Tuesday, 15 September 2009

Asking the right questions

I was not in the least surprised at the results of the recent opinion poll about whether people would prefer to plug the budget gap by raising taxes or by cutting public spending. But I'm not convinced that the survey has added much light to the debate. It seems to have proved, mostly, that the answer you get depends on the question you ask.

If the choice people were given had been between modest tax rises and closing half the country's hospitals, I'm reasonably certain that the headline could equally have read - 'people demand tax increases'. That alternative question is not a fair or realistic way of framing the question, of course; but my point is that neither was the question which was actually put to people.

'Cutting public spending' is always likely to prove popular; it's only when people are asked more specifically about what to cut that they have to give the question a bit more thought. Far too often, some politicians (of all parties, sadly) lead people to think that the answer is as simple as 'eliminating waste and bureaucracy'. There's a danger that that simply avoids facing up to the real question.

That's not to say that there isn't any 'waste and bureaucracy' in public expenditure. No organisation can be as big as the public sector without having some scope to improve its efficiency; but it is wrong and misleading to suggest either that such improvements can be achieved as a result of simply cutting their overall budgets by an arbitrary percentage, or that the level of savings likely to be achieved will be enough to plug the budget deficit without any cuts to services.

There are some big programmes which could and should be chopped, of course. There's a developing consensus that ID cards and the replacement of Trident are in that category. I'd add illegal wars to the list as well, although bringing involvement in those to an end will not be a simple task.

Even after taking such obvious steps, the gap between government income and current levels of expenditure remains a large one. And, for a variety of reasons including the need to spend on something else in some cases, and the costs already committed, the savings are not likely to be as large as the headline costs of the projects.

The cost of bailing out the financial sector has been a phenomenal cost which has led to a hugely increased level of government debt. (As an aside, I'm far from convinced that enough is being done to ensure that the same cannot happen again in the future. That's not directly relevant to the argument about how we get out of the current hole, but it's vital that government tackles that issue, and does so soon.)

Plugging that gap will be the major economic task facing the next government, and for all the attempts by Labour to try and paint themselves as being different from the Conservatives on this issue, it seems to me that whichever of the two leads the government after the election, there will, in reality, be a mix of both service cuts and tax rises. That will pose a particular challenge in Wales, for two main reasons.

Firstly, we are more heavily dependent on the public sector, and secondly, under the current devolution settlement (and even after the changed situation which will pertain after the referendum which is to be held in the next two and a half years) we have no tax-varying powers. Cuts in English public expenditure will lead to an automatic reduction in the block grant – and the Welsh government will find itself forced to cut budgets in some areas.

LIke most other people, I find discussion of Barnett incredibly boring – but the issue of fair funding for Wales has never been more important than it is right now. The current unfair funding system means, effectively, that those parts of the UK which are underfunded on a needs basis will suffer disproportionately from spending cuts – the exact opposite of what any needs-based approach would suggest should happen.

The One Wales government will be faced with some difficult choices in the near future - but we should surely start by trying to ensure that we have a fair allocation of funding in the first place, rather than by rolling over and accepting the situation.


Dyfrig said...

Of course the question is badly framed, but it is genuinely reflective of public attitudes towards spending. People only object to reduced public services if they directly affect them in a very clear and tangiable way - i.e. Their local school or hospital closes, or their job is threatened. It is a fallacy that people care about public services in a general sense. Most non-wonks find such abstract discussions as boring as the Barnett Formula. This is one of those facts that is often overlooked in opposition, but is an unavoidable reality of government.
The point about efficiency is interesting. Endlessly cutting back on civil servants' paperclips will not deliver efficiency savings. But contracting the delivery of services out to the private sector means that they assume the burden of risk, and seek greater efficiency when maximising profit. Well drafted and properly enforced PPPs could deliver real efficiency savings. Why won't we as a party consider this route?

John Dixon said...


"People only object to reduced public services if they directly affect them in a very clear and tangiable way - i.e. Their local school or hospital closes, or their job is threatened. It is a fallacy that people care about public services in a general sense."

I agree - and that's the point I was trying to make. Ask people about "cutting public spending" and they'll says yes; ask them about "closing hospitals" and they'll say no.

"But contracting the delivery of services out to the private sector means that they assume the burden of risk, and seek greater efficiency when maximising profit."

I'm not convinced that they do 'assume the burden of risk'. Nor am I convinced that the way that they maximise profit is necessarily through 'greater efficiency'. Far too often, greater efficiency is talked about as though it's the same thing as reducing cost. In some cases, the two phrases are indeed one and the same thing; but in far too many cases they are not.

As an example, we have seen cases where staff transferred from the public sector to the private sector face less favourable terms of employment; that certainly cuts costs, but isn't an improvement in efficiency. As another example, privatised hospital cleaning contracts in some cases reduced costs by reducing cleaning standards. Again, it's a cost reduction, but not an efficiency improvement.

Thre is no necessary reason why the public sector cannot operate as efficiently as the private sector (although I'd agree that we haven't always made that happen).

Dyfrig said...

I think that it's important not to assume that because the UK government have a record of contracting services out at terms which favour profit over people, that this always needs to be the case. When a government forms a PPP, it sets out the service it wishes to buy from the private sector. As a comissioner of a service, it is free to dictate the terms of the agreement. We need to differentiate between good and bad PPPs.
The public sector can often be an efficient deliverer of service. The problem is often with the services that do not work well. Entrenched cultures often make implementing change difficult. The advantage of a PPP is that you do not have to battle with a single monolithic provider of services. If your current contractor is failing to deliver, you simply end the contract and put it out to tender again.
Good regulation is preferable to tight control, in my book. But the failure of regulation in the past has persuaded some progressives that tight control is the only option. We as a party need to seriously examine this attitude, if we are to provide a progressive alternative to Labour in Wales.

John Dixon said...

"I think that it's important not to assume that because the UK government have a record of contracting services out at terms which favour profit over people, that this always needs to be the case."


"The public sector can often be an efficient deliverer of service."

Again, agreed.

"The advantage of a PPP is that you do not have to battle with a single monolithic provider of services. If your current contractor is failing to deliver, you simply end the contract and put it out to tender again. "

Sounds straightforward, but... Whether the contractor's staff were outsourced from the public sector initially, or recruited directly by the contractor, they are the staff with the experience and skills (depending on the task we are talking about) to do the job. The question is how they are best managed to do that job well.

There is a danger in the public sector of a 'job for life' attitude, and of entrenched cultures; but transferring them to a private sector body may well create increased job insecurity and less favourable terms of employment. Neither is ideal.

The attraction of contracting out a service and creating a situation where a private sector company can not only do the job for less but also turn a profit is an obviously attractive scenario; that much I agree.

But, where has that profit come from? If solely from greater efficiency, then why cannot the public sector itself generate that efficiency? Part of the answer to that is the overly bureaucratic and target-driven style of the public sector, but that doesn't have to be a given. More often it comes from reduced standards, or reduced terms and conditions for the staff.

Having worked in an outsourcing environment, I'm also very familiar with the 'loss-leader' approach adopted by some contractors. They quote low, knowing that they will make a loss, and depend on two things to recover their situation in the longer term. The first is 'change control' - defining the service to be provided so tightly that almost anything the customer really wants is a chargeable extra. The second is being able to substantially increase their prices in future years, once the customer no longer has an easy option of doing the work in house.

There have been many, many contracts where the apparent savings have not ultimately been achieved because of this sort of factor.

Dyfrig said...

I agree that pay and conditions need to be regulated, but I'm not convinced that job security is any of our concern, as politicians. In a British context, most people now see long-term guarantees of employment as a thing of the past. Most people accept that the loss of the job for life is a necessary part of a flexible employment market, which is ultimately better for both employer and employee.
I also remain to be convinced that companies seeking to profit from change control are doing anything wrong. Tightly defined contracts help to protect both parties, and if we expect private sector providers to ensure that jobs are done on time, on budget, and according to our agreed conditions, we as public service comissioners should be willing to respect the cost implication of providing additional services.
I absolutely agree that there are dangers with poorly managed PPPs, but I also think that there is a huge potential as well. My concern is that we as a party are reluctanct to even consider private sector delivery of service. It is certainly not a panacea, but it should be an option.

(The lack of debate within the wider party might explain why I'm being so verbose here. On my blog I've floated the idea of a session at the Spring Conference, taking an alternative look at where Plaid Cymru sit on the left-right axis. This may be a subject for that debate).

Llyr said...

There is another alternative to the public and private sectors. An alternative that historically we in Wales have a rich tradition of utilising - but not necessarily in the delivery of public services until recent years.
Social enterprise is the perfect model for delivering efficient, cost-effective services that puts the citizen at the heart of the service. It also has the added benefit of ensuring that any profit generated is re-invested into improving the service further (and not pocketed by shareholders).
There are plenty of examples of social enterprises moving in to deliver services in areas where the private sector has failed or the public sector is failing or cutting back e.g. social care, transport, environmental services, leisure etc etc.
So forget PPPs! It's PCPs we need - Public Community Partnerships!!!

John Dixon said...


My comment about job security really relates to the possibility that staff will be transferred from the public sector to the private, and then the private sector contractor loses the contract. I think that politicians who undertake such transfers do have some responsibility for those former staff over the longer term.

I'm not suggesting that benefiting from 'change control' is in itself wrong. However, pitching the bid to run the service at a level at which the contractor expects to make a loss, and then depending on wording the contract so tightly that the customer ends up paying through the nose for a whole host of extras (which the customer originally thought were part of the base contract) means that the original cost-benefit analysis to outsource the service was based on a wholly inaccurate comparison of costs, and it is, in that sense, a dishonest - albeit not illegal - practice.

'Tightly defined contracts' sounds like the way out, but it isn't that easy - and the contractor holds most of the aces (I've been there!). It also means that the customer needs to employ contract managers (and lawyers) which is a cost over and above the cost of providing the service in-house (and is generally hidden in another budget rather than being costed as part of the total cost of providing the contracted-out service).

The basic question which you pose, as I understand it, is "If services can be provided more cheaply by the private sector than by the public sector, but remain free at point of use to the public, what's wrong with someone making a profit in the process?". It's a good question, but my alternative is this, "If it is possible to provide those services at a lower cost by genuine improvements in efficiency (rather than by sutting wages or standards) why can't the public sector do that, and retain the monies which would otherwise be going in profits for extensions to services (or tax cuts, depending on viewpoint)?"

I don't see any necessary reason why the public sector cannot be every bit as efficient as the private sector, but I'd certainly agree that there's plenty of scope for debating why it appears not to happen in practice.

John Dixon said...


Agreed - up to a point. Social enterprise can indeed play a bigger role in a whole host of activities, but we do need to consider the basis on which people are employed. There are different types of social entreprise. What I don't think helps the overall economic situation in Wales is where a social enterprise employs staff to run its services, but also harnesses volunteers to undertake work which was previously done (or which could be done) by paid employees.

Anonymous said...

Dyfrig's naivety regarding private companies is astounding considering he's a councillor.
Here's what happens when you go private. Our council has contracted out a major service to a private company. The contract will run for 25 years so the company has a guaranteed income for a generation. When fuel prices rose dramatically last year, so did the contract - by £40m. When challenged, the council officers conceded that there was no cap on the contract and that the price could rise whenever the company decided.
There is no risk being taken by the company. If they encounter extra costs they will pass them on to the public authority, saying they cannot deliver the service otherwise.
"Efficiency savings" is another term for providing a poorer service or shedding staff.

Public services are things people care about - schools, hospitals, care for the elderly, keeping your streets clean, leisure centres and libraries. They have a huge impact on people's lives. Yes, there are huge inefficiences in the public sector but does anyone believe that BT or Virgin Rail or United Utilities are paragons of lean efficiency? All big organisations have layers of unnecessary bureaucracy - our job is to make them manageable and accountable.
Companies are duty bound by law to maximise profits for their shareholders. They will opt for profit over people every time because they have to.

Spirit of BME said...

Children,children,- now calm down or you will all be sent to your room with no tea.
Economic collapse is on the horizon and a great oppertunity for Blaid.Strangly the future rests with China ,who hold most of the US debit, if they dump the dollar then HMG goes to the wall.Services provided by the public purse will have to be revampt -big time as international bond markets will not support HM Treasury.(the GBP is heading for parity with the EUR on their current concern.)The new test will be that HMG will only support a service as a last resort based on public security and social cohesion.- that means to avoid riots and to secure the Realm. A liberated Wales will I trust have a Federal system of government where the size of government- State or Federal will not have the power to offer life long guarantees to employees that blackmail those that pay their taxes.