The Public Sector Funding Challenge

At the halfway point in the year, we’re still waiting for the Chancellor, Phillip Hammond, to publish his Spending Review. Although progressive thinkers are arguing for a long-term, integrated, strategic approach to public spending, The outlook for the 2019 Spending Review hints that, with all the uncertainty around Brexit (the NHS excepted) his review may be as short-term as a year (2020 – 21)!

Departmental spending is at the same level as it was 18 years ago!

No doubt about it, these are challenging times for public-sector leaders. Although the purse-strings were loosened a little, in last year’s budget, 10 years of austerity mean tough decisions around the sustainability of services are needed. On a like-for-like basis, departmental spending is more than £40 billion lower in 2018–19 than in 2009–10 and has fallen to a share of national income last seen in 2000–01. At 38.2% of national income, total government spending is roughly where it was in 2006−07.[i]

Whether through strategic, operational or structural change many of the leaders we work with have already made significant budget savings. Utilising the latest digital technologies has also enabled more efficient and cost-effective service delivery. Such transformation, however, only gets you so far. With rising demand for services and the relentless pressure to do more with less, they are having to become increasingly commercial and innovative in the ways they make their budgets work – looking for ways to generate income, as well as making savings.

They are also questioning the way in which funding is managed. When the leading public-sector thinkers are agreed that a collaborative, integrated approach to service provision at a local level offers best value for money, it raises the question why more funding isn’t devolved regionally.

The argument for reform

All this highlights the archaic system public bodies work within. Are we right, for example, to combine the management of economics and public spending within the same ministry? The Treasury is increasingly isolated from public services and their leaders, who are becoming increasingly frustrated by the fact that, as one leader put it: “[The Treasury] reaches a view without engaging outside government, above all with leaders at the sharp end of public service delivery.”[ii] It is a system at the mercy of short-term politics rather than long-term strategic ambition.

The Institute for Government, a think tank set up to address inefficiencies in government itself, suggests that: ‘Spending reviews too often consist of ministers jostling with the Treasury (and with each other, often through the media) about marginal increases or reductions in their department’s budget. This gets in the way of any high-level strategy being fully reflected in decisions across government. It discourages departments from acting together, or the Treasury from using the review to solve problems that stretch across departments (such as health and social care, or police resources and mental health). It prevents the review process from being able to look at spending overall and find the best opportunities for greater efficiency or for reform.’[iii]

Which brings us on to talent or the lack thereof. Although the ‘big 4’ consulting model has, rightly, received plenty of criticism for invariably costing more than it saves, many public-sector organisations are seeing measurable efficiencies from using expert, independent consultants to lead transformation.[iv] Some are recommending that the Treasury does the same. With too many young ‘generalist’ civil servants, it needs more staff with higher levels of financial skill and experience in delivering public services, as well as making use of ‘selected short-term external hires, to improve its insight into the most challenging issues facing the 2019 Spending Review.’[v]

Should there still be a role for the private sector?

So, what role should the private sector play in all of this? Whilst the lure of private investment is attractive in solving immediate infrastructure challenges, more research is needed into its benefits over the longer-term. Contractual inflexibility, the high costs of the initial procurement process, the higher cost of borrowing (compared with gilt borrowing), cost overruns etc. all need rigorous evaluation.

Then there is service delivery. The part-public-part-privatised hybrid that is the probation service received a bit of a pasting recently – from its outgoing head! In her damning, final annual report, Dame Glenys Stacey asks whether it is really possible to reduce complex services to a simple set of contractually defined transactions. When it comes to the probation service, clearly not.

The very sad collapse of Carillion and the precarious positions of companies like Capita and Interserve have cast a further shadow over the wisdom of outsourcing. Yet the government continued to hand out contracts worth over £85 billion, over their lifetime, in 2018. £8.7 billion of this went to profit-led companies, like Virgin Care, working in the NHS. In its latest 10-year plan, NHS England’s chief executive Simon Stevens highlighted the barriers to integration caused by automatic tendering rules, arguing with MPs on the health and social care select committee for their repeal.[vi] Whatever the outcome, the relationship between the public and private sector is looking progressively shaky.

Finding a new funding paradigm

As demand grows and expectations remain high, for our public services to be sustainable, innovation and transformation are needed from the very top down; this includes our approach to funding them. Progressive sector thinkers are arguing for a model based on desired outcomes rather than departmental allocations, one that involves the public in a more realistic debate and which better manages their expectations. For the NHS and social care, for example, such a discussion would inevitably be around ‘the need for greater self-care, perhaps supported by technology, as a crucial means for reducing demand on health and social care services.’[vii] If funding is based on desired outcomes, then it is easier to spell out honestly how much will be needed to achieve them and, of course, to measure whether or not they are met.

At a local level, we’re seeing a better return on investment, in terms of social and financial capital, by an integrated, strategic approach to budget allocation, driven by over-arching, community-wide, rather than single-service, aspirations. Isn’t it about time we put politics aside and do the same at government level, too?

[i] Carl Emmerson, Thomas Pope and Ben Zaranko, The outlook for the 2019 Spending Review, Institute for Fiscal Studies, IFS Briefing Note BNF243

[ii] Martin Wheatley, Bronwen Maddox, Tess Kidney Bishop, The 2019 Spending Review: How to run it well, Institute for Government, September 2018, https://www.instituteforgovernment.org.uk/summary-2019-spending-review-how-run-it-well

[iii] Ibid

[iv] https://www.executivegrapevine.com/content/article/odgers-interim-2018-12-11-brave-new-world-how-the-nhs-can-fix-its-expensive-management-consultancy-problem

[v] Martin Wheatley, Bronwen Maddox, Tess Kidney Bishop, The 2019 Spending Review: How to run it well, Institute for Government, September 2018, https://www.instituteforgovernment.org.uk/summary-2019-spending-review-how-run-it-well

[vi] Denis Campbell, NHS chiefs tell Teressa May it is time to curb privatisation in the NHS, Guardian, 7 January 2019 https://www.theguardian.com/society/2019/jan/07/nhs-chiefs-tell-theresa-may-time-to-curb-privatisation-automatic-tendering-care-contract

[vii] Article from State of the State, 2019 https://www2.deloitte.com/uk/en/pages/public-sector/articles/spending-review-2019.html

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