Examination of Witnesses(Questions 20-38)|
WEDNESDAY 17 JULY 2002
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
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
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
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
(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
(Professor Talbot) I think so. The other dogs that
have not barked are yourselvesnot 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
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.
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 Budget160 as it started,
down to 130 targetsor 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
(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 Reviewswhat 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.