Challenges

The 2009 Budget as announced by the Chancellor on 22 April heralds a new era of fiscal tightening. Above all, the Budget confirmed the worrying state of public finances in the UK and has major implications for spending in the public sector over coming years.

With the Chancellor now predicting public expenditure at £671bn for 2009/2010 and income at only £496bn there will be net public borrowing of £175bn and his prediction for 2010/11 is for borrowing of £173bn. These figures have already soared since the Pre-Budget Report in November when they were projected at £118bn and £73bn.
 

The income and expenditure figures depend on his growth predictions being accurate. He expects the UK economy to contract by 3.5% this year but is forecasting that it will start growing again by the end of year and expects growth of 1.25% in 2010/11, which is far off the consensus of economic opinion. This suggests that we will be fortunate to achieve neutral growth in the coming period. With unemployment growing fast and deflation upon us it is hard to see where the impetus for such a recovery will come from. With the global economy suffering also, exporting our way out of recession doesn’t offer an easy panacea. Last November the forecasts from the Pre-Budget Review were for growth in the UK of 0.75% in 2009/10 and 1.5-2% in 2010/11 and these have already proved to have been highly optimistic. Now the provisional first quarter Gross Domestic Product (GDP) data for 2009 released on 24 April by the Office for National Statistics show a contraction in the economy of 1.9 per cent which belies the Chancellor’s Budget forecast.

The Budget also included a further £9bn of efficiency savings per annum, identified by the Operational Efficiency Programme, to be achieved by 2013/14. These savings are across collaborative procurement, back office and IT, and property running costs. This £9bn is in addition to the £35bn (originally £30bn) of efficiency savings that are being demanded under the 2007 Comprehensive Spending Review. Aside from a promise of £2.3bn savings from the Department of Health, it has not yet been announced how much each of the various Government Departments will need to contribute to the additional £9bn. However, it is probably likely that this will impact across the board.

Applying a fiscal stimulus to the real economy is the immediate approach of the Government through this Budget, such as the additional £1.7bn announced for Job Centre Plus, however there are question marks over the size of fiscal envelope available to the Chancellor in the longer term. If indeed his forecasts on growth are optimistic the level of public debt will also be under-estimated and the Chancellor will be forced to look at more robust measures to curb government spending.

Regardless of the scale of the short term stimulus and the flexibility afforded by new borrowing, at some point the debt needs to be paid and this can only be done by either raising taxes or cutting spending. The Budget plans do include raising taxes from 2011/12 by £5bn but this will not probably be sufficient to fill the gap in the finances. For example some commentators consider the introduction of a new higher income tax rate as unlikely to yield significant revenue gains. Big savings will still need to be found.

So what’s in store for the public sector in the longer term? Efficiency savings could be increased and brought forward but it is inevitable that there will also need to be genuine cuts in public expenditure as well. Job cuts cannot be ruled out. However, Departments will still be expected to deliver improved services and value for money.

Expanding the use of back-office shared services in Government and increasing the utilisation of IT to attain “transformational government” have been on the Government’s agenda since the 2004 Gershon Review. Furthermore, the recent Operational Efficiency Programme report suggests that £3.2 bn of IT savings can be found without compromising the quality of frontline service delivery. Nonetheless, it is clear that maintaining and improving services in a context of real cuts rather than just efficiency savings requires more a radical vision and transformation of the “business” of Government.

In this respect, the continuing commitment of the Government in the Budget to digitising Britain (complemented by a £750m emerging technologies fund) points to a brave new world of innovation-led growth. A braver step would be to ensure that public sector transformation is the touchstone that kick-starts demand for such innovation.

Changes Required in Departmental Thinking: Doing more with less

With the substantial changes that are needed to deliver OEP and the further savings that will be required, it is vital that sufficient time and effort is invested in ensuring that cultural, behavioural change and capability needs are also addressed. Governance and ownership by mandarins through life of the projects is vital well beyond ‘go-live’, and greater rigour is required around the management of the portfolio of projects both within and across Departments. With the scale of the financial crisis becoming clearer it is also apparent that hard decisions will be required in prioritising initiatives and acceptance that not all desired outcomes will be able to be afforded.

In order to be sustainable, Departments need to take a broader, cross-project view of their various initiatives and the benefits they seek to attain. Not only must benefits be fully realised; each project must also embed a culture of continuous improvement to ensure that the inevitable future cost and efficiency challenges are met.

Above all, Departments will need to take on a customer centric view of driving operational efficiency, considering new inter-Departmental operating models, with “Lean”, IT-enabled processes extending into Government supply chain as well as into frontline service delivery. Too often we see “silos” of efficiency where in isolation the processes seem streamlined but disregard the customer interaction across silos. This is particularly true as the role of private sector and the voluntary sector in delivering public services increases.

By taking an end-to-end view of the customer journey more waste can be eliminated and the focus put on valuable customer interactions.

Adoption of innovative technologies will be required to support the customer centric target operating models. This should include:

• Use of technologies such as Web2.0 for collaboration between Departments;
• Use of social technologies for engaging citizens, Government Gateway for secure identification and transactions, and the provision of more information through portals;
• Better business intelligence and predictive analytics to support policy development and predict service demand, particularly in volatile markets where speed of response is vital.
• Leaning IT provision through shared services, use of carbon neutral technologies and encouraging the use of cloud computing and virtualisation technologies; and
• More consistent and joined up adoption of open standards e.g. Opensource.

Through innovative use of technology, Departments will be able to improve efficiency and potentially achieve savings to a greater extent than with conventional thinking.

However, achieving public service goals is not just about technology-enabled gains. The 1980s witnessed a major philosophical debate on defining the role and reach of the public sector that led to significant changes in the machinery of government in the UK. Indeed, such ideas were mirrored in reforms globally as well. In a world where many other countries have had much more experience in addressing public service goals with frugal resources there are potentially lessons to be learned to be applied here.

Rahzeb Chowdhury and Donald Selmes