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Philip Hammond: Doing more with less

The challenge facing whoever wins the next General Election will be a daunting one;

The backdrop is an unprecedented peace-time fiscal deficit, with Government borrowing more than a quarter of what it is spending. 

Hopefully, the recession will have finally come to an end and economic growth, however modest, will have resumed.  But as the Governor of the Bank of England has emphasised, the recovery is likely to be uneven. That means it will be vital to keep interest rates low to continue support to highly-indebted families and businesses while financing the investment that will be needed to deliver the jobs and sustainable prosperity of the future, as well as avoiding a public sector debt trap.

But to allow interest rates to remain low in the face of unprecedented levels of Government borrowing, the incoming Government must demonstrate that it has three things:

a clear strategy for resolving the fiscal crisis this country faces;

a mandate from the electorate to do so,

and the political resolve to execute that mandate, however tough the going gets.

Anything less threatens to undermine Britain's creditworthiness and put our coveted AAA credit rating at risk. A loss of confidence in the UK's ability, willingness and commitment to address its fiscal problems, could make financing the deficit impossible - or at the very least, ruinously expensive.

Once the election is over, whatever the result, the markets will expect immediate action - with a credible plan delivered over a credible timescale.  Commentator after commentator, from the CBI, to the OECD, to the Governor of the Bank of England, have now endorsed our view that "credible", in this context, means going further and faster than the present Government proposes.

The stark reality is, that with a deficit running in excess of 12% of our GDP and probably more than half of that being structural, rather than cyclical, the end of the recession does not mean the end of our fiscal problems.

We face a painful adjustment of expectations after years of an illusory prosperity based on the debt-fuelled explosion of public spending, asset values and financial sector profits. 

The pain of that adjustment can only be tempered by sustainable economic growth.  That is why David Cameron and George Osborne have been focussing on the challenges of promoting and sustaining economic growth in the years ahead.

But growth requires confidence and affordable credit.  And both the restoration of confidence and the maintenance of low interest rates depend upon a credible fiscal strategy.

So we are ready to take the tough decisions that will be needed in the coming months, precisely to secure economic growth. 

We know that some of those decisions may not be popular. 

But we will not shirk from them. Because only the restoration of fiscal discipline will allow a continuation of the supportive monetary policy by the Bank of England that will get Britain's economy back on course.

We have pledged that an incoming Conservative Government will review every government programme.  Where we identify programmes or projects of low social or economic value, delivering poor value for taxpayers' money, or ambitions that are simply beyond the nation's means, they will need to be abandoned, or modified, or postponed - and we will say so clearly.

George Osborne made a start at the Conservative Party Conference a few weeks ago, by setting out some of the specific measures that a Conservative Government will take to tackle the deficit it will inherit, including a one-year pay freeze in the public sector from 2011, advancing the date for the state pension age increase, capping the biggest public sector pensions, cutting the cost of Whitehall bureaucracy and quangos, ending child tax credit for those on the highest incomes and scrapping child trust funds for all but disabled children and the poorest families.

He also made clear that these measures would have to come on top of tens of billions of pounds of efficiency savings throughout the public sector.

Because while people understand that savings must be made, before any programme is cut, or any project abandoned, they expect a competent government to have first ensured that no stone is left unturned in the war against waste;

that all the spending it is undertaking on behalf of the taxpayer is delivering services in the most efficient way possible;

that it is obtaining maximum value for the taxpayer's hard-earned money.

Labour has failed that efficiency challenge.

A succession of reviews - from Gershon in 2004 to the latest Operational Efficiency Review - have identified clear scope for savings but sadly to a government that has been remarkably ineffective at delivering them.

According to the National Audit Office, only one quarter of the Government's original claimed delivery of Gershon savings stand up to scrutiny.

Behind the rhetoric of the succession of "efficiency drives", Labour's record in office on public service productivity has not just been poor, it has been catastrophic.

Back in 1998, Gordon Brown identified productivity as the greatest challenge facing Britain - the "fundamental yardstick", as he put it, of economic performance - but then spent a decade ignoring it in the public sector as he crippled our public services with his unsustainable overindulgence.

He defined Labour's agenda for the public services by reference to inputs rather than outcomes. The ultimate betrayal of the productivity agenda.

For a decade Labour politicians, challenged on the public services, have reeled off the figures of more money spent, greater resources employed - apparently oblivious to the price of this indulgence in the shape of falling public service productivity.

Over the first decade of Labour's rule from 1997 to 2007, according to the ONS, quality adjusted public sector productivity shrank by 3.4%.  Over the same period, productivity in the private sector of the economy grew by over 30% and even in the services sector, grew by more than 20%. 

We have modelled what would have happened if the public sector of our economy had delivered the same productivity performance as the private service sector in each year of that decade. The result is startling: we would today be enjoying the same quality and quantity of public services - with a saving to the taxpayer of some £60 billion per year.  That is the price we are paying, every year, for Labour's failure to deliver public service reform.

Put another way, possibly substantially more than half of our structural deficit - the bit of the deficit that we have to tackle by fiscal consolidation - is due to Labour's failure to obtain value for money for the increases in spending it lavished on the public services during the good years.

That means that at least £60 billion of efficiency savings could be achieved simply by making up the lost ground of Labour's lost decade without any impact on public service outcomes.

Some of that saving would quite properly be reinvested back into front line services, for example in health where we have committed to real terms increases in funding. 

Labour's £60 billion inefficiency bill underlines the scale of potential savings that could be harvested.  For the future, we can, and will, resolve to drive productivity gains throughout government and the public services on a par with those achieved in the private sector.

Not, as Labour has attempted to do, by one-off, time limited, "efficiency drives".  But by placing the systematic driving down of unit costs at the heart of what our public services do.  Delivering a fundamental change in culture across government and the wider public sector.

I am used to a polite scepticism of this agenda.

Unsurprisingly, Labour's failed "efficiency agenda" has given efficiency a bad name.   As something much talked about, but seldom delivered;

some kind of "soft option".

It won't be a soft option if I become Chief Secretary.

The savings required to reduce the deficit over a sensible timescale and to restore confidence in the British economy will be made. That much should be in no doubt.

But, just as any fool can spend money - Gordon Brown has demonstrated that in spades - so any fool can cut a budget. 

The challenge we set ourselves - and the basis on which we should be judged - is our success in ensuring that the reductions in budgets for administration and continuing programmes, over and above the programme and project cuts that have been explicitly announced, are absorbed by genuine improvements in public sector productivity.

I am under no illusion whatsoever about this: a Conservative Government will be judged at the end of a four or five year term not on its rhetoric, but on its demonstrated ability to protect frontline public services while shrinking the deficit and delivering sustainable economic growth. 

So the principal job of the Chief Secretary in the next Government will be to ensure that the machinery in the engine room of government is calibrated to deliver a continuous stream of productivity improvements; enhancing the efficiency of public services; delivering improvements in outcomes, even as budgets are reduced.

We do not accept that the public services are intrinsically less efficient than other parts of the economy or the lazy assumption that more money, even badly spent, necessarily means better outcomes.

But we do understand that Labour's approach, over more than a decade, has created an environment of perverse incentives which we must now undo.

Our challenge is two-fold: First to ensure the rapid implementation across Government and the public services of the many efficiency savings that have already been identified, but not effectively delivered.

And secondly to embed the process of constant innovation in our public sector to create a culture in which the pursuit of efficiency becomes self-sustaining.

To help me in these tasks, we have decided to establish a Shadow Public Services Productivity Advisory Board, recreating the Advisory Panel that Gordon Brown abandoned in 2006.

It will comprise a small group of prominent individuals with experience and understanding of this agenda in the public and the private sectors. We will announce details of the membership of the Board shortly.

It will start work immediately and if we win the election, it will go with us into Government.

To oversee the task of turning the "efficiency drives" of the past into an institutionalised culture change in the public sector of the future.

Labour's failure even to begin the reforms that are necessary to embed that culture of financial performance management into our public services is its ultimate undoing.

The irony is acute: now that even Gordon Brown accepts that spending must be cut, Labour's genetic inability to deliver deep-rooted public service reform condemns it to be the party that will end up delivering public service cuts.

Meanwhile the Conservatives, philosophically much more open to the case for reform, less constrained by ideological baggage about the configuration of public service delivery, will embrace the radical changes needed to protect services in the face of an unprecedented squeeze on resources, by embedding a culture of efficiency gains.

Under Labour, the "efficiency agenda" has been a burden imposed on departments and organisations; A set of requirements which are seen not so much as a solution to an internal problem, as yet another external challenge to be met; another box to be ticked, another threat to be seen off.

If efficiency gain is going to yield year-on-year savings and become a central part of what public sector bodies do, it has to become embedded within them, not imposed upon them.  It has to work with the grain of those bodies, not against it.

We need a "hearts and minds" agenda: coercion is hard work and can only be maintained for a limited period of time.  But win the hearts and minds and the dynamics change radically.

That is what we need to do with the managements of our public services.  To create a "demand pull" for efficiency solutions; a hunger for innovation; a desire to deliver productivity improvement.

So that the solutions that the efficiency agenda offers become tools which the managers in our public services grasp enthusiastically to deliver what has become their own agenda.

Why will we succeed where Labour has failed? What do we bring, that Labour lacks?

First, an honesty and a clarity, with ourselves and with the electorate, about the scale and urgency of the task ahead. David Cameron was the first Party Leader to tell the British people, frankly, that spending would have to be cut.  It took Gordon Brown five months to catch up with him.  Even now, many Labour politicians, including the Prime Minister, remain equivocal about the need for spending reductions - one minute embracing the argument; the next announcing new spending commitments. Proposing legislation to enforce fiscal discipline, while sheltering behind any convenient reason for not actually delivering it.

We have no such doubts.

Secondly, an iron determination to deliver: a Conservative Government will require spending to be reduced; and it will require key frontline public service outputs to be maintained; and therefore costs per unit of output will fall - as we take the first steps to rebuilding the relative productivity of the public sector. Everyone - Ministers, Civil servants and public sector workers, will have the clearest and most unambiguous signal from the very top of an incoming Conservative Government of the absolute priority it places on this agenda. And will be left in no doubt as to the measure of success by which they will be judged.

Thirdly, a readiness to embrace change; to respond to this crisis by seizing the opportunity to make our public services work better, deliver more effectively, be more accountable. A willingness to take measured risks, to relax control, to de-centralise power; to open up government; to extend choice to service users and greater autonomy to service providers.

And finally, the competence to deliver. A knowledge and understanding of the challenges of a competitive environment where innovation is the key to survival; a willingness and ability to learn from the experience of others - in the private sector, in local Government, in the success stories within our own public services and from abroad. The understanding to interpret and apply those lessons; and the humility to listen to those who have trodden this road before. 

How will we go about the task of changing attitudes? Of creating a culture of financial performance management and innovation throughout our public services?

Earlier this year, we set out our initial thoughts in our consultation paper "It's your Money"; Greater transparency of public spending information; clearer incentives in the civil service; a strengthened role for financial managers; new ways to investigate wasteful spending in Government and a specific duty of care on senior civil servants in the spending of public money.

Since then, we have received many responses to that consultation, many offers of help and support to take this agenda forward. Working with a wide range of individuals and organisations, in the public and private sectors and from abroad we have refined and sharpened our ideas.

Almost without exception, the responses we have received deliver the same message: it can be done.

It will take grit and determination. There are many barriers and much inertia to be overcome. It will require a willingness to think outside the box and to take decisions that Sir Humphrey might have described as "brave", but the clear advice is that cost savings of double digit percentage figures can readily be achieved in the short term without damaging public service outcomes, and that ongoing productivity gain can be delivered by embedding effective financial performance management in the culture of our public services.

I need to focus on three drivers of behaviour that are crucial to changing that culture:

The first is transparency.  By shining a light into the process of government; allowing the public, journalists, commentators - opposition politicians - to see just who is doing what and how effectively, we will change behaviour patterns.

We have already announced our commitment to publish readable departmental accounts; to post online all items of expenditure over £25,000 and to list everyone paid more than £150,000. These measures alone have sent a shock wave through Whitehall.

And we are now analysing ideas for extensions of the transparency regime into other areas of Government.

If you doubt that transparency changes behaviour, ask officials at Windsor and Maidenhead Borough Council who know that their use of energy is being monitored real-time over the internet by their potential critics - a policy that cut energy consumption in Windsor's public buildings by 15% in less than a week.

Or GLA employees who know that every item they buy costing more than £1,000 is going to be included in a monthly report for scrutiny by millions of Internet users across the country.

The likelihood of being found out is one of the most powerful disincentives to sloppy and wasteful behaviour.

The second driver is effective incentives. In public services today incentives are at best blurred and at worst perverse. 

Departments or bodies making significant savings through improved productivity are as likely as not to see the savings snatched back on an ad hoc basis by the Treasury.  What kind of incentive does that create?

So a Conservative Government will introduce a structured sharing of any further efficiency surpluses, with the majority being retained by the public service organisation, creating strong and clear incentives to efficient delivery.

Another powerful incentive is being paid only for what you deliver - "payment by results". We will provide more and stronger incentives by extending the principle of tariffs and payment by results already established in the NHS and at the heart of our schools policy.

Under our proposals, schools will be paid for each pupil that they attract, hospitals for the treatments they deliver. Our welfare to work programme will pay providers only if they succeed in getting someone into a sustainable job. If you don't deliver, you don't get paid.

A payment by results structure means that waste is never funded. 

This is the best way of protecting output and ensuring that organisations cut waste, rather than front-line services.  We would extend the payment by results structure to as many public services as possible, using innovative approaches like "availability contracts" in areas where outputs are more difficult to reward directly.

And we will also ensure that Government Departments have a clear incentive to use more efficiently the billions of pounds worth of property assets on Central Government's balance sheet. We will transfer the ownership of central government property into a publicly owned, professionally managed, asset company, which will charge departments rent for their use. So that if they reduce that use, they will make cash savings.

The third driver is freedom to innovate.

We start from the assumption that people in the public sector can be as innovative and enterprising as the private sector.

What has stifled public sector innovation is a top-down, micro-managing, target-setting approach. A Conservative government would give all managers the freedom to manage and personal accountability for the results they achieve.

We know that a significant part of the productivity gain we are seeking in the public services will be delivered through process innovation - finding different, smarter ways to deliver service outcomes.

We need to free the professionals working in our public services from the straightjacket of process targets which Labour has trapped them in, and set them free to deliver that innovation.

I know from my own experience that innovation is driven by competitive challenge - and the response of established players to it. Our public services are crying out for fresh, better and more efficient ways of delivering services.  And who better to identify them than the people who work in them. 

So a Conservative Government will sweep away the mass of box-ticking process control targets that Labour has put in place, with its expensive infrastructure of rule-setting, specifying, ring-fencing, bidding, allocation and monitoring, to set them free. 

And in the process help to deliver our pledge to reduce the policy, funding and regulation cost of central government by one-third over the lifetime of the next Parliament, saving £2 billion a year.

In some areas, competition to provide, as under our schools programme, will deliver the stimulus for innovation in the public sector. In other areas, outsourcing will be the right solution. But the answer will not always lie outside the public sector. Why can't high-performing public sector businesses themselves act as the "new entrants", challenging other providers to up their game? Why shouldn't an agency with an outstanding track record of customer service and a demonstrated capability in the use of technology - such as the Passport Service - bid for work from other Government departments?

What will matter to us is whether or not a successful outcome is delivered at an affordable price - not who delivers it.

By giving public sector entities the right to bid to do work for other departments or agencies and a transparent framework in which to do so, we will foster a cadre of public sector entrepreneurs, innovating across the sector to deliver better public services at lower cost to the taxpayer.

We cannot afford not to unleash the latent entrepreneurial talent in our public sector. 

<h2>CONCLUSION</h2>

The immediate need to reduce the cost of delivering public services is self-evident.

And I have quantified this morning the staggering burden British taxpayers are bearing as a result of Labour's failure to rise to this challenge.

The option of ever-higher taxes to support public service productivity that is out of line with the rest of the economy simply does not exist any more.

So if we are to ensure our public services remain affordable and sustainable for future generations to enjoy, we need change.

Scrapping Labour's tired top-down approach of targets, bureaucracy and centralisation.

Bringing in a fresh new Conservative approach that uses transparency, incentives and freedoms.

To embed a culture of innovation that will deliver productivity growth year in, year out.

Protecting our services; safeguarding our public finances; delivering the change Britain needs.

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