Yes We Can

New Zealand has given us so much more than deeply disturbing TV ads

Maurice McTigue is a New Zealander, and was a member of that country's government as they tackled their own problems of bloated government. He has recently been talking about the experience, and his speech is well worth reading in full (HTP Peter Q). It is hugely encouraging for those of us who want the same here.

First, he explains how they managed to cut public sector employment with none of the dire consequences predicted by the Big Government doomsters:

"When we started this process with the Department of Transportation, it had 5,600 employees. When we finished, it had 53. When we started with the Forest Service, it had 17,000 employees. When we finished, it had 17. When we applied it to the Ministry of Works, it had 28,000 employees. I used to be Minister of Works, and ended up being the only employee. In the latter case, most of what the department did was construction and engineering, and there are plenty of people who can do that without government involvement.

And if you say to me, �But you killed all those jobs!��well, that�s just not true. The government stopped employing people in those jobs, but the need for the jobs didn�t disappear. I visited some of the forestry workers some months after they�d lost their government jobs, and they were quite happy. They told me that they were now earning about three times what they used to earn�on top of which, they were surprised to learn that they could do about 60 percent more than they used to! The same lesson applies to the other jobs I mentioned."

McTigue goes on to talk about how they reformed the schools system. And given the epic and vital struggle Gove is currently having to push through his Free Schools reforms, it's worth quoting in full:

"We eliminated all of the Boards of Education in the country. Every single school came under the control of a board of trustees elected by the parents of the children at that school, and by nobody else. We gave schools a block of money based on the number of students that went to them, with no strings attached. At the same time, we told the parents that they had an absolute right to choose where their children would go to school. It is absolutely obnoxious to me that anybody would tell parents that they must send their children to a bad school. We converted 4,500 schools to this new system all on the same day.

But we went even further: We made it possible for privately owned schools to be funded in exactly the same way as publicly owned schools, giving parents the ability to spend their education dollars wherever they chose. Again, everybody predicted that there would be a major exodus of students from the public to the private schools, because the private schools showed an academic advantage of 14 to 15 percent. It didn�t happen, however, because the differential between schools disappeared in about 18-24 months. Why? Because all of a sudden teachers realized that if they lost their students, they would lose their funding; and if they lost their funding, they would lose their jobs. Eighty-five percent of our students went to public schools at the beginning of this process. That fell to only about 84 percent over the first year or so of our reforms. But three years later, 87 percent of the students were going to public schools. More importantly, we moved from being about 14 or 15 percent below our international peers to being about 14 or 15 percent above our international peers in terms of educational attainment."

Now that is radical. Not only did they go for a Big Bang reform, making all schools independent pretty well overnight, they also allowed parents to take their school vouchers and buy schooling in the private sector. Which is way beyond what Gove is contemplating.

And the result?

New Zealand schools are now firmly established as top ten performers in the international attainment league tables, comfortably beating our schools right across the board.

As the BBC and rest of the left continue their Luddite war against public sector reform, we should take heart from New Zealand. By focusing on outputs rather than inputs, and by being bold, they achieved a huge improvement in efficiency without laying waste to anything.

Yes, it can be done.

The Ken And George Show

How it would work

This morning's City AM/YouGov poll of City types does not make for comfortable reading. Only 23% of these financiers think George would make the best Chancellor, just 3% ahead of St Vince. True, Darling trails way back on 7%. But streets ahead of all of them - on 36% - is Cuddly Ken.

Of course, anyone who has talked to these City types recently will already know how they feel. As City AM editor Alister Heath notes:

"[Osborne's] policies are often more anti-City even than Labour�s, while Clarke often sounds more pro free-enterprise and more forthright about explaining the size and scale of the crisis. Clarke is also vastly more experienced and has held real jobs in the private sector."

Which brings us back to an idea we first floated back in August - Ken should be made Minister for Public Sector Reform, charged not only with steering the cuts programme, but also leading the reinvention of the public sector.

The appointment of such a minister was one key element of the successful and much-lauded Canadian programme of fiscal retrenchment back in the 1990s. For it to work it has to be someone of wide experience and real clout. And to command respect, he must be seen to be independent of both the Treasury and the big spending departments.

Willie Whitelaw did a similar job for Thatcher back in the early 80s (the so-called Star Chamber), but in terms of experience and expertise, Ken would be even better. Remember he's run both the Treasury and two major spending departments. He would fit the role like a hand in a glove.

What's more, he's always been highly regarded in the City. Both the evil bankers and those credit ratings agencies would breathe a huge sigh of relief. It would buy us more time to arrange an orderly retreat on public spending, rather than a panicky slash and burn forced on us by a market crisis.

What's that? Ken is an unreconstructed left-winger?

Well, it is true that he appears warmer towards public spending than Tyler. But when you look at his record as Chancellor you find he did actually preside over a real terms cut in Departmental Expenditure Limits (DEL). Between 1993-94 and 1997-98, DEL spending fell by 6%. And as a percentage of GDP it fell by over 4 percentage points (from 23.8% to 19.6%).

That was no small achievement, and it shows that Ken can deliver cuts.

What's more, he has hands on experience of public sector reform. Thatcher famously put him into the Department of Health to drive through the biggest NHS reform since its foundation - the introduction of the internal market. Despite massive opposition he succeeded, and although the idiot doctrinaire Dobson later reverted to Stalinism as soon as Labour got elected, since then, Labour have been forced to readopt many of the ideas Ken pioneered.

So with Ken as Minister for Public Sector reform, what would George do?

Well, he'd still become Chancellor, and with our tax and benefit system an incentive sapping mess, our financial system still stuttering, and our creditors banging on the door, I fancy he wouldn't be short of work.

And as we all recall from the much-missed Ken and Eddie Show, Ken works well as part of a duo.

But What Reforms?

Wrong type of deckchair

When we started BOM back in 2005, identifying government waste was still a minority sport. True, we'd had Gershon Mk I and the Tory James Review, but on the other side there were plenty of Big Government types arguing that overall, the public sector did a pretty good job at a very reasonable price.

We are now in very different times. Our fiscal crisis is concentrating minds all over. The world and his wife now agree that the public sector is bloated and inefficient, with huge scope for efficiency savings. Or to put it another way, we could cut public spending with no appreciable decline in the delivery of public services.

How big are the potential savings? Regular BOM readers will be familiar with some of the key evidence.

First, we have the international studies comparing public sector efficiency in the UK with that overseas. The best known study is that published by the European Central Bank (eg see this blog), and that suggests we could save 16% of total public spending, or around �110bn next year.

Second, we have the analysis of public sector productivity published by the Office for National Statistics (eg see this blog). The ONS says that since 1997, public sector productivity has been falling by between 0.3 and 0.9% pa (depending on whether you adjust the output figures for so-called quality improvements). Yet over the same period, private sector productivity has been rising by 2.2% pa. Over a decade that kind of difference mounts up to a total public sector efficiency shortfall of well over 20%.

Third, we have the various studies that are now underway in Whitehall itself. They are largely secret, but Tyler understands that several big spending departments are currently going through their programmes and identifying a considerable margin of duplication and inefficiency. Just last week, we got the results of one such exercise - 15% waste on public service spending in London (see this blog).

And on the detail of possible savings, Hammersmith and Fulham councillor Harry Phibbs has just posted this excellent analysis showing precisely how Mayor Boris could save �93m and cut his precept on London taxpayers by 10%.

Drawing it all together, we can quite reasonably assume that 15-20% of public spending is wasted - and it may well be more.

The real question though, is how do we put it right?

As the ludicrous deckchair rearranging Gershon "efficiency" programme has shown only too vividly, we cannot do it through "better management". We've been trying that for decades, and it hasn't delivered. And neither is it any good having yet another slice and dice Whitehall reorganisation. We have to reform the public sector far more fundamentally than that.

But how? What reforms exactly?

We have always believed that the critical reforms are those that make our public services much more directly accountable to their customers: school vouchers and many more independent schools; the NHS broken up and replaced by competing social insurers; and local authorities made to raise the bulk of their own funding from local taxpayers (ie fiscal decentralisation).

Such reforms would give public service suppliers the kind of incentives that private service suppliers already have. And that's a key point - a point that's so obvious it often gets overlooked. Reforms that don't link the public sector's incentives to customer satisfaction are most unlikely to deliver improved efficiency. There has to be a direct pay-off in order both to stimulate new thinking, and to persuade managers to take the tough decisions on things like staff numbers and working arrangements.

Just one small problem - reforms like that mean breaking the power of Westminster and Whitehall. They mean reversing an entire century of centralisation.

Absent military defeat and occupation by a foreign power, HTF do we do that?

PS Tyler finally found out that BOM's comments provider, Haloscan, is heading for the scrapheap. So we've had to switch to a new provider called Echo. We'll see how it goes.

To Fundamentally Reform

Surely George ought to know better:

"We need to fundamentally reform the way public services are delivered."

To fundamentally reform? What kind of talk is that?

I mean, we understood George had received an expensive education at one of Britain's very toppest schools. Surely a school like that doesn't have the motto Fide et Literis for nothing, does it? What would his old English master have said?

I'm afraid the Major was so appalled he was quite unable to concentrate on the rest of George's speech, and was forced to repair to the 19th hole for immediate medication.

Fortunately, Tyler is made of sterner stuff. And for the sake of understanding what had been billed as a key speech on public sector reform, he was prepared to overlook the odd grammatical infelicity.

So reformwise, what did George actually have to say?

First, he said that the coming spending cuts make fundamental public sector reform all the more important:

"Without fundamentally improving the productivity of public services, the quality of those services will deteriorate as budgets are squeezed."

Spot on - as we've blogged many times.

Second, he said Gershon-style "efficiency savings" will not do the trick:

"... to pretend that efficiency savings alone will suffice when the country is borrowing one pound for every four it is spending, is to take the public for fools. It is deeply dishonest and it condemns those who claim it to the sidelines of the real debate. The truth is that we need to fundamentally reform the way public services are delivered."

Again, spot on - as we've also blogged many times.

Third, he confirmed that Dave's government will "legislate early" to introduce those school vouchers:

"We will, as they have in Sweden, give parents the ability to take the money the education bureaucracy currently spends on their behalf and allow them to take that money to the new school they want.

...we will allow new providers to set up state schools where there is demonstrable demand from parents."

Hurrah for that.

Fourth, on the NHS, the Tories will be... umm...

"... making the case for progressive reform in health, achieving improvements through patient choice and professional autonomy, bringing productivity gains through diversity of provision and an effective roll out of payment by results."

Hmm.

And how exactly does that differ from all the good intentions we've heard over the last decade? In theory we already have patient choice and professional autonomy and diversity and payment by results. In theory.

The problem is that while Whitehall holds all the purse-strings, the theory don't add up to a row of beans.

No, if Dave and George are going to deliver "fundamental" reform in healthcare, they will need to be much more radical.

As we've blogged many times, they need to break up the lumbering dysfunctional NHS and replace it with a range of continental-style social insurers. That's the only practical way to inject meaningful competition and customer choice, which is the only practical way to drive higher productivity.

If we're to stand any chance of preserving service standards in the face of the forthcoming spending cuts, Dave and George will have to raise their sights.

They need to boldly go where no man has gone before.

They need to explore new worlds beyond the NHS platitude zone.

PS I'm sure I've quoted it before, but I just love Raymond Chandler's famous riposte to the proof reader who attempted to unsplit one of his badly busted infinitives: "By the way, would you convey my compliments to the purist who reads your proofs and tell him or her that I write in a sort of broken-down patois which is something like the way a Swiss-waiter talks, and that when I split an infinitive, God damn it, I split it so it will remain split."

Public Service Productivity - Still Appalling

Fancy stats, but the picture remains the same

For many years now, the Office for National Statistics has been beavering away trying to develop measures of output and productivity in our public services. It hasn't been at all straightforward, as we can see by glancing at the dense array of statistical formulae they have been forced to deploy.

So why is it important?

Because we've shovelled vast amounts of dosh into these services over the last decade, they now consume well over 20% of our national income, and we need to understand just what we're getting in return. We need to know if we're getting value for money.

And why's that so hard to do?

Because the output of public services is not subject to valuation in the marketplace. We know precisely what cars and window cleaning services are worth, because the marketplace tells us. But with public services provided free at the point of use, we have literally no idea what they're worth.

All we know is that they cost hundreds of billions every year, and since 1997 the bill has more than doubled.

So the ONS has being trying to work out how much of our extra spending has actually fed through into extra output. And this week, they published their latest attempt, which for the first time gave a picture for the whole of our public services (although still excluding welfare payments, and other cash transfers). Here's their widely quoted big picture:

As we can see, they reckon that from 1997 to 2007, the combined output of our public services went up by 33.6%. Unfortunately, the inputs - after stripping out inflation - increased by 38%. So according to the ONS, productivity fell by just over 3%.

Now let's just be quite sure we all understand what that means. It means that compared to 1997, our public services are now delivering worse value for money - we get less for every pound we put in.

Ah well, you say, a fall of 3%... that's not too bad... at least the bulk of the extra money has fed though into more output... at least we are getting 33.6% more healthcare, education, law enforcement etc etc. Could be a lot worse, so quit whining.

Hmm.

Just compare this public service productivity performance with that delivered by the market sector of the economy. According to the ONS, over that same period, 1997-2007, productivity in the market sector increased by 2.2% pa. Which meant that by the end of the period we were getting nearly a quarter more output from the same input.

So why can't our public services manage that? Surely they should be able to achieve at least some productivity gains. Surely they shouldn't be giving us worse value for money as each year passes. How hard can it be?

And in truth, the picture is almost certainly even worse than the ONS figures suggest.

That's because the ONS has incorporated into its output measures a series of highly contentious "quality" adjustments which they claim have the effect of increasing measured output year-on-year.

For example, its measure of education output basically comprises the number of pupils passing through our state schools and colleges. But the ONS now adjusts that straightforward measure for supposed improvements in quality, and they do that by factoring in the year-on-year rise GCSE grades.

What?

GCSE grades as in prizes-for-all-dumbed-down-through-the-floor-abandoned-by-the-leading-private-schools GCSE grades? Why would anyone believe education quality had improved just because our kids have even more of them?

Similarly, the ouput of healthcare services has been adjusted for supposed improved quality using - among other indicators - the reduction in recorded waiting times. Even though we know that waiting times are routinely massaged and gamed by NHS managers (see previous posts).

So the ONS results almost certainly overstate the output growth of our public services and understate the extent to which productivity has fallen.

Indeed, the ONS themselves publish this alternative version of productivity, without the quality adjustment (blue line):

As we can see, on this measure, productivity is down by 9% over the period, a fall of around 1%pa.

Or to put it the other way round, even after allowing for inflation, every pound we put into public services today buys 9% less than it did a decade ago.

Ten years of massive spending has left us with the fiscal headache to end all fiscal headaches. And despite interminable wittering about public service reform, value for money has gone out the window. How long are we supposed to put up with this?

Never mind about "ring-fencing" this or that hot potato public service. Now the money has run out, drastic reform is the only solution:

• choice and competition
• school vouchers
• social health insurance
• elected sheriffs
• localised welfare
• fiscal decentralisation

We all know the score by now.

But sadly, we're still searching for those balls of steel.

So We're All Agreed Then

Save the country - get hated

Tyler's Sunday papers are agreed on two things.

First, Cam will have to make some swingeing cuts to public spending - even bigger than Thatcher/Howe.

And second, he hasn't given us any serious account of how he's going to do it.

Indeed, there is still doubt that he understands the scale of the problem, something that could have dire consequences for confidence in the international bond markets. As Liam Halligan says today:

"Because the current Tory leadership spouted such vapid nonsense on the public finances for so long... Cameron now needs to demonstrate he "gets it". Repeat after me, David: "the Tories WILL implement a painful round of cuts GOING WAY BEYOND Sir Geoffrey Howe's Budget in 1981".

But that's easier said than squared up to: for those that don't remember, the 81 Budget was the one that galvanised the entire UK economic establishment (including one M King) to write to the Times formally declaring Thatcher/Howe to be stark raving bonkers and embarked on a plan to incinerate Britain (see this post).

The S Telegraph editorial urges Dave to risk Maggie's unpopularity, and says:

"Public spending will have to be drastically cut. Identifying what to cut, and how to replace rigid state provision with alternatives that make more efficient use of taxpayers� money, represents the biggest political challenge for David Cameron�s Conservative Party. The Tory leader needs to think about how to achieve those goals at least as profoundly as Mrs Thatcher�s party did...

He will also need to inform the electorate, before the election and in considerable detail, exactly how he intends to do so...

...if he is to have any chance of success, he will have to pursue policies which generate as much anger, bitterness and unpopularity as those of the �Iron Lady�.

Similarly invoking "the Spirit of Maggie", the S Times urges Cam to cut public spending by 20% - around �130bn pa. That's way beyond even the 10% we've talked about, but the ST cites the 20% cuts imposed by the cash-strapped Canadian government in somewhat comparable circs in the 1990s:

"It worked. The economy, freed from the burden of too much state spending, grew faster than most western economies. Hard as it may seem to make such cuts here, savings will have to be made. Britain is at a crossroads, as it was in 1979. The risk is that we continue to head in the wrong direction."

Now, it is painfully obvious that cuts on this scale cannot be delivered simply by axing a few computer programs and trimming the pay of fat cat quangocrats. Something far more drastic will be required.

As we've blogged many times, we've finally reached the point where fundamental public sector reform is no longer a nice-to-have: it is absolutely vital if our schools and hospitals are to continue functioning.

Because since 1997, this government only managed to keep our public services going with humongous dollops of taxpayer cash. Few serious commentators would argue that public service standards have significantly improved over the last decade, yet public expenditure increased by getting on for 50% in real terms (eg see this post).

And now, the money has run out.

Well, no. It's worse than that.

The money hasn't just run out - we are actually racking up huge new debts. And they will have to be serviced and repaid, constituting a substantial additional drain on our public finances (see this post for how debt interest payments could treble, to �90bn pa, by 2013-14).

Spending has to be slashed - that's non-negotiable. The real question is HTF can we do more with less?

There is only one hope.

All together now:

• break up the public services, decentralise, introduce choice and competition
• school vouchers, and schools competing independent of local and central government - the Swedish model
• social health insurance, with competing providers - the Dutch model
• fiscal decentralisation - virtually anyone's model from the developed economies
• directly elected officials - the Sheriff Joe model

As Janet Daley writes today, the time for posturing and positioning is over.

We are facing another of those grievous ordeals.

It's time for Mr C to get real.