Dealing With The Local Government Recession
Author: Iain Hasdell, eGov Monitor |
In our recently launched report “The Bottom Line” KPMG – together with the Think Tank Localis – discuss 5 actions for local government that are essential for success in the current and emerging situation” writes the author.
It is beyond doubt that the UK public sector is facing a period of austerity that will last for several years – possibly as long as a decade.
The start will be deferred for a year or more, because the current government is committed to a Keynesian policy of fiscal stimulus – using public money to help ease the economy out of recession.
However by 2011, when the effects of the current government’s fiscal stimulus policy have expired, we will face the tightest squeeze on public spending in the post war era.
The Institute of Fiscal Studies estimates that Departmental Expenditure Limits (the total amounts available to government departments and therefore to the public sector as a whole) are likely to fall, on average, by 2.3% a year (£790m for DCLG) in real terms between 2011 and 2014.
It is unlikely that the cuts will be spread evenly: health, education and international aid will probably be shielded to some degree. It is therefore reasonable to assume that other areas including local government could face year-on-year cuts of 7% (£2.4bn for DCLG) or more.
There is considerable uncertainty about what will happen after 2014, but it would be prudent to assume that public expenditure will be flat, or grow very little in real terms, in the period 2014 to 2018.
It seems most unlikely that we will see a rapid return to the substantial annual spending increases that the public sector including local government has enjoyed in the last decade.
In addition the public mood is becoming increasingly sceptical towards the public sector and its levels of spending.
The public are becoming increasingly aware that the imminent public sector recession is not just a result of the current private sector recession. There is a growing recognition that it is as much a long standing systemic problem. Indeed some say an unsustainable proportion of GDP has been allocated to the public sector for a lengthy period of time – not just very recently.
In local government addressing this overall challenge will involve tough decisions but if these are not made, the consequences will be far more severe. Only by taking significant action now will the need to resort to damaging and arbitrary service cuts be avoided.
In our recently launched report “The Bottom Line” KPMG – together with the Think Tank Localis – discuss 5 actions for local government that are essential for success in the current and emerging situation.
These 5 actions focus on productivity, accountability, the local economy, cross boundary working and financial innovation.
The first of our recommendations is a determined programme of productivity improvement, to reduce the cost base of local authorities by at least 20% by April 2011 and a higher percentage beyond that.
Costs that do not contribute to the delivery of front line services or key Council activities that sit outside service delivery should be swiftly eliminated and headroom created for the implementation of our other recommendations some of which will take longer to deliver results.
No area should be off limits, including pay structures and the on-going liabilities created by final salary pension schemes.
There is clear evidence now in local government that dramatic cost reduction can readily go hand in hand with better efficiency and effectiveness and indeed that it can be the best path to such improvements in performance.
Our second recommendation is on accountability. At the moment Councils are at best equally accountable to central government as they are to local residents.
The future will need to be much more about genuinely improved performance based on meeting or exceeding the expectations of local residents. It must be characterised by dynamism and innovation with Councils using performance data far more effectively to engage local residents directly with performance and the decision making process.
Our third recommendation is on the local economy. We argue that Councils should make much more sophisticated use of their existing powers in order to stimulate their local economies.
Councils should focus their economic development investments with laser like precision on those parts of the economy most likely to yield growth and commercial success.
Councils should deploy prudential borrowing, risk pooling, trading powers and innovative financial partnership models in order to implement their new investment priorities.
Our penultimate recommendation encourages local government to take a greater leadership role in cross boundary working. Local public services are organised in an incredibly complicated manner. There is confusion about who runs which services, and the spatial level at which they are supposed to be run.
There is a great opportunity in this context for local Councils to take on a much stronger commissioning role for the wider public sector aimed at achieving key local outcomes,
Finally we recommend that Councils embrace financial innovation to a far greater extent.
The hesitancy of many Councils to use existing financial freedoms and instruments is inexplicable and not sustainable in the current funding context.
We suggest, for instance, that Councils set themselves a self imposed target, in the region of 10% of gross revenue, to be raised through local revenue raising techniques other than Council Tax collection.
These five recommendations alone will not, of course, address all of the challenges facing local government. But they do set out a vision for how local government should be in the future.
The challenge of a local government recession is unlike any that politicians and managers have faced in the past decade at least. The degree of difficulty will be high.
However a visionary approach is preferable to drifting unprepared into starker choices, involving deep and inefficient cuts in essential services or substantial tax increases or a lethal combination of both.