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- The Reformer Blog
15 May 2015
The main driver of public spending decisions is still debt – where voters have been showing more concern about long term risks than the indwellers of the Whitehall Bubble. Certainly the debt crisis gives clear signals not just for the next five years but for the 10 after that. It will take five years to get to the position where the debt stops growing, during the campaign this position was described in misleading terms as “ending the deficit”. It will take another 10 years to bring about a reduction in the debt, an essential move given the risk of rising interest rates.
In addition to the case from debt, there is a moral and economic case for a smaller state which has yet to be made. The moral case is that people should have more control over and responsibility for their own decisions. Unless they are prevented by severe disability, work should be possible and adds to capability and well-being. People who are out of the workforce are likely to have poor health and much lower well-being.1
The economic case has changed and emerged more recently. For growth and higher employment it is vital to allow room for increased private spending. Small and medium-sized enterprises (SMEs) depend much more on private demand than large corporations. The last government’s efforts to open government contracting to SMEs had limited impact. For ease of management the public sector prefers large contracts with known suppliers.
Employment growth has been in four main areas: accommodation and food, professional, scientific and technical services, information and communication, health and social care. In all these areas SMEs can often compete quite effectively. For example, a recent Care Quality Commission Report showed that care homes managed by single proprietors offered better care than the corporates.2
All these areas are highly dependent on private demand from people across the UK. Much of the employment growth has been outside London as service demand is much less concentrated than the former growth areas of financial services and car manufacturing. Rebalancing of the economy depends on private sector demand and SMEs also offer more employment opportunities for the less skilled. For the first time in decades employment has increased for the less skilled and a further increase is likely.
Some will argue that the growth has only been in low paid jobs, but for people moving into the workforce for the first time, or returning after long period out, there is not the experience effect which is essential for higher pay. It will take time for people to gain expertise but many will eventually. Even now the Low Pay Commission has reported that the differential between low and high pay is the lowest it has been for many years.
The need for private savings is another key support for a smaller state. The new pensions framework involves a flat rate national insurance contribution and an opt-out system of compulsory pensions. This is a sound framework but will take many years to produce a reasonable income in retirement. For the next 15 years it is vital to encourage private savings. The system of Individual Savings Accounts has been a huge success so there is plenty to build on.
Does the smaller state mean an unsustainable cost in lower services? The phrase “doing more with less” is often used but it is important to define the specific opportunities which are available here and now. We are now in a time when it is actually possible to do much more with less. The old system spent heavily on large new buildings and specialized professional staff on lifetime contracts. In healthcare, communication with patients and users was poor.
There are opportunities to use funding, less but still large – in the case of the National Health Service, 9 per cent of GDP – to develop services which are closer to the patient/user, more integrated and linked by digital technology.3 The recent LaingBuisson awards to innovators in social care showed upbeat results. New kinds of care are emerging through local initiative more streetwise and less dependent on large specialized buildings.
In addition there is pressure from spending change to get more value from the funding – a pressure which is sadly absent when spending is increasing rapidly. Outsourcing also means greater staffing flexibility so that skills can be developed through in-service training. It could mean a release from the benevolent despotism of professional labour markets with their immensely lengthy training programmes and very high costs. Quality can be delivered in other ways by team expertise.
The move to a lower level of public spending may have started as a reflex of fear to the debt crisis, but it has the potential to show highly positive results. The spending limit is clear not just for the next five but for the next 15 years. Far from being an obstacle to growth and equity, it provides the essential condition not just for growth but for participation. People in socio-economic groups C and D have in fact gained little from high social spending. It is the development of markets which raises their real incomes and offers new opportunities for themselves and for their children.
Professor Nick Bosanquet, Professor of Health Policy, Imperial College and Reform Advisory Board Member
1. The life satisfaction of people who are economically inactive because of long-term illness or disability is 5.5 out of 10, compared with the population average of 7.5. Office for National Statistics. Has personal well-being improved for people in and out of work? 2014.
2. Care Quality Commission. The State of Health Care and Adult Social Care in England 2013/14. 2015
3. NHS England. Five Year Forward View. 2015