Select Committee on Treasury Minutes of Evidence

Examination of Witnesses(Questions 20-38)



  20. So it is under-spending in the English comparative spending that produces the Barnet formula totals.
  (Professor Talbot) It would only affect it if the Chancellor in subsequent years clawed back that under-spending.

  21. So it is a sort of Celtic bonus if there is English under-spending.
  (Professor Talbot) You could put it like that. I would not.

Mr Laws

  22. Can I ask Andrew Dilnot this question. There has been some press attention leading up to the Comprehensive Spending Review statement about the rate at which government inflation is rising in comparison to the ordinary rate of inflation. Michael Saunders of Salomon Brothers in one of his recent publications claimed that in the first quarter of this year 59 per cent of the rise in nominal government spending was accounted for by inflation, and on the basis of that, he said that he feared that quite a lot of the planned rise in public spending may be absorbed in higher public sector inflation rather than in better services. Firstly, do you think that is true, and secondly, do you think this is going to be a problem for the Government?
  (Mr Dilnot) I would be very wary of any terribly specific figures, because trying to work out what public sector inflation is is terribly hard. It requires us to measure outputs, and in the public sector, as in almost all service industries, it is a great deal easier to measure inputs than it is to measure outputs, and if you see salary costs go up, whether that is pure inflation or whether some of that is reflecting a higher average quality of staff and therefore a higher average quality of output is an extremely difficult point to get to the bottom of. As far as what is going on though, I think there is no doubt that quite a lot of the extra money in areas like health and education has gone into higher pay, and in some areas higher inflation. That is inevitable. It is partly because the increases we have seen, particularly in health and education, since 2000 follow many years of very slow spending growth during which the pressure to hold spending down has been very great, and we are now seeing something of a reaction to that, and in pay, as in most things, there is a natural cycle, and if you hold down pay in any sector, public or private, for a period, when the lid comes off, necessarily you will see some increase. As far as the public sector is concerned, that trend is particularly inevitable because in large areas of the public sector recruitment is a very serious problem. We know that in both the health and education sectors that there has been some under-spending, and some of that under-spending has occurred because people have not wanted to take the jobs that have been advertised, and in those circumstances necessarily pay tends to drift up. It has been occurring, it will continue to occur, and if we want to see a larger number of nurses, if we want to see a larger number of teachers, if we want to go with the spirit as well as the letter of the European Working Time Directive as far as doctors are concerned within the Health Service and so on, we will see the average price that we have to pay to get people of the quality that we want in the public service rising. But I do think it is important that we should not naturally assume that that is money wasted. It is not just money for the same thing. It may be money for something a lot better. If we want to maintain or increase the average quality of staff within the public sector, we may well have to pay them more. It would be easy simply to call that extra inflation. It is true that the price you are paying per unit of worker might be going up, but it is also the case that if you do not do that, the quality per unit of worker might fall. So yes, it is an enormous problem for the Government, but I do not think we should just imagine that the money is being poured down the drain.

  23. So it is inevitable and not necessarily a bad thing that the Government should worry about, but it may follow that for a given increase in overall public spending, we will not see quite the impact on delivery that we might, because necessarily a large amount will have to go in pay, and some of that pay will go to people who were working in the sector anyway.
  (Mr Dilnot) Yes. A classic example is health, where we have 7.4 per cent annual real increases in spending planned and of course, any government responsible for that would love to see a 7.4 per cent increase in activity rates and outputs. I think necessarily that will not turn out to be the case.
  (Professor Talbot) If the extra spending on staffing, both in terms of new bodies and existing staff, leads to improved morale, better productivity, better efficiency and better quality of services, then you do see improved outputs at the service delivery end for that money. It is not simply a question of saying it has disappeared somewhere.

  24. Do you see any evidence so far of an improvement in public sector productivity in areas such as the NHS?
  (Mr Dilnot) It is not something on which I could claim massive expertise. We are continuing to see increases in output, but it is a very mixed picture. I could not claim to have evidence that would go either way.
  (Professor Talbot) I do not think there is any clear evidence.

  25. Coming back to Andrew Dilnot, do you think that the Government is going to be able to translate this very large increase in public expenditure over the next three years into a tangible improvement in public services such as health and education?
  (Mr Dilnot) I am sure there will be an improvement. I am wary myself of describing it as too large an increase. It is a significant increase but we are talking about the consequence of this Spending Review being to increase the share of national income absorbed by public spending by 2 percentage points, that is, one-fiftieth. So we are going to re-allocate one-fiftieth of the economy. To imagine that this would lead to a transformation of the Health Service, the education system, the transport system, law and order and child poverty, to say nothing of the concerns of Mr Cousins in two years' time, I think would be naive. So yes, there will be improvements, and I think in the areas where the money is being particularly focussed we can expect some significant improvements, but it is not going to turn everything round. If it were possible to make an enormous difference to an institution, whatever its size, by re-allocating one-fiftieth of the resources it absorbed, the world would be a much easier one than the one in which we live. So I think we can expect to see differences in treatment times, waiting times, within the hospital service. I think we can expect to see improvements in secondary education as the focus of the Government's education programme seems to be moving from primary to secondary, and there is no doubt we have seen improvements in primary education. But I do not think we are going to see a massive transformation because I do not think the amount of inputs reflect a massive transformation.

  26. Do you think there is a danger therefore still that the Government may directly or indirectly be over-hyping expectations, and they may find themselves in a few years' time failing for that reason rather than because the delivery mechanisms themselves are wrong?
  (Mr Dilnot) Yes, I do. My own view is that I think it is very likely that the Government will wish to increase spending in 2004-05 and 2005-06 significantly beyond the plans that have been set out here, and if it turns out either for economic or political reasons that that is difficult, there will be a political problem in the extent to which public services have been transformed.


  27. Can I ask Professor Talbot a question on the issue of public sector reform. These proposals and this money has come with strings, as Gordon Brown said. We need to reform. How difficult do you think that reform will be to achieve, and what is the reform he is talking about?
  (Professor Talbot) If I could start at the top with Public Service Agreements themselves, my view of the way that the Chancellor and the Treasury put into place the mechanisms for delivering these changes is that it is deeply flawed. I will start off with the Public Service Agreements. It is deeply flawed, and the phrase I would use is that a number of dogs in this simply have not barked. The first one was the Chancellor, when he made his statement on Monday. I thought they had lost a chunk of the speech, where he would have said, "We have had two spending reviews now, we now have three years' worth of results against PSA targets, and here they are, and I am reporting them to Parliament. These are the achievements we have made against all the targets that were set, and this is why we are now going to tackle these things in a different way." That is the first thing that was missing. The second thing that was missing in what the Chancellor said and in the documentation that was being produced is a clear link between the resources that have been provided and the reform programme and how these things are going to be delivered. The targets that have been set in the PSAs are largely outcome targets. That is very good. I think it is important that government has a clear sense of what it is trying to achieve in terms of outcomes for the money that is being spent, but outcomes are extremely difficult to manage. The things that really get managed are the management inputs, processes and outputs in the public sector, and that bit is missing entirely. It has been put into the service delivery agreements, which are not coming out till November, and it strikes me that, in terms of a strategic planning process, that is an extremely bad way of doing it. It is the old-fashioned strategic planning approach, which sets some sorts of targets with no regard for how you might actually deliver them and no thinking through how they are going to be delivered, and leaving that till later. It is fairly typical public policy, I have to say, to set broad objectives for things and regard implementation as a minor afterthought. So it seems to me, until we see the service delivery agreements and see how these things link into plans, we have no real idea of how these things are going to be achieved. In fact, this year's documentation is a step back from the last Spending Review. At least in the Spending Review the PSA targets were integrated into the entire review. If you look at the departmental sections in this document, only about five of them have anything about the PSA targets in the main document itself, and they are relegated to a separate document, and then, because they have concentrated on fewer targets than before, a lot more detail about how these things are going to be delivered in terms of processes and outputs is relegated to the service delivery agreements, which we will not see until November. It is very difficult to see how they are going to deliver these things. My general criticism of that is that it lacks balance. Most of the services that we are talking about in the service delivery field in the public sector are human services, which are labour-intensive and involve an awful lot of people, and they involve the human interface, and therefore the involvement of staff and managers in delivering those services, in being committed to improving them, is absolutely crucial to any real improvement in the services. The whole problem about this process from the very start is that it has been largely a top-down, opaque process. There has been a limited amount of consultation this time round with the Local Government Association. There is a bit of consultation goes on around local PSAs for local government, but by and large this is a top-down command and control system. I do not think, as some people have suggested, that you can replace that with a completely bottom-up system. There is a need for some top-down steering, but there are other ways of doing it which are done in other jurisdictions which are far better at involving the people that actually have to deliver the services and therefore you are much more likely to get better service delivery at the end of it.

  28. I think you are suggesting that from the scrutiny point of view in parliament, there is much work to be done in the budgeting and management areas. We are only really starting that.
  (Professor Talbot) I think so. The other dogs that have not barked are yourselves—not this Committee in particular but parliament generally. You have actually taken an interest in Public Service Agreements. Most of the Select Committees have not. There have been one or two cases where they have actually looked at the Public Service Agreements to see what is being delivered. In most cases they have not. The NAO has not been asked by and large to commission work on looking at Public Service Agreements. Given that this is supposed to be an entirely revolutionary way of delivering public services, I would have expected at the very least every single specific policy area Select Committee to have gone through what targets had been set, what has been achieved so far and hold some hearings around that. It has simply not been done.

  Chairman: I am conscious it is an area we have not focussed on. We have a lot of work to do and we look forward to involving yourself in that, Professor Talbot.

Mr Mudie

  29. My first question to you was going to be "Does anybody take these PSAs seriously?" but I think you have touched on that. Has anybody analysed the PSAs in monetary terms, in terms of either the Budget—160 as it started, down to 130 targets—or how much of the expenditure actually relates to those targets?
  (Professor Talbot) In expenditure terms, no, there is very little. There has been some publication of information in some of the annual reports about how far expenditure relates to objectives, not targets, but it is fairly patchy across the different annual reports for individual departments. In terms of the start of your question, how seriously do people take these, I think the more that they become reduced to a few headline targets, which is the phrase that is being used, around outcomes, the less seriously people in departments take PSAs themselves. Anecdotal evidence suggests that they have not been thoroughly integrated into this process. The fact that some departments have PSA targets in the main document but most of them do not suggests that they have been added on towards the end of the process. I know that in at least one case the Department did not actually meet the Treasury to talk about its PSA targets until 10 June. So it has not exactly been integrated into the process of deciding what this money is for in terms of setting targets for PSAs.

  30. Is there any sign that performance against past Agreements has been related to the Spending Review? Has it either cut it or increased it? Andrew made the point about child poverty needing £10 billion. Is there any sign of an acceptance that we are failing to meet our targets?
  (Professor Talbot) First of all, on whether or not performance information is used at all, the only evidence we have is that Gordon Brown and the Treasury say it is being used to inform the decisions made in subsequent spending rounds. We have no real, clear evidence as to how that is being used or what part in the discussion it plays, and there is no research on that. That is something that hopefully will come in the future. In terms of withdrawing funds, no, there are no cases, to my knowledge, of extra funds being taken away from particular services or particular areas, or at least, nothing specific has been said about that. What there is a tendency towards is creating pockets of money which reward high performers and that is mentioned explicitly in the Review as one of the strategies. In terms of the rewards and punishments, if you like, the rewards are you get more flexibility and more money if you perform well, and the punishment is you get some sort of hit squad sent in or are taken over by somebody else or whatever if you do not perform well, but it is not related to resources if you do not perform.
  (Mr Dilnot) I would reiterate where Colin began, when he said it is remarkable that there was not a great deal of attention given in this document or some related document to the way in which the PSAs set at the time of the last Spending Review had led to achievement or non-achievement. The process where targets are set, and then other targets are set seems, as Colin says, to have a bit missing somewhere.

  31. Or even targets disappearing between Spending Reviews.
  (Professor Talbot) There is still a central confusion about the whole process: Alan Milburn wrote in The Guardian on Monday that he was glad the Spending Review only came round every three years. I do not know about him, but I seem to think it is every two years it comes around. One of the confusions is this process we have now where we have this three-year Spending Review with fixed plans for three years that are reviewed every two years, and of course, targets are reviewed every two years. So you have this overlap where, for example, the Department for International Development, which is one of the better bits of reporting of their targets, have two sets of reports about targets, one about the 1998 Spending Review targets and one about the 2000 Spending Review targets in this year's Annual Report. At least they have done it like that and you can make some sense of what is in there. The Home Office ones are totally confusing. It is difficult to work out what they are doing.

  32. The vehicle crime one was set in 1998 at 30 per cent reduction in 2005. We have passed two Spending Reviews and there is still no indication where we are in terms of the target. An even worse one is the child poverty one, 2020, but there is another due 2010. What is the point in putting them in? In 2010 there will have been three general elections and seven Spending Reviews—what is the point?
  (Professor Talbot) On that particular point, there are a number of the targets where they have put an end point target but they put nothing in between in terms of progress, and it seems to me mad if you are going to have those sorts of outcome-based targets, and that can be done. A couple of years ago I was in Canada and the prison and probation service there have-outcome-based targets about re-offending rates there. They are targeted over a long period, but they have annual figures as well on them, and they use them. Their chief executive was reporting them to their senior management conference and discussing them. They recognise there is a limit to what they can do in terms of managing those outcomes of re-offending rates, but they see it as an important part of what they do. There is a danger with having this focussed exclusively on outcomes. I think the Treasury has succumbed to the latest public management fashion about the trend in the OECD literature towards outcome-based government and outcome-based budgeting. There is no such thing, in my view. You have to have a balanced approach which looks at inputs, the processes by which things are achieved, the outputs that are achieved and the outcomes, and simply having a list of desirable outcomes in PSA targets is not going to achieve that.

  33. You would have a target, but as each year passed, you would find out where you were against that target and why you were where you were, but there is no sign that the dialogue takes place or any changes takes place in the money.
  (Professor Talbot) I could not agree more.

  34. What about the spending controls in the new bodies that are overseeing this spending. How seriously do you take these?
  (Professor Talbot) I think there is a major problem about how this information is actually used, what you want to use it for and therefore what bodies you will put in place to monitor it. Again, I think it comes to this issue of seeing this basically as a command control system. It seems to me that the inspection and audit arrangements that are being put in place are purely for the Government's benefit, to see whether or not the service delivery agencies are actually delivering what the Government has instructed them to deliver. There is a wider issue about public accountability, which is that the Government says at the beginning of the Spending Review that this is an agreement between the Government and the people, and I think if that was true, the people have a right to know whether or not the Government is performing as a whole, and to do that, you need a powerful, independent audit body which is capable of challenging the Government about issues on performance. In my view, what is happening at the moment is we are seeing the fragmentation of audit in the UK. We already had it fragmented between the National Audit Office and the Audit Commission. With the establishment of these new bodies, what we are seeing is an increased fragmentation and the Government spinning this as if they are creating some sort of powerful mechanism for public accountability. I do not think it is. I think it is actually weakening public accountability on these issues. I think if you were going to change it, you would reform the NAO in the direction of something more like the General Accounting Office in the United States, which is much more independent, and produces reports on the way in which performance is measured, what is measured and the detail of the performance itself, and presents those reports to Congress on a regular basis on every area of federal government expenditure in the United States.

  35. Would you hazard a guess at how many of these bodies are new?
  (Professor Talbot) Some of them are simply amalgamations of existing bodies.

  36. Would you be surprised if I told you only one is new?
  (Professor Talbot) No, not particularly. The functions have been moved around.

  37. How realistically do you take the Chancellor's view and the Secretary of State for Education's view to take direct action against people in terms of so-called failing of local services?
  (Professor Talbot) That is a common theme, not just in education, but across a range of public services. There are going to be a lot of very busy people in Whitehall. If you take local government as an example, there is a commitment to roll out the local Public Service Agreements, which presumably are going to be negotiated with the Department of the Environment to all local authorities in England. Now, if that is done and individual targets in their PSAs have to be negotiated with the Department of the Environment, then there will be this direct negotiation process going on for every single one of those. Similar things are being talked about in education where the problems are even larger in terms of numbers of bodies involved. It is completely unwieldy, in my view, to operate that sort of system; it just simply will not work.


  38. So are there any final comments given that we are seeing the Chancellor tomorrow afternoon? What is the big issue for each of you? Andrew?
  (Mr Dilnot) This is not a terribly big issue, but it is one I take personally seriously and that is I really am fed up with getting six days' notice of an event of this significance. It does seem to me that if we are to take the Comprehensive Spending Review seriously as part of a transparent and well-managed way of organising and running public service in this country, we need much more warning and I cannot think of any good excuse for not having it. Having it on a Monday was also an innovation. I do not care when it is, although I would much rather it was in the morning so we have slightly more mature coverage of it in the following morning's press. It does seem to me very, very peculiar, unnecessary and poor to have as little notice as we are given, and I simply cannot understand why we cannot be given three months' notice for this as of course we should have three months' notice of Comprehensive Spending Reviews and Budgets.
  (Professor Talbot) If I can just add to that, I would take that a lot further and say why can't we have a White Paper on the draft? This is now a two-year process and there is no reason whatsoever why, when we know what the overall public spending envelope is, the Government could not produce White Papers suggesting what they want to spend in what areas and what targets they want set in terms of achievement for that and open that up for discussion and consultation before they take the final decision. It takes no constitutional power away from the Executive and it would change entirely the way this process was dealt with. The United States Federal Government manages to do that on an annual cycle. Why we cannot do it is completely beyond me.
  (Mr Walton) I agree wholeheartedly with Andrew. The only thing I would say from an economic perspective is we have got this very rapid increase in discretionary spending of 5Ö per cent a year during the course of this Parliament. There is just a longer-term issue of how easy it is to slow it back down again. Clearly if you do put a lot of money into public services, it is not so easy to slow down that momentum, so at least some thought needs to be given at some point if the Government really does, after this Spending Review runs out, want spending slowed back down towards the trend growth in the economy.

  Chairman: Well, thank you very much for your attendance and we look forward to seeing you when this issue, in two years' time, returns.

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