Deloitte State of the State 2015

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The State of the State 2015-16 Recalibrating government UK Public Sector | #stateofstate

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Now in its fourth year, Deloitte LLP and Reform have once again collaborated to analyse material from a wide range of public sources, including the government’s accounts, public spending data, departmental reports and official economic figures. We augment that data with insight from roundtable discussions and interviews with leaders from across the public services to produce a report that is grounded in the realities of our public finances and constructive in its thinking. Read the full report: www.deloitte.co.uk/stateofstate

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Government in numbers This financial year, the UK Government will raise £673 billion and spend £742 billion. The difference between what the state earns and what it spends – the deficit – is funded by borrowing and this financial year, the Government is expected to borrow £69.5 billion. The cumulative effect of that borrowing over time means that the Government’s debts have risen almost threefold since the global financial crisis in 2008 to £1.5 trillion in 2015. The Government’s latest balance sheet shows £1.337 trillion of assets including land, the road network and military equipment and liabilities of £3.189 trillion including public sector pension schemes and government borrowing. The state’s net liability – the difference between what the Government owns and what it owes at an accounting year end – rose by £224 billion to reach £1.852 trillion at last count for the 2013-14 financial year. Government income will be £673 billion in 2015-16 Government will spend £742 billion in 2015-16 Income tax National insurance Excise duties Corporation tax VAT £billion 170 115 47 42 133 Source: Budget 2015, HM Treasury Business rates Council tax Other taxes Other £billion 28 28 65 44 Social protection Personal social services Health Transport Education Defence £billion 231 30 141 28 99 45 £billion Industry, agriculture and employment Housing and environment Public order and safety Other Debt interest 24 28 36 48 36

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The state of public finances After a five-year programme of deficit reduction, broadly 80 per cent through public spending cuts, the deficit is expected to stand at £69.5 billion this financial year. The Coalition ultimately reduced it by half, leaving the remaining half to be reduced in this UK Parliament. Under the new Conservative Government, the target date for the deficit’s elimination and a shift to a surplus is now 2019-20. The austerity decade (right) shows the outlook for Resource Departmental Expenditure Limits, a good guide for spending on public services and running the state, for this UK Parliament. As the figure also shows, that outlook changed substantially between the Coalition’s March Budget and the Conservative’s July Budget. In March, spending cuts scheduled for 201617 and 2017-18 were twice as deep as the deepest annual cuts in the previous parliament, which would have eliminated the deficit by 2018-19. By July, with the election returning a Conservative majority government, the Chancellor delivered a new Budget that effectively cancelled £83.3 billion of spending cuts from the March Budget. But the Government is making that possible by running a deficit for one further year, eliminating it by 2019-20. Figure 5. The austerity decade Change since 2007-08 (per cent of GDP) 2 1 0 -1 -2 -3 -4 -5 Summer Budget March Budget -6 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 Source: Office for Budget Responsibility

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The state of public finances (continued) In the past year, signals have emerged that some local public sector organisations – councils, NHS bodies, police forces and further education colleges – could be facing financial distress as a result of funding reductions and shifting patterns of demand for their services. Sector-wide warnings suggests that more than 200 frontline public sector organisations in the NHS, local government, police and further education could be at risk from financial distress and require intervention in the course of this UK Parliament. Around half of those are NHS trusts. These financial distress signals suggest a turbulent period ahead for our local public service organisations and some may require performance intervention from within their sector or remedial financial support from central government. While mergers can be a workable solution in many cases, organisations with long-standing, multiple problems may not be attractive propositions for merger with high-performing peers unless central governments provide incentives and support. Each of the UK’s administrations need to be clear on the risk of financial failure across the public services and plan for intervention. In the past year, signals have emerged that some local public sector organisations – councils, NHS bodies, police forces and further education colleges – could be facing financial distress

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Government through business lenses Government is not a business. But applying ‘business lenses’ to the public sector can allow for distinctive perspectives and fresh thinking. Our analysis suggests that as the Government continues to recalibrate the public sector to a lower level of spending, it should consider reform through three such lenses: a productivity lens, a talent lens and a balance sheet lens.

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The productivity lens Productivity gains can help the public sector maximise its efforts, focus on the impact it delivers and make the most of its funding. We suggest that every hour of public sector staff time saved in a year through better productivity is worth £57.7 million to the public sector in England, £2.9 million in Northern Ireland, £7.2 million in Scotland and £4.3 million in Wales – a total of £72 million to the UK’s public purse. Research for The State of the State assessed public sector reform programmes and high-performing organisations around the world to identify common themes and behaviours. That analysis points to seven characteristics of highly productive public sector organisations. These seven characteristics may not be applicable to all organisations but are intended as simple reference points to help guide the pursuit of better productivity. They are: 1 2 Talented people with a licence to deliver No repetition, hesitation or deviation Citizen-centric forces shape services and attract resources Insight informs deployment and demand management Technology helps people work smarter and cheaper Form follows function 34 56 7 The journey never ends Recommendations through a productivity lens The State of the State concludes that looking through a productivity lens, the UK Government and devolved administrations need to: accelerate the use of digital technology through ‘invest to save’ funding for public services and procurement reforms establish a meaningful framework through which organisations can agree definitions on productivity, pursue gains, and share best practice generate productivity gains through departmental co-ordination, and through continued local devolution that integrates services and organisations back evidence-based reforms that may challenge widely-held beliefs on funding priorities, giving leaders across the public services license to make bold decisions that will improve productivity encourage the use of user reviews, social media and other research to access continuous user feedback on public services.

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The talent lens Advanced governments around the world are increasingly alive to the importance of talent but unfortunately, austerity has taken its toll on the public sector workforce. As our interviews with public sector leaders in the next chapter show, redundancies, pay freezes and reduced promotion opportunities have affected morale. But as public sector organisations continue to reduce their headcount, redesign their operations and seek productivity gains, public sector leaders know that they need skilled and motivated employees more than ever. Deloitte research suggests that the government leaders of the future will demonstrate a series of new abilities and behaviours that encompass multiple skill sets. They will be adept at connecting people, information and resources to deliver through complex networks. They will operate with a default level of transparency towards their colleagues and citizens, and use social media to engage both continually. Their decisions will be informed by evidence and they will test out their thinking by iterative processes as part of innovation. These kinds of behaviours and abilities – rather than individual skills – need to be nurtured by governments that want to shape their future talent. Beyond leadership roles, if the public sector continues to shape around citizen expectations, some technical professions may need to become more customerorientated or organisations will need to decide where customer care is centred within their workforce. Recommendations through a talent lens The State of the State concludes that looking through a talent lens, the public sector needs to: • ensure that further headcount reductions are considered in relation to medium-term plans so that public sector organisations retain the talent and skills that they need • recognise the role of reward in attracting and retaining talent, especially where specific and highly-marketable skills are needed • develop leading-edge abilities in future talent, recognising that the public sector needs new behaviours as well as specific skills sets.

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The financial statement lens Viewed through a financial statement lens, the Government faces a debt reduction dilemma. Paying down its £1.5 trillion debts as quickly as possible would reduce exposure to risk and debt servicing costs, but could require a continuation or acceleration of austerity measures. Conversely, with interest rates low, there is an argument to let high debt levels continue and pay debts down over decades, allowing for greater public spending and investment. Of course, the reality is complex, and it is far from a binary choice; continuing or increasing borrowing while interest rates are low is likely to have a longer run effect on underlying interest rates, thereby increasing repayment costs overall. The Chancellor’s Summer Budget implies that the Government favours a longer-term, organic approach and is planning to reduce its debt over decades by running an ongoing budget surplus. While that provides more scope for investment, the Treasury’s modelling suggests that debt might not return to its pre-financial crisis level until beyond 2035, assuming optimistic economic conditions. Recommendations through a financial statement lens The State of the State concludes that looking through a financial statements lens, the government needs to: •  valuate new ventures to assess whether they are E likely to be classified as part of the public sector and would therefore add to the public sector balance sheet •  nsure that policy decisions are assessed for e implications on liabilities, and act to drive down the state’s net liabilities over time to manage the UK’s exposure to risk and unsustainable trends •  ontinue development of Whole of Government c Accounts in line with National Audit office (NAO) guidance so that they become a single view of the state’s financial position, used across Government to inform policymaking. … debt might not return to its pre-financial crisis level until beyond 2035

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Local voices: In the words of public sector chief executives The UK’s local public service leaders – including council and NHS chief executives, chief constables, chief fire officers, and directors of children’s services – are uniquely placed to provide a view on the state of the state. As in previous years, Deloitte and Reform have commissioned Ipsos MORI to capture their attitudes and outlook through in-depth interviews. This summer, they interviewed public sector leaders from across England, Northern Ireland, Scotland and Wales who are collectively responsible for £16 billion of public spending. Consensus views emerged on seven areas in those interviews: austerity, risk, people, technology, local devolution, politics and the future. This chapter shares insight, along with quotes, from the interviews.

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What public sector leaders told us about austerity The majority of public sector leaders interviewed for The State of the State were confident in how they had changed their organisations in response to budget reductions. Most spoke with a sense of pride about what their people had achieved since 2010, and while none suggested that change was easy, many described their organisations as fitter and more focused as a consequence of austerity measures. If you had asked local government in 2010 to become as productive as we’ve become, we probably couldn’t have done it. We wouldn’t have known how to do it, but by forcing us to become more productive, we have. I think we have made the best of it. It has meant that we have had to go through an enormous amount of change, constant reorganisation and so looking at all our demand. There’s no doubt, back in 2010, things were pretty inefficient. Local Government Police NHS

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What public sector leaders told us about risk Some of the public sector leaders we interviewed told us that austerity measures had increased their organisation’s exposure to risk and the prospect of adverse events – and they warned that those risks could rise as cuts continue. The Government is ‘salami slicing’ but this will affect the safety of the public. A process of seeking efficiencies, managing a smaller budget and delivering with a smaller workforce is possible but we will need to manage that within a very short timeframe which brings many risks as you don’t have time to plan things, you just have to do the best you can. Financial constraints are clearly compromising patient quality. We are taking more risks than we should. We cannot fill staffing template for wards with our own staff so we have to use temporary staff, and we will have to use more health care assistants and not nurses. Police Civil Service NHS

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What public sector leaders told us about their people Our interviews suggest that people issues are a significant preoccupation for public sector leaders. Some said that their staff were demoralised after years of cuts, including a police chief constable who told us that he struggles to maintain morale among staff experiencing pay freezes and a drop in promotions. Another simply said, “the workforce has lost motivation”. Some interviewees told us that headcount reductions in recent years had increased the workload for remaining staff. We need to be much more closely attuned to thinking about what will attract and keep staff who are capable of doing great things with limited resources. Most of the people in the organisation now work flat out as the organisation has shrunk. One challenge is going to be retaining and motivating top quality directors and senior management because it’s a fairly thankless job being a director of a hospital trust, and with no money being put in to the system it’s going to get increasingly tough. Local Government Fire NHS

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What public sector leaders told us about technology Many of our interviewees spoke about the importance of technology in making savings, working more productively and meeting citizen expectations. Harnessing digital technology is seen as particularly critical. One local government director summed up the consensus view that digital is “cheaper, quicker and it’s what the public want from us.” Mobile technology is also seen as vital to the future of public services. Many interviewees told us that their frontline staff in the field were increasingly equipped with mobile devices to help maximise their productivity and reduce downtime. The individuals within the organisation are a constraint. While many are perfectly able to use technology, we are not an organisation made of the digital generation that see technology as an intrinsic part of day to day life. So that represents a barrier for us. We have restricted funding so are therefore less ambitious than we would like to be. It would be better to be more mobile and tech based. It is hard to get officers to understand that they can use their devices to stay out in the community and that they don’t need to come back to the station. Civil Service Fire Police

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What public sector leaders told us about politics Politics matters in local public services. Nationally, decisions taken in Holyrood, the Senned, Westminster and Stormont have far-reaching implications for people managing the public sector. Locally, democratically-accountable organisations are led by politicians who make a profound difference to their success and their connection to citizens. In the past there has been an expectation to deliver services with local councillors as the point of contact, but this new way with less funding will place tensions on those relationships. We need more real leadership. What you have got is a government that is not as committed to the NHS as it like to make out it is. I think they make a lot of decisions that are not very well thought through. There is a lot going on that they aren’t thinking about the impact further down the line. The Government needs to tell the public that there won’t be Police and Community Support Officers in the neighbourhood. Do they want patrolling on the street or the net, because they can’t have both. Local Government NHS Police

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What public sector leaders told us about local devolution Unsurprisingly, most local public sector leaders were supportive of the UK Government’s move towards greater devolution to local areas. Most saw the main benefit as more joined-up, redesigned public services. In many parts of the country, there is no real identification with the region. In Manchester and the North East, people do identify strongly but in this part of the world, people do not identify with the region. That’s a challenge. The main benefit is the opportunity to redesign public services at local level. To break out of the silos. I think the drawback is that it’s such a huge and complex thing to get your head around in terms of being able to deliver that degree of change. If anything, you scratch your head as to why we have still got so much of the public service designed on what feels like very much a Victorian model. There are two elements to it: there’s a political element – to use the example of the Northern powerhouse, it’s about making the North feel valued by Westminster in political terms. But there’s also a finance and efficiency aspect of it because there is something, I think, to be said for making sure that local people get the local decisions that they need. Education Police Fire

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What public sector leaders told us about the future When we asked our interviewees to tell us how they saw their organisation in 2020, three common expectations emerged. First, they expect their organisations to retrench into core activities. Local government interviewees were clear that discretionary services will be increasingly scaled back as authorities focus on their statutory duties. Second, public sector leaders expect greater crosssector collaboration and a greater variety of providers over the next five years. Third, our interviewees expect their organisation to be designed differently by 2020, with a renewed sense of mission – and most see that as a positive development. All of the ‘nice to haves’ will have gone. It will be harder to get complex families into work. The threshold for support for vulnerable people will rise. It will be harder in 2020 than in 2010. For example police cannot go to a burglary straight away unless they absolutely need to. We would need to merge with other forces and work more closely. Close police stations to keep officers out and about in the community. Increase the number of mobile data devices. Local Government Police

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Around the UK The UK’s devolved government arrangements as we know them today began in the late 1990s with the Good Friday Agreement of 1998, Scotland Act of 1998 and Wales Act of 1998. The most significant steps towards greater devolution since then are now underway, triggered to a great extent by 2015’s close-run independence referendum for Scotland. However, those steps are not restricted to Scotland’s relationship with Westminster as the referendum has stimulated devolution debates in each of the administrations.

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England Figure 10. Across the UK Public sector spending per head Figure 10. Across the UK Public sector spending per head Public Spending Annual public spending per head is lower in England than in the other UK administrations. At £8,678 per head, citizens in England receive around three quarters of the amount spent on citizens in Northern Ireland on their public sectors. From 2009-10 to 2013-14, which are the most recent figures available, annual spending per head in England went gone down by six per cent compared to four per cent in the other administrations. Public Sector employment England has the lowest proportion of public sector employees in the UK as a proportion of the total workforce. Some 16 per cent of the workforce is employed by the state, equalling 4,204,000 people. Since 2010, public sector headcount in England has reduced by seven per cent, or 320,000 people. Scotland England £10,275 £8,678 Scotland England £10,275 Public £8,678 a percentage of total employment sector as Wales £9,924 Wales £9,924 Northern Ireland £10,961 Northern Ireland £10,961 Wales 21.4% Wales 21.4% Northern Ireland 26.0% Northern Ireland 26.0% Public sector as a percentage of total employment England 16.1% England 16.1% Scotland 20.5% Scotland 20.5%

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Northern Ireland Figure 10. Across the UK Public sector spending per head Spending reductions per head across the UK Figure 10. Across the UK Public sector spending per head Spending reductions per head across the UK -4% Public Spending Annual public spending per head is higher in Northern Ireland than anywhere else in the UK. At £10,961 per person, Northern Ireland residents each receive £2,283 more in public spending per year than those in England. -4% Scotland Scotland Since 2009-10, annual spending per head has gone down by £472 in real terms, or four per cent. That is the same level of austerity reduction seen in Scotland and Wales when measured as spending per head, but slightly less than the six per cent in England. Scotland England £10,275 £8,678 Scotland England £10,275 Public£8,678 a percentage of total employment sector as Wales £9,924 Wales £9,924 Public Sector employment Northern Ireland has the highest proportion of public sector employees in the total employment Public sector as a percentage of UK. Some 26 per cent of the workforce is employed by the state, equalling 208,000 people and since 2010, headcount has reduced by less than five per cent, or around 10,000 people. -5% -4% -5% North East -4% Northern Ireland Northern Ireland £10,961 Northern Ireland £10,961 -5% Northern Ireland -5% -4% -4% North Yorkshire East and The North Humber West Yorkshire and The North Humber East West Midlands -4% -4% -5% Map shows spending -4% reductions per head in West -5% Midlands real terms from Wales Map shows spending 2009-10 to reductions per head in West 2013-14 Midlands real terms from Wales 2009-10 to -3% South West 2013-14 -4% Ea Engl East Midlands London Eas Engla South East London South East -3% South West Areas of main spending difference England 16.1% England 16.1% Scotland 20.5% Scotland 20.5% Wales 21.4% Wales 21.4% Northern Ireland 26.0% Northern Ireland 26.0% Areas of order and safety difference Public main spending Public order and safety Economic affairs -5% -5%

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Scotland Figure 10. Across the UK Public sector spending per head Spen Figure 10. Across the UK Public sector spending per head Spend Public Spending At £10,275 per head, annual public spending in Scotland is the second highest across the four UK countries. However, that has reduced by £453 per head since 2009-10. Scotland has the highest spending per person on health in the UK at £2,151, some £157 more than is spent in England. It also spends substantially more than any other country in the union on economic affairs, including economic development and transport, at £1,069 per head compared to £516 in England. -4 -4 Scotland England £10,275 £8,678 Scotland England £10,275 Public£8,678 a percentage of total employment sector as Public Sector employment Scotland has the second lowest level of public sector employment in the UK. Some 21 per cent of the Public sector as a percentage of total employment country’s workforce are employed by the public sector, amounting to 532,000 people. Wales £9,924 Wales £9,924 Northern Ireland £10,961 Northern Ireland £10,961 Since 2010, Scotland’s public sector headcount has gone down by 7 per cent, or 42,000 people. Map reduc real te Map s 2009 reduct 2013 real te 20092013- Areas England 16.1% England 16.1% Scotland 20.5% Scotland 20.5% Wales 21.4% Wales 21.4% Northern Ireland 26.0% Northern Ireland 26.0% Areas Pub Pub

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Wales Figure 10. Across the UK Public sector spending per head Spending reductions per head a Figure 10. Across the UK Public sector spending per head Spending reductions per head a Public Spending At £9,924 per head, public spending in Wales is the second lowest in the UK. Since 2009-10, it has gone down by £415 per person in real terms. Scotland Wales is the only UK country without any outlying public spending levels. The only area of public services in which Wales spends more than the other UK countries is education, where spending per head is £1,520 compared to £1,410 in England, £1,428 in Scotland and £1,503 in Northern Ireland. Scotland England £10,275 £8,678 Scotland England £10,275 Public£8,678 a percentage of total employment sector as Public Sector employment Wales has the second highest proportion of public sector employment in the UK.as a percentage cent ofemployment Public sector Some 21 per of total the total workforce is employed by the state, amounting to 293,000 people. Scotland -4% Northern -4%Ireland Wales £9,924 Wales £9,924 Northern Ireland £10,961 Northern Ireland £10,961 Since 2010, headcount has reduced by 9 per cent or 32,000 people. -5% Northern Ireland -5% -4% Map shows spending -4% reductions per head in real terms from Wales Map shows spending 2009-10 to reductions per head in 2013-14 real terms from Wales 2009-10 to -3% South 2013-14 -3% South Areas of main spending differen England 16.1% England 16.1% Scotland 20.5% Scotland 20.5% Wales 21.4% Wales 21.4% Northern Ireland 26.0% Northern Ireland 26.0% Areas of order and safety differen Public main spending Public order and safety Economic affairs

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Contacts Deloitte Reform Mike Turley Vice Chairman UK and Global Public Sector Leader 020 7303 3162 mturley@deloitte.co.uk Andrew Haldenby Director 020 3327 1186 andrew.haldenby@reform.co.uk @reformthinktank Ed Roddis Head of Government Research 020 7007 2920 eroddis@deloitte.co.uk @DeloitteUKGov Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”), a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its member firms. Deloitte LLP is the United Kingdom member firm of DTTL. This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this publication. Deloitte LLP would be pleased to advise readers on how to apply the principles set out in this publication to their specific circumstances. Deloitte LLP accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication. © 2015 Deloitte LLP. All rights reserved. Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at 2 New Street Square, London EC4A 3BZ, United Kingdom. Tel: +44 (0) 20 7936 3000 Fax: +44 (0) 20 7583 1198. Designed and produced by The Creative Studio at Deloitte, London. J2061

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