Yes, you can cut back and reform but it's a tough call

How can you not reform public services if you make sufficiently severe cuts in public spending? Cut spending by five per cent or so and, despite squeals of pain, many public services can absorb that without radical changes: they can use familiar responses such as hiring freezes, pay freezes (or letting pay lag behind inflation), cancellation or delay of contracts, adjustments to qualifying periods or indexation of benefits. Cut spending by ten per cent for any sustained period and such responses become more difficult, but even then many kinds of public organisations can function more or less as before by trimming around the edges.

But cut by much more than that and something really has to give in the basic ways that public services are delivered and government relates to society. So we might think public service reform and spending cutbacks are Siamese twins — inextricably linked, for good or ill. Aren’t they?

Not necessarily. If we look at UK history and that of other countries we can find numerous cases of public spending cutbacks under governments of various parties. There are also instances of public sector reforms that were significant in that they involved major changes in what public services were delivered and how they were delivered.  But those two things don’t necessarily come together.

For example, the UK between World Wars I and II saw two well-known episodes of spending cuts: those imposed by the David Lloyd George Liberal-Conservative coalition in the early 1920s and the cuts imposed by Ramsay MacDonald’s National coalition government in its 1931 emergency budget; the latter far less severe in aggregate than the former, but politically just as explosive. Both involved draconian cuts. The first took well over £100bn out of central government spending in present-money values — equivalent to well over 25 per cent. The second, while less severe in aggregate at less than ten per cent of public spending, nonetheless cut unemployment benefits and public-sector wages by ten per cent at a single stroke while simultaneously raising income tax by two and a half per cent.  

Both of these cutback episodes undoubtedly had dramatic political consequences. The first, while it arguably preserved the Coalition’s life by about six months by helping to keep the Conservatives in the government until 1922, can also be said to have done severe long-term damage to Liberal electoral support, notably through the cuts in post-school leaving age education. The second split the Labour party in a way that still resonates up to the present day, provoked the last major military mutiny (the naval mutiny at Invergordon) and indeed led to serious threats of a re-run of the 1919 police strike when the army had to be called in.

But even so, viewed from a long-term perspective, neither of those cutback episodes seems to have radically altered the sorts of things the state did or how it did them. They were not linked with any broad strategy to reposition the state relative to society, to alter radically the range of public services or how existing services were delivered.

Similarly, looking back over time, we can find instances of public service reforms that did make significant changes to what the state did or how it provided services. The Thatcher Conservative government (1979-90) is often said to have conducted such reforms, because it led a shift from state-owned enterprise to regulated private firms for the provision of basic public utilities, from local authorities to housing associations for the provision of social housing, and in the creation of separately-managed executive agencies for much of central government’s operational work.

Those changes too were politically dramatic and divisive at the time, linked as they were to episodes such as the 1984-5 miners’ strike. But while they took place at a time when public spending was restrained, real public spending did not fall overall during the time of the Thatcher government, though for a time it fell as a proportion of GDP.

The real cuts of that period took place under the previous James Callaghan Labour government with its three budgets in 1976, two of which cut over £30bn from public spending in today’s prices and which were accompanied with with tax and National Insurance rises. But, as with the examples given earlier of the 1920s and 1930s, those cuts were not obviously associated with changing the way most public services were delivered or with the relationship between society and the state.

The only possible exception was that the Callaghan government’s fiscal consolidation measures of 1976 included the first big privatisation in the form of a sale of government shares in BP, scheduled for the following year; this arguably opened the floodgates for the wave of Conservative privatisations in the following decade.

Nevertheless, there do seem to be some cases where significant public service reform has accompanied spending cutbacks. For example, the massive reductions in public spending and staffing that took place after World War II under the Clement Attlee Labour government dwarf all other twentieth-century reductions in UK public spending by orders of magnitude. But that period did see a significant change in the shape of the state from a fully-mobilised Soviet-type economy to something approximating a mixed economy (indeed, the closest the UK got in the last century to the sort of restructuring that went on in Russia and Eastern Europe in the 1990s).

That era also witnessed big changes in the way some public services were delivered, of which easily the most dramatic and durable was the creation of the National Health Service in 1948 out of a previous collection of municipal, charitable and other establishments, bringing these establishments together into a single service whose structured owed much to that of military medicine by the end of World War II.

If that is the clearest example of significant reform and spending reductions going together, it is an isolated one, belonging as it does to the very special circumstances of reconstruction after total mobilisation in a world war. If we look overseas, apart from the special case of post-Soviet transitions, we can find other examples occurring in different conditions.

For instance, after New Zealand’s deep currency crisis and the watershed election of 1984 won by David Lange’s Labour party, the subsequent decade saw big reductions in government spending , which fell by more than ten per cent of GDP and by over ten per cent per capita.  These reductions were accompanied by major reforms in the way the state was run along with a long-term move away from a once strongly corporatist approach to industrial and agricultural intervention; agricultural subsidies disappeared virtually overnight.

Another case is the Program Review system in Canada under the Jean Chrétien Liberal government in the 1990s, which has recently attracted attention from the Conservatives here as a model for the UK. Program Review achieved both federal spending reductions in the region of 20 per cent — though some of that involved shifting of spending to other levels of government — and important changes in the way that some public services were run. A good example of the latter is Canadian transport. Here operations were separated wholesale from regulation and policy; and over five years Transport Canada’s budget was cut by more than half and its staff by four-fifths .

These examples do not by themselves suggest that spending cuts and major public service reform are Siamese twins in the sense that they invariably go together, and that by wielding the financial axe, reform will necessarily follow.  Indeed, many radical schemes for re-engineering government services tend to be of the ‘spend to save’ variety; for instance, where they depend on sophisticated new software or new institutional processes to achieve the promised cost-cutting.  These run up sharply against demands for short-term savings.  But these examples also do not suggest that reform and cutbacks are always an ‘awkward couple’ that can never combine in any circumstances.

So the question is, what are the circumstances that result in both things happening at once?

All of the three examples given above of the two things happening together took place under single-party rather than coalition governments. They largely involved applying experienced talent from inside government rather than importing private sector people to come up with the cost-cutting and restructuring. (Indeed, it was the failure of the latter approach in Canada under the Mulroney government in the 1980s that led Jean Chrétien’s government to design the Program Review system in the way that it did). And while none of them involved the sort of ‘big society’ thinking the current government hopes to advance in tandem with its spending cuts, they all involved policy or managerial agendas that had been incubated to some extent in advance and that could be developed alongside a cutbacks agenda. So if not Siamese twins, they could at least fit together as matching parts.             

Christopher Hood is Gladstone Professor of Government and Fellow of All Souls College Oxford.