Public sector cost cutting calls for surgeons not butchers

The deficit must be reduced, says MT's contrarian Alastair Dryburgh. But not by political blunt instruments.

Last Updated: 31 Aug 2010

As the former finance director of six companies I'm well used to setting budgets, often in difficult times.  But in this election campaign, I've been appalled by the quality of thinking on how to reduce the budget deficit emerging from all three main parties. So far, three main ideas have been aired:

1. Reduce waste

2. Have a public-sector recruitment freeze

3. Concentrate cuts in the "back office" to protect"front line services."

None of them is convincing or properly thought through. Here's why:

The idea of reducing waste should induce more yawns than anything else. Governments have been crusading against waste since at least 1979. If waste is still there, let's be realistic and accept that we're not going to get rid of it quickly now.

The recruitment freeze is a horrible idea. It's just a way of creating random holes in organisations, depending on who happens to leave and who doesn't. It will lower the average quality of  staff (since it's always the best who find it easiest to move) and reduce effectiveness much faster than it reduces cost.

The front line/back office split is artificial. If your front line people, whether police officers or sales reps, are already spending significant amounts of their time on administration and record keeping, it's quite possible to produce better results by having fewer front line staff but giving them really excellent back office support. If this sounds counterintuitive, you urgently need to upgrade your intuition.

The real problem with all the approaches suggested so far is that they only look at costs in isolation. This is completely wrong-headed, as costs in one area inevitably affect costs in another, and also affect the output of the organisation as a whole. You can't do anything meaningful to reduce costs unless you understand these interconnections. The amount spent on preventive maintenance affects the amount spent on emergency repairs, just as the amount spent on staff training affects the amount spent on rectifying mistakes. I could go on.

Then there is the relationship between cost and impact, or output. In the private sector this is obvious - there is no point in cutting costs if a £1,000 cost reduction causes a £1,500 loss of revenue.  In the public sector, it can also be very tangible. For instance, a recent report for the Tax Justice Network pointed out that Her Majesty's Revenue and Customs had reduced its staff numbers substantially over the last few years, with the result that "for 90% of the total tax paying population, tax compliance is now entirely voluntary".  The rate of tax collection has also slowed, with £11.2bn of tax owing being written off in 2008-09. More spent here would improve the public finances, not damage them.

 Mostly, though, cost cutting in the public sector is complicated by the fact that the relationship between cost and quality of service is far less clear. This creates the danger that simple-minded arbitrary cost reduction will damage public services more than is necessary. Let's not forget that these are important things - we are talking after all about the services which safeguard our health, educate our children and protect us from criminals, terrorists and natural disasters.

As taxpayers and citizens we should expect that any party asking for our vote convinces us  not just that they can safeguard the public finances but th at they have a way of doing so which makes best use of our taxes and minimises the damage done to the services we rely on. On the evidence so far, I'm not optimistic.

Alastair Dryburgh is head of Akenhurst Consultants and author of MT's regular Don't you believe it column.


In today's bulletin:

Goldman Sachs fraud case puts whole industry on trial
Airlines under a cloud, as eruptions continue
City fat cats take home a third of UK's wage bill
Public sector cost cutting calls for surgeons not butchers
Boss-napping back on the menu in France

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