Graham Leicester: Scotland ill-prepared for radical spending cuts

With a nod to its location in Dundee, the conference is heralded as a "Voyage of Discovery". That seems appropriate for the spirit of adventure we will need in the next few years. I hope delegates can live up to the metaphor – not many public officials are ready for a journey into the unknown.

Back in 1997, Gavin McCrone, former chief economist at the Scottish Office, warned me that sooner or later Scotland would have to adjust to a shrinking public sector budget. He suggested we should learn lessons from the deep spending cuts of the early 1980s so that, when the time came, we could make the transition here more intelligently and with less collateral damage.

I tested the idea with others, including potential funders. There was no interest. On the eve of devolution, with emotions riding high and a new Labour government just elected, planning for darker times held no appeal. It still doesn't.

In the event, the anticipated squeeze on public spending in Scotland never came. The Scottish budget has doubled since devolution with average real-term increases of just over 5 per cent per year. Spending on the NHS has more than doubled to over 2,000 for every man, woman and child in the country. Spending on education has increased by 50 per cent over ten years. We really have never had it so good.

But the hour of reckoning is now at hand. Even Audit Scotland's best-case scenario involves spending cuts of 7 per cent over the next three years. In a period of rising demand, where so much of the budget is relatively locked in (over 50 per cent is staff costs, a further 10 per cent capital costs), they conclude that efficiency savings and incremental budget reductions will not be enough to bridge the gap.

This is where the ghost of the 1980s enters the room. A small army of management consultants is now on hand to offer solutions to public agencies struggling to make ends meet. In the first phase, they suggest, we need to make efficiency and cash savings: a hiring freeze, a pay freeze, renegotiate supplier contracts, consolidate purchasing, cut out unnecessary spending on entertainment, travel and so on. This is a bridging strategy to tide things over until growth resumes.

In the second phase we might have to go further: cuts, means testing, charges, shared services and outsourcing. Or if we are feeling bold, take on some sacred cows, too difficult to challenge in good times: terms of employment, pension rights, hospital closures, enforced redundancies.

The third phase involves positioning for recovery. For businesses this is about taking advantage of prevailing market conditions: snapping up talent at low rates, taking over competitors. It is much more difficult to see how this aggressive, invest-in-the-future approach applies in a public sector context. Typical strategies are therefore much stronger on cost-cutting than on providing any credible promise of future viability.

My concern in Scotland, at least in the public debate, is that we are still only talking about a phase one, bridging strategy. It is going to get much tougher than that – and we are woefully ill-prepared. My wider concern is that even the more radical strategies so far on offer will prove inadequate.

Take the NHS, which accounts for nearly a third of the Scottish budget. IFF's forthcoming report, Costing an Arm and a Leg, shows that healthcare costs have risen inexorably for decades, throughout the developed world. There has never been a sustained period of zero growth in NHS history, even in economic downturns.

Yet now the Department of Health is warning the NHS in England to prepare for up to 20 per cent cuts in the next three years. History suggests that this cannot be done by any of the means currently being discussed (efficiency, competition, prevention and so on). Nothing but trouble lies ahead for any politician who promises otherwise.

At least the English debate recognises the scale of the challenge. By contrast, heads in the sand, the Scottish Government last week awarded an above-inflation rise in NHS spending for 2010-11 and issued a press release trumpeting record funding levels. There was no hint whatsoever of the troubles to come.

The cuts of the 1980s were driven by the abstract targets and arcane measures that underpinned monetarist economics. They inevitably manifested as crude, divorced from real lives and blind to human consequences. The danger is that the cuts of the next few years will be equally crude and damaging – because they will be driven by nothing other than rising panic as the relatively painless bridging strategy fails.

The only way to frame an alternative passage through that dark night is to light a candle at the end of the tunnel. We need to know where we are heading, what the pain is for. We need a values-based vision of the future, not simply an accounting formula.

I have been impressed in recent conversations inside and outside government – about health, inequality, community safety, prisons, education – by how many people are genuinely up for this kind of discussion. There is a readiness to acknowledge that some existing spending actually makes matters worse, that much of it involves propping up fundamentally unsustainable systems, and that top down control is both costly and increasingly ineffective.

In all these spheres, part of the shift towards longer term viability is from a service logic of "trust the government" to "trust the professional" and ultimately "trust the user". Yet this is in direct opposition to the trend in a recession – towards tighter performance management and central control. The innovative headteachers I talk to, for example, are worried that the little room they have at present for financial autonomy and professional discretion will be clawed back in the name of austerity.

Yet it is the dynamism, vision and commitment of such individuals that we must encourage in our public services in order to come through this recession stronger. IFF calls them "pioneers", and Scotland is full of them. These people are redesigning the plane while flying it. We need to support them. If instead we deny the scale of the challenge, or rely on the 1980s menu of responses, I fear the plane will crash.

Graham Leicester is director of the International Futures Forum