Public sector squeeze: Accounting & Business

Posted on September 21, 2010 · Posted in Accounting & Business

The coalition Government has started as it evidently means to continue – by both immediately cutting public spending and making a rash of policy commitments.  Together they amount to not only a potentially large reduction in the size of the public sector, but also a significant change in the way it is organized.

 

Immediate public spending reductions of £6.2bn affect much of central and local government.   The biggest cut is £1.2bn in grant to local authorities.  Given that councils are to be largely freed from the restraint of ring-fenced grants, authorities will have some flexibility in deciding how these cuts are implemented.  The second largest cut is of £704m, from grant distributed to the devolved nations of Scotland, Wales and Northern Ireland – whose governments will also decide how their cuts are implemented.

 

Other big losers include the Department for Business, Innovation and Skills, whose funding is cut by £836m; the Department for Transport, whose budget is down by £683m; the Department of Education, whose grant is cut by £670m; and the Department for Work and Pensions, which loses £535m.  The previous Government’s plan to increase university places by 20,000 has been halved.

 

A pledge has been made to increase NHS spending.  However, some additional care services may in future be funded from NHS budgets: it is unclear how this will affect overall healthcare spending.  But as with the provision of other public services, there will be a major reduction in the number of unelected bodies within the NHS.  This seems likely to lead to the abolition of strategic health authorities.  GPs will be engaged more directly in the commissioning of health services.  Primary care trusts will focus more on public health – but might be eliminated. 

 

Quangos are also being abolished across central government – with an initial saving of £600m.  Agencies to go immediately include the Qualifications and Curriculum Development Authority, Becta, which gave IT advice to schools , and the General Teaching Council for England.  Other education reforms will enable parents to set-up ‘free schools’, while more existing schools are able to obtain academy status.  Taken together these two initiatives will lead to a reduction in the involvement of local government in education, while the role of the regulator, Ofsted, will also become more limited.

 

Other regulators will similarly have fewer responsibilities.  The Comprehensive Area Assessment – which brought local inspections by the Audit Commission and other regulators together – has been abolished. 

 

The emphasis of the first round of cuts has been on avoiding front line services.  Consequently, civil service budgets for consultancy, advertising and travel have been cut by £1.15bn; £170million is removed from property budgets; and £95million from IT.  But there are fears that spending reductions of £1.7bn from delaying or cancelling contracts and projects could adversely affect the construction sector.  There are also doubts about the future of the Building Schools for the Future programme.

Staffing costs will be cut, including through saving £120m by freezing civil service recruitment.   The highest earners face tougher scrutiny, with any central government pay package above that of the Prime Minister now requiring authorisation from the Treasury.  A more wide ranging announcement on public sector pay was deferred until the emergency Budget, but Will Hutton – former editor of the Observer – has been commissioned to review the fairness of public sector pay.  Major changes on public sector pension provision are likely – the costs are to be reviewed by the Office for Budget Responsibility.  As a signal of its willingness to lead by example, the Cabinet agreed a 5% cut in ministers’ pay, which is frozen for the rest of the current Parliament.

Announcements on public spending cuts made at the onset of government by the Chancellor of the Exchequer George Osborne and his short-lived chief secretary David Laws were only the beginning.  The Programme for Government indicates an ongoing schedule of reform and budget cuts.  Future changes will include the abolition of the Government Office for London and possibly other regional government offices; a review of local government finance, including the Housing Revenue Account; a freeze on council tax in England for at least a year; the creation of directly elected mayors in the 12 largest English cities (subject to referendums); a general power of competence for English councils; a 25% reduction in Ministry of Defence running costs; and a cut in NHS administrative costs of a third.

 

Key roles in the NHS and financial forecasting are to be made independent from government, through a new NHS board and the Office for Budget Responsibility (see box).  Further cuts will follow in the autumn, when a full spending review will report.

 

But the lack of detail behind many of the headline announcements of cuts and reviews is causing anxiety in the public sector.  Gillian Fawcett, head of public sector technical at ACCA, says: “It is critical that the new government provides as quickly as possible more clarity and substance behind the £6.2 billion of savings required in 2010/11 – not only to alleviate uncertainty in the public sector, but also to allow for effective financial management and service delivery decisions to be made, particularly, in those sectors that will bear the biggest savings.”

 

What is clear, though, says Fawcett, is that the tightening of the screws on the public sector means that there must be greater focus on having strong financial management skills in public bodies.  “Now more than ever, the expertise and skills of finance professionals will be pivotal in supporting public services as they undergo change to create savings and control public expenditure,” she says.

 

“We are lucky within the UK as we have some highly experienced finance professionals working in public services, who are well equipped to deal with the financial challenges ahead.  However, we must also remember that responsibility for achieving effective financial stewardship does not just rely with the ‘finance function / department’ alone, it goes much wider.  The best and most effective finance departments in the future will be those that promote effective financial management among non-finance staff with responsibility for budget management across the organisation.”

 

Box – The OBR

The Office for Budget Responsibility is a new body charged with making independent assessments of the public finances and the economy.  Explaining the need for an independent OBR, the Chancellor of the Exchequer George Osborne said: “The last Government’s forecasts for growth in the economy, over the past 10 years, have on average been out by £13bn. Their forecasts of the budget deficit three years ahead have on average been out by £40bn….. For the first time we will have an independently audited and transparent national balance sheet.”

An initial forecast by the OBR has fed into the emergency Budget.  The OBR is also engaged in assessing the accuracy of the public sector balance sheet, including through the examination of the cost of outstanding PFI contracts, public service pensions and the financial impact of the ageing society.

The first head of the OBR is Sir Alan Budd, an inaugural member of the Monetary Policy Committee and a former economic advisor to two Conservative chancellors.  Sir Alan will also be a member of an independent Budget Responsibility Committee, together with Geoffrey Dicks, a respected economist, and Graham Parker, a former government financial forecaster.