After five years of austerity, during which UK government spending fell by 2.8%, the 2015 Spending Review set out plans for a second round of spending reductions.* In November 2015, over £10bn was earmarked to be removed from departmental budgets in real terms by 2019/20.
Spending Review 2015 settlements were not driven by the data.
As the last chapter showed, significant demand and quality pressures – particularly in hospitals, adult social care and prisons – were already clearly evident at this time. But there is little sign that the settlements handed to departments were fundamentally driven by an assessment of how services had fared after 2010.
The MoJ received a 15% real-terms cut, with no protection for prisons despite spiralling violence. The funding settlement for local government was complex, but the net result was no real increase in funding for adult social care, despite continued growth in demand and accelerating problems in discharging people from hospitals. The NHS received extra real-terms funding, front-loaded into 2016/17, but much of this was absorbed in meeting the hospital deficits being run in 2015/16.
In schools and the police, there were fewer immediate pressures evident in the data in the run-up to the 2015 Spending Review: pupil attainment was holding up, as was public confidence in the police. Yet in both of these areas spending was protected, with police and schools budgets flat in real terms (i.e. broadly similar to adult social care, which faced severe pressures).
The circumstances in which Spending Review 2015 must be implemented are more challenging than in 2010.
Spending Review 2010 was largely implemented successfully, at least for the first three to four years, as the last chapter showed. But the challenge for the Government in 2015 was much tougher. Many public services already faced large pressures that had built up over the preceding years, in contrast to 2010, which had been preceded by historically high levels of spending growth. The easy efficiency gains – holding down staff numbers and costs – had largely already been made.
Since the Review, the pressures have only intensified, pushing services such as adult social care and hospitals towards breaking point, and in the case of prisons beyond it. Governments of all shades have long promised to transform public services by reducing demand, making better use of technology and finding new ways of working.
But the growing pressures on services show that these ambitions have yet to be realised. The Government has failed to develop alternative strategies – new ways to manage demand or make services more efficient – and has continued to pursue belt-tightening approaches that in many cases have already run their course.
The Government is struggling to implement the 2015 Spending Review, and has been forced into emergency action on prisons and adult social care.
In the 18 months following the Spending Review, the Government was twice forced into emergency action in response to public concern, providing more cash in the short term to bail out troubled services.
- An injection of money was granted to the MoJ at the 2016 Autumn Statement to pay for 2,500 new prison officers – in effect reopening the 2015 Spending Review settlement less than a year after it was agreed.
- Within a month of the 2016 Autumn Statement, which was widely criticised for making no mention of social care, the Government announced further flexibility for local authorities to increase council tax in 2017 to help fund social care.
Given the depth of the problems in these services it will take more than cash bailouts to turn the situation around. The MoJ’s additional spending cannot immediately alter the situation within prisons, as the 12-hour riot at HMP Birmingham in the weeks following the Autumn Statement and the recent BBC investigation into the state of prisons showed. The Prime Minister herself admitted that the Government’s recent action on social care does not constitute a long-term solution. Surrey County Council proposed (and then withdrew) plans to offer a local referendum on further council tax increases.
The Government has continued to hold fast to its approach to NHS funding and transformation, despite calls for a new direction from the chief executive of the NHS, sector advocates and experts. Following a challenging winter for hospitals, the warnings have recently become louder. Lord Carter, who produced the Government’s independent review of NHS productivity, recently stated that: “We need to be incredibly proud that our hospitals are running so hot, and yet they haven’t broken… This is like being [in] a war actually… but you can’t continue on a war basis forever.” Sir Robert Francis, author of the report into catastrophic failures of care in Mid Staffordshire, said in mid-February 2017 that there was a risk of such failures being repeated as the NHS faced an “existential crisis”.
Jeremy Hunt, the Secretary of State for Health, has acknowledged that there are “extraordinary pressures” and characterised some performance as “completely unacceptable”. In this context, the Government may look to revise its plans around the time of the Budget.
The Government must address the pressures it currently faces and make longer-term reforms to embed efficiency within its decision-making
The Government cannot continue to bounce from crisis to crisis in this way. Without action, within two years it could face a disastrous combination of failing public services and breached spending controls, against a background of deeply contentious Brexit negotiations. Therefore, in the coming Budget, on 8 March, the Government must address:
- areas such as prisons and social care, where it has already taken emergency measures. For prisons, this should involve ensuring that there are enough resources to operate the prison estate safely and securely. Any further cuts are unlikely to come through greater efficiency, and would instead require a substantial reduction in prisoner numbers, whether through sentencing reform or major improvements in reoffending rates. For social care, the sector needs a clear direction of travel, following the postponement of the Dilnot Review implementation and the slow pace of genuine health and social care integration.
- areas where pressure is building, most importantly in hospitals. The potential efficiencies outlined in the Carter Review need to be realised. But these have only ever been part of the solution. The NHS STPs – regionally derived plans to maintain and improve the quality of local healthcare services within current spending envelopes – are nowhere near the concrete organisational (and political) plans needed to prevent recurring overspending and service deterioration over the next two years. The Government must show how STPs can deliver, or find a new approach, before the freeze in NHS funding built into the next two years’ plans really bites.
- the need to improve efficiency across the board, setting out progress on its Efficiency Review.** The Government needs this to be a serious, data-driven exercise. It should use information such as that in Performance Tracker, alongside wider findings, such as those of its What Works and the Infrastructure and Projects Authority. Instead of repeating aspirations to transform services, it should analyse why transformation has not occurred in the past and develop strategies that can succeed this time around. And it must take seriously the emerging signs of pressure, such as recruitment problems in teaching and rising stress levels in the police. The Efficiency Review should also build on the recent work to improve Whitehall’s finance function. This has developed new processes for understanding spending, and where there are potential improvements in efficiency, within and across departments, which can greatly help the Review.
Addressing these issues – and ensuring the long-term sustainability and quality of public services – will require informed decision-making. Spending decisions tend to be tactical in the short term and overlaid with optimism bias in the medium to long term.*** All governments tend to focus on the next year and, beyond that, assume the best possible outcomes, understating risks and assuming everything will work exactly as planned, while plugging any gaps between demand and resources with often heroic efficiency assumptions. This approach should be turned on its head.
The analysis in this report shows that the data provides leading indicators, which demonstrate there are major pressures ahead. However, it is striking that a Performance Tracker-type exercise is not performed systematically in the Treasury or elsewhere: the NAO and PAC have both highlighted the lack of 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.
The Government should therefore consider how it can embed efficiency within public sector decision-making. It is in ministers’ and the public’s interest to prevent wishful thinking, and to stop pressures building to breaking point. Therefore, we recommend that:
- The Chancellor should instruct the Treasury, working with departmental finance and analytic professionals, to develop its own Performance Tracker, matching spending in public services to an assessment of demand, scope and quality. This should be used as the basis for developing and managing improvements in efficiency over time.
- The Treasury should publish this Tracker or, at a minimum, make the key assumptions underpinning spending decisions public and available for scrutiny by Parliament.
- 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 possible, so that public money can be used as effectively as possible.
The Government is struggling to implement the 2015 Spending Review. At this point, the pressures on services are real and easy to identify, and it has already been forced to spend more than it planned on prisons and adult social care. Politically, the Government is bouncing from crisis to crisis, showing few signs of getting to grips with the situation.
Without action, we could face a disastrous combination of failing public services and breached spending controls just as we exit the European Union in 2019. In the upcoming Budget, the Chancellor cannot choose to simply ‘tough it out’ as he did in the Autumn Statement, largely eschewing reference to the mounting pressures in public services. He must lead the Government in a hard-headed assessment of where it is, and what it needs to do to get its plans back on track.
* Figures are for Total Managed Expenditure (TME) and are taken from HM Treasury’s Public Expenditure Statistical Analyses (PESA) 2015, Table 1.2.
** Initially announced in George Osborne’s 2015 Budget speech, Philip Hammond has also committed to this new initiative to find £3.5bn of efficiency savings by 2019/20 and ‘embed a culture where incremental improvements in the efficiency of public services are made year on year’. Cabinet Office, ‘Government announces efficiency savings for 2015/16’, 3 February 2017, https://www.gov.uk/government/news/government-announces-efficiency-savings-for-201516
*** In this vein, the Comptroller and Auditor General, Sir Amyas Morse, in a recent speech at Kings College London, pointed to a series of problems with the sustainability of public services which, in his view, had not been reflected in central government decision-making, https://www.nao.org.uk/wp-content/uploads/2017/02/CAG-speech-Kings-College-London-070217.pdf