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Last Updated: Thursday, 18 March, 2004, 16:06 GMT
Is Brown right to wield the axe?
Analysis
By James Arnold
BBC News Online business reporter

Gents in bowlers
Good value for money?

As making the country's ends meet becomes ever more of a struggle, it's little wonder that policy makers are looking at ways to tighten their belts - or rather, other people's.

Reducing government waste has become an obsession of all sides of the political debate around this year's Budget.

Last month, the Tories said they would slash 7bn off annual government running costs, resulting in an eventual 80bn pot to pour into tax cuts and better public services, and asked the public to send in their ideas to save money.

Now, Chancellor Gordon Brown has unveiled a wave of cut-backs to the bureaucracy, arguing that public-sector efficiencies could unlock 20bn in annual economic value.

It seems that waste and inefficiency is now the key battleground in the debate over the future of the public spending, with both political parties eager to discover costless savings they can use for to achieve their own goals.

No one is disputing that public-sector waste exists, but it might be worth asking whether these efficiency zealots are tilting at windmills.

Slashing and slicing

Mr Brown is planning to carve out waste with two tools - the axe and the scalpel.

DEBT PREDICTIONS
2003/04: 37bn (up 10bn)
2004/05: 33bn (up 9bn)
2005/06: 31bn (up 8bn)
2006/7: 27bn (up 5bn)
Figures show Mr Brown's current predictions compared with his forecasts in April 2003

He wielded his axe mightily in this year's Budget, announcing 40,000 job cuts at the Inland Revenue and Customs & Excise - which are to merge - and the Department for Work and Pensions.

Spending at the head office of the Department for Education and Skills is to fall by one-third, and most departments are to cut their administration costs by 2.5% annually for the next three years.

And willingly or unwillingly, some 20,000 civil servants are to be shipped out of London to berths in the cheaper provinces.

While the absolute numbers seem large, amounting to some 7.5% of the 530,000 full-time civil servants there is some element of smoke and mirrors.

Of the 30,000 civil servants to be cut from the Department of Work and Pensions, for example, reductions by 18,000 had already been announced, with the additional 12,000 job losses to come in 2006-7 and 2007-8 at the same rate as before.

Saving 10,000 jobs by merging Inland Revenue and Customs and Excise may turn out to be penny-wise and pound-foolish if it means that there is lower tax revenue for the government - and the government has already reduced its estimates for job-saving by 3,500.

Pay deals

Some of those jobs will just be transferred to the private sector, eliminating the civil servants but not necessarily the spending.

And the total saved by cutting back administration costs to the level when Labour came to power amounts to a modest 1.1bn, according to the independent think tank, the Institute for Fiscal Studies.

Mr Brown did not mention another factor which will have an even bigger effect on public spending - the future wage settlements he will be hoping to negotiate with the unions, limiting public sector pay rises to the new inflation index of 2% and under.

With his scalpel, meanwhile, Mr Brown is to perform the more delicate operation of reforming the way the government functions, introducing a culture where public money is spent with intelligence and care.

Cavaliers...

Certainly, there is fat to trim.

Examples of gross self-enrichment are, thankfully, rare in the British civil service.

But carelessness seems, on anecdotal evidence at least, to be distressingly common.

Best-known are the billions of pounds spent on ill-conceived and abortive information technology projects - most notoriously at the Child Support Agency and the Inland Revenue.

A guide to the ups and downs of the UK economy

But the same cavalier attitude seems to penetrate all the way down to relatively modest amounts.

It emerged last month that booking and repeatedly cancelling seminars at a luxury hotel had resulted in a 70,000 bill for the National Health Service's own waste-reduction task force.

And some of the savings identified by the yet-to-published Gershon report, such as combining the purchasing power of government to get lower prices, seem eminently sensible.

... and Roundheads?

But before politicians get too excited, it may be instructive to compare the supposedly wasteful public sector with the supposedly lean privateers.

On the face of it, the public sector has much to learn here.

The various downturns of the past couple of decades have resulted in thousands of corporate job losses, and produced a far tighter focus on value for money; most serious companies now operate according to a battery of efficiency measures - return on capital employed, for example.

Treasury estimates that overall productivity in the private sector is now growing at 2.25% each year

But as anyone who works in a big company knows, waste is just as endemic to the private sector as the state, and the sums involved can often be much larger.

Small beer

Cutting billions from state institutions is complicated by the fact that they are relatively niggardly operations.

The three senior civil servants at the Ministry of Defence, for example, earn between 130,000 and 160,000 - grand for the public sector, but peanuts by comparison with companies.

The chief executive of oil company BP, an organisation of roughly the same size as the ministry, earned 3.3m last year, without even counting shares and other perks.

As a whole, public-sector salaries are rising briskly: they have gone up by 17% on average since 2000, compared with 15% in the private sector.

But pay in the civil service "in no way stacks up with the private sector," says Jonathan Baume, general secretary of the First Division Association, a union for senior civil servants.

Productivity problems

Ah yes, say the axe-wielders, but what really counts is not what you spend, but how you spend it.

The secret of the private sector is its productivity, squeezing far more output from every pound than a government ever could.

The UK Government's record here certainly is not good. According to a report published in the middle of last year, public-sector productivity has shrunk dramatically since the mid-1990s.

In 1995, government production - a sort of gross domestic product of state services - more or less equated to the cash put in; now, the state spends some 45bn more per year than it earns in output.

In theory, then, by allocating government largesse more sensibly, Mr Brown's 20bn in annual efficiencies looks relatively modest.

But his efficiency savings of 2.5% annually imply that in future the public sector will do much better than the private sector at boosting productivity - historically an unlikely prospect.

Slash now, pay later

Or perhaps not.

For a start, measuring government output is horribly inexact, not least because more does not always mean better - processing more benefit claimants, for example, is not a public boon in the same way as selling more cinema tickets.

And government expenditure now could pave the way for government output in the future, either by building more schools and hospitals and so on, or by investing in technology that will make the state purr along more smoothly.

Mr Brown had earlier seemed to recognise this by setting his fiscal rules to allow him to borrow to invest.

Slashing expenditure now certainly makes chancellors look more decisive, but it might come at the cost of future efficiencies.

The scalpel, it seems, is mightier than the axe.


WATCH AND LISTEN
The BBC's Jeff Randall
"The Government could save 1.5bn a year"



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