Creating opportunity out of the funding crisis

When the Conservative-Liberal coalition which succeeded the Labour Government introduced its emergency budget I recall one person who stood out against the widespread chorus of approval. The budget, he said, was “replete with folly and injustice”. And he went on to say, “Every person in this country of super-asinine propensities, everyone who hates social progress and loves deflation, feels that his hour has come and triumphantly announces how, by refraining from every form of economic activity, we can all become prosperous again.” But this wasn’t last week. It was John Maynard Keynes writing in September 1931.

One of the advantages for a politician of being an economic historian, as I am, is that you are more than usually aware of how governments over the years have dealt with previous economic crises, and also of Karl Marx’s dictum that, “History repeats itself, first as tragedy, second as farce.”

Since the 2007 Credit Crunch I have repeatedly warned as Finance Minister that we were facing a public finance Tsunami, that the old ways of doing business were not sustainable, and that the public sector in Wales had to wake up and start planning for that. That is why in conjunction with the Assembly Government’s Budget last December I published a policy statement on the future shape of public services in Wales, Better Outcomes for Tougher Times: The Next Phase in Public Service Improvement which has shaped the Labour-Plaid coalition government’s response to the delivery of public services in Wales.

Our planning assumption, based on the previous Labour Government’s 2009 budget, was of revenue reductions of 2-3 per cent, and on capital reductions of 10 per cent a year. The then Chancellor’s plan was to cut the budget deficit by reducing public expenditure by £75 billion over the next five years. However, following last week’s Emergency Budget from the Tory-Lib Dem coalition which will entail even more drastic cuts, we now see what this Tsunami will mean.

The Welsh Government is unlikely to know what its funding for 2011-12 and beyond will be until this autumn when the UK Government’s next three-year Spending Review is announced. The Government also has to decide whether to implement its share of the previously announced UK cuts of some £187 million, or defer all or part of it until next year.

One silver lining for the Government in Cardiff Bay is that the Tory-Lib Dem coalition has ring-fenced health spending. As a result the Barnett share of that element of its Block Grant will be greater than if that department also had a 25 per cent cut in spending. So, how should the Welsh Government and public service providers in Wales respond to the most severely constrained budget in recent times?

Firstly, we need to concentrate our resources and action on fewer but better outcomes for citizens and communities, especially the most vulnerable and disadvantaged. We need to move towards an outcome-based approach and away from a system so heavily reliant on targets. The focus must be on what is ‘must do’ rather than ‘nice to do’.

Politically, this ‘Voice not Choice’ agenda also marks Wales as having a distinct policy agenda from that of the UK government. There needs to be an agreement about a limited number of service priorities – around policy outcomes, not single programme spending areas. For example, one service outcome could be based on maintaining independent living for older people. In this way all relevant budget lines and programmes could be assessed and evaluated against their contribution to this policy outcome.

Another priority could be on the needs of young people at risk from the economic downturn. We know that one of the most pernicious effects of the 1980s recession in Wales was a ‘wasted generation’ of young people who saw neither meaningful employment nor training, a legacy the Welsh Government is still dealing with nearly 30 years later.

Of course, this strategy also presupposes that there will be no ring-fencing of budgets as the UK Government is doing with health. When the Welsh Government previously had to find £215 million of efficiency savings, the average 1.6 per cent saving this represented was applied to all departments, and no exceptions were made or allowed.

These strategic priorities should be agreed collectively, through what I termed a ‘Team Wales’ approach, which also follows the Government’s ‘Collaboration not Competition’ agenda. I recommended at the time of last year’s Assembly Budget that a series of Public Service Summits be held, on the lines of the successful Economic Summits that Rhodri Morgan established in response to the recession. This would bring together all the players in providing and receiving public services in Wales. In addition, I recommended an Efficiency and Innovation Partnership be established, again bringing all the main players together to thrash out an agreed programme of service priorities. I am pleased that both these ideas have been taken forward by Carwyn Jones’ government.

The planning must also be long-term and cover a 4-5 year plan, covering both the next Spending Review period and the next Assembly term. While it cannot bind any successive government in Cardiff Bay, this has several advantages. Not only does it give some degree of financial certainty for public service providers, it also allows local government, the health service and the voluntary sector to build and develop service delivery around collaborative, long-term strategic priorities. Hopefully, it will also set a framework for political parties to develop their policies and manifestos. One key plank of this approach must also be to agree these priorities with the unions based on a model of social partnership. I adopted this approach when undertaking the planning and delivery of the merger of the WDA, in which the unions were heavily involved.

Another area where the Labour-Plaid coalition can mark out its distinctive agenda from the Tory-Lib Dem coalition is framing its policies to protect the poorest and most vulnerable. It is now clear that the UK Coalition budget is the most regressive since the Thatcherite period of Conservative governments of the 1980s. The huge impact of George Osborne‘s emergency budget on the poor has been revealed in a study by economists Howard Reed and Tim Horton that finds the country’s the poorest 10 per cent of households, earning under £14,200, who face cuts equivalent to 21.7 per cent, more than one fifth of their household income. By contrast the richest, those earning over £49,700, will suffer a cut of just 3.6 per cent. That means the poor will be hit six times harder than the very richest.

One long-standing priority for me as a Minister was to focus on outcomes and delivery, not bureaucratic process. The priority must be on quality service delivery and implementation of existing policy. Government of all persuasions have a bias towards legislation, much of it with minimal impact or effectiveness. They also tend to develop a plethora of new policy initiatives and strategies rather than focusing on implementation and delivery. While legislation has its place, it must be seen as one of a range of tools in delivering a policy outcome, and should not be an end in itself. I would therefore limit any new policy initiative, strategy or bid for new legislation unless and until it supports the Welsh Government in delivering its key strategic policy priorities.

However, while there are going to be cuts in spending, I have long argued that they are not the only or indeed the most effective method to save money. We must pay more attention to how effectively we spend public money, rather than how much money is spent. Are we getting value for money and are there more cost effective ways of delivering local services?

Consistently high quality standards of service delivered at optimal value for money must be the aim. The Welsh Public Service should embrace the ‘Adopt of Justify’ mantra. Service providers should adopt best practice wherever it exists or justify why they haven’t. There must be greater transparency on the effectiveness and value for money of the services that are currently delivered in Wales. We need to transform the efficiency and productivity of our services as a result.

While I saw high quality services right across Wales, performance was often patchy. For example, there is massive variation in the quality of services provided by the 22 local authorities in Wales, and also huge variation in the cost of delivering those services. While one expects some variation in different parts of Wales, the degree is often staggering. Benchmarking best practice against which service providers can be assessed should be the norm. On the basis that ‘sunshine is the best disinfectant’, providing better, more accessible information to the public about performance will also assist accountability and transparency.

With the potential for a 50 per cent cut in capital funding over the next five years this is a crucial area where innovative thinking is required. As Finance Minister I established the Strategic Capital Funding Fund (SCIF) that allowed the Welsh Government to make investments in key priorities such as the  One Wales commitments. I think there is a strong argument for extending this process across the bulk of the Government’s capital programme to allow it to marshal its resources in line with its key priorities, rather than delegating this to each department. We also need to develop new approaches to raising capital such as the Welsh Housing Investment Trust, which is exploring new ways of levering additional funds to allow the Government to deliver more affordable housing.

These are huge challenges. As George Santayana has said, “Those who cannot remember the past are condemned to repeat it”.  We thought the lessons of the 1930s, that ‘long, dishonest decade’, had been learned in the Beveridge Report and the achievements of the great Labour government of 1945. It took thirty years for those lessons to be forgotten and to usher in a second dismal decade, the ‘on-yer-bike’ years of the Thatcherite 1980s.

History will look a lot more kindly on the economic record of the 1997 Labour Government than today’s self-serving right-wing press. Yet, here we are, thirty years on from the disastrous Howe budget of 1981, with a Government hell-bent on making the same mistakes again. In Wales, we remember the past all too well. At least this time we have an Assembly where, by working and acting collectively, we can do all we can to avoid being the fall-guys for others’ failures for a third time.