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Dr. Vincent Cable (Twickenham) (LD): I shall first respond directly to the hon. Member for Rochdale (Mrs. Fitzsimons) who threw a question at me. She is right, and I have never concealed the fact that I believe that all parties, whether in government or in opposition, have to make choices. That means saying that we cannot solve all the problems of government by eliminating waste. I entirely agree with the spirit of the comments made earlier by the right hon. and learned Member for Rushcliffe (Mr. Clarke). That is why we have said that there are certain things that the Government should get out of.

We have paid considerable attention to area-based initiatives. It may well be that the one in Rochdale is brilliant and I commend it if it is, but our experience has been—it is not an academic analysis, as there are Lib Dem councils in northern cities as well as in the south-east—that many of the area-based initiatives duplicate and centralise many of the functions of local government. They should therefore be cut back. The hon. Lady is right that we are arguing in favour of cutting back those initiatives.

The former Chancellor, the right hon. and learned Member for Rushcliffe, made wise and helpful comments. He rightly started off by placing the discussion in the context of macro-economic policy. Discussion about waste is important, but we have to look at the macro-economic context. It is certainly true, at least on the surface, that the budgetary position is very good and the debt position is comfortable. The golden rule appears to be being met.

My concern about the macro-economic position is that, although the British economy as a whole has been fairly stable, the Budget has been highly unstable. We have had a lurch from famine to feast. We saw public spending at roughly half the growth of the economy as a whole for the first few years, then it greatly exceeded the overall growth of the economy, and we now have the third phase. The Government have not pointed out clearly that public spending plans are front-loaded with a big increase for 2005–06 and then a sharp slowdown subsequently.

It is not simply that instability is a problem in itself, because enormous costs are associated with it. One of the biggest causes of waste in government is not so much bureaucrats—we will get round to them in a minute—but the £1 billion a year that we pay on excess charges in the NHS for agency nurses. There are several reasons for that. One of the reasons why there are so many agency nurses is that key decisions on nurse recruitment and education were not taken five or six years ago. We are paying the price for that today.

Another example is that we are currently talking about paying £60,000 for a maths teacher, again because the problem of scarcity was not identified earlier on in
 
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the Government's term of office. It takes a long time to take a child through from A-levels, to university, teacher training and then into teaching—and it is only now that the problems have been identified. We are now paying the costs and the price of the instability when we lurched from under-funding to over-funding within the public services.

Mr. Hopkins: On nursing, a chief executive of a hospital trust told me that if he could take the same global sum of money that he spends on nursing and pay a higher rate to all his nurses, he would have a full permanently employed nursing staff. He would not need to employ agency staff. Unfortunately, he is not able to do that, so he has to have a lower level of pay for his nurses and buy in agency nurses.

Dr. Cable: There is a lot of wisdom in what the hon. Gentleman says, but he knows that there is an overall problem of supply, which traces back in time to failures of recruitment.

Our debate today has focused primarily on the concept of waste in public services. It was particularly evident in what the Conservative spokesman said, but it has been equated by virtually everyone with the cost of administration. We can argue about too much administration and too much bureaucracy, but waste is a wider concept than that. The Government are right to point out that some elements of waste have fallen. We have less unemployment, fewer debt interests and we are avoiding policy areas such as the poll tax.

The concept of privatisation was also slipped into the Government's litany of Conservative crimes. I was rather surprised by that: as I understood it, one of the key elements in the Government's spending plan is £30 billion worth of asset sales. I think that that is privatisation, so I do not understand why it found its way into the list.

Other elements of waste have not been mentioned. We heard the Prime Minister's statement earlier today. For some of us, the £3.5 billion spent on the war could be classified as a sort of waste—not simply because the war was fought, but because if it had been fought properly under multilateral rules, it would have been funded internationally, as the first Gulf war was.

Yesterday we debated energy. What was not spotted by too many people was the fact that the Government have now put into the public domain, admittedly over a long period of time, liabilities of a minimum of £50 billion, because electricity—particularly nuclear electricity—was not properly costed. That waste, both physical and financial, is now dumped back into the public sector. Waste is multi-dimensional, and not only to do with bureaucracy.

Mr. Flight: I said that there were two types of waste. One is defined in the narrow and traditional sense and investigated by the Public Accounts Committee and the National Audit Office; the other requires major policy change to address, as my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke) pointed out. It is highly important that we all are clear what we are talking about. I certainly meant the word "waste" to be taken in its widest sense.

Dr. Cable: I agree, and I will develop the point now.
 
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The key point in the debate is the assumption that public sector productivity can grow by 2.5 per cent. a year. In the private sector, which has additional incentives, service productivity growth is only 1.5 per cent. The Government assume that the public sector will be much more productive than the private sector, even without the incentive structures. The figures are elusive, but I understand public sector productivity growth is close to zero. That means that some pretty heroic assumptions are being made.

I often call to mind the old story about the economist stranded on a desert island with tinned food and nothing else. When asked how he will survive, he says, "Let's assume the existence of a tin opener." Essentially, that is what lies behind the Government's plan. They are saying, "Let's assume the existence of 2.5 per cent. productivity growth—plausible or otherwise."

The Chief Secretary helpfully clarified a confusing element in the statement. I refer hon. Members to page 13 of the published version. He said that the £20 billion Gershon savings, which include savings from the dismissal of a net total of 70,000 civil servants, will be outside the spending review. Therefore, the savings made from the sacking of civil servants and implementing the Gershon report will be over and above the spending limits. The Government's strategy is to feed those savings back, in some sense, into public services.

That raises some important questions. How will the Gershon dividend be paid? What is the mechanism? I offer a simple example involving the Department for Work and Pensions. I do not want to go into the pros and cons of the matter, but by sacking 40,000 civil servants costing roughly £25,000 each the Department will save £1 billion a year. What will happen to that money? Will it go into improved services in work and pensions? Will it go into pensions, or back to the Treasury? How does the dividend get paid?

There is a bigger question for the economy as a whole. I hope that Ministers will correct me if I am wrong, as I am trying to understand what is going on, but the Government have said that the £20 billion a year generated in additional savings and extra productivity will all be spent on public services, and that it will not go back to the taxpayer. Is not the logic of that that the share of public spending in gross domestic product will rise as a result of the successful implementation of Gershon? I should be happy to be corrected if I have misunderstood the proposition, but we need to be very clear about how the Gershon dividend will operate, at both micro and macro level.

My second question is about conditionality, and it relates in part to what the right hon. and learned Member for Rushcliffe said. How do Departments get their spending allocations in the context of the Gershon reforms? Let us suppose—it may not happen—that the Department of Health performs extremely badly in respect of all the Gershon reforms, and that it does not achieve its IT or procurement targets and so on. Does that mean that the funding in the spending review will be withheld, or will it be increased because of the Department's underperformance? There has always been much ambiguity about what public service agreements mean, but what rewards and penalties exist
 
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in the system to ensure the implementation of the Gershon improvements? How the conditions work is massively unclear.

The right hon. and learned Gentleman asked another question: how do we know when reform has been implemented, and how do we measure performance? I am delighted that Professor Tony Atkinson, who is an underestimated and important academic, will be brought in to try to help answer those questions. However, economists have been worrying for 20 years about how to assess public sector productivity.

The attempts to improve productivity in the public sector can be very daft. Shortly before I became an MP, I visited my local borough police commander. He was a bright young thing who had just come out of a refresher course at the police college and was buzzing with management speak about productivity. He told me that he had been thinking through his borough's strategy and that he intended to get rid of beat policing. He gave me a little homily to the effect that the chances of a burglar being caught by a beat police officer were as remote as the chances of being hit by an asteroid. That proved to him that good management and improving productivity meant getting officers back into the police station so that they could go out in their cars in emergencies. He called that high-productivity policing, but we all know in retrospect that it was just daft. The police have since done a U-turn on that policy, and we are no closer to understanding how we could improve productivity in policing.

Further education is another example. The head of my local FE college tells me that it has been subject to productivity targets from the Treasury, via the Department for Education and Skills, for the past five years. The sector already has a 2.5 per cent. productivity target. The college achieves the target by increasing class sizes—more students, same number of staff. Is that what the Gershon reforms will mean?

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