Reducing the deficit and improving public services

The October Spending Review will set out unprecedented cuts in departmental spending. These cuts will not be pain free. They will be felt by public sector workers, by users of public services and by recipients of benefits. But done in the right way, they could lead to better public services and sustainable public finances.

Reducing the deficit and improving public services is a huge challenge. But it can be done. Reform is bringing together leaders from the public sector, from private sector organisations and from New Zealand and Ireland who have successfully improved the quality of services and increased fiscal credibility. Their lessons will be welcomed as the UK sets out to restore its economic and fiscal position.

The October Spending Review will see all public budgets come under increased pressure as public spending is brought under control. There is a right way and a wrong way to cut public spending. As Ruth Richardson who eliminated a deficit in New Zealand between 1990 and 1993 has warned, eliminating waste and salami-slicing existing budgets tend to be the politicians stock answer, but none of these approaches go to the heart of the problem. The right way involves structural reform to allow services to offer value for money. Improving public sector productivity requires a radical redesign of public services.

This approach will not be possible without good public sector management. Reform has spoken to good managers in the public sector. They are acutely conscious of costs to the taxpayer and want to be held personally accountable for performance. But they do this despite the system, not because of it. Accountability to the users of services to local electorates or to Ministers will improve management and performance.

Reform will also require a redrawing of the boundary between state and individual responsibility. The link between taxation and public services has been broken, with the expectation of the British public that the UK can have high levels of public spending for moderate taxes. The fiscal crisis will give way to a new era of smaller government and balanced budgets. Individuals will need to take greater responsibility for things like their healthcare, their postretirement savings and their choices over higher education.

In this new era of fiscal discipline, what the state continues to do it will need to do in different ways. Many of the UKs public services are still provided as state-run monopolies. This means that they have weak incentives for better management and lower costs. Government should more often limit its role to funding public services, rather than both funding and providing them. Government as commissioner not provider will lead to an improvement in quality and a reduction in costs.