Ireland in crisis: Public Finance

Posted on December 29, 2009 · Posted in Public Finance

 

Crisis creates opportunities. But whether those opportunities are used for good or bad ends depends on who holds the power – and also on the perspective of what actually is ‘good’ or ‘bad’.

 

It is, alas, self-evident that things cannot go on as they are in terms of public sector spending. The scale of the banking bail-outs and the collapse in tax revenues because of the recession mean that there will now have to be a combination of higher taxes and lower public spending. No political party is suggesting an alternative to this, merely putting forward different variations on tax rises and spending cuts.

 

The scale of the problem is severe. The Treasury has said the cost of the bank rescues will be between £20bn and £50bn – though with the levelling out of the recession and the reduction in banking write-offs, the total may actually be less than this. The loss in tax revenues (including from the banks) may have a more severe impact, and represents a key element of why the Treasury suggests that cuts of £90bn from public spending over the next seven years is necessary.

 

When it comes to formulating strategies for tackling this public finance crisis, it seems that mutuals and social enterprises are about to take centre stage. This could be a rather uncomfortable conversation for many in the co-operative movement, who may feel pulled in contrary directions.

 

The first point of discomfort is that we will have to question openly the legacy of the 1945 Labour Government. It has long been accepted that this was the most progressive administration in the history of the United Kingdom: it created the welfare state, it formulated the National Health Service and it put the shutters up on the Empire.

 

But did it make serious mistakes in strategy in doing this? Leaving aside the question of partition in India – outside the scope of this article – many are now suggesting the models used to run the NHS and the welfare state were fundamentally wrong. Specifically, Conservative Party leader David Cameron has suggested that the Labour Party took a wrong turn in the 1920s when it was strongly influenced by the Fabians.

 

The Fabians were rather taken by the emerging experience of the Soviet Union and were committed to a centralist command and control state. Their influence was significant in leading to the creation of a ‘welfare state’, with the emphasis on ‘state’, rather than a ‘welfare society’. A welfare society, argues Cameron, could have left friendly societies in a stronger position to provide support for working people.

 

Equally, there is a question over whether it was correct for Aneuran Bevan to have created an NHS that was the largest employer in Europe. That legacy has already been partially dismantled by Tony Blair and Gordon Brown, not least through the establishment of mutual-inspired foundation trusts and social enterprise providers operating within the framework of the NHS.

 

It seems that whether the next election is won by David Cameron or Gordon Brown (unlikely though that seems), we will see a big increase in the role of mutuality in public service delivery under the next administration. But the models that would be adopted by the two parties would probably be significantly different.

 

One of the big initiatives being put forward by Cameron is the creation of a family of ‘co-op schools’ (education minister Ed Balls is also putting forward co-op school proposals). Parents would be given the right to set-up new schools where there was sufficient demand. They would compete with state schools and would be controlled by a group of parents.

 

Co-op schools could have strong virtues, increasing the supply of schools and creating new competition to failing state schools. But at a time of financial difficulty it seems likely that there might also be pressure for much of the administrative structure to be conducted on a voluntary basis by parents. It seems unlikely, in fact, that a new generation of schools can be fully funded when other projects – such as the capital programme Building Schools for the Future – faces the axe from an incoming Tory government.

 

I suspect that the co-option of volunteers into the system of public service oversight could become a defining characteristic of a Conservative government. Cameron also seems to be looking to the spirit of volunteering as a means of reducing the costs of public service delivery. “If we are to break the culture of charities and social bodies being dependent on the state for hand-outs we need to look at how government can use loans alongside grants to help make them more sustainable and effective,” said Cameron in a recent speech, which promoted the role of mutuality in society.

 

In other words, parts of the state and the state-supported sector will be loaned money to turn them into social enterprises that can then move towards becoming free standing businesses. Cameron explains: “when organisations that have been dependent on the state are asked to go outside government for funding” this will “improve their record of engaging with the public and society”.

 

It seems to me that while Labour is also talking about ‘mutualising the state’, it’s approach is subtlely different. The focus of Labour’s proposals – described by the Guardian as creating ‘John Lewis public services’ – is as much as anything to improve the engagement of state employees with their customers, the service users. Labour sources point to the higher levels of productivity in co-partnerships. This compares to the largely failed attempts by the recent Labour administrations to raise productivity within the public sector.

 

But there is a second element to Labour’s proposals. This again reflects the enforced dynamics brought on by the fiscal crisis. That is the ability of mutualised public services, and those converted into social enterprises, to generate additional revenues.

 

This connects with a Conservative agenda at local authority level to strip out ‘luxury’ elements of public services, supply services that meet only minimum standards and then charge to ‘top them up’. The Tory structure of public service delivery could equally be met by social enterprises or mainstream structured businesses.

 

I believe, and hope, that Labour is rather more motivated by the Greenwich Leisure experience. This brings together both the productivity gains and the ability to increase revenues by mutualising services. Greenwich Leisure converted local authority workforces into an employee ownership structure, with employee engagement in management decisions.

 

The Greenwich Leisure structure has helped to improve standards for all types of service users, without discriminating against those who cannot afford to pay. Rather, it introduced innovative charging structures to provide daytime services for those out of work at lower cost, to increase service use at non-peak times. It also remains broadly part of the public service family – with close connections to the local authorities to which it is contracted.

 

Whether Greenwich Leisure’s model could be replicated across other service areas is an interesting question. I hope it could – and certainly the experiences of social care services operated by co-operatives and social enterprises seem very positive. Sadly, I am not at all sure we will ever find out the answer.