy the technical definition of maintaining current funding but, given demand and other budget pressures, it will not be sufficient to guarantee avoiding any cuts.

There are further implications to consider, too. Protection of NHS and schools funding comes at a cost. It means more severe budget constraints elsewhere, perhaps in adult social care or in safeguarding children.

Non-prioritised services have to take their full share of the cuts and, in addition, take the strain of promises to protect favoured services. For this reason important, but less fashionable, local services could be a real area of vulnerability and concern and should be firmly on the risk radar.

Some urgent reports have referred to plans to ‘protect front-line services’. The implication is that all of the services which are visible and accessible to the public can be maintained and that the brunt of cuts can be borne by ‘invisible’ back-office functions. This needs to be researched carefully in all organisations.

Most will find scope for some efficiency improvements in the back office. But few, if any, will solve all of their financial challenges here.

Responding to challenges

By modelling both optimistic and pessimistic scenarios and overlaying some of the key options available to decision-makers, we hope ultimately to come to that most interesting space — how do public organisations
with all of their interfaces with the real world, from citizens to staff — respond to these challenges?

There is a huge amount to think about here. How do we confront the scale of change which the financial challenges pose?

Are existing business models still valid, or do we have to think about our roles and responsibilities in a completely different way?

How do we engage with service users and customers in such difficult circumstances?

Can they help to point to better models which would provide equivalent or perhaps even better outcomes for reduced inputs?

And how do we engage with and manage our people?

How can we make best use of their knowledge and skills? How can we secure their support and maintain their morale?

Can we join up much more effectively with other public bodies or perhaps with the private and voluntary sectors?

None of these questions are original, but even viewed through the lens of most optimistic forecasts they now need to be explored with a new vigour and urgency.

The new CIPFA/Solace project is under way. Our first Chatham House workshop was held on 13 July with delegates from a wide range of public service agencies and representative bodies. We have already made very good inroads into many of the various challenges and questions outlined.

There is much more to do, but already we can see the shape of a very interesting report which will be available in the autumn.

Steve Freer is chief executive of the Chartered Institute of Public Finance & Accountancy

Mike Bennett is assistant director general of the Society of Local Authority Chief Executives and Senior Managers

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