Making public sector cash do more.

Earlier this month, the CBI claimed that the extra costs of ‘generous wage growth and disappointing productivity performance’ were eating into the government’s public service investment programme to the tune of around £7.5bn.

Such a figure threatened, it said, to undermine the government’s investment programme in the state sector.

‘The government must urgently improve the efficiency of public spending or face the painful choice between scaling back investment or increasing taxes further,’ said Confederation of British Industry director-general Digby Jones.

‘The private sector is busting a gut to be both productive and competitive. Surely taxpayers – business and individuals – are entitled to see the public sector do the same.’

It is yet another concern about public sector spending, which is probably causing the chancellor more sleepless nights than his newborn baby.

For months, there have been general concerns about the level of spending.

Public spending is running well ahead of the budget so far this year – current spending is increasing at 9.8% per year, compared to a forecast of 7%. And tax revenues have increased by only 5.9% compared with last year, a figure in contrast to the forecast of 7.3%.

Much of the spending concerns may be related to staffing levels and pay.

From a peak of 7.5 million in 1979, the number of public sector employees had dropped to less than five million by 1998.

The current government is intent on increasing funding and recruitment.

It is committed to raising real spending, excluding health, by around 2.5% a year through to 2008, and the number of staff is up to 5.3 million.

Wages are rising as well. Last year, public sector pay rose, on average by 4.2%, compared with 3.4% in the private sector.

However, the CBI’s criticism is more focused than just well-voiced concerns about general spending levels. It is saying there should be better ways of ensuring money spent on services is actually spent efficiently.

Well, it could soon get its wish. The well-connected Institute for Public Policy Research is just about to launch into a huge study of how the extra money being spent ‘impact on public service outcomes’.

‘Public service output is incredibly difficult to measure,’ says Richard Brooks, a research fellow in economics with the IPPR.

Certainly, it is impossible to do a straight comparison of the public sector with the private sector. For example, cutting teachers’ jobs at a school may reduce overheads, but it may not do much for class sizes or grades.

The study, which the IPPR hopes to publish before the government’s spending review next summer, is probably the biggest of its type in the UK, and will look at where money has been spent and what affect that has had on frontline services.

However, fears over finances should not just concern the public sector.

The government’s ‘modernisation’ programme in the public services has largely revolved around buying in private sector expertise. Crucial fees have been earned across the private sector in return for management, financial and manufacturing expertise being bought in by the public sector.

If the IPPR study finds that money is being spent unwisely, and some of that is on the consultancy fees generously paid out over the past few years, then private business could start feeling the pinch of more efficient public sector spending.

Pay is unlikely to be squeezed, at least at the top end, as the government has made great play about getting in private sector managers on private sector-type salaries. Even among middle-ranking public sector workers, the aim is to increase staff retention levels, which decent salaries go a long way towards helping.

Political pressure to improve services will also no doubt increase over the next 18 or so months in the run-up to the general election.

Recently, the government signalled that it had no intention of scaling back its use of the private sector when it called in KPMG to train head teachers in the art of budget management.

Education secretary Charles Clarke says the move would help provide vital training to improve financial management. But David Hart, general secretary of the National Association of Head Teachers, is unimpressed: ‘The idea that we have to bring in KPMG because a significant number of heads are not managing their budgets properly, I categorically reject.’

Using private sector expertise is something that could be reduced if somehow it is proved that bringing in the business sector is not an efficient use of funds.

Analysis of the output of the public sector may just prove that it gives value for money after all.

Related reading