Off-target government cuts could cause untold damage

Anthony Hilton
27 Apr 2010

It is one thing to say that government spending is too high and needs to be cut — it is quite another to say that this can be achieved meaningfully and sensibly within weeks of a new Government taking office.

Lombard Street Research, one of our leading independent research houses, this week publishes a special report* by Brian Reading, Richard Roberts and Gerald Opie that looks at how and when cuts in public spending have been achieved in this country in the past, and what lessons we should learn to help us with the next round.

The first, and in many ways the most important, is how hard it is to do it sensibly, and how easy it is to create more waste than is actually saved by cutting the wrong things in the wrong way. They point out too that there have only been three times in the past 100 years when there have been effective reductions in public spending — each incidentally under a coalition of minority government.

As mentioned in this column last week, these were in the Lloyd George-led Liberal-Conservative coalition of 1921-22, the Ramsay MacDonald-led National Government of 1931 and the minority Labour Government propped up by the Lib-Lab pact following the arrival of the IMF in 1976.

One reason it is so difficult is that today's system of public spending control and statistical analysis might almost have been designed to make for ill-conceived and misdirected cuts. It does not even define the “front-line services” the politicians tell us they will protect.

And even if we know how many doctors are employed — which we don't — it does not tell us what they do and in particular how much of their time is spent on bureaucracy rather than clinical care.

As a result, cuts traditionally have been allocated in proportion to political weaknesses. The big, bullying politicians successfully protect their departments — the younger, weaker ministers get shredded whether or not it makes sense that their departments should bear the brunt. The other thing that also gets hit is capital spending — on roads, railways and infrastructure — which is why so much in this country is poor and crumbling. Politicians probably know this is profoundly stupid but they do it anyway because it is easy.

The Lombard Street analysis supports what most people — with the exception of George Osborne — probably instinctively believe. As the report puts it: “The notion that there is a cornucopia of conventional spending cuts that eliminate waste without anyone having to suffer is pure bunkum. But there is a potential plethora of savings once it is accepted that painful cuts in bureaucracy are required and the PC nanny state rolled back.”

To illustrate the point, it noted that the Health Department report identifies 31 different boards, 20-plus committees and multiples of subcommittees. Tasks, teams and targets get innumerable mentions while doctors get mentioned only 28 times. Huge amounts of time are spent collating reports which tell you how many seconds it took in 2008 to answer 130,000 phone calls, or deal with the 69,434 letters and emails received from the public.

But it does not tell you how many agency workers there are, nor how much out-of-hours work was covered by agency doctors. It is impossible to discover how much time front-line workers spent on front-line duties.

What does shine through, however, is the more money that is spent, the more goes in the bloated bureaucracy-producing reports which add no value. And the faster spending has grown, the more of it has been wasted. The authors calculate that productivity across the public sector fell at 0.3% a year for the 10 years from 1997 to 2007 and by 0.4% a year in health — where half the increase in spending since 1997 has gone on wages.

The Ministry of Defence does slightly better but the figure provides little comfort. It employs 80,000 and the military 190,000. Of this 270,000 total, just 28,000 are on active service, which amounts to one soldier firing a gun and nine holding his jacket.

But if this seems wasteful — what do the 80,000 people in the MoD do? — it also needs to be seen in proportion. The combined total of MoD and military personnel is less that the mere increase in direct and indirect health service employment over the past 10 years.

Cutting spending is complicated. There is roughly a third that cannot be cut — interest on the debt for example. There is another third that can only be cut by uncomfortable political decision — abolishing free bus passes, free prescriptions or child trust funds — and there is a third that can be cut by proper management and spending the money more sensibly.

But the central point of the report is that to have any success, cuts have to be thought through in advance, properly planned and, if at all possible, seen to be fair, focused and agreed if they are to be effective.

If politicians simply jump in with both feet because they think this will make them look purposeful and dynamic, all that will happen is that the bureaucracy will protect itself, and all the pain will fall on those who actually do the useful work. That will mean more waste, not less.

*Sharpening the Axe: Lombard Street Research.