By Dr Patrick Nolan, Chief Economist, Reform
Cutting government spending is the main game in town. When developing their plans for spending cuts, David Cameron and Gordon Brown have both said that they will protect frontline jobs. This is the wrong approach - as Reform and Steve Bundred, Chief Executive of the Audit Office, have noted.
Frontline jobs make up the bulk of the cost of public services, with most of the costs of public services being workforce costs and most of the workforce costs being front line workers. Of the 1.4 million people working in the NHS only just over 200,000 provide administrative support. Plans to address the deficit that fail to reduce the cost of front-line jobs are simply not credible.
Two arguments against cutting font line jobs or wages are commonly made. The first is that ‘these cuts would take money out of these workers’ pockets and hold back economic recovery (weaken private consumption)’. The second is that ‘these cuts would reduce the quality of services available’. These arguments are also wrong.
The first argument is based on the view that government spending is needed to stimulate the economy during a recession. This draws on so called Keynesian multipliers, which suggest that, for example, hiring more people in the public sector (even if there is nothing productive for them to do) not only increases employment in this sector but gives these workers wages to spend, which in turn creates downstream economic benefits (for example, shopkeepers taking on extra staff).
But this argument contains flaws. It assumes that resources are free and have no alternative uses. It is silent on opportunity costs – e.g., whether spending government money on propping up unproductive jobs in the public service is the best use of scarce government resources or whether these workers would be better off in more productive jobs elsewhere. As the economy moves out of recession the case for Keynesian multipliers also becomes less strong as there is less spare capacity (more real jobs are available) in the economy.
The second argument is based on the tendency to confuse the outcomes of public services (the benefits to the community from them) with the number of front line workers. Success is often incorrectly measured in terms of greater inputs, with the 2000 NHS Plan, for example, setting targets for the recruitment of doctors and other staff. The expansion of inputs in the health service over the last 10 years has seen falling levels of productivity.
In contrast, good public sector managers understand that cutting the cost of the front line means that savings can be made without harming the quality of services. Good managers also understand that resisting cuts to the front line can place entire services at risk. But these managers need political leadership to explain to the electorate the consequences of greater efficiency in the public sector and to allow managers to manage.
Not providing managers the freedom to cut the costs of front line would encourage the wrong sort of spending cuts. Lowering workforce costs through, for example, nationally imposed wage freezes across all workers would fail to recognise that managers can lower costs in other ways, such as managing headcount numbers. Holding all wages down to keep unproductive workers in jobs will simply discourage the best workers and do nothing for improving public sector productivity. If public services are going to be improved, while costs reduced, no area can be immune from spending cuts.
