Brian Monteith: Excess spending still with us

IN THIS so-called age of austerity it is possibly difficult for us to comprehend that there remains such a thing as public sector waste.

A brave politician could still find savings in the public sector and government departments, writes Brian Monteith. Picture: PA

Surely with all the cuts, cost-trimming, rationalisation, centralisation and new efficiency strategies there is no fat to be found? It is only natural to expect our municipal and central services must be fitter than ever before with no more savings to be found.

Yet such is the scale of government intervention, it is not that difficult to find spending commitments that might be questioned – resulting in the possibility of delivering large savings for the public purse that can be passed back to the taxpayer. To prove this very point, the TaxPayers’ Alliance has just published a new volume of the Bumper Book of Waste that has found an astonishing £120 billion of excess spending – practically the same as the government’s current annual deficit. That is the equivalent of £4,500 per year for every UK household.

If that £120bn – or even half of it – could be saved, then the economic prospects for the country would change overnight, the political future for the coalition government parties would look a great deal brighter and the livelihoods of countless people would be improved. But is it realisable?

There are two things that leap out from the report immediately: firstly, we have been here many times before, inasmuch as governments are constantly fighting waste as if it is like painting the Forth Bridge; and secondly, what is some people’s waste is considered an entitlement by others.

Both difficulties call for an eternal vigilance that few politicians possess, and even were they to have the political will and resolution of Margaret Thatcher, there is always the need to win elections – which makes compromise a necessary part of the process.

That is why Thatcher herself had to launch initiative after initiative to try and find more waste that could be saved – and why her reputation for scything public spending is undoubtedly greater than her actual achievements.

Taking information from original research and other studies conduct by institutes that specialise in particular fields, the bumper book’s list includes the following: the £53bn additional cost of funding pay and pensions for public sector workers over and above the private sector average; a total of £25bn wasted through inefficient public sector procurement and poor use of outsourcing; the £20.3bn cost to the economy of public sector fraud; a sum of £5bn paid in benefits to those with an income in excess of £100,000; losses to the taxpayer from RBS and the sale of Northern Rock totalling £4bn; an amount of £2.9bn spent needlessly by the Department for Business, Innovation and Skills and Department for Culture, Media and Sport; and the £1.2bn contribution to the annual subsidy to foreign farmers through the EU’s Common Agricultural Policy.

Just looking at that list shows how difficult it is to achieve value for money in government. Public sector workers are naturally very keen to guard their pension rights and are willing to strike if need be. What might be viewed as wasteful by some politicians (why is it necessary to pay better-than-average pensions in some public sector jobs?) will be challenged by others. The closer to an election that any savings are proposed then the chances of a resolution favourable to the taxpayer are reduced. Given that the coalition parties face an election in two years, the prospects for making a sizeable dent in that £53bn pension bill seem poor. Also, by their very nature, achieving savings in pensions is a gradual process; politicians need to be prepared to take a long view – often rewarding future governments they may not be part of. The political incentives are loaded in favour of the pension recipients rather than the taxpayers who help fund the most generous schemes.

The scale of the challenge does not mean any attempt should be abandoned, but every billion saved will expend a great deal of political credit that only the toughest and wiliest politician can risk.

Some waste will always be with us. Take fraud: all that can be done is to minimise it by investing in greater detection and achieving prosecutions that act as a deterrent. Eliminating it altogether is just not practicable.

As for public procurement, there will always be a competing demand for achieving the highest savings – but at what cost to the quality of the goods and services? Again, a balance has to be struck that means procurement improvements cannot (and probably should not) realise 100 per cent of their potential.

Even so, the TaxPayers’ Alliance claims, with some justification, that its total of £120bn is almost certainly an underestimate. Following a rigorous assessment of relative efficiency levels between governments, the European Central Bank found that if the UK’s public sector were as efficient as that in countries like the US, Australia and Japan, some £137bn could have been saved in the last year. Inefficiency is undoubtedly waste, suggesting there’s certainly more than £120bn to be saved.

To be truly effective in cutting waste, there has to be an acceptance of the need to challenge the scope and role of government. A recent paper for the CESIfo Group of economic researchers, by James Cloyne of University College London, found that a 1 per cent cut in taxes stimulates British GDP by 0.6 per cent on impact and by 2.5 per cent over three years, suggesting that savings from waste that feed into tax cuts can be beneficial to the economy as a whole.

Taken another way, it also suggests that supposedly “good” or “beneficial” public spending – such as that justified by Vince Cable and his Department of Business, Innovation and Skills – is not worthwhile unless it generates 0.6 per cent growth in GDP in the short term or 2.5 per cent in the medium term. If such public sector economic activity creates such growth then reducing taxes by cutting out well-intended spending programmes is more likely to be better for everyone.

Chancellor George Osborne can do us all a favour in his coming spending review by challenging not just the obvious waste but the need for whole departments and what they do.