UK: The State Of The State 2014-15 - Government’s Inflection Point

Last Updated: 27 January 2015
Article by Deloitte Government & Public Sector Group

Foreword

Welcome to The State of the State 2014-15. Now in its third year, this annual report aims to provide an independent and accessible view of the UK public sector.

Deloitte LLP and Reform have once again collaborated to bring together material from a wide range of public sources – including the government's accounts, public spending data, the Budget, the Autumn Statement and official economic forecasts – into a single snapshot. We augment that data with insight from roundtable discussions and interviews with executives from across the public services. Our aim is to create a report that helps facilitate a more informed and constructive debate on the operation of the UK state.

This year's State of the State finds the UK public sector approaching a historic inflection point. We are half way through a far-reaching fiscal consolidation programme that is reducing the size of the state. The public sector reform required to achieve the second half of the consolidation looks set to alter the way that many public bodies operate. And the Scottish Referendum has triggered a fundamental rethink of how power is devolved across the UK. In the next five years, the UK and its public sector will change profoundly.

The need to restore the public finances has been hard on government and the public services since 2010, requiring difficult decisions by public sector leaders and executives. But those decisions are about to get harder. Completing the deficit reduction plan will require the Government elected in May 2015 to decide where the next, deeper half of public sector cuts will fall in a 2015 Spending Round. Our research shows that the people running the UK's public services are justly proud of how they have adjusted to budget reductions so far. It also shows they are apprehensive about the next period of change and challenge.

The public spending outlook may appear bleak and government may need to balance citizen expectation with affordability. But continued reform – based on evidence about what works and driven by effective leaders – will help maximise the public sector's effectiveness and allow it to thrive as it continues to rise to its challenges.

At its best, the UK public sector leads the way in many areas of modernisation. HM Treasury's financial management review is revitalising the way public money is managed, the Government Digital Service is helping forge a more citizen-centred digital experience of the state and public bodies across the UK are driving organisational change under significant austerity pressure. Governments around the world are watching ours to learn lessons.

Executive summary

The State of the State 2014-15 finds the Government moving towards a historic inflection point. In the next five years, the UK's governance, our public sector organisations and citizen experiences of the public services are likely to change profoundly.

Following the global financial crisis, the UK budget deficit reached a record level in 2010. The Government's annual spending was £159 billion more than its income and the newly-elected Coalition Government set out a programme to reduce its annual deficit, mainly through cuts to public spending. As at 2014-15, the UK is just half way through it with the deficit expected to be £96 billion this financial year and eliminated by 2018-19.

A second half of spending cuts will therefore be required. The Government elected in May 2015 will need to set out where those cuts will fall in a 2015 Spending Round announcement, realistically within six months of taking office.

Interviews conducted with senior executives in the local public services suggest that they are justly proud of the way they have managed the first half of the spending cuts. Many added that their organisations and the services they provide have improved as a result of austerity pressures.

However, most of those interviewed had a less positive outlook for the future and the further cuts to come. Many spoke of risk, uncertainty and the prospect of organisational and service failure in the years ahead. They know that the second half of spending cuts will be much harder to deliver than the first and the changes required to cope with them will have profound implications for their organisations, the services they deliver and the expectations of the citizens who experience them. The publication of the 2015 Spending Round that identifies those cuts will therefore be a defining moment for the future of the public sector.

Our interviews also found that local public sector chief executives hope that political leaders offer a more supportive political narrative over public service cuts in the years ahead. Many believe that national and local politicians have a duty to engage citizens in constructive dialogue about the changing limits of the state.

Supporting the public services through such profound budget reductions will be one of the Government's primary challenges in the next five years, along with recasting the UK's governance in the wake of the Scottish referendum, driving continued economic growth and bolstering national security.

The State of the State finds that better productivity is central to the UK's advancement in both the private and public sectors and the Government needs to show leadership and direction for a renaissance in both. Private sector improvements, driven by investment in infrastructure, technology and people are needed to secure UK economic growth. Public sector productivity gains, delivered by a package of reforms that should include talent management, demand management and use of technology are fundamental to the future of government. Every one per cent of public sector staff time saved through a productivity measure is worth at least £1.6 billion to the public purse.

Beyond the deficit, the Government will need to turn its attention to reducing its debts. Public sector debt has trebled in the past decade – inevitably as the Government borrows to fund the shortfall in its spending – but when the deficit is eliminated, the £1.4 trillion of UK Government debt will need to be paid down. The UK's current debt levels, ninth highest in the EU as a percentage of GDP, mean that from a technical perspective the UK does not meet the original Euro entry criteria. This level of debt keeps the UK exposed to excessive financial insecurity and burdens the taxpayer. At £1 billion a week, the UK state already spends as much on debt interest as on education, more than it spends on public services in Northern Ireland and Wales combined or three times as much as Whitehall currently saves through efficiencies.

While the next Government may exercise its power to change the way the deficit is reduced, failing to eliminate it is not a viable option. If debt continued to rise, by 2023 debt interest would have risen to three times what the state spends on defence.

The State of the State 2014-15 recommends that the Government elected in 2015 should focus on its priorities by considering its programme through three lenses.

First, a debt reduction lens would help focus the Government on reducing public sector debt and ensure that spending decisions were assessed for their impact on the state's long term liabilities. That would help restrain public sector spending growth, taking us from a period of austerity into a new era of prudence from 2020.

Second, a productivity lens would help the Government focus on policies to turn around the UK's productivity record and sharpen its vision for further public sector reform by focusing on sustainable productivity gains.

Third, looking at the public sector workforce through a talent lens would help Government manage and deploy its people to best effect. At a time of major headcount reductions and significant change management challenges, it is more important than ever that the public sector has the right people with the right skills in the right jobs.

To read this Report in full, please click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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