Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 40-59)

14 JULY 2004

MR ROBERT CHOTE, PROFESSOR COLIN TALBOT AND MR DAVID WALTON

  Q40 Angela Eagle: Do you then deny that the DWP's payment organisation programme has now got 65% of all people in receipt of benefit having their payments made direct to a bank account, which costs 2p per transaction instead of £1?

  Professor Talbot: No.

  Q41 Angela Eagle: All of these are savings that are being delivered now because of this modernisation. Why the easy cynicism about the scope for further savings? It is easy to be cynical.

  Mr Chote: As I say, I think Colin's point is to look back at the history.

  Q42 Angela Eagle: Look at the examples in here in front of you that have actually happened.

  Professor Talbot: Do those examples add up to £20 billion?

  Q43 Angela Eagle: They are beginning to make progress towards that. When I first went into the DWP, we had green computer screens and when we had to try to come up with management figures, we had to take people off the front line to count manually. That has changed fundamentally over the last five years, and it is delivering serous savings. How about acknowledging that instead of just being cynical about the scope for further savings?

  Professor Talbot: I am not being cynical. May I say that I also work, and have worked for the last ten years or so, with a large number of public sector organisations as a consultant working with them, actually trying to improve their own services, including government departments? It is simply not that easy. It takes considerable amounts of time; it often requires huge amounts of investment, some of which is actually specifically ruled out by Gershon. I am not cynical for the sake of being cynical. I am simply saying that the sorts of targets that are being promised, £21.5 billion now according to the Chancellor, simply do not seem realisable in the timescale that is being suggested. If you look at the detail not of what has been archived in the past but of what has actually being proposed for each individual department, it is extremely thin. It does not explain to me, for example in education, how you are going to improve the productivity of teachers, lecturers and university staff by 30% over the next three years. There is nothing there that tells me how this is going to be done.

  Q44 Angela Eagle: Would not that detail be in the financial statement?

  Professor Talbot: It is not in the financial statement. This is the Gershon Review.

  Q45 Angela Eagle: You would not expect there to be an agreement on any of these figures at departmental level or indeed in the devolved administrations unless they did not think they could reach them. If they do not agree with them, they do not agree with the Treasury to do it, and then it does not get announced. That is how government works. Why have they agreed to these things if they think they cannot achieve them?

  Professor Talbot: If you want a bit more cynicism, I have had conversations with senior civil servants in the past in spending departments in reaction to these sorts of announcements. For example, and one I quote in my brief from the senior management reviews when they were expected to reduce senior management by 25% in the 1990s, their reaction was, "Of course we will agree to them and then we will work out how we are going to `do it'." Some of it will actually happen and some things will not.

  Q46 Angela Eagle: Do you not think there is a difference between attempting to make savings during years of Conservative mass cuts and making savings during years when the public service is being expanded? Those are fundamentally different.

  Professor Talbot: You could be right; they are different. I would suggest to you that in a situation where these budgets have been allocated, departments are going to get the budgets regardless of whether they make the savings or not. They are in a position where all departments' expenditure is going up in real terms, some less than others. The pressure for them actually to achieve savings, other than by pressure being put on them directly by the Treasury, is fairly low. The time when there is huge pressure to improve efficiency is the position where your budgets is going down, not when your budget is going up.

  Q47 Angela Eagle: On page 19 there is a very interesting sector on productivity time in the Gershon Report, which again looks at realising the benefits of reforming work forces, using ICT investment, process reform, and the shift to day surgery in the NHS is an example. This is going on all the time increasing the efficiency of our public services. Again, why is this not recognised?

  Professor Talbot: It is.

  Q48 Angela Eagle: So none of this counts to the total then; it is just all easily dismissed in your cynical shrug?

  Professor Talbot: I do not think I actually shrugged. No, it is not dismissed. It will lead to some efficiency gains.

  Q49 Angela Eagle: Ah!

  Professor Talbot: I have said this about five times so far and you do not seem to have heard me saying it. It will lead to some efficiency gains. What I am questioning is this overall figure of £21.5 billion over the three-year period of the Spending Review. I simply find insufficient evidence in the Gershon Report to convince me that that is going to be achieved, particularly in the context of initiatives in the past which have attempted to achieve far less ambitious targets for efficiency savings and far less holistic in terms of involving the whole of the public sector, which rely on, for example, local authorities which government does not directly control, NHS trusts, foundation hospitals, foundation schools and so on, which have become increasing autonomous. That in itself raises issues about how some of these things are going to be implemented.

  Q50 Angela Eagle: Mr Chote, one final question: what do you think of the new long-term measure on child poverty that has been announced?

  Mr Chote: It is a testing target and the first point to make is that it is very welcome that the Government has laid down clearly what the target is. It is also quite welcome that they have done so in a way that sticks, with the long-term target for 2010 and 2020, rather than having too many staging posts in the near term. The danger perhaps in the past is that that led perhaps to an allocation of money more in the direction of direct cash transfers versus services, such as SureStart for example, which might have more beneficial impact. Essentially speaking, the implication of the child poverty target—

  Q51 Angela Eagle: Not the target, the new long-term measure which is announced?

  Mr Chote: Whether moving to a measure which is before housing costs is more sensible I think is debatable in the relative low income measure. I do not have any problem with the move to the new equivalent scale, which is weighting the needs of different members of families. As for the idea of combining the multiple targets so that you have relative low income, absolute and material deprivation, clearly poverty is a multi-dimensional concept and it is sensible to look at it on a number of levels. The danger obviously of having multiple targets is that it is less easy to hold people to them. With material deprivation, I would have some more doubts about defining particular items that people should or should not have; it is a difficult concept. It would be interesting to see how the measure comes out on that when it is clarified in the next Spending Review.

  Q52 Mr Cousins: I wondered if anyone had any idea about this. For example, the number of people entitled to pension credit rises by about 100,000 each year because of the technical way that the credit is calculated. Do we have any idea what assumptions the Government is making about under-spending on delivering pension credit to people that are entitled to it?

  Mr Chote: I do not have that information on me. That is the answer. I can check that. I think the assumption would be that the level of take-up is probably constant over time, but I can check that.

  Q53 Mr Cousins: At the moment, we are seeing a growth of under-spend, and I am sorry to change the topic so dramatically from forecasts of doom. Personally speaking, I am rather cynical about doom. There is a growth of under-spending in several key departments, including those like Education and Work and Pensions. In Scotland, the Scots seem to have considerable difficulty in spending the money they are given. Do you think this is likely to be an increasing factor? We do not have this year's figures, of course, or rather last year's outturn figures.

  Mr Chote: I would not necessarily have expected it to be an increasing factor. One of the good things to say about accumulated under-spending is that the system is clearly doing less to force departments to spend money at the end of the year just for sake of it to ensure that they are not penalised the following year. In a sense, it would suggest that the end-year flexibility, if you do not have to float money out of the door just to ensure you get more later, is actually hitting. If the argument is that some of this under-spending is taking place maybe for example on the capital side because sensible decisions are being taken about let us not go ahead with spending which does not look like value for money, and the system is allowing departments to make those sorts of sensitive decisions, then I do not think that is necessarily a bad thing.

  Q54 Mr Cousins: Do you think we are seeing the emergence of something which in effect is quite a sizeable contingency reserve spread around the departments because of the existence of this accumulated under-spending under the end-of-year flexibility schemes?

  Mr Chote: Whether you count it as a contingency, it is a contingency reserve in the sense of departments having this money which is available to them, but in terms of if the departments then went out and spent it, the aggregate figures would clearly look that much worse. It is not as though that money is being carried forward within the spending totals in a way which would suggest that if the departments came out, then there would be a genuine increase in public spending if some of that under-spend was used up.

  Professor Talbot: The really big under-spend problem we had was when the Chancellor turned on the faucet, or the tap, in terms of public spending—

  Q55 Mr Cousins: Professor Talbot, this is a British parliament; we do not use terminology like "faucet".

  Professor Talbot: When the Chancellor turned on the taps after the 2000 Spending Review, if you remember, at one point the under-spend was around £8 billion. I suspect some of the problems that we are experiencing at the moment are of the sort that Robert Chote has indicated, and I very much doubt that we are going to get into that sort of territory again, given that for most departments, spending is only growing marginally above inflation in real terms. It is very unlikely that they are going to get into major under-spending problems. The two places where that might happen obviously are Education and Health where resources are continuing to increase fairly substantially.

  Q56 Mr Walter: I have just one question that I wanted to go back to and this is the whole question of choice. Choice seems to be a major factor in what the Chancellor has talked about. Choice implies that there is capacity elsewhere which you can choose from. How have you seen that being enacted?

  Professor Talbot: I think the issue about choice versus efficiency is a very interesting one. I have already indicated that one of the aspects of choice obviously is that you need to create as many autonomous bodies in the sense of foundation hospitals, foundation schools and so on to be able to compete with one another, which means granting them a degree of autonomy to manage their own affairs. That in itself then raises issues about how do you realise some the economies of scale that are talked about in Gershon in terms of convincing autonomous bodies to adopt central initiatives on purchasing, on bankruptcies and so on, and that is not an easy problem to crack at all. I think that is one issue where there is an obvious tension. There is another issue in relation to performance information. There has been a lot of talk because of the headline figures about PSA targets and reducing them to 110 from some of the statements that have been made, for example by the Secretary of State for Health about reducing overall target levels. I do not believe actually the amount of measurement of performance in the UK public sector is going down at the moment. Some people want it to do so. Some people want to get rid of measurements but I think if you are going for a choice agenda, then you need a great deal of measurement; otherwise how can people decide which school to choose or which hospital to choose if they have no information about how well those institutions are doing and delivering services? Not only do you have to have that information but it has to be comparable information. The idea that you can decentralise performance measurement to these institutions along with their operations' management seems to be fallacious if you are going to try and introduce choice because people need to have comparable information between different schools and different hospitals in order to make any sort of decision. There is a number of ways in which I think there are tensions between the agenda for having increased choice at the public service delivery end and increased efficiencies in back-office services and efficiencies of scale, and issues about measurement as well. All of those need to be addressed. They do not seem to be even recognised adequately at the moment.

  Q57 Mr Walter: Is there not a contradiction, or are you suggesting there is a contradiction, that if you are going to provide choice and also have central purchasing and common systems and so on, surely those who are providing the choice think they can provide it better? If B thinks it can provide it better than A, they may say, "We can provide it better than A because we are not bogged down by this central purchasing system; we have a much smarter way of acquiring these assets"?

  Professor Talbot: You are talking about two different areas of choice, choice in terms of consumer, user, end user choice. That requires that there is some sort of competition, that there is some sort of difference between different public service providers. That in turn implies that they have some autonomy and organisational and operational management independence. If they are all having the same back-office services imposed on them, and Gershon proposes for example developing common personnel systems again when most public services have spent the last 15 years getting rid of common personnel systems and devolving those down to front-line organisations, and putting back in place a whole series of those standardised back-office and support services, then that minimises the amount of scope for operational managers within individual units to change the way in which they do things. We have been through this before. If you go back to the early 1990s when market testing was introduced and all executive agencies were told that they had to market test a certain proportion of their services regardless of whether it was necessary or not, I remember having a conversation at the time with the then Chief Executive of the Employment Service saying that he was wasting huge amounts of management time doing market testing, which was completely irrelevant to what he wanted to achieve in terms of improving the efficiency of the Employment Service because he had been told centrally that is the initiative which is going to save money. In his view it was not within that particular organisation. So there is always a tension between these centralised initiatives which are going to achieve economies of scale and local autonomous management. That is a difficult problem to deal with. Again, taking Gershon, all the way through most of the big areas for saving money are in more centralised purchasing, more centralised back-office services, more standardised personnel systems and finance systems and so on. At one point he even suggests standardising the actual finance package that all the departments use. That is not choice of local managers in determining what is best for their particular organisation.

  Q58 Chairman: David Walton, you have not had a chance to come in on this issue of efficiency targets. Are there any points you want to make?

  Mr Walton: I do not have anything in addition to what the others have said.

  Q59 Chairman: On the issue of the timetable of the Spending Review and the issue of scrutiny here, we have yet to see the Atkinson Review published. We are still waiting for that. There is no public expenditure outturn White Paper until next week. How difficult does that make your job as an expert?

  Mr Chote: We have to make do with the numbers that we have at any given moment. There is clearly a problem at the moment as well on the public finances. Judging from what has happened to spending in the past, the number are wobbling around quite a bit in terms of the outturn for 2003-04 because of the links between the national accounts numbers and the numbers that the Treasury is coming up with. For example, the last set of monthly public finance data is explicitly flagging the possibility of further announcements on the changes of numbers and depreciation. The state of knowledge is always imperfect. Obviously with each new bit of information we get, that will make things easier. As I say, we still do not know what public spending was last year.


 
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