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Investing in the Future

March 18, 2018

red-pound-sign

It’s the end of March so the streets are full of roadworks and Finance Directors, across the public sector, are scratching their heads about how to manage end of year underspends. The constraints of annuality remain one of the striking examples of how the rules of public sector finance can provide obstacles to taking the most prudent decisions about spending and investment. While always frustrating, those constraints have a particularly negative impact at a time of austerity.

In any endeavour there is always a balance between long and short-term interests but at, the current time, when not only is money tight in the short term but there also major challenges about the long-term sustainability of public services it is particularly difficult. Whether in the NHS, local Government, criminal justice system or any other public service the logic is that we should be doing everything we can to invest in prevention and early intervention with the aim of reducing long term demand pressures. In reality, the system is forced, when resources are tight, to focus disproportionately on the management of short term financial pressures and concentrate spending on the most expensive parts of the system where demand cannot, in the short term, be, easily avoided.

These issues are not new and, to be fair, the system is nothing like as limited as it was when I started my career in the public service when, even budgets for Government Departments, were set on an annual basis in the Autumn Statement. The Comprehensive Spending Review and the introduction of 3 years spending settlements have been positive developments as have been aspects of the new financial regimes for bodies such as Foundation Trusts.

However, three aspects of the overall regime for public sector finance still stand in the way of the best overall use of public resources and the most effective (and efficient) deployment of public services.

The first, which I have already alluded to, is the restrictions in carrying money forward from one financial year to another. This causes artificial pressures on how resources are used, in particular in cases where the purpose of resources has been clearly decided in advance, for instance as part of an agreed project plan. Great flexibility here would promote better use of resources by removing the pressure to rush important decisions about the design of initiatives or sub-optimal decisions to spend in haste so the money is not lost. It would allow precious management attention to be focused on the task in hand rather than being wasted on the management of financial rules.

The second issue is more fundamental and is the perennial challenge of programmes focused on investing to save. Across public services there is good evidence for how investment in one sector or organisations can liberate savings in another sector. The structures of public sector finance, however, stand in the way of realising benefits for the system as a whole. It appears we are working on solutions. Placed based budgets and integrated care systems are examples of trying to facilitate the joined-up commissioning of services.

The third challenge relates to funding longer term interventions. Often such interventions relate to upstream and preventative initiatives, many of which can demonstrate an excellent return on investment, I heard, this week, about anti-bullying initiatives which can demonstrate lifetime savings of £146 for every £1 spent on the programmes. There is a case for trying to separate such programmes from the mainstream of public spending. There would, for instance, be a case for totally separating public health from other spending to ensure that investment in the future health of the nation continued, whatever the vagaries of the economic cycle and short term pressures on other health and local government services. If that was not possible, there could be an argument for funding public health and other long-term initiatives on a capitalised basis (as we do for buildings, IT and other public assets) which would allow upfront investment against an evidenced stream of longer term benefits.

The same argument would apply to the costs of transformation where an element of upfront investment or double running costs are an inevitable part of any plan to reshape services and moving from one service model to another. Such transformation investment was, eventually, permitted with the closure of the long stay hospitals, in that case set against the anticipated capital receipts from the sale of prime real estate.

There are many reasons why the Treasury and others are reluctant to embrace the risks of more innovative models of financing. In a complex and dispersed financial system one can appreciate the nervousness of losing financial control. On the eve of nearly going broke in the 1970s the administration of New York had capitalised a quarter of its overall expenditure as a means of living beyond its means.

However, by their nature, public finances are long term. National debt and the security of future tax receipts should allow the State to take a level of risk in making investments which smaller institutions are unable to do so. It was only in the early 2000s that we paid off the last of the debts accumulated in the two World Wars.

My argument is not to let go of overall control of public finances but to consider, in an open way, a range of innovative solutions, which facilitate well-constructed and evidenced base investment in initiatives which can help deliver a sustainable future shape to public services. Such initiatives need to have clear burdens of proof and clear lines of accountability for the delivery. However, the biggest lesson of austerity for me is the need to think about the long term. In the short-term services may be under pressure. In the long term, if we don’t do something different they won’t be there at all.

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