Public sector waste should be priority

IN HOLYROOD the big talking point last week was a proposal for constitutional reform. Yes, another one. Calls for more powers for the Scottish Parliament might suggest that those areas for which it is already responsible are well managed or at least in reasonable working order. Sadly, this is not a safe assumption.

The "top priority" of the SNP administration is a sustainable uplift in Scotland's economic growth. Central to the delivery of this goal is a pronounced improvement in the performance of the public sector. This accounts for more than 50% of Scotland's GDP. It employs 580,000, or 23% of Scotland's workforce. And in just five years the Scottish Government's budget has risen from £21.5bn to £31.3bn, a real-terms increase of almost 30%.

Little wonder that the public sector and the critical need to lift its performance have become immediate concerns of the First Minister's Council of Economic Advisers.

However, not only does performance improvement look like mission impossible, but there are also big problems building that, if untackled, will result in a serious crisis in Scotland's public finances and curtailment or breakdown of services. That is why, in my view, the problems within those responsibilities already devolved to Holyrood should be of more pressing concern to the Parliament than further models of constitutional reform.

The scope and depth of the problems are compellingly set out by the respected economist Jo Armstrong in a research paper recently published by the David Hume Institute. It is headed Improving Productivity In Scotland's Public Services, though I would say this does not do the paper justice. The issues raised are much wider in their engagement and implication, and the paper poses the most searching questions.

Ms Armstrong sets out some impressive figures on savings at Scottish Water and asks whether such productivity improvements can be achieved in three other areas of public service delivery: social housing, care services and waste management. What might be the drivers of change in areas where the public sector is a monopoly provider with no competition? How are the interests of consumers and customers safeguarded? And how can the system ensure value for money for the taxpayer? Scotland's politicians are good at the rhetoric of 'free' public services. But, in truth, nothing is free at all; it has to be provided out of funds raised from taxation.

The figures on cost savings at Scottish Water are impressive. Since its establishment, it has cut its annual running costs by £453m. In 2005-06 alone, the annual saving was more than £106m. As a result, the average water bill for Scotland's households is forecast to be lower than the average charge for customers in the privatised industry in England and Wales by the end of 2009-10.

This matters, because if the Scottish Government were to achieve savings equivalent to those achieved in Scottish Water across its total discretionary budget, then up to £1.75bn could be released. That would put another 1,000 police on the beat and 1,000 teachers in classrooms, along with a reduction in both the average Band D council tax charge and non-domestic rates of roughly 40%, at no extra cost to Scotland's consumers.

But moving the productivity formula across from Scottish Water into the heart of public services will be no mean task. Scottish Water enjoyed a clarity of objectives which may be impossible to replicate in other areas where multiple policy goals are being pursued. There are also cultural barriers to change. Indeed, the very words 'productivity' and 'efficiency' are ones from which large areas of the public sector instinctively recoil. Far more worrying, however, is that in both social housing and social care are huge structural problems that threaten future provision of services.

In social housing a financial time-bomb is ticking. More than a quarter of a million homes are now owned and managed by Registered Social Landlords - mostly housing associations registered with Communities Scotland. Over the past five years maintenance costs have risen 34% above inflation while management costs have increased by 26%, again on top of inflation. These are modest increases compared with the local authority sector, where operating costs have risen more than 60% in real terms and management costs have soared even higher, at more than 70% in real terms. Operating surpluses have thus plunged by more than 80% over the period.

Rents account for more than three-quarters of housing association turnover. But these have not matched the rate of increase in costs. Rents thus need to rise above the rate of inflation to maintain annual operating surpluses. If rents cannot maintain their ever-upward path then these operating surpluses will be eliminated, leaving housing associations facing unsustainable financial losses.

Now there is growing pressure to keep rents down. In 2005-06, more than half of housing associations' rental income came from housing benefit. The outcome of the public sector funding settlement has left the Department for Work and Pensions with an annual cash cut of 5.6%. Such a budget reduction could force the DWP to look again at what can be afforded. In such circumstances, housing associations dependent on tenants receiving housing benefit and whose rent is above the capped rate will be under severe pressure.

Care services in Scotland face severe challenges. Spending on care services by local authorities as a share of local government total spending has nearly doubled in six years, from around 7.5% to 14.5%. The introduction of 'free' personal and nursing care for older people in 2002 has taken this segment of spending from 25% of the total social work budget to 46% in seven years.

Spending on care services now accounts for almost three-quarters of the total social work budget in Scotland. And remember that by 2024 there will be 990,000 households headed by people over 60, up 30% on current levels; and more than 115,000 will be headed by someone aged 85 or over, a doubling in the same timescale.

This is where Scotland's biggest problems lie. Productivity improvement is imperative if the public finance system is not to come under unbearable pressure. Such reform needs both a new language and a champion if there is to be any hope of success. But who in Holyrood is listening or much cares? Not many, I suspect.