A d v ic e Pa p er (10-04)

M A RC H 2 0 1 0

The efficient delivery of public services within a period of tightening public expenditure:

comments for the Scottish Parliaments Finance Committee.

Summary Public bodies must acknowledge the seriousness of the scale of reduction required in public expenditure and prepare
the public not just for efficiency savings but for a fundamental shift in the level of services provided and manner in which these are delivered.

The immediate time frame will be the next three years of the spending review but the impact of the current
budgetary challenge is likely to have long term implications and therefore requires a reframing of public sector expenditure in Scotland.

Scotlands public bodies should reflect on how services were delivered in previous periods when similar levels of
spending prevailed.While these periods will have had challenges of their own, there may be lessons to be drawn on how the economy can be reshaped in a more sustainable manner.

The scope and scale of the reduction required over the next spending review period must be made clear at the highest
level of government.There must be a move away from annual targets which can obscure this reality and drive public bodies to make quick, apparently more manageable cuts that in reality undermine their future capability.

A balance must be found between top-down and bottom-up decision making. Central government must provide
leadership, set clear targets for the spending period and provide guidance on what services are essential. It must use its leverage as the principal provider of funds to encourage rapid adoption of good practice. However there must be a high degree of flexibility on how targets are achieved and services delivered.There must also be leadership from the Scottish Parliament in seeking ways in which difficult and potentially divisive issues can be effectively addressed.

There are real opportunities for leadership from within the public and voluntary sectors.With little certainty over
future levels of funding, public bodies will have to be more innovative and agile.There should be clear incentives to develop novel ways of working.

It is urgent that all central policies are re-evaluated with a level of realism as to what is absolutely essential to the
Scottish public and economy. Only when the social, economic and environmental benefits and costs of each policy are evaluated should decisions be made as to which will be pursued.

Policies that would reduce the burden of debt on public sector balance books must also be considered.The mutualisation
of housing stock, for example, would create a net receipt and reduce on-going expenditure on the modernisation and up-keep of these homes which would then be the responsibility of the not-for-profit sector.

In order to secure a sustainable economy in the longer term consideration must be given now to the difficult but vital
issues of reducing the public wage bill and how the allocation of resources within Scotland can be brought in line with patterns of need. In effect there is a need to reset Scotlands budgetary framework.

Ensuring that the expenditure of public money is well managed and efficient will require a tough audit scrutiny
process.Audit Scotland must consider how it will strengthen its analysis of service providers and encourage the rapid adoption of good practice. However the Scottish Parliament, and the Finance Committee, will have a key role to play in ensuring that proper scrutiny is undertaken in this difficult period.This is likely to require a more focussed and speedy approach to regulatory scrutiny.
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Introduction
1 The Royal Society of Edinburgh (RSE), Scotlands National Academy, welcomes the strategic budgetary review being undertaken by the Finance Committee of the Scottish Parliament, with its focus on the efficient delivery of public services in a period of tightening public expenditure.The Fellowship of the RSE includes extensive expertise on the economy, public management and the allocation of resources, as well as substantial experience in the delivery of public services in the areas of higher education and health among others. The RSE notes that the debate on public expenditure at UK level involves questions around macroeconomic policy, external constraints and the pace at which cuts should be introduced in order to address the level of public debt while protecting economic recovery. However, as the Scottish Governments responsibilities are restricted to expenditure, this response focuses only on the actions that can be taken at Scottish level to ensure that public services are delivered efficiently in a challenging economic climate. Scotland is currently facing cuts in public sector expenditure on a scale that has not previously been seen in recent years. Despite the uncertainty that surrounds questions about the scale and pace of economic recovery, this key fact is incontrovertible. It is imperative that the approaches of those in the public sector reflect the seriousness of the situation. The savings that must be made in the foreseeable future cannot be met through efficiencies in the delivery of public services alone.While efficiency savings are important, championing these as the sole answer to public spending problems implies that such cuts will be painless, with little perceivable impact on service users.The reality of the current situation is that a radical re-think is needed about what services the public sector should provide and how best to provide them. In order to ensure that, given the funds available to the public sector, they are used to the very best effect, alternative modes of delivering any current service need to be openly considered.As there needs to be such fundamental re-thinking, it is crucial that the public be made aware of the range of options and the rationale behind actions and decisions. The Scottish Government and Scottish Parliament both have a role to play in acknowledging and addressing these issues. Both institutions must do more to prepare the Scottish public for the major challenge that reduced public expenditure will entail. Both must take a fundamental look at the baseline and be open to reviewing all existing policies with a critical eye and a degree of realism over what is absolutely vital to the people of Scotland and the Scottish economy. There must be a clear path between the allocation of resources and the delivery of national outcomes that links the activities undertaken by local authorities and other public service providers with the high level objectives of central government. The scale of the cuts required to reduce the level of public debt is unprecedented.What is not are the levels of real spending.The last decade has seen a significant increase in expenditure in the public sector, both in nominal and real terms. In 2000/01 expenditure by the then Scottish Executive was 17.6 billion.This figure has grown at around 5 per cent per annum in real terms since then. However, if one were to apply the GDP deflator to the 2000/01 base, an estimate of what it would cost at todays prices to deliver the levels of public services Scotland enjoyed in 2000/01 is 22 billion.This compares with the current level of approximately 29 billion1. The RSE does, of course, accept that there were challenges in these earlier spending periods that have been addressed through increased spending. Furthermore, policies that have been implemented in recent years cannot simply be reversed and it is also clear that demographic changes such as the aging population will, for the foreseeable future, continue to put pressure on spending to an extent that has not previously been experienced. However, addressing the need to make cuts provides a unique opportunity to reflect on what public expenditure can achieve and think about whether there are lessons from the past that will assist in re-shaping the public sector in a way that delivers the potential for sustainable economic development and growth. In recognising the seriousness of the challenge we face, the RSE strongly advocates a move from the setting of annual expenditure reduction targets to providing a clear picture of the total reduction required over the three year spending review period.We acknowledge that there are uncertainties inherent in longer term predictions, but it is vital that there is widespread understanding of the scale of reductions that must be achieved overall and this can be obscured by less meaningful annual targets.The Centre for Public Policy for Regions has calculated that the Scottish budget in 2013/14 could be between 2.1 billion and 3.8 billion less than that of 2009/10 2. Current analyses3 estimate that public sector funding could decline in real terms by up to 14 per cent by 2014, potentially a cut of over 4 billion to the 2013/14 budget compared to 2009/10.The challenge is unlikely to cease in 2014, which emphasises the need for a longer term approach.

The scale of the challenge facing Scotland

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The overall picture: expenditure reduction by 2014

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1 Unfortunately the statistics recorded in the Scottish Government publication Government Expenditure and Revenue in Scotland 2007-08 do not help since this seems to aggregate Scottish Government and other Government expenditure and quotes a figure for 2007-08 of 45 billion which is obviously not consistent. However, in GERS 2000-01, the fraction of Scottish Executive expenditure relative to identifiable total expenditure was 68 per cent, and so, on the assumption that fraction has been stable, applying it to 45 billion gives approximately 29 billion. 2 Centre for Public Policy for Regions, briefing note: Post Budget 2009 Update of the Scottish Governments Budget Growth Scenarios up to 2013-14,April 2009 3 Professor Sir John Arbuthnott, Clyde Valley Review Nov 09;Audit Scotland, Scotland's public finances: preparing for the future, Dec 09.

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9 Moreover, there is a real danger that, when pressed to meet detailed annual targets, public bodies will be driven to make spending cuts where these are relatively straightforward and immediate, even where they are not the most appropriate cuts to make.These short term knee-jerk cuts and a salami-slicing approach may achieve immediate savings but impair the organisations ability to perform well in the future. been a contentious issue to date as the implementation of shared services has often been a lengthy, challenging and costly process with little evidence of significant savings. However previous attempts at sharing services have taken place largely in a benign financial climate with little incentive to force through the difficult changes needed. In the current climate the pressure to achieve savings may drive local authorities to overcome previous problems. If this is the case, however, the means of delivery in local government must be reconsidered with a view to facilitating the joint working required.The recent ClydeValley Review demonstrated that eight neighbouring local authorities were able to produce a framework extending across the whole range of service delivery from health and social care to waste management and transport services. This change programme is being taken forward by the ClydeValley Community Planning Partnership.

10 Indeed this short term approach may actively restrict public bodies from making the more fundamental changes that are needed to deliver services in a sustainable manner in the long term.This raises a key question on the balance between top-down and bottom-up decision making on strategies and initiatives undertaken to deliver cuts.

Driving change:top-down vs.bottom-up

11 We have asserted that not only the Scottish Government but also the Parliament have major roles to play in providing the leadership required to reshape the public expenditure landscape in such a way that public services are delivered effectively with significantly less resources. It is at this top level that clear targets for reduction over the spending review period must be set and direction on the priority services and the actions that are of paramount importance to the Scottish public and Scottish economy must be given. 12 However the means through which public bodies achieve the cuts needed to meet these targets and the manner in which they deliver services can best be decided by the bodies themselves. It is, after all, these bodies that have responsibility for the expenditure of the bulk of public money, with one third of the Scottish budget being allocated to the NHS and another third to local authorities. Central government can, and should, use its leverage as the principal provider of funds to encourage public bodies to explore and plan rigorously their own methods of service delivery. When faced with budgetary pressure and no guarantees on future levels of funding, public bodies will be forced to become more agile, flexible and innovative.The initiatives that will then be designed and implemented by each body can be tailored to its own circumstances and the needs of the public it serves, drawing on strong leadership and creativity within the organisation. 13 Many public bodies, notably local authorities, operate at a much closer level to service users and can evaluate and address changing needs more rapidly. This is important as demand for certain services changes in light of both the recession, due, for example, to rising unemployment, and changing demographics, particularly of an ageing population. 14 Flexibility for public bodies such as local authorities to find new ways of working will need to include consideration of the shared services agenda.This has
4 Audit Scotland, Scotland's public finances: preparing for the future, Nov 09.

A critical re-evaluation of policies

15 It is in the debate on the policies and actions that are absolutely essential to the Scottish people and economic recovery that the Scottish Government and Parliament must take urgent action and provide clear guidance for public bodies.We opened our submission with the comment that Scotlands politicians must be prepared to reconsider and evaluate all current and proposed policies and take a realistic view as to what elements are absolutely necessary to providing a certain level of wellbeing for the Scottish public and driving the Scottish economy. No policy should be protected until both the benefits and opportunity costs social, economic and environmental of its delivery are critically evaluated, as the protection of one policy will clearly lead to an even greater impact on others. 16 This evaluation applies across the board, to policies instigated or championed by all political parties. While these are inherently laudable, the RSE suggests examples of such policies include the abolition of university student fees, limiting class sizes, the provision of free personal and nursing care (projected to cost around 562 million in 2010/20114 with significant rises thereafter as the percentage of Scotlands population that is elderly rises disproportionately) and concessionary fare travel schemes (estimated at 189.4 million in 2010/2011).There should be no a priori sacred cows. 17 Such evaluation must also take into account the marginal returns of public expenditure to the Scottish economy and consider what areas of spending have the biggest impact on economic recovery and performance.As a major employer in Scotland, and a key commissioner of goods and services, the public sector acts as a driver of the economy in many ways. It has been calculated that for every 1 that is taken off expenditure, the actual saving is 0.63 once factors such as lost revenue,VAT, redundancy payments etc have been taken into account.

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18 There is a responsibility on central bodies to consider also policies that would reduce the burden of debt on public sector balance books. One such example is in housing policy. If the Scottish Government pursued a programme of mutualisation and the transfer of housing stock this would create a net receipt for the public sector balance sheet and reduce public expenditure currently required for the modernisation and up-keep of stock. Responsibility for this would then fall to the not-for-profit sector without recourse to the public purse. Research by Scottish universities confirms that past actions in this area have produced better homes and more satisfied tenants and staff. restructured in line with need.Achieving this kind of change will be a long and difficult process but it is one that will be a key feature of a sustainable economy. The Scottish Government and Scottish Parliament must both lead and drive this process.A more seamless approach to working across the major sectors of health, social services, education, enterprise and development and infrastructural planning is needed.

Accountability for public expenditure

22 Accountability for the expenditure of tax-payers money is important in any financial climate. However in the current climate it is increasingly crucial that the Scottish people can be confident that services are being delivered as efficiently as possible. 23 The RSE urges that the organisations and processes in place to scrutinise public expenditure in Scotland be reviewed in order to ensure a strong and effective audit scrutiny process is in place that encourages public bodies to strive for efficiency.Audit Scotland must consider how it can use its analysis process to drive forward rapid adoption of good practice by public service providers.This will require taking a tough stance on poor performance as well as incentivising these bodies to raise their game from the outset. In light of the short timescales in which public sector bodies must adopt changes to working practices, scrutiny processes should reflect this urgency and enable faster assessment, and sharing of good practice, than has previously been the case. COSLA could play a similar role in relation to the performance of councils. 24 The Scottish Parliament, and the Finance Committee in particular, has an important role to play in this scrutiny process.This will be a key responsibility for the Committee in the immediate future as Scotlands public sector faces up to the challenge of delivering unprecedented cuts in public expenditure.

A sustainable Scottish economy for the future

19 Clearly the financial situation that we currently face demands that public expenditure in Scotland is significantly reduced in the near future. However the RSE wishes to highlight a number of important factors that may not bring short term results but that must be considered now if we are to build a sustainable economy in the long term. 20 A key issue is that of the public sector wage bill which currently stands at around half of public sector expenditure. Clearly there can be little meaningful change without a significant reduction in this spending which will have a consequential major impact on employment.The RSE is aware that there are constraints on taking early action to address this situation, including pay deal periods and a commitment by the Scottish Government to make no compulsory redundancies during the current spending review period, ending March 2011.Time must also be taken to give proper consideration of how the staffing of public bodies should be recast in order that these organisations can deliver the services required of them efficiently. However this consideration must be set in motion now and public bodies must take this forward in conjunction with trade unions. Several local authorities, such as Glasgow, have already made public the scale of job losses they are considering.The talent base in public services in Scotland needs to be empowered and the workforce has to be treated fairly. Engagement with that workforce is a priority. 21 A second factor that must be considered in the longer term is that of the distribution of expenditure within Scotland.The allocation of resources, particularly to local authorities, has, over the years, developed somewhat arbitrarily and does not now reflect patterns of need.With fundamental changes now required to deliver major cuts to expenditure, allocation must be

Additional Information This response has been prepared by an expert RSE working group and signed-off by the General Secretary on behalf of the Society. Any enquiries about this submission and others should be addressed to the RSEs Consultations Officer, Ms Susan Bishop (evidenceadvice@royalsoced.org.uk). Responses are published on the RSE website (www.royalsoced.org.uk).
Advice paper (Royal Society of Edinburgh) ISSN 2040-2694

The Royal Society of Edinburgh (RSE) is Scotlands National Academy. It is an independent body with a multidisciplinary fellowship of men and women of international standing which makes it uniquely placed to offer informed, independent comment on matters of national interest. The Royal Society of Edinburgh, Scotland's National Academy, is Scottish Charity No. SC000470
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