What the Government needs to do now

The era of tight spending controls is far from over. The Government’s current spending plans, set out at the 2015 Spending Review, imply further restraint on public sector spending lasting into the next decade. In those plans, the last financial year was designated a relative year of plenty, with budgeted day-to-day spending in 2016/17 around £0.4bn higher than the year before. The squeeze is set to kick in again this financial year, with budgeted spending falling to £10.4bn below 2015/16 levels by 2019/20.[1]

The preceding chapters laid out the context in which this spending control will take place: while some services are continuing to make efficiencies – such as criminal courts and some neighbourhood services – there are serious pressures building up in others. The data are clear: a new approach will be necessary in these areas.

There are many things the Government could do to square this circle: reducing spending while addressing the pressures. It could pursue new ways of delivering services for less money – through the transformative use of technology, for example, or integrating the delivery of services. It could choose to reduce the level of service provided, through sentencing reform for example, or by more explicit rationing of access to certain parts of the health system. It could drop or lower certain quality standards. Loosening spending control, and putting more money from tax or borrowing into certain services, is also an option. But all of these interventions require time.

A lack of successful action in the recent past has limited the Chancellor’s room to manoeuvre. Rather than making those changes, this Government has largely allowed services to carry on along their current trajectories, hoping that those running the services will be able to manage with less by making the necessary efficiencies. This approach has trapped them in the reactive cycle: allowing problems to mount, being confronted with a crisis (practical or political) and being left with the only option of injecting emergency cash.

The data in this report make it clear where the risk of continuing that cycle is greatest: in prisons, hospitals, schools and adult social care. By allowing political or operational pressures to build up, this Government and its predecessors have created an imperative to act. The greater the imperative, the fewer options available to the Chancellor.

In prisons and hospitals, there are immediate issues which limit the Chancellor’s options to one: spending more money.

  • Prisons: To tackle increasing rates of violence and self-harm in prisons, the Government must increase the staff-prisoner ratio as a matter of urgency. Despite the Justice Secretary’s stated desire to reduce prisoner numbers, there are currently no policy changes on the horizon which would reduce the size of the prison population – indeed the latest numbers were higher than expected. So the only short-term recourse is to recruit more officers and to slow currently high levels of staff turnover by incentivising existing officers to remain in the job. The new 1.7% pay increase for prison officers is therefore the right move. Government must now closely monitor the situation to ensure that this action is having the necessary effect, and be prepared to put more money in if it does not.
  • Hospitals: In the short run, the Government has no choice but to spend more money on hospitals: it just has to decide whether it wants to accept continuing overspends and deteriorating performance, or whether it wants to explicitly put in more cash up-front. Despite a £1.8bn injection of cash in 2016/17, NHS providers ended that financial year with a reported deficit of £791m. Official projections put the 2017/18 deficit at £0.5bn – although detailed analysis of NHS cost pressures by the Nuffield Trust suggests that the underlying deficit is substantially higher.[2] If the Government wants to prevent this short-term solution on hospitals from becoming the long-term reality, and break this cycle of ongoing spending increases, then they – and the NHS – need to make good on the transformative promises of the Sustainability and Transformation Plans (STPs).

Sticking-plaster solutions will not solve the problems in schools and adult social care.

In schools and adult social care, the Chancellor has also already made emergency cash injections. This will allow the services to carry on operating in much the same way in the short term. But these ‘sticking-plaster’ solutions have a time limit: if the Government does not want to have to return with more money in a few years’ time, it will need to start preparing the ground for genuine service changes.

  • Schools: the Government must make clear the basis on which it believes it is possible for some schools to operate with less money – or accept that those spending reductions will not be possible, and adapt their financial plans accordingly. Following the election, an extra £1.3bn over two years was found from the DfE budget, allowing the Government to meet its manifesto commitment that no school would lose money (in cash terms) when the new formula for distributing funding is introduced. This has headed off the worst of the criticisms about impending budget pressures, but only by postponing them.
  • Adult social care: the Government must begin the process of long-term reform in the adult social care sector. In spring, an extra £2bn (over three years) was injected into the adult social care system, and there are signs that the system is stabilising: the numbers of delayed transfers of care from hospital to social care, for example, have stopped rising (although they remain high). The larger questions – about who should provide social care, who should pay for it, and how – remain unanswered. During the election campaign, the public outcry and subsequent Conservative u-turn on the so-called ‘dementia tax’ have demonstrated just how politically challenging the journey to those answers will be. Spring’s investment has bought the Government some time to begin the wider public conversation. A choice to delay the promised green paper would therefore ultimately signal a return to the crisis, cash, repeat cycle further down the road.

Government and the public need more information about the police and neighbourhood services.

The police and neighbourhood services have both absorbed large spending reductions since 2010, and are not showing the clear signs of immediate distress evident in other services. But in both cases, the Government and the public need more information to make a coherent choice about next steps.

  • Police: the Government needs a better understanding of the changing dynamics of crime, and the best interventions to tackle them. The police service is under pressure from rising activity and changing demand, with violent crime, cyber-crime and terrorism of specific concern. The Government could gain a quick political win by heeding calls to increase police officer numbers, but it may not be the most efficient way of tackling those practical issues.
  • Local neighbourhood services: local authorities have successfully made efficiencies across a range of services, under severe financial pressure. However, that data on this are insufficient to give a clear picture of how well those services may be able to absorb further reductions. The recent fall in the size of local authority reserves suggests that some authorities are now starting to turn to unsustainable financial tactics, having squeezed their budgets as far as they can.

UK Visas and Immigration weathered the first phase of its post-referendum workload, but a new magnitude of demand lies ahead of it, demanding a fundamental transformation of its processes. It is not facing a spending squeeze: rising demand will bring in more money through charging. It successfully made short-term efficiencies, which have allowed it to deal with a surge in demand, processing over 300,000 applications since the start of 2016. But it has a new task ahead: registering approximately three million EU nationals resident in the UK under the new ‘settled status’.

The Government must deliver on reforms in criminal courts and general practice.

Finally, there are two services – criminal courts and GPs – in which the Government has set out clear plans for the future, and which the available data suggest are on a stable course. The Government now needs to deliver on those reform programmes.

  • Government will need to monitor progress closely to ensure that it meets its challenging pledge to recruit 5,000 more GPs. In 2016, the Government decided that spending control had started to place pressures on GP services. It committed to a new investment programme, aimed at increasing the number of GPs and widening access. This investment is due to continue until 2020, and it is too early to tell if it is having the intended effects.
  • Criminal courts have managed substantial spending reductions since 2009/10, without a notable drop in service quality. As the service now undertakes an ambitious transformation programme that will reduce the size of the courts’ estate and make greater use of digital technology, it will need to carefully monitor performance data – especially around waiting times – to ensure that it retains the flexibility to respond to changes in case volume.

The last service we looked at, UK Visas and Immigration, does not face a spending squeeze. It has successfully made short-term efficiencies over the last year, which have allowed it to deal with a surge in demand after the referendum. But the task ahead – registering approximately three million EU nationals resident in the UK under the new ‘settled status’ – is of a different order of magnitude, demanding a fundamental transformation of its processes.

The political context further limits the Chancellor’s options.

With a minority Government behind him, and the challenge of Brexit to manage, the Chancellor may well be tempted to keep ducking the decisions outlined above – avoiding politically controversial or organisationally disruptive changes, and acting only where and when public pressure peaks.

In some areas, this may be the most politically judicious choice. Public support for austerity has fallen – 43% of people polled by the Institute for Government in July 2017 believed that spending cuts are necessary, compared with 58% just before the May 2015 general election. This makes big spending announcements, even if they are in response to a crisis, more appealing than ever. However, the short-term consequences of inaction – allowing prison violence and hospital waiting times to grow, or allowing fractious debates about police numbers and schools funding to rumble on – may be even less palatable than the alternatives.

These political pressures facing government are highlighted by the current debate on public sector pay. The 1% cap on public sector pay increases, put in place in 2015, rose to prominence as a political issue during the election campaign. Before the summer, various Cabinet ministers made contradictory comments on their willingness to remove it. Since then, the Government has more formally signalled its intention to revise this cap, beginning with the announcement of a 2% pay award for police officers, and an average of 1.7% for prison officers.

Crucially, these pay increases will be funded ‘from within existing budgets’. Funding these pay increases will therefore involve money being squeezed from elsewhere: trade-offs will have to be made. This is a strategy which the Government has already employed a number of times in recent years, focusing its financial resources on day- to-day frontline service delivery to try and meet presenting demand.

This has allowed expenditure on a number of the most high profile services to grow at a faster rate than overall budgets. Last year Department of Health (DH) expenditure grew by just 2.1% but hospital expenditure funded by the department grew by 4.3%. This was achieved by restraining growth elsewhere; for example spending on pharmaceutical services and prescribing fell while spending on primary care and public health was broadly flat. A similar pattern can be seen in Education, Home Affairs and Justice where schools, the police and prisons were protected relative to other areas. Although this has mitigated some of the immediate impacts of spending cuts on service quality it may be storing up further problems for the future. It is also a strategy with limited capacity: budgets can only be raided a certain number of times before disappearing.

Before taking further action on the pay cap then, the Government must clarify what the trade-offs will be and what problem they are trying to solve. If recruitment or retention is the problem, then pay increases may be a good solution. However, if workload rather than pay is driving the problem, then paying existing staff at the expense of hiring more staff is likely to exacerbate the issue. The introduction of pay increases for all high-profile workforces – at the expense of other interventions – may lead to greater political problems further down the line.

Government needs to change the way it makes spending decisions.

Ultimately, a single set of good decisions made at this Autumn Budget will not solve the underlying problems which have allowed the Government to get into this reactive spending cycle. No government should be faced with an imperative to act, unless it has been beset by a natural disaster or similarly unpredictable event. Yet this is the position the Government has faced repeatedly since 2016 and currently faces in prisons and hospitals.

Our current process for making spending decisions incentivises a reactive, short-term approach. Spending decisions are made with the spending review (and electoral) cycle in mind, with the focus on how to survive now, rather than on what services will need to look like in five years’ time if they are going to successfully fit within their budgets. As we wrote in our last Performance Tracker, layers of optimism bias creep in over time, resulting in over-optimistic assumptions about the potential for efficiency.

It is striking that a Performance Tracker-type exercise is not performed systematically in the Treasury or elsewhere. The Treasury operates a highly effective system for spending control, but it has no standard framework for assessing what has been achieved with the spending, or for consistently reacting to pressures as they emerge. The National Audit Office (NAO) and Public Accounts Committee (PAC) have both highlighted the lack of a consistent framework for planning and assessing performance within government. Nor is there an independent body that does this, in the way that the Office for Budget Responsibility scrutinises the assumptions behind the Government’s tax and benefit spending forecasts.

Therefore we recommend:

  1. The Chancellor should instruct the Treasury, working with departmental finance and analytic professionals, to develop its own Performance Tracker, as a planningand performance management tool. The Tracker should clearly set out assumptions about demand, inflation, efficiency and quality at least three to five years ahead and be regularly updated.
  2. The efficiency assumptions should be supported by clear and realistic delivery plans including timescales and national and local responsibilities.
  3. The Treasury should publish this Tracker or, at a minimum, make the key assumptions public and available for scrutiny by Parliament.
  4. The Government should subject these assumptions to independent review to assess their viability, potentially through an ‘OBR for public spending’.

This is about more than just identifying warning signs of potential service failure. It is about driving performance improvements in the public sector. The Chancellor and the public need to know the real consequences of spending decisions, and understand where further efficiencies may or may not be realistic, so that public money can be used as effectively as possible.