Public Administration and the Fiscal Squeeze - Public Administration Committee Contents

Examination of Witnesses (Questions 1-55)

MR DAVID HALPERN, MR ANDREW HALDENBY, PROFESSOR COLIN TALBOT AND MR TONY TRAVERS

3 DECEMBER 2009

  Q1  Chairman: Let us welcome our witnesses. It is a great pleasure to have you come along. What the Committee wanted to do was to basically explore the challenges for the process of government over what is being said to be the fiscal challenges of the upcoming years. I do not particularly want to argue about the actual sort of numbers, as it were, on what has to be done, we know that it is of a high order and we know broadly over what time period things have to happen. It is what this means for the process of government; what it means for doing it; how does government actually set about the task of meeting this challenge. That is really the focus of this Committee, and that is why we wanted you to come and help us with that. Would any of you like to say anything, just very briefly, by way of introduction? We have read some of your collected works on this. Or would you like us to just fire off?

Mr Travers: First, thank you for inviting me, and us, I am sure. The only point that I would strongly reiterate from what I wrote in this short note is to make the fairly simple point that if the past is to be any guide, it would be unlikely that the processes of government and the way in which government is configured will be the first order priority if and when there needs to be a radical reduction in the size of public expenditure and/or an increase in taxation, that is, changing the way the state operates may well be an element in that, but it would be an element of cost-cutting rather than a carefully thought through way of delivering some significant change. That is all I would really stress.

  Q2  Chairman: I am sure we will go on to explore that.

  Professor Talbot: Thank you for inviting me, Chairman. The only thing I would say is that government over the last 12 years or so has put quite a lot of effort into trying to create more strategic decision-making capacity in the central government, with things like spending reviews and public service agreements and the strategy unit and so on. Ironically, at precisely the moment that that is probably going to be needed, in that whatever size of reduction in public expenditure is agreed upon by whatever the next government is, the best way to do it would be more strategically and more medium term. The irony is probably that those decision processes that have been attempted to be put in place are being eroded, and it is not at all clear what the commitment is, by either of the major parties at the moment, to try to make those sorts of strategic decision-making processes work. The consequence of that is almost certainly going to be that one will resort to what has always happened in these sorts of crises in the past, which is we just slice 10 or 5% or whatever off everything, with the dire consequences that leads to.

  Q3  Chairman: That is very much what we will come back to.

  Mr Halpern: Thank you for inviting me. As you know, the Institute for Government has taken a very similar focus to yours, not looking at the big numbers but to look at what are the characteristics of our systems of governance and how it will interact with the fiscal consolidation. We know the headline figures and so on, but in just a few seconds, the punchlines are: there is good reason to think that British government is rather good at doing headline fiscal consolidation, they will reach the numbers, and we can be quite confident about that. It is a bit more of a mixed story as to whether you politically survive it, which is one of the reasons why we looked, of course, at success stories where they both managed a consolidation overseas but also got re-elected, notably Canada and Sweden. But the big challenge, where we have most grounds for concern, is: what kind of consolidation do you run? The characteristics of a system which make us good at doing the headline figures are the same ones which make us tend to operate in a relatively silo-based way, which means that we will not make a smarter set of efficiency gains or whatever, that is not what we will do, we will generally lead to general degradation of service quality. So the key thing, I think, in this sort of eye of the storm, before things really hit, is to identify certain key structural reforms which would change the character with which we would conduct a consolidation. I think that is a very timely focus to have.

  Mr Haldenby: Just to add to that, I very strongly agree with that, and if those comments were perhaps focused on the centre of government and Whitehall, exactly the same arguments apply to the rest of the public sector. In fact, it is more important to address the management of the rest of the public sector, because that is where the costs are. Although the Civil Service has absorbed most political attention recently, and both the Government and the Opposition have been looking at changing the Civil Service, actually all the costs are in public services, particularly health and education, so it is structural reforms in those areas which have to be achieved if this deficit is going to be reduced. I am perhaps a little bit more optimistic than the others on how it can happen, because when we speak to public sector managers, the good ones are already doing it; whether it is chief fire officers who are reorganising fire stations, closing fire stations in order to make those services more efficient, changing staffing patterns and so on, whether it is PCT chief executives who are closing some inefficient hospitals in order to open new units, these sort of difficult, politically contentious things that have to be done to improve management in the public sector are happening, but they are happening without sufficient political leadership and without the kind of structural framework that is needed to encourage it. So I think good managers are there in the public sector to do this, but they do need better political leadership and wider structural reform.

  Q4  Chairman: Thank you. Could I just ask you to start with: where do we sort of situate where we are at from a historical perspective? Have we been in this kind of position before? How does the challenge for government now look, compared with how it looked, say, in the 1970s or in the interwar years? Can we learn something from how government responded to deficit reduction issues in those periods that might help us now? Without going into huge historical detail, is it possible to say something useful about that, Colin?

  Professor Talbot: The first useful thing to say is that it is far worse than anything that we have had to deal with before, in terms of the cumulative size of the deficit and, at the moment, the annual deficit, which is not to say that it will not get better in the future, but the size of the problem is huge. However, we are also in a position where we have had a fairly prolonged period of extra investment into frontline services particularly, and that raises issues about how far there is scope for things like efficiency savings in those areas. So the challenge is quite large, but we are starting from a fairly high base. I think the political administrative challenge is the one that I talked about at the beginning, which is how do we have some sort of system for taking strategic decisions about this, rather than the way in which we have tended to react in the past, and not always very successfully. I was doing my homework on the train, and rereading Leo Pliatzky's book about the Treasury under Mrs Thatcher, and it is quite salutary that the Thatcher administration came in in 1979 committed to freezing public expenditure, or in fact reducing it in real terms, and failed completely in the first five years. There may be a lesson there somewhere for people at the moment.

  Mr Halpern: I hesitate to ever differ from Colin, but it seems to me that you could argue that the 1978 numbers were quite similar, although you might remind yourself also you ended up with a million public service workers on strike. Otherwise you have to go back to the Geddes Axe of the 1920s, which is the last time there was a sustained real term cut, and over that kind of period, from roughly 1920-21 through to 1928, there was roughly a 25% cut in central government expenditure. Arguably that was worse, but of course that was also post-war, and you had a lot of military spending which you were ready to wind down anyway.

  Q5  Chairman: I was quite interested, reading the papers, to discover about the Blair Government's Fundamental Savings Review, was it called, in the last period?

  Mr Halpern: It was, yes.

  Q6  Chairman: Which you know about. It was going to be published, and then was not published, but it was sort of big thinking about savings, was it not? Everyone who was in the system keeps referring to it as a big moment; those of us who were not inside the system would like to know about it.

  Mr Halpern: Some of it is now in the public domain. Forgive me if I do not get into the very specifics, but essentially it was an exercise in the context of a spending review, where the Prime Minister felt it was right and proper, if he was going to ask for additional spending, he should seek to identify areas where he felt there was less of a priority. So it was an exercise essentially to identify those areas where he would be prepared to see reductions in expenditure, and he roughly identified about £15 billion of spend. Of course, you might know, that is not that large a number compared to what we are now looking at, but in the sense of whether it was a sensible thing you might do in a spending review process in general, yes, absolutely. We are going to see that writ much larger when we say: what is it that we really want to protect and, therefore, what is it, in a more strategic way, that we are prepared to then sacrifice?

  Q7  Chairman: What were the big ticket items?

  Mr Halpern: Obviously some of them relate to aspects of benefits and so on, but forgive me if I do not go into the full detail. Julian McCrae, who is sitting quietly over there, was one of the figures, working for us, who did lead it.

  Q8  Chairman: That is the frustration, as you know, of knowing people who know what the big ticket items were, but who will not quite tell you.

  Mr Halpern: Basically, you can imagine it is an exercise where you are trying to work out which are areas of spend where you think their efficacy is less than you would hope. I can give you a personal view rather than one referring back to the FSR, if I might. You could argue that certain areas of certainly expenditure—EMAs, there was some analysis done where there was an argument there were quite large dead weight costs, some aspects of benefits where you get oscillations—

  Mr Walker: We have jargon in there. Can you just speak slowly, in English, so us mere mortals can understand it?

  Q9  Chairman: Charles is not a mere mortal!

  Mr Halpern: Educational maintenance allowances were an area where the Treasury insisted on rather a good allowance of what worked and what did not. In that, you could work out there were quite dead weight costs, in the sense that there was money spent that you could say did not actually have a beneficial effect. Even though there were some benefits overall, when you worked out the total sum, which was quite substantial, half a billion-odd, you might say actually it was not the most effective form of spend. Another area which, of course, many MPs like is capital expenditure, for example on schools, where you might say in fact the empirical evidence for those educational improvements that follow from it were relatively limited. So there are issues like this, apart from my own examples, rather than from FSR, which there are plenty of.

  Q10  Chairman: Thank you very much. One last question, and then colleagues will come in. I think you, David, mentioned Sweden and Canada. These are being given as the alternative scenarios, are they not? As it were, Canada, big targeted strategic cuts, certain bits of government taking the big hits; Sweden, everybody takes a hit across the board. Probably this is too crude, but there are two different approaches to doing it, and reading the materials that you have all been writing, my sense is that some of you are rather more Swedish and some of you are rather more Canadian. Do you want to just say something about that? Tony, I think you are a bit of a Swedish man.

  Mr Travers: There is clearly at one end of the spectrum the possibility of carefully thought through, justified, targeted changes here and there, some services taking bigger reductions than others, changes to the way benefits are paid, and all of that carefully worked out line by line, department by department. Alternatively, there is the across the board method, and I can see that although the across the board method is intellectually less justifiable and less cogent in many ways, (a) it is probably easier for the politicians who undertake it, and (b) it has a kind of perverse sense of fairness about it, in the sense that everybody is being targeted with a 5% cut. Then it is fair, is it not, because everybody shares the pain and, frankly, from the Chief Secretary of the Treasury's point of view, fewer people would be coming to say, "Well, we really are an exception", because if it is an across the board cuts regime, then it would simply be easier to manage in that way too. So I think it was more the political reality, and that to some extent is born of observing the way allocation mechanisms work the other way round. Allocate money to local authorities and health authorities in a relatively flat rate way, the Government gets less of a reaction against it than if they skew the distribution so some get a lot and some get very little extra, because those who get less complain. If you give everybody the same, you get broadly no reaction. So there is a kind of fairness embedded in the idea of across the board.

  Q11  Chairman: So you are a sensible Swede. Colin, what are you?

  Professor Talbot: Somewhere in between. There are those two alternatives. I think there is a third. The first one, I think Tony is absolutely right that the one governments generally go for, and our Government has in the past, is the across the board top slicing, share the pain equally. There are all sorts of reasons why that is easy, quick, causes less problems in terms of complaints, and so on and so forth. Alongside that as well there will be intense pressure on operational efficiency issues. That is at one end. I do not see these things necessarily as mutually exclusive. At the other end of the spectrum is the strategic allocative decisions about saying, "We are going to stop doing some things in a big way", and make some real savings doing that. I would say there is a third element to this, though, which I think needs to be looked at, or it ought to be looked at but I doubt will be, which is that where the big savings could really be made, in efficiency terms rather than allocative efficiency terms, I suspect, although probably a mixture of both, is in the sort of initiative which David's boss, Sir Michael Bichard, has pioneered with this Total Place stuff, and looking at how public resources are actually used to achieve public purposes in particular areas. The problem with that is that it immediately runs into the extremely haphazard way in which public services are structured in the UK, and the historical accidents of the way some things are organised nationally and other things are organised locally, and some are part of local government when they are local and some are not part of local government when they are local, and that creates enormous problems. While Total Place I think may make some progress with the pilots it is doing, which are essentially driven by DCLG and the Treasury, if that was to make any real progress at local level, we would have to have new local government structures to actually make that work, and a new way of controlling all public services that are operating in a particular geographical area.

  Q12  Chairman: David, you are definitely a Canadian, are you not?

  Mr Halpern: I think we can be more Canadian than the Swedes, in the sense of our system of governance. It was interesting, as you know, we brought over the Canadians, both the politicians and also the senior civil servant who led the process in the early 1990s, and it was a very impressive story. Just for those who do not know the detail, obviously it did lead to quite differentiated cuts, surgical; in some areas, transport, cuts were up to 68% in transport, if I recall, other areas actually saw some increase in spend, like pensions. In that sense, it was quite differentiated, although it was very collegiate as a process. That is definitely one of the lessons you get. Nothing was signed off until everything was signed off, so the whole Cabinet had to agree to the total package, and that seems to be part of the story. On the other hand, when we brought Göran Persson over a little while later, he was talking about a very flat approach, and we thought actually that does sound very sensible, because politically it is so powerful. But even the Canadians, if you listened to Marcel Masse speak, he was very much emphasising that partly why it worked, and indeed they were re-elected, was because of the spreading of the pain and all interest groups were kind of screaming. In that sense, the difference is not quite as dramatic as it seems, but a key thing, which Colin is alluding to, is: at what level do you go for the flat cut versus the differentiation? Our current system essentially of administration means you more or less at Treasury level settle with a department as a whole, and your ability to get into programme by programme, as you guys will know well, line by line analysis, is quite limited in the UK context. That sort of skews a bit where we are at and makes it more difficult. The Canadians partly settled that by having peer review of departmental spend, again driven in a collegiate way, but the point about Total Place, I think this illustrates it rather well, is what you are trying to do, you may go for an overall spread the pain, but at a level which cuts across the silos, so you can do something more intelligent than simply: let us cut a little bit off health and a little bit off education, and so on. A related point is that a simple devolutionary approach to it is not necessarily going to get you where you want to be. A very concrete example of something like the non-emergency telephone number, which everybody thinks is a great idea, we found it incredibly difficult to deliver such a thing even in the good times in the UK, let alone in the bad times. That is the trick; you can go for sharing the pain, but you do not want it just then to run down into these unreformed silos. If you do that, we know pretty predictably what we will get, and it will not be pretty.

  Q13  Chairman: Andrew, I suspect you are an über Canadian.

  Mr Haldenby: Yes, absolutely, because these services are different. In some cases, as we have said earlier, it is a question of whether government should be in this business at all. Let us take something like higher education, for example; we now have partial tuition fees, there is a higher education review going on, and I think we would all expect that that will see the tuition fee cap to rise. That would be an area of policy where we could move to government withdrawing from funding, and that becoming a private sector financed activity. That is one way of looking at it. But then, I think, looking at the other services, it is a question of productivity: where has the lowest productivity been, where has there been greatest increase in budget, greatest increase in headcount for least increase in outcomes? Well, probably top of the list would be the health service, so one would expect that the health service would undergo a greater period of change, and reduction in headcount and budget, than the other services. I think those sort of fundamental questions of the role of government and then productivity will lead to a differentiating approach across each of the departments.

  Chairman: That should get the Committee going.

  Q14  Mr Prentice: I read in my papers somewhere that in Canada, the ratio of cuts to tax increases was seven to one, and in Sweden the ratio was two to one. In Britain, given where we are now, do you think there is scope for major tax increases rather than these savage cuts in the public sector that we have been reading about?

  Mr Halpern: You will know the current Treasury figures suggest a ratio of 4:1 in the next Parliamentary period, but to answer your question, if you were going to go back to 2007, our analysis suggests that roughly you would do two thirds of it on the basis of reducing expenditure and a third of it you do by tax increases, noting you had a fall in revenue. That in broad terms is the answer. There is an interesting political twist to the story; when you look at the history of successful consolidations, governments on the left tend to do it more, perhaps surprisingly, you might think, by cutting expenditure, whereas on the right they have to do it through tax increases slightly more, and that may partly be about market credibility.

  Q15  Mr Prentice: Talking about what is politically deliverable, the front page of the Daily Telegraph quotes Lord Myners today and tells us that 5,000 bankers earn £1 million, 5,000 earn £1 million. Large parts of the banks are now in the public sector, of course, we own 43% of Lloyds. Should these bankers in the public sector get their £1 million, or should those salaries be capped?

  Mr Haldenby: No, I do not think they should be capped, because I think there should be a link between remuneration and performance.

  Q16  Mr Prentice: You see that link, do you, between remuneration and performance?

  Mr Haldenby: What is happening is the banks are having an incredibly good year, partly to do with regulatory change. That is the case. I do not think that the banking sector has settled down, I do not think it has reached a sustainable position, and that is the task that the Government has to achieve. Addressing bonuses and remuneration is a sort of symptom rather than a cause.

  Q17  Mr Prentice: Do you see any role for tax increases, or do you think, in this economic maelstrom that we are in, the burden should fall on the shoulders of the public sector and the people who work in the public sector, apart from the bankers?

  Mr Haldenby: Firstly, tax increases would fall on people who work in public services as much as anybody else. I would very, very, very strongly argue for the focus to be on spending. Firstly because what has happened to the UK public sector in the last decade is a dramatic increase in the size of budget and in the size of spending, so I think clearly that has to then be where the question is asked; but the second thing is the message to public sector managers. Is the idea that we are going to raise taxes to support unchanged public services, or are we going to reform those public services? Just to tell one story about that, I happened to speak at the NHS Confederation annual conference in June, and it was the day, if you remember, that Andrew Lansley went on the Today programme to say that his budget was going to be protected, the NHS budget would always increase under a Conservative government, so all of his colleagues' budgets would have to be cut by large numbers. One of the chief executives of a PCT in one of the big cities said that she was furious about that, because she had been saying to her managers that the world has changed, and that budgets were going to need to be cut and they were going to need to do the difficult things, and they were going to need to change services and face up to the challenge of doing that, all the things they might have been postponing, now was the time to do it, and she felt Andrew Lansley had taken her legs out from under her by giving the impression that the money would always be there. I do think that there are excellent, excellent public sector managers who are waiting for a lead, and that lead includes saying there is no compromise on spending.

  Q18  Mr Prentice: I will bring the others in in a moment, but you are recommending that we reduce senior doctors' pay by 10%, just like that, and a reduction of other senior managers' pay? Do you think that is deliverable, in the real world rather than on planet Mars? Do you think it is possible?

  Mr Haldenby: The real world is one where authorities from the IMF to Mervyn King, the Bank of England, are saying that unless the UK has a plan to get out of this situation, then it will lose—

  Q19  Mr Prentice: That is fair enough, you are not talking about a freeze, you are talking about a cut of 10%. That is fine, we understand that.

  Mr Travers: The point I was going to raise is of course there is a case that can be made for higher taxes, the problem that we face here is that public expenditure as a proportion of GDP this year is going to be 49 or 50%, and taxes as a proportion of GDP will be about 33%. As the economy starts to grow again, the 49% will drop and the 33% will go back towards its 35-38%. As far as governments in recent times, if you look at the last Treasury Red Book, 38% seems to be a kind of ceiling. It would be possible to get that figure above 38%, that is tax as a proportion of GDP, but it would require leading politicians in the major parties to argue for higher taxes as a morally good thing, and it would have not to pretend that it can only be done, frankly, by a few bankers being taxed. It would require general taxes visibly to go up for people on all levels of income. Then it would be possible. But to pretend it can be done—I know you are not—by taxing bankers, it is just not going to be enough.

  Q20  Mr Prentice: I know it is more than bankers.

  Mr Travers: There is a perfectly good moral case to be made for raising taxes, but oddly, national politicians have not been making it very much, and many of our taxes are very difficult to perceive, they are hidden. That is because taxation is unpopular. Politicians are much happier to talk about higher spending than they are to talk about higher taxes, as you know.

  Professor Talbot: A couple of points. First of all, your Telegraph headline about the bankers. There is a general problem here, I think, which is pretty common across the Western world, which reminds me of a book published in the 1940s called The Managerial Revolution, which forecast the world being taken over by the managers; well, I think he was right, basically. The problem that we have, if you look at the ratio of earnings of senior managers to staff, across the private sector, in their businesses over the last 20 years, the ratios have absolutely skyrocketed. That is, I think, a major policy issue. Taxation is one way of addressing it, but there are other ways of addressing it as well, particularly about the governance of private institutions. But part of that has been a fall-out in the public sector, which is seen as a consequence, as a knock-on, I think, mainly, of some public sector salaries rising quite considerably and out of line with what is happening in the rest of the public sector, and certainly out of line with what the responsibilities of those managers are. That is one issue. There is a second issue about the health service, which is the key problem with the health service is clearly that we spent a lot of extra money on it, according to the ONS figures, with a fall in productivity as a result. My personal view is the main reason for that fall in productivity is twofold. One is the constant what has been called redisorganisation of the health service. When I talk to groups of health service senior managers, their main concern is which job are they applying for next in the re-organised Trust, merged PCT or whatever it is that is going on. The other is the contracts for GPs and consultants, which were disastrous in their consequences. I have been in two GP practices in the last couple of years, and virtually all of my doctors are now part-time because they are earning the same amount of money as they did when they were full-time, and they do not have to do out of hours call-out either. That was the second point. The third point I wanted to make was just about this general overall picture. I would like the Committee to bear in mind the magic number 43—not, as Douglas Adams said, 42, but it is 43; the average proportion of GDP spent on the public sector over the last four or five decades has been about 43%. Before the crisis hit, we were on, guess what, about 43% of GDP. It was not actually extraordinarily high by historical standards, it has been much higher. The highest it has been in the last 40 years was under Margaret Thatcher, and the lowest was under Gordon Brown as Chancellor.

  Q21  Mr Walker: When under Margaret Thatcher? 1979?

  Professor Talbot: No, not 1979; the middle of the recession in the early 1980s, when it went up to nearly 50% GDP.

  Q22  Mr Walker: In the first Parliament.

  Professor Talbot: In the first Parliament, yes.

  Q23  Mr Walker: Clearing up the mess of the last Parliament.

  Professor Talbot: It is not playing with statistics. My point is this: for the last couple of general elections, we have basically had more or less political consensus that that is about the right proportion of national wealth to be spending on public services, and both the main parties have been working at keeping it at about that sort of level. We have now gone into the situation, because of the crisis, where, as Tony said, it has skyrocketed to 49-50% of GDP. Some of that will come back down as a result of economic growth. The key political question that both parties ought to be addressing is where do they see it being in five years' time or 10 years' time? Do they see it back down to that historical average of about 43% of GDP, and then we work out how we divvy up that money amongst the different public services, or do they see it being radically different, either higher or lower? This is one of the strangest general elections, I think, that we are heading towards at the moment, where we as electors have no idea what the main parties are saying about that, because it is totally unclear what they are saying. You could read some of the Conservative statements to suggest they want to move towards American levels of public spending, about a third of GDP, and some of the things that New Labour has been saying tend to suggest that we might hold public spending at much higher levels than 43% for some time to come. I do not know, and I doubt most of the population do when they go into the polling booths in six months' time.

  Q24  Chairman: I think Roy Jenkins once suggested 40% as a target and got into trouble, but everyone is terrified of talking about numbers in terms of the size of the stake.

  Mr Halpern: I was simply going to try and answer your question directly, in the sense that in the history of consolidations, and a lot of them have been done in the last 40 years and across countries, if they are strongly tax led, they fail at a much higher rate, and it is precisely for the reason that I think Andrew is alluding to, which is that it lets you off the hook doing lots of other things and you do not sort out your basic problems. That said, very powerfully said by Göran Persson, the Swedish PM who took them through this cycle, part of the story of sharing the pain, given that most welfare benefits and much of public expenditure disproportionately benefits the less advantaged in society, the quid pro quo of sharing the pain generally means tax increases for the most affluent and able, and it is difficult to see politically, in my view, how you would be able to do the kind of things you would need to do in public services without also sharing the pain in terms of the most affluent.

  Q25  Mr Walker: Would you then therefore advocate that the 50% tax band due to come in is probably not high enough on the highest earners?

  Mr Halpern: Forgive me if I avoid the very specifics, but the general point would certainly remain, you would have to say: in what form would that sharing the pain be? What is the equivalent of a squeeze on the public sector?

  Q26  Chairman: Andrew, I think you are still back on the previous conversation.

  Mr Haldenby: If we are going to penalise higher income people, then another way of doing it is to question the benefits that they receive. You do not have to introduce a whacking great tax rate which would be hard to remove, but you could take away subsidised student loans, you could take away child benefit for better off people; that may achieve the purpose of being tough on richer people, but it would also help to lower the public spending burden overall.

  Q27  Mr Prentice: This is positively my last question for the moment: would you be in favour of the Opposition's policy of freezing salaries in the public sector for people earning more than £18,000?

  Mr Haldenby: No, because, again, that seems to me to be a sort of short-term idea, which is a bit like stopping bonuses to bankers. The point is that remuneration should follow performance. If we are going to talk about the public sector workforce, what seems to me to be essential is to address the headcount, the numbers, as well as the remuneration, and where does the public sector workforce have to go in the end? It certainly has to become more productive, which is, I think, shared across politics, we want a higher, more productive public service. That vision then is really of a smaller workforce on higher wages, that is the kind of higher productivity workforce that you are going to get. I am much more critical of the Opposition's pledge to protect health spending forever, because it seems to me that there must be—

  Mr Prentice: Yes, you made that point.

  Q28  Kelvin Hopkins: If I can ask the obvious macro question first of all: cutting public expenditure at this particular time would surely just drive us deeper into recession, and have the opposite effect of what we want?

  Mr Haldenby: There is another view to that, which is that there is a greater risk to not doing it. The risk to not addressing the fiscal deficit is that the markets will take a much lower view of the economy, they will not have confidence in the willingness of government to maintain a sustainable economy, Britain loses its top credit rating, we become seen as a second rank economy, which has damaging consequences for investment; there are also particular problems about having to pay higher interest payments on a skyrocketing national debt. So suddenly, by postponing cuts, Britain's economy is really a lot weaker, a lot weaker, with much lower investment, much lower employment. So there are two options here, and I very strongly think, and again as David has said, the evidence from many of these passages with other countries is that getting a grip of public finances actually restores confidence, and enables growth after that.

  Q29  Kelvin Hopkins: We have been asked not to get into the economic debate, I would love to do that, but I will just say that if you are going to invest, then in an economy which is indulging in blood-letting and reducing demand, you are not going to invest in that economy; one with rising demand, you might actually put some money into it. But we have been warned off that discussion.

  Professor Talbot: Just very briefly, whilst I accept all those arguments about markets possibly taking fright, two things I think need to be borne in mind. One is that they have not, because I think, broadly speaking, the markets have recognised that what has happened has been so extraordinary, in the total collapse of income from taxation from the financial sector as a result of the nature of the crisis, that that has had a profound effect on the public finances. The second is that they are waiting to see whichever government it is has some clear strategy for the medium to long term to reducing the accumulated debt that we now have. Frankly, as long as the Government has that, what it does short-term, in the next year or two, I do not think matters that much to the markets. I think the markets will be perfectly happy to go along with where we are at the moment. If they were not, frankly, I would have expected them to have reacted much more badly by now to what is plain to everybody about the cumulative size of the national debt, as well as the annual deficit, and they have not. I think that is because they recognise that whichever government it is, there will be a medium-term plan; they may be different in terms of how quickly they do it, but I suspect actually they are going to be an awful lot closer than the political rhetoric at the moment would suggest.

  Q30  Kelvin Hopkins: It is suggested that the Government is having no difficulties in selling gilts and raising money at the moment, so clearly there is not a fear in the markets that we are a busted flush for the longer term.

  Mr Travers: That is true. I think the only difficulty with that analysis is that markets are fickle and they do not signal in advance that they are about to panic or change their minds. So it will be all right so long as it is all right. I am not an expert on the markets. As my colleagues have said, in a sense nobody is an expert in this, because it is impossible to judge whether withdrawing stimulus, and roughly £14 billion worth of lower borrowing would be equivalent to 1% of GDP is the ready reckoner as I understand it, so there clearly is an effect of reducing borrowing and spending sharply. On the other hand, there is the downside risk that the markets might decide—and you can see political instability in the UK, for example, a hung Parliament, would make this a much more problematic issue than a powerful government of one party or another. So these things are very, very difficult to judge, and we have seen again and again in the last 18 months that external events can change things suddenly. I think nobody knows, is the real answer. We are not economic experts in all of this, but frankly nobody is any more.

  Mr Halpern: There are questions about what the markets will tolerate, and I think that is fairly well rehearsed, although one caveat, of course, is that a lot of the international buyers are not so present, and we are buying a lot of our own bonds, you could argue. So you might say it is not fully tested in the current situation. But still I think the basic story holds true. Your point is not only about the markets, but a real economy. The markets will tolerate various kinds of economy, some of which we might not want to have in terms of the level of decimation. That suggests, in the short-term, a pretty strong argument to carry on propping up the economy. A couple of caveats, though. One is that in some areas of government spend, public servants have been surprised at the extent to which we are not cutting, we are continuing to inflate, projected expenditure increases are continuing to run through. A lot of it is about the timing, of course. If we try and act, realistically, given the political cycle, by the time these things feed through, you are going to be at least a year or so off anyway, so hopefully you are in a stronger economy. In terms of the broader story, it does look like you can do it, you can get these expenditures down, and you can get good prospects, and indeed arguably marginally better prospects for economic growth in the years to come.

  Q31  Kelvin Hopkins: I will come back to that. The TUC is suggesting that the kind of cuts that are being suggested would raise unemployment by 40% in towns like Leicester, Middlesbrough and no doubt Luton, my own town, and this would actually reduce tax revenues and increase public expenditure on benefits. That has a negative effect, and makes the deficit worse. Surely the logic is to try to drive employment upwards and not increase unemployment. That would reduce the deficit and actually make the markets more confident.

  Mr Halpern: I believe Heseltine was once asked about it in relation to renewal, urban regeneration and so on, and very similar arguments were played about: we should boost employment, and so on, and get more people going. He said: why do we not give people spoons instead of spades? The point is, the implication of a lot of this is you are going to have to do some restructuring in relation to aspects of public services, and there are some deep efficiency gains to be had, where you could do less for more. That does imply some employment shift across the economy, including the public sector. But you are absolutely right, there is clearly a very tricky issue of timing about when you do it, and now does not seem to be the right time to do it. That said, again, history tends to show the most successful fiscal consolidations that occur are substantially triggered in the year after an election, and they normally take about three years to substantially work their way through.

  Q32  Kelvin Hopkins: I have a dozen more questions which I would like to ask, but just one more perhaps: is there not a moral question involved here too, that we are asking working class people who have paid PAYE to take a hit for the crass mistakes and greed of bankers, for whom we are being told we must not raise their taxes?

  Mr Halpern: I have touched on that point already, I think you do have to spread the pain, but what drags most countries into it—actually, we have moved into perhaps the reality of it faster than most countries have done in the past, to look at the consequences if you do not act. At the moment, our debt payments are £28 billion. Obviously they are going to rise very substantially, and if interest rates start to move at all, then even more substantially. What normally draws countries into having to resolve the issue is they are faced with exactly that kind of choice of the difficulty. On the other hand, they say: what happens if we do not? Then we will have to start doing really severe cuts which will be that much worse, we will be crucified on the back of this.

  Mr Haldenby: Just a couple of things. One is it is not just these this kind of discretionary fiscal policy changes that determine demand in the economy; a much more important factor is monetary policy. While we have interest rates right on the floor, that will do more than anything to keep the economy going, but also non-discretionary fiscal policy, so benefits, the so-called automatic stabilisers. That is why public spending has suddenly gone up to 50%, there is this huge additional weight of spending. That will go on. So just to say, I think the implication that you must postpone anything of this kind in order to prevent economic activity stopping, full stop, is not true.

  Mr Travers: This precise point is in response to Mr Hopkins' question and observation. I think I am right that there is a map in the Financial Times this morning of public sector employment by local authority area, which is very interesting, but it does point to the reality that public expenditure cuts, when they come, if they are public spending cuts rather than tax increases, will have a differential effect, because the public sector is different. The public sector is effectively an industry, and in some local authorities it is much more heavily present than others. Oddly, here in the City of Westminster the public sector, despite the existence of the Civil Service, is a relatively small part of the economy, but in many north eastern, Scottish and Welsh constituencies it can be up towards 50% of employment. So the impact of cuts in public employment, when and if they happen, will have a very different effect from place to place, which is an issue that the Centre for Cities has looked at in a little detail and produced figures for where it is most likely to be worst.

  Q33  David Heyes: My question follows nicely from that. There is another aspect from that, is there not, which is the possible impact on morale, the ability of public sector to recruit and retain quality staff, experienced staff, and in that way potentially downgrading the quality of the public service. For any of you really, what is your sense of the likely impact on staff morale, on issues like recruitment and retention, for the kind of major cuts that we have been speculating around today?

  Mr Haldenby: We are publishing a report on Monday on public sector workforce and its contribution to the reduction in the deficit, and the evidence on morale and sickness absence, for example, job satisfaction, views of quality of management, is that actually the public sector is at a lower level; people in the public sector tend to take longer sickness absence, have lower job satisfaction, have lower morale, have a lower view of their own organisations. It comes back to what I was trying to say earlier about if we can reduce the size of the public sector and make it more productive, and I think reform it so that people working within it are more empowered to achieve the changes they want to make, I think that would improve the working experience of working in the public sector.

  Mr Halpern: I think it is an absolutely fascinating question. I was certainly very interested to know what happened in previous times. Of course, our own history of Britain is not entirely a happy one, given the "winter of discontent", but in Canada especially, one of the people we brought over was Jocelyne Bourgon, who was effectively the equivalent of Cabinet Secretary. We asked, did it not decimate morale, what happened, given that in the Canadian case central government was planning cuts of roughly 20%, and her argument was: look, what happened, for several years, in fact, you can argue for almost a decade, they were trying to squeeze things down through efficiency gains, salami slicing, and actually what that did was that was totally destructive of morale. She argued that what happened is that people were so relieved that decisive action was finally taken, that in fact staff morale moved up substantially through the late 1990s. Those are the ones who are left, you can argue. The deeper question is: what happens to everybody? It goes, of course, to your point about what is the human cost of this? We are not in a society and world where there is not lots of work to do, there are many valuable things to do. I will just take you back to a very concrete example of the non-emergency number; when New York moved from it, it had more than 4,000 different numbers that the public would call, and it moved to a single number and integrated call centres. Clearly there are efficiency gains, that means less staff in call centres or whatever, but it also releases people to do more productive things, you hope, either in the public sector or in the wider economy, and this is the deep trick that we need to achieve.

  Professor Talbot: Several things. One is, along with slashing budgets on an across-the-board basis, one of the typical reactions in these sorts of situations is to look at staffing numbers and want to cut the numbers, and that potentially is extremely damaging, because you cut the wrong people in the wrong places, and you have voluntary redundancy schemes, which means the best people leave because they are the ones that can go and get jobs elsewhere, and so on and so forth. It is quite interesting that in the late 1990s/early 2000s, most OECD governments that had had controls on numbers across public sector staffing abandoned them on the grounds that they were extremely blunt and ineffective instruments. That is the first point. Second, Andrew's point about these smaller but better paid public services, I am afraid I just do not see that. There are large chunks of the work that is done in public services which is taken out of the market quite deliberately, which are relatively low-skilled jobs; emptying bedpans, being teaching assistants, plodding round streets protecting people are jobs which are never going to be highly technological. You are not going to be able to make huge savings through lots of capital investments, or by skilling people up. I know there is a general tendency at the moment for everybody to want a degree to do anything. All the professions are going for it, we have just seen the nurses, and now the social workers want to, and so on. Sure, I can understand why they want to do that, but the truth of the matter is there is a lot of stuff that gets done in the public sector, by very large numbers of public sector staff, which is never going to be extremely well paid, because of the nature of the work involved. I just think we have to recognise that. That is the reality of it. It is one of the things that also makes it very hard to drive very large productivity savings in the public sector. By and large, if you look at the economy as a whole, those areas where you get the biggest productivity gains are going to be those that are most capital-intensive. The public sector is almost entirely in the service sector and therefore is of low capital intensity, and therefore it is always going to be more difficult to drive productivity changes at even the average rate of the economy. It is something I have been arguing for years, that some of the so-called efficiency targets that have been set are just completely unrealistic for the nature of the organisations that we are dealing with.

  Mr Travers: Interestingly, I think there is no doubt that we are currently in a sort of phoney war territory in all of this, because public expenditure this year will increase in real terms, and the Government's plans for next year are that it will increase in real terms. The local government finance settlement made last week shows a number of counties getting 4-7% grant increases in cash next year. So we are talking here about a world in which the Government and the main Opposition party find it extremely difficult to spell out what is going to happen, and this Committee is ahead of the game in that sense, but where public sector managers are behaving as if all the announcements of the cuts have been made. If you talk privately to chief executives in local authorities and health authorities, they are preparing with gusto and quite relaxedly, actually, to do all the things we are discussing. So the Institute for Fiscal Studies and the chief executive of the Audit Commission and others have said it is all going to be terrible, and the public sector managers and their finance officers have picked up that story. Politicians are sort of left out of all of this, because they do not comment on it. So what I think you will find happens is that senior officers are currently leading this process in advance of anything actually happening. I think that points to something my colleagues have said already; if it is to be done at all and it is to be done well, it will require politicians to lead it, to say what is going to happen and then, as it were, to provide leadership to the people they employ, and that stage is missing at present.

  Q34  David Heyes: That is certainly true of the people I speak to in my local area. The chief execs of Primary Care Trusts and hospital boards, and the chief execs in local government are busily planning away and just taking it for granted it is going to happen. They are fazed when challenged, or I try to put a counter point of view. Just one more point on this. Part of the offset against the sort of low motivation, low morale in the public sector is decent standard public sector pensions. That is another area that is coming under attack and is potentially being lined up for reduction in the value. I just wonder what impact that is likely to have, how appropriate it is that we do that and, linking it back to my previous question, what impact that might have on morale and the quality of service.

  Mr Haldenby: You described it as an offset.

  Q35  David Heyes: I speak as a former public sector worker. Maybe I still am a public sector worker, I do not know. With a good pension. I remember one of my colleagues saying: this job can be dire sometimes, but at least we have got a good pension to look forward to. That is very common, right across the public sector.

  Mr Haldenby: Public sector pensions is a strange subject. Again, a bit like we were saying about managers, everybody assumes that something has to be done about them, but no one quite knows what. There are these enormous headline numbers about the total liability, which is many hundreds of billions of pounds over those years, but the real question is what is the annual cost of servicing them, and my understanding is that it is several billion pounds, somewhere between £5 billion and £10 billion a year. So the question is, faced with a structural deficit of whatever it is, £120 billion, does one have to address a cost of that size, and I think probably one does, yes.

  Mr Travers: As somebody who has a university pension, as I suspect Colin does, I ought to declare that interest first, it seems to me that public sector pensions are going to get caught up in a wider debate, of which bankers and all of that are also a part, of fairness as between different groups in society, people who are in work, people who are out of work, rich, poor, and so on, which is a bigger issue, a cultural issue, which is almost certainly changing around us as we speak, in ways we will only understand when we look back on it. So big have been the changes to our economy, the financial sector and politics in the last 18 months that things will happen of that kind. So I think that public sector pensions will feature in that debate about fairness over time, fairness between sectors and so on. There would be ways of protecting the concept of pensions of this kind, but they are going to require give and take, and there will be give and take, I suspect, in the areas of how much employees contribute, and also when the pensions start to be taken. I mean, those are the ways where compromise could be achieved without dropping the concept of these kind of pensions, which everybody agrees it would be better if the private sector had more of this kind of pension, but the issues of fairness are going to be sorted out partly because of politicians reacting to societal pressures that have to do with understanding the fairness between different groups.

  Q36  David Heyes: But the question for this Committee is: to what extent does that impact on the quality of public administration?

  Mr Travers: Clearly, public sector pensions and their relative generosity will make it possible for the public sector to employ higher quality staff and/or pay less, and Colin has referred to that issue, than would otherwise have been the case, and I think they need to be seen in that way, that they are part of the overall package of why people work in the public or private sector.

  Professor Talbot: Just a general point. I absolutely agree with Tony, I think the key issue of this is going to be perceptions of fairness, and the psychological contract between public service workers and their employees, ie the rest of the public, has been in the past of one form, which included slightly lower wages than you get in the private sector and a better pension, and I have worked in several parts of the public sector and that was always the case in the different bits of it, even for university professors. If we are changing that contract, then we have to think about what—I think you are quite right about what the morale effects will be in the public services, and I think alongside that you have to fit that into a much broader picture about how society addresses what has clearly been a major crisis, which has caused us major long-term economic and financial problems, that have to be sorted out over probably a 10, 15, possibly 20-year period to recover from completely, what we have been through in the last couple of years, it is of that order of magnitude, and generally how we deal with that, in terms of policy options, I think is going to be absolutely fundamental, and I think fairness is going to be fundamental to that. We are concentrating at the moment on discussions about shrinking the public sector, which I think probably in the short-term is going to have to happen, but if you look at this in a more long-term perspective, I think there are some quite interesting trends, which is, roughly speaking, from the end of the Second World War up until the mid 1970s there was a general trend towards more collectivist solutions to things, and this was across the Western world, not just in Britain. We then had the oil crisis, and so on, we had a short interregnum, and then we moved into a phase which has lasted about 30 years where, by and large, individualist solutions to things, and "markets work, and markets are going to triumph and solve all our problems for us", have been the dominant view. The question is what happens after the crisis we have now had? Are we going to move back to just saying, well, markets will solve everything for us, will they not? I personally doubt that that is what is going to happen. Or are we going to move back towards some more collectivist view of saying, actually, even if we have a slightly smaller state, we do want to make sure that people are treated fairly. The other point I would make on this is that the research evidence now on levels of equality/inequality in advanced countries, causing major social, health and other problems, the epidemiological data on that is absolutely clear, that those countries that have the largest levels of inequality have the largest levels of social problems, of health problems, of educational problems, not just affecting those people who are poor, but affecting those people that are well off as well. You know, the evidence on that is quite clear. I suspect all of that is going to feed into a discussion about how do we deal with the consequences of this crisis in a way which is seen as being fair to everybody, including public sector workers?

  Q37  Paul Rowen: Following on from what you have just said, Colin, is it a case of asking public services to do more with less, or is it an easyJet model, a basic with extra entitlements?

  Professor Talbot: First of all, is it going to be a question of asking public services to do more with less? Yes, it always is. Even in times of plenty, we ought to be asking public services to do more with less, in the sense that all of human progress has been about doing more with less; that is what we do, we make stuff easier to do, and produce stuff more effectively. To that extent, public services always have to be seeking improvements in efficiencies. Secondly, it is clearly the case that large scale organisations, in both the public and the private sector, it is not just a public sector problem, very large scale organisations always have a tendency towards becoming more and more sclerotic, cumbersome, bureaucratic, and periodically have to have bouts of trying to sort themselves out. You can see exactly the same thing happening in the private sector with large organisations, they go through these periodic attempts to slim themselves down and make themselves more efficient. So yes, that is going to be an important element of what is going to happen. I do not think, however, we can exaggerate what is possible on the efficiency side. As I was saying at the beginning, I think strategic decisions will have to be made if we are going to make cutbacks in the amount of money we are spending, devoting to the public domain, of the order that people are talking about at the moment.

  Q38  Paul Rowen: So do we go for the easyJet model? If you go into hospital, yes, you will get your medical treatment, but you provide your own food, or whatever.

  Professor Talbot: I would be extremely cautious about that, for several reasons. One is, coming back to the fairness issue, I think there are going to be some important issues of fairness because, of course, if you do not provide things like food for people in hospitals, some people can afford to use the Marks & Spencer's food dispensary that is going to be going into every hospital, apparently, and some people cannot afford to do that, and they will be having to nip out to McDonalds to get their lunch. So there are going to be fairness issues involved, and that relates also to issues about taxation, because the point about public services largely is their universality, in the fact that everybody gets them equally, on a reasonable basis, and people pay their taxes on that basis. I think the more you move to a situation where it is not clear you are getting the benefit from paying taxes, people will become more reluctant to want to pay taxes for public services, so I think that is a major problem.

  Mr Travers: If we just aim off for the term "easyJet model", which I can see has become a kind of matter of ritual battle between different ideological positions, just aim off for the words, the idea that, as I understand, lies behind this idea is: would it be possible in some parts of the public sector to offer higher standards of service in a way that at best would cross-subsidise the general service, to liberate more money for the service? I think if you look at it like that, firstly, it is not as if it does not happen already, it happens in the NHS already, in dentistry. In dentistry, oddly enough, we have all of us accepted co-payments, because they are there, or prescription charges. Second, the Government itself has introduced this at the Passport Office, where you can either get a standard service, slowish, or passport overnight for £100-odd, I assume that cross-subsidises the general service, and of course with first class rail travel. So it is not as if this idea does not exist in the real world that the present Government currently operates. It does. It would crucially depend on whether this was a way of producing more money to protect the core service, and it would be a very different thing if it were to allow some people to get a proper service and other people to be left with a bad one. I think we need to be a bit more nuanced in how we interpret the easyJet model if that is what it is meant—

  Q39  Paul Rowen: But easyJet and these low cost airlines are very popular. BA is struggling.

  Mr Travers: Indeed. I did not want to go into that.

  Q40  Paul Rowen: Is that going to allow public services to deliver?

  Mr Travers: I did not want to get tangled up in civil aviation. You are absolutely right, although the budget airlines induce quite a lot of critical comment, they are also very popular, which is itself a confusion, even within civil aviation. They are doing well, and the high quality, traditional airlines less well. But the point I am making is that as far as the public sector and the structure of the public sector is concerned, I think that the question that we are really asking here is: are there ways of getting people to pay more for services that would cross-subsidise the core of the public service, at a time when money is going to be short? I think that is the key issue. As I say, I think it would be very unlikely for the NHS not to consider issues such as co-payments, they have already been debated, and remember, local authorities are under pressure from the Audit Commission to increase their charging anyway. So the public sector already has all these elements in it. I think the issue, looking ahead, is can they be used constructively to raise more money for the core of public provision, at a time when taxpayers' money will be short?

  Mr Halpern: Will we see more of it? I am sure we will. Remember, easyJet also has other kinds of big changes it introduced, which is why it beats BA. Now you do not have to check in in the same way, you can do it online, and there are lots of other gains that come through such a system. Contrast that, for example, in relation to our benefits system, where we have hardly gone online at all. So there are plenty of examples even within it where you can try and squeeze out quite substantial advantages. I think the more profoundly interesting one, in terms of a public admin point of view, which I am sure your constituents must illustrate to you on a weekly basis, is you will routinely come across services duplicating and falling over each other. Indeed, an area I spent a long time working on in government was social exclusion, where you saw it in extreme forms. You could have 10, 12, 15 agencies involved in a family, spending a lot of money, with very little effect.

  Q41  Paul Rowen: Is not the problem there that the centre of government, whether it is here, is reluctant to hand over control to localities to enable them to make the sorts of savings and changes which could be made?

  Mr Halpern: Absolutely. That is why I think you are absolutely right to focus on it. There is a substantial public admin issue at the heart of this, and one of the reasons why we got very interested in Sir Michael being involved in Total Place is because he very passionately believes that on the basis of that evidence we can do a lot more for less.

  Q42  Paul Rowen: It always strikes me that the NHS is the biggest communist state that we have. It is the most centralised, most controlled, multi-layered—you know, you cannot do anything in Rochdale without some civil servant here actually signing it off. Somebody earlier on talked about the multi-re-organisations that these things have. How do you actually go about things, without having to go through yet another whole series of re-organisations where they all re-invent themselves and get paid more along the way?

  Mr Halpern: We do start to see that. There are a couple of PCTs which have now merged with local authorities, and we see it particularly at discussions, indeed in Total Place 2, around adult care and social care, where the budgets are very little overlapping today, and yet there are very substantial gains to be had, both for patients. Chronic conditions, very similar characteristics. The half-full version is there are lots of grounds to think there are things that we could do, but it does certainly involve a letting go in a relatively silo-based system from the centre, but also not a simple devolutionary settlement. The likelihood is that what we will see is some areas will get the hang of this. As Tony and others have illustrated, some public service managers have already been quite imaginative about this and they will leap forward, and others will not; others will be the worst kind of the Ryanair example you are thinking of, with general degradation, even without imagination.

  Mr Haldenby: On the easyJet idea, I think it is very, very unlikely that there will be an enormous debate about how that principle could be applied across the public sector, to the level of things like hospital food, which clearly would not be right. What is more likely to happen is a continuation of the things that are already happening. For example, in higher education, as I was mentioning earlier, there are already tuition fees, and we will probably see those increase; in pensions, there will be a compulsory private pension under the Adair Turner proposals, in 2012, I think. We will have that, and that might—

  Q43  Paul Rowen: Personal accounts.

  Mr Haldenby: Right. In the NHS, as of last year, it is now legal to have co-payments, particularly thinking about certain kinds of cancer drugs, and that might be extended. So there will be a general increase of that kind.

  Q44  Paul Rowen: In terms of the size of the public sector, if we are going to shift this £120 billion deficit, what proportion of cuts do you see us having to make? I know some of you said we should not be doing that, but at the end of the day, you have to have a figure to aim for and you have to know when you have done it.

  Mr Travers: For broad orders of magnitude, if we are starting with a £175 billion debt, that will shrink, because we are all assuming the economy will start to grow and continue to grow in all of these discussions, which itself is a brave thing, but we have to assume that; it starts to grow in 2011 and then grows at trend every year thereafter. That would start to shrink it in both directions, it would bring down public expenditure and it would increase tax yields, so the borrowing figure would shrink. There is disagreement, and I am not sure we are exactly the right people to have here to say how much of this is structural, but clearly, say, half of it is structural.

  Mr Halpern: Our estimate is 90 billion.

  Mr Travers: Right, 85-90 billion is structural. We are talking about, if it was two thirds/one third, 30 billion on tax and 60 billion off spending. It is those orders of magnitude, I would guess.

  Mr Halpern: It is a political choice. Of course there are big political choices in here, but if you are saying get back to roughly 2007, which we were happy about, Tony's figures are exactly right, that is what we are talking about.

  Q45  Paul Rowen: How does that equate in terms of public sector jobs, the size of the Civil Service, or is it more outsourcing and that is delivering things cheaper?

  Mr Travers: Again, these are heroic, back of the envelope kind of numbers, but 60 billion is very broadly equivalent to, I will put it that way, 10% of public spending. If public spending were to be reduced by 60 billion, that is 10% of today's public sector. There have been some analyses done that suggest that, in a sense, there would be a sort of mountain of public spending, and public sector employment would rise up to a zenith today, and then fall back to roughly where it was in 1998-99, if this happened, but I think Colin made this point indirectly and David has made it, that we are talking here about getting public expenditure back to levels that were probably realistically in the early 2000s. That is what is going to happen. So it is not all the way back to some earlier age, but it is bringing it down to that level. That is what we are talking about.

  Professor Talbot: The size of the public sector workforce compared to the rest of the labour force has actually been remarkably stable over the last 20 years or so. It went down slightly under the last Conservative government, down to about 19% of the workforce, and it has gone up under the Labour government to about 22% at the moment, which is actually a very small variation, given the amounts of changes in spending patterns that we have seen over that period. But the rough, very, very rough ratio is that public sector employment tends to be about half of whatever public sector spending is as a proportion of GDP, so it varies a bit. The question will be, the 60 billion that would come out of saving on public spending, how much of that is saving on the half of public spending which goes on services, which employs people, and how much of it will come out of the half—

  Q46  Paul Rowen: How much of it would be on the easyJet model? If you say we provide a base level of service, of that 60 billion are you going to say 20 billion will be through greater income streams or whatever?

  Mr Travers: I think that is too many hypotheticals for us.

  Professor Talbot: I would say I think it is extremely unlikely that you could generate income from the sort of easyJet, "easyCouncil" model, that would in any way make a huge dent on that. There is a big difference between saying we have some areas at the moment in public services which have elements of co-payment in them, to saying that we move the whole of public services and the core of public spending on public services to co-payment models. You are talking about a quantum leap in terms of change of the way things would have to operate, and that would raise all sorts of political problems. The point I was trying to make, and I will put it in the airline terms, how long would people tolerate paying BA prices for easyJet services, in terms of paying BA levels of taxation for easyJet levels of services? Not very long, I suspect.

  Q47  Mr Prentice: Are people ready for a fairly big extension of means testing? Because Andrew has said universal child benefit should go, universal winter fuel allowances should go, free TV licences are just a gimmick, and so on; there is a long list. Do you think in the present climate, given what you have said about fairness, that the people out there would be ready to accept a big extension in means testing?

  Professor Talbot: I have no idea. We do not know. I do not think anybody knows at the moment.

  Q48  Mr Prentice: No, but you think about these things all the time, you must have a view.

  Professor Talbot: My personal view would be that I suspect there are some areas where people would be tolerant of those sorts of changes, if they saw it as part of an overall package which was leading towards a fairer society and they were being asked to make their contribution towards it. But, frankly, middle class families losing things like support for childcare may well tolerate that if at the same time the bankers that you are talking about were taking a hit, rather than at the moment we are in a ludicrous situation where, frankly, they are getting paid for failure, and us having had to bail them all out through the taxation system. I suspect, if you start saying to middle class parents, "Would you mind giving up your childcare allowance to help us make sure that the people in RBS who we publicly own get their bonuses?" which is in effect what is happening, they might be just a little bit miffed.

  Q49  Kelvin Hopkins: The real route to redistribution is through the taxation system, not means testing.

  Mr Travers: I think this is trading off different evils, because what we are coming round to is that unless politicians are prepared to say "We want higher taxes for all", and have a bigger stake permanently, then we are broadly agreed that public spending will to some degree have to fall. There are various ways of doing that, and all we are doing is fleshing out the various possibilities, and these are to some degree alternatives. Means testing benefits would substantially reduce public expenditure relatively quickly, but it has a number of risks, not the least of which it might lead some more well-off people, as it were, to feel they were getting nothing back out of the welfare state. That is a risk the previous Prime Minister was always exercised by, but there are others besides we have not talked about. Massive asset sales, that is another way of doing this; one-off, it is true. So means testing, efficiency savings, asset sales, putting up taxes, they are all to some degree charging, they all compete for doing the same thing. Now I think, in a sense, what you would expect most politicians to do would be to mix and match from among all of these, because the more you mix and match them, the less you have to do any one to the exclusion of all the others.

  Q50  Julie Morgan: Surely one of the disadvantages of the means tested benefits is the low take-up. If you are talking about fairness and reaching people, a lot of the means tested benefits have very low take-up, whereas the universal benefits do absolutely reach everybody.

  Mr Haldenby: Since we looked at it, some of the means tested benefits have very high take-up, 95%, so it is partly about the design of that. As Tony says, it is the lesser of two evils. Means testing has all of the obvious disadvantages, but take something like child benefit, the total cost of that benefit is over £10 billion a year, so there is obviously the idea there that some people receiving the benefit do not need the £20 a week for the first child, and that is why we raise it as an idea.

  Q51  Julie Morgan: It is balancing, is it not?

  Mr Halpern: I was going to make the straightforward point which of course is the big area of public spending, at least a third or so, which in principle you could cover without having impacts on jobs, which causes benefits, which includes pensions and all kinds of things, not a particularly pleasant area to start picking at, but you might decide—but there is obviously a lot of money in that.

  Q52  Paul Rowen: If you take most of the benefits, they are already below poverty levels.

  Mr Halpern: Absolutely. Contrast with Sweden, which did a lot of cutting. If you look at the history of these things, you may say Canada had a lot of inbuilt subsidies, they were easier low hanging fruit, Sweden had a more generous benefits system. What is the equivalent for us? Most people would probably say it is public services, that is the area which we have expanded most rapidly. The question is: can we do that? What would that mean in job terms? If you move to a model, for example, long-term care, where you use more telemedicine, et cetera, what does it actually mean? It does mean some people doing less things than they are doing now, but it also might mean new things; people might be working in new higher tech forms of medicine or chips. There are possibilities, but there is a lot of pain along the way too. We are putting out a report on this, pulling together what we have been doing together on this for the last six months or so, after the PBR, and I think the key thing, and it is very much a public admin one, is what are the sorts of changes that we can make to the way our government operates that mean that we do a better consolidation, rather than one that meets the headline figures but actually has lots of pain along the way? That is what we are in the business of. It turns out a lot of that hinges on the detailed ways in which our government operates from top to bottom. We have this window of opportunity where we can try and get some of those changes in place. They are the ones that we really need to zoom in on. Can I just offer a few thoughts where I think we will move towards? Obviously it starts at the top, it is a certain collegiate-style approach, where you have to reach a collective settlement about your relatively priorities. You have to do that, and you have to reach a collective settlement at Cabinet level, and all the tough things it involves, and not allow it to be done on a Treasury, by department, sort of silo base. That would be a disaster. There are ways you could reinforce that. We are quite keen on, as indeed the Cabinet Secretary is, I know, on cross-cutting budgets, where you have a powerful minister who holds a large budget for an issue such as some youth issues, for example, but who does not actually sit in the department. Then they drive, as it were, a different perspective on spending. Of course, you then have to do that at local level, which is a point being made repeatedly. We are relatively upbeat about the evidence coming from Total Place about the lessons. We have some things in place already, like the common area assessment, it starts to move you towards looking at it as a whole, as opposed to testing each service individually. But a lot of it will involve Treasury and others letting go, and we are going to have to let some local authorities and areas, and PCTs and so on, do their own thing, and yet they have to do it in a way which is kind of connected, imaginative. Could it mean devolution beyond that? We think there is a lot of promise in individually held budgets. The number of budgets we have said we are going to do, more individually held budgets for problem youth and so on, actually our progress on it is quite limited. Social care, we have 3,500 people on individual budgets, but we think there are 1.3 million who could hold them. That is what we have to do. If we could get into a world like that, and create the kind of platforms for that sort of public service, then we can be reasonably confident that in five years' time actually the pain will have been somewhat less, there will still be pain, but we will really have more efficient, effective public services that we can be proud of.

  Q53  Julie Morgan: I had a meeting earlier in the week with a small voluntary body who had worked with young offenders. They were funded by the local authority. What this voluntary body did was work with young offenders who were in institutions and then followed them into the community, and did some very simple things, like ensuring they had bank accounts, supported them with accommodation. This was evaluated, and there was a huge drop in the re-offending rate, a huge saving to the public purse by some very simple measures. They had lobbied everybody to try to get this spread throughout the whole of the UK, and it seemed to be almost virtually impossible to make that move. I wondered whether simple evidence-based things that have long-term effects, how that sort of decision, those sort of movements forward could be built into the sort of process that is going to happen? Because my fear is that we will look at ways to cut here, there, and we will not look at the policies that will actually bring spending down long-term but are actually very positive for people in the community generally.

  Professor Talbot: I think part of that is about the way in which we take decisions about allocation of money to particular areas. One of the things that is unusual about the British set-up is that we have a Parliament that plays absolutely no role whatsoever in deciding how we spend money. In every other Western country, and in Scotland and Wales and Northern Ireland, the assembly body, in Parliament or Congress, has a real role in public expenditure decisions, and actually scrutinises decisions before they are made, and has a chance to feed into them and present exactly the sort of evidence that you are talking about in that process. In Scotland, for example, the Parliament publishes draft budgets and then the various departmental committees hold hearings at which interest groups and people with that sort of evidence can come along and challenge spending priorities and decisions by saying, "Should we be putting money into this area? It does not work", or "Should we not be putting money into this area? It does work." None of that conversation in Britain takes place outside the discussions within Whitehall, at the moment between the Treasury and the individual spending ministries, and the occasional cross-cutting review. It seems to me that only when you open that system up to that sort of democratic scrutiny, and Parliament becomes involved in it—we have had the perfect opportunity for the last 12 years with the spending review processes, they were every two or three years, depending on what flavour it was this time round, and it gave ample opportunity for them to have published draft spending plans, inviting select committees in Parliament to hold hearings around them, take evidence, judge which things seemed to work and which did not, and instead it is all done at the moment by civil servants and ministers behind closed doors. I think that is a major public administration change that we would need to make to the way the system operates. It would not take away the right of the executive to take the eventual decisions, but it would be subject to all sorts of checks and balances through doing that, and scrutiny, before they made the decisions about where they were putting the money, and precisely give people involved in the sorts of initiatives that you are talking about the opportunity to get involved. At the moment, the attitude in most of the public sector, I was talking to some colleagues who are involved in a major collaborative project about protecting parts of the national parks and moorlands from wildfires, it is a great collaboration between all sorts of different bodies, and their one great fear was that Whitehall found out about it.

  Mr Haldenby: I think you have asked the big question really, which is of all of the things, we all know, in the public sector, so many wonderful things are happening, and people are achieving more for less, and remarkable things are being done, why are they not just naturally disseminated and get repeated? I think it is because, and we're back to these words of accountability, who actually is accountable for achieving that saving? Who benefits for achieving that saving? I suspect that the person who has achieved that saving that you have just described does not really see it, it is just sort of lost in the general scheme of things. This Committee has done so much work on improving the accountability of government and public services. I think something like criminal justice can be made more locally accountable, with money raised locally for those services and then spent on those services, so that local people can see the benefit. Some other services are more accountable to the individual, like the health service, so that if money is saved in the health service, that can come back to the patient. There are different ways of doing it, but I think it does take you back to the fundamental thing that unless we are quite tough about making public services more accountable, those kind of examples of best practice will not be taken up.

  Mr Halpern: I think it is a very powerful example, it is one that comes up all the time. If you think about it, you are an offender, you are out of prison, your drug dealer will get to you in a few hours, but it will take weeks for someone to sort out your housing and lots of other issues. What is going on? It is a split budget. It is a classic split budget issue. Those who have the ability, in principle, to be there and greet someone as they leave, they are not handling the criminal justice budget, and vice versa. You can imagine a world where those things are held. I remember when John Reid said we should transfer criminal justice costs back to countries where the offenders are coming from. Of course, we probably would have a net loss, given we produce a lot of them. But you could do that in terms of local authorities. In the same way, in previous generations, local authorities took responsibility for people going off to university; actually, you could take responsibility for criminal justice expenditure. So you would hold the whole budget, and then you would see it in a rounded way, and surely you would do very different things to what our current practice would be.

  Professor Talbot: Can I just add to that? That is one of the points I was trying to make earlier. Out of historical accident, within England and Wales the prisons are organised on an English and Welsh basis as a national agency, whereas everybody that I have talked to in the criminal justice system says it would be much more sensible for the vast majority of people who have to go to prison to have locally managed and administered prison services, which were tied into local services, which kept people close to home and so on, and yet we have an entire system structured at the moment around the historical accident that it is run by the Home Office, and has been since the 1960s. It is completely mad. As a result, we get proposals for things like giant prisons instead of, where the real problem is, it is the short-term prison sentence offender for whom the key issue when they come out of prison is: do they still have a relationship with somebody, do they have somewhere to live, do they have a job, do they have support; all of those issues, which are destroyed by the fact that at the moment they are shunted around—somebody from South Wales doing three months can end up in the north-east, because that is where the prison place is.

  Mr Halpern: 70% of our expenditure is central government driven in the UK, higher than any other country in the OECD and New Zealand, I think I am right in saying. It comes back to the fundamental. We can do fiscal consolidations really well, we can get Treasury and shut down those numbers, and actually we will generally do it in a very bad way when it is expressed at local level. That is the fundamentals of that situation.

  Q54  Chairman: Could we perhaps end on a positive note, which is that often adversity is the real spur to innovation, is it not? There is a way of telling this which, as Tony rightly says, we shall not know until some years down the track when we look back at what we did, but it is at least conceivable that this is going to be a moment of major innovation in actually how we do government in this country, not because anybody chose to do it in that way, but because we were forced to think rather radically about it. We are going to have a paper, are we not, shortly, on the "smarter state", which is going to carry some of this? Someone suggested the problem is we may finish up with a stupider state if we do not get it right. But the chance of getting it right is there, is it not, if we actually do a project in the right way? We should reconvene in several years' time and see how we got on.

  Professor Talbot: May I have one last comment? The one thing that we have not addressed is the machinery of government issues, which David sort of alluded to, about how government takes these decisions in relation to things like collective Cabinet responsibility, but I think that also spills over into the institutional realm. Again, we are an outlier, in Britain, in having the finance ministry running the show, basically. There are very few other countries where the equivalent of the Treasury is as powerful as it is within the British system, particularly in relation to domestic policies. At the moment, I think that is even more true, because the First Lord of the Treasury happens to be the person who was the Chancellor for 10 years as well. I think one of the institutional issues that has to be addressed, which has come up perennially over the last 30 or 40 years, has been how do you actually have a strategic centre to government which can make strategic decisions that isn't the Treasury; includes the Treasury but is not the Treasury? We have had the Department for Economic Affairs and the CPRS and all sorts of other things as attempts to do that, and it has never succeeded at the moment. Unless we find some way of solving that problem, I think a lot of the things we have been talking about today just will not happen.

  Chairman: Now that you have provoked me with more things, Tony's point about the politicians being the sort of silent voices here, all the managers ready to go on all this stuff, it did really remind me that certainly in Sweden, but possibly in Canada too, they were very different political cultures, in a different world, and particularly if you are trying to get a programme which convinces people that it is fair, and gets national assent to it, you try to do things in a rather more collegiate way. I mean, you would have a national recovery programme, you would say that for five years, or whatever it is going to be, we have all got to—but the problem is, we do not do politics like that here, and that is a big impediment, is it not, to doing the kind of things we are talking about?

  Mr Prentice: That is another story.

  Q55  Chairman: May I just say, we have had a really, really excellent panel, it really has been very, very interesting, a brilliant panel. We are very grateful to all of you for coming along and sharing all of this with us.

  Mr Halpern: I just want to say one tiny little thing? It was just simply that you may not be able to fix the Treasury, but you can try and make Parliamentary committees scrutinise other than within departmental silos, and that is something which actually is—

  Chairman: That is an even bigger issue, but thank you for it. Thank you very much.

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Prepared 29 March 2010