The Comptroller and Auditor General in the UK and England is an old post that came into being in 1866. Now as the 17th occupant of the office, is to head the National Audit Office (NAO) and to support Parliament in holding government to account for how departments and agencies spend public money. He has just published a report on the LSE site
He explored some of the elements of strategic financial management and planning, a potentially dry topic but ultimately one that determines success in any major government reform programmes. His specific context was how central government introduces reforms to locally delivered services so as to achieve its policy objectives, and the effect of its approach on funding, budgeting and efficiency.
There is a strong case for considering this area in the light of recent practical experience, alongside the problems created by a lack of joined-up thinking.
He said nothing particularly surprising, or anything that any of the senior figures involved would argue with, though they might not like his conclusion. He did not challenge any policy objectives nor the basic principle of seeking to use public resources as efficiently as possible and make economies where possible. He talked about the ‘how’, not the ‘what’ – in short: intelligent implementation and its context of budgeting and funding.
He set out the fundamental issue. The examples of connected systems used were local government, adult social care (delivered by local government) and the National Health Service in England.
The policy background is that since 2010 central government in Whitehall has been progressively ‘freeing’ local government from central government by first the push for localism and culminating in financial self-sufficiency; then English devolution plans to transfer more services to local government, including health, along the lines of the ‘Greater Manchester model’; and there has been a desire to drive up quality and manage the health needs of an aging population.
Underlying everything has been the Government’s austerity agenda.
Joined-up decision-making and funding arrangements between connected systems – central government and local bodies for instance – have often been missing, leading to deleterious consequences. Within these connected systems, this gives rise to:
- unforeseen conflicting objectives for local bodies;
- cost shunting between parts of connected systems; and ultimately
- risks of financial, or service, failure locally.
Central government has been slow to adjust – often acting only when serious failure occurs.
Part of the reason for this is an ‘out of sight, out of mind’ culture. It is relatively easy to for central decision-makers to allocate savings to be made by those operating outside a department’s boundary or with a different mandate, without necessarily understanding their effect. When public sector decision-makers are making big decisions and cost reductions, they need to be able to validate those decisions very well and they haven’t.
Decision-makers have an obligation to have good evidence, to have explored the secondary effects of their potential decision, and to have explored the downsides. They need to take a ‘one government’ approach – including local government – to managing the overall government finances for the best overall outcomes. Without this, the consequences of hasty decision-making have come home to roost, sometimes quite quickly.
Local government
He looked at some examples. Since 2010 central government has progressively cut support to local government, meanwhile giving it new powers including a general power of competence under the Localism Act. More recently, DCLG took the first steps towards local government retaining 100% of business rates by the end of this Parliament, making local government ‘financially self-sufficient’.
But the ability to retain local taxes must be set against background where local authority spending power – covering the day-to-day costs of running services – fell by around 25% in real terms from 2010 to 2016, with another 6% cut in spending power planned up to 2020.
The inference and expectation was that there is waste in local government so more could be delivered for less, and local government will be able to generate its own income through fees, charges and commercialisation schemes.
At the beginning, local government responded with new, more efficient ways to deliver services. However, over time this has shifted from ‘more for less’ to ‘less for less’.
This is because, during this progressive reduction in funding, there has been no evidence-based effort to reconcile funding to local needs. The policy objectives for local government and the local government statutory duties have not been properly weighted against potential efficiency savings. The 2015 Spending Review made some headway here but it was not a comprehensive approach. Accordingly, what we see are ‘deficit behaviours’ such as:
- the invisible rationing of services; and
- quiet drops in service quality.
Users are now coming into the system later with greater needs. These are local councils’ only real options to square the circle as they are prevented by law from going into financial deficit or to borrow to fund revenue spending. This has obvious direct effects on service users, but also reduces local government resilience, and its ability to contribute discretionary resources to central initiatives, however attractive. But those ‘deficit behaviours’ are hidden, since there are few local government sector-wide leading indicator statistics to give a clear indication that the system is in distress and where the gaps in services are occurring.
NAO reports into this area tell us that there have been large, real-terms, planned reductions in spending between 2010 and 2015, for instance reductions of:
- 36% for cultural services;
- 47% for housing services; and
- 53% for planning and development.
Once funding passed directly to schools is removed, it becomes clear, however, that local authority expenditure is dominated by social care for both children and adults. Local authorities have also sought to protect spending on social care because of the high number of statutory responsibilities that they have.
Nevertheless, there has been an overall 7% real-terms reduction in spending on adult social care by local authorities between 2010 and 2015. And areas with the greatest needs lost the most. Besides the direct effect on care service users, this reduction has a destructive effect on the NHS, which is, in part, highly connected to the social care system.
Costs are effectively being shunted from one part of the connected system to another. For instance, hospitals’ ability to discharge patients with care needs on time is affected when patients who are not supported to live independently tumble into A&E and acute health provision – a leading indicator of primary care and social care shortfalls.
That is not the whole story for the health care system however. Since the introduction of the Health and Social Care Act 2012 – the Lansley reforms – there have been significant changes to the NHS. These were, and are, aimed at improving patient care at a time of rising demand.
Again, in addition to the reforms themselves, this was at a time when there was, as with local government, an agenda of increased financial pressures arising from austerity. And again, the implication – that there was slack in system and more efficiencies were possible.
For the NHS, this came in the form of the ‘Nicholson challenge’, named after the former NHS chief, Sir David Nicholson. The parameters of the ‘Nicholson challenge’ collectively added up to a demand for the NHS to find £20 billion in efficiency savings by 2015 to close the gap between need and available funding.
The latest iteration of which is the Five Year Forward View, which assumes that the NHS will deliver a further £22 billion of efficiency savings out of a flat real budget. Initially the Government had an efficiency target of 4% but this was reduced to 2% in 2016-17 – which was deemed a more reasonable requirement.
Nevertheless, over the entire period, the financial position of NHS bodies has continued to decline.
The number of trusts in deficit has steadily risen. 66% of NHS trusts and NHS foundation trusts are now in deficit. Ironically, these trusts were selected a few years ago for foundation status because NHS England assessed them as independently financially viable.
Where deficits become the norm, trust managers no longer feel ‘singled out’ and they probably worry more about the hard-nosed judgements delivered on health care standards by Care Quality Commission.
The Care Quality Commission has led a drive to name hospitals that were not operating to the right standards. In these circumstances, unreconciled pressures face hospital chief executives, many of who are highly experienced, highly skilled managers. The implementation approach for both efficiencies and reforms did not take a full and realistic account of the context within which the healthcare system was operating. The implementation approach also failed to consider the result of other policies being put into effect simultaneously.
As early as 2014 there were a number of ‘leading indicator’ statistics – including cancer referral to treatment times and ambulance response times falling below national standards – showing the system is quite clearly struggling to cope. In short, service standards are under strain, as is the financial sustainability of our health care system.
Rather than heed the early warning signs, however, ministers appeared largely to plough forward with their efficiency regime. The government introduced a range of further initiatives that it wants the NHS system to take on-board, including the seven-day service and new strategies for cancer and mental health. All of these may be, no doubt, good ideas and desirable developments. But they represent signals to build demand in a system already under severe resource pressure.
There has been no real dialogue between central government and healthcare bodies regarding the mix between rationing, efficiencies and services provided. The health service has, in fairness, attempted to do this with Sustainability and Transformation Plans for 2017-18, and this is accompanied by a front end boost in spending. This might have the effect of stabilising NHS England but the Plans, or Proposals as they are now called, are built around a forcing strategy rather than consensus. If they do not meet NHS England’s requirements in terms of matching demand with resource the trusts will lose money.
The political assumption remains that there is excess capacity that can be taken out of the system – or that demand can be made to fit the resources available. Perhaps such a position was true at a certain point, but who believes that it remains true? When was the clear point at which the number of trust in deficit became untenable and the system moved into a state of distress?
Of course, the centre of government cannot avoid making informed assumptions about efficiencies that may be available. However, they can do much more to understand how these assumptions are likely to affect government’s objectives, and to promptly manage major risks. That is why many of the recent audit reports highlighted the need to identify critical assumptions, work through their implications and monitor them closely. That is also why, since 2014, there have been a series of reviews of the financial sustainability of local services, including reports on local authorities, police forces, fire and rescue services and the health service. The aim has been both to help central government understand how changes in responsibilities and funding are affecting local services and to help identify and share good practice.
As an aside, it seems likely that the education system may be the next to experience these pressures. Schools have to make £3 billion in efficiency savings by 2020 against a background of growing pupil numbers and a real-terms reduction in funding per pupil. I hope that this will be much more closely monitored and managed.
Almost every conversation these days is dominated by brexit, but the implications will be felt long and wide. First, local bodies could be put under further resource pressure by the loss of EU funding streams to local areas with no specific plan so far to replace them.
Second, Brexit is highly likely to divert senior talent time and attention in quite a number of departments, never mind the diversion of talent into the main Brexit department and multiple trade deal negotiations of the future. In all likelihood, this means less senior talent time for resolving funding and reform challenges for local bodies.
Finally – and this hardly needs saying – local services are, to a significant degree, depending on workers from EU countries. Without EU doctors and care workers there could be further strain on the system unless alternative arrangements are in place.
Those in the centre can be a lot more agile about getting out of their silos and understanding the complex interlocking reform environment, recognising negative trends, and shifting their position quickly to limit damage.
In the examples described the reaction from central government has been slow, perhaps because of silo problems between spending departments and the Treasury, and there has been little real change of direction. Did the centre know, do they know now, when the boundary between mainly efficiencies, more for less, was crossed and we started into the territory of less for less?
Central savings may have been secured, but significant damage has been done.