Robert Black: Facing up to fiscal challenge

The first decade of devolution was the most benign period for the public finances in living memory, with budgets growing close to 5 per cent a year in real terms. We are now into the most challenging period in living memory, with the current spending plans providing for reductions of over 12 per cent by 2014-15 and the prospect of further reductions beyond that.

Attention is usually given to the bleak prospect for public revenues, but we need to be acutely aware of pressures on the cost side. The backlog in maintenance of the physical estate (roads, buildings and other infrastructure) is in excess of £4 billion. To meet targets, councils will need to increase spending on waste management to £580 million a year. By 2030, an extra £3.6bn will have to be found to pay for health and social services for people over 65, if delivery systems remain as they are now.

Energy prices continue to rise ahead of general inflation. Free personal and nursing care costs have been rising around 15 per cent each year and are now above £560m. The cost of the concessionary travel scheme could rise towards £500m in the next decade. Free prescription charges and eye tests amount to around £150m. Drug prescribing costs more than doubled in the last decade and now stand at over £1bn.

The council tax freeze, which benefits better-off home owners and occupiers, will leave an income shortfall of around £490m which has to be met from other sources by the end of the spending period. Welfare reforms will have significant implications for many vulnerable groups and the consequent pressures will be most keenly felt by local authorities and charities.

Scotland’s largest council, Glasgow City, has already reduced its workforce by about 10 per cent. It is saving roughly 12.5 per cent in its revenue budget over the five years up to 2014-15. Within this, the council has to accommodate the cost pressures and additional social needs which I have outlined. For the following two years officials are anticipating further reductions of around £50m.

Political debate is focused on the independence issue, leaving less space to address the great challenges we are facing, but we cannot afford to place this agenda to one side until after 2014.

How do we respond to these challenges? A good starting point would be to ensure that public service productivity improves. The picture is mixed. Tight cash limits are an incentive to improve productivity. The Scottish Government’s top-down efficiency targets delivered significant savings, but continuing with a top-down approach increases the risk that services will be affected. The Office of National Statistics found that rising NHS budgets at the UK level did not produce commensurate increases in outputs.

Audit Scotland reported that a real-terms increase of 68 per cent in spending on orthopaedic services over ten years produced an 11 per cent increase in activity. Of course, outcomes for patients may be getting better. It may therefore be a good sign that measured activity is declining, but without data on the quality of the service, we simply do not know if this is the case. This is an unacceptable state of affairs given the severe constraints on budgets and the high opportunity cost of every public pound

Successive governments have put considerable emphasis on partnership working. The need for partnerships partly reflects the complexity of modern service delivery and a commitment to ensuring that services are joined up across organisational boundaries.

But Audit Scotland reports show that partnerships are complex and challenging to operate. There is insufficient evidence that partnerships have been making a real difference to joining up service delivery or to improving quality and access to services. They tend to add administrative complexity rather than reducing costs.

Councils and health boards still have a long way to go to develop good commissioning of care services. This matters greatly to not-for-profit service providers, which play a vital role in this sector, and, equally importantly, to vulnerable clients who require stable care packages that are suited to their personal needs.

In the first decade of devolution, with the generous budget settlements, it was possible to deliver better services, better pay and conditions in the public sector, and of course to provide many important services free at the point of delivery. On average, there have been 15 Acts of the Scottish Parliament put on the statute book each year, many of which made a real difference to people’s lives. This is a significant achievement by any standard. However, given the severe financial constraints and a long economic recession, the Parliament should be thinking about its contribution to the transformational changes which will be needed.

Law-making should not be exempt from the productivity challenge. Is enough done to make sure that each and every piece of legislation is really necessary? Is there sufficient challenge to the government to find out if the desired outcomes could be achieved administratively? Is enough done to ensure that both the financial costs, and the compliance costs, of legislation are made clear at the outset? Should there be a mandatory requirement to review certain legislation after a few years of operation? Should there be sunset clauses for regulations?

These questions are important, partly because more than 70 per cent of bodies in an Audit Scotland survey reported that legislation and statutory duties were a barrier to achieving efficiencies.

Should the Parliament put more emphasis on budget scrutiny and performance review and if necessary, scale back its work on processing legislation? The finance committee is well served by an expert adviser and a small financial scrutiny unit, but examination of the budget remains short term and incremental.

Since 2002 I have been proposing that there should, over the lifetime of a Parliament, be systematic scrutiny of the performance and efficiency of service delivery across every spending area, as part of a rolling programme of reviews. Is the time now right to develop this idea?

The David Hume Institute and the Royal Society of Edinburgh suggest that Scotland needs an augmented Treasury function or an equivalent to the Office of Budget Responsibility at the UK level. I would go beyond that. A standing commission on resources and performance, working closely with the Scottish Government but also accountable to the Parliament, could provide the wide-ranging analytical reports that would be needed for Parliament to conduct a rigorous, evidence-based reviews across the public sector.

Similar bodies exist elsewhere, one example being the Australian Productivity Commission. By redeploying existing resources, a commission could be established at little or no additional cost. There is no shortage of issues for a commission to consider. As a starting point, it could blow the dust off the excellent Independent Budget Review report which came out some two years ago, and it could also delve into the very large pile of Audit Scotland performance reports.

If public bodies knew that they were soon to come under the spotlight of the commission, they would be incentivised to improve their productivity and cost information before the economists and performance auditors paid a visit.

Given that there is little desire in Scotland for introducing further competition in the public sector, we have to provide an alternative challenge framework. A powerful commission on resources and performance could be part of the answer.

• Robert Black is a former Auditor General for Scotland