Brown's micro-managing approach to public spending flies in face of corporate experience in business

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The Independent Online

We all like spending money and Gordon Brown is no different from the rest of us. But this latest twist to his spending spree does have a difference. Public services will go on expanding - but from now on they will grow only at about the same rate as the rest of the economy.

Yes, he is telling the spending departments: you can have some more money. But a lot of that new money you are getting is coming not from me but from you: not from the Treasury but from all these efficiency savings that you can make.

It is a bit like saying the family will have more money for the "front-line" holiday in France because of extra savings from bulk-buying the year's supply of booze in Calais. And if that does not save enough, drinking less of it.

Step back a moment. There are three big issues raised by this spending round. The first is whether there will, in practice, really be many more resources pushed into public spending. The second is whether the savings that are crucial to the whole exercise can really be delivered. And the third is whether the Chancellor's vision of an all-wise Treasury, micro-managing such detailed matters as the insulation in pensioners' homes and sick-note procedure, is really the right way to ensure that everyone has access to good services. So is there more money? Well, in most cases a bit. But it won't feel like it. Take defence. It gets an increase of an average 1.4 per cent a year in real terms. But the economy will grow at, with luck, an average of 2.75 per cent. So the size of the defence budget will continue to shrink as a percentage of GDP.

What will happen to costs? Pay scales in the forces will have to grow more or less in line with pay scales outside - which have been growing a lot faster than 1.4 per cent in real terms for the past decade. So there will have to be staff cuts. The cost of military equipment has been rising faster than inflation in general too - particularly joint projects like the Eurofighter. So the forces will have to manage with less kit.

Sure, some departments will continue to get a lot more: health spending is going up of course, as is spending on foreign aid. The onus there will be to demonstrate value for money. Results so far, particularly in the NHS, have been discouraging, for there appears to have been a sharp decline in efficiency - though part of that is a measurement problem. But there is a fundamental problem here. The Government is committed to particular priorities and rightly so. What do you do when the departments that have to deliver those priorities spend the additional money badly? You would normally stop giving them the money but you cannot do that because they are a priority.

That leads to issue number two: can you really save 84,000 jobs through greater efficiency? In theory it should be easy. Sir Peter Gershon comes from the private sector - between 1994 and 1999 he was at Marconi, though it was a very different company then from what it is now. In the private sector, companies are continually rethinking how to save jobs by running things more efficiently and most large companies have spent the past four years shedding labour. But it is not easy, or rather it is not easy to do so without damaging customer service. Cut badly and you very quickly see the business tanking and know you have to feed back some more resources.

In the public sector you don't have this instant response. Disgruntled customers of the Inland Revenue can't go to another service provider. So you don't know whether you have cut well or badly.

So while it is almost certainly right that the civil service could indeed lose 84,000 staff without any fall off in performance, it is equally sure that a lot of the 84,000 who lose their jobs will be the wrong ones to let go. Thus to save jobs by merging the Inland Revenue and the Customs and Excise sounds a great idea, for they both collect money. But their cultures are completely different and Gordon Brown won't know what a mess his diktat has caused until years later - when of course he will not be in the job.

And so to the final issue, the notion that a wise Treasury can micro-manage what is arguably the most centralised public sector in the developed world. It has not done too badly over the past 25 years. The British public sector was ranked on 2000 figures about one-third down the developed country league in terms of its efficiency, well behind the US. The ranking was done by the OECD; for a Government obsessed with league tables, it has given surprisingly little publicity to its own performance on this measure.

Is this then the best model? Strip away the electioneering element to yesterday's announcement and the personal desire of the Chancellor to build support in the party, for these spending plans play to both of those. The absolutely crucial thing here is whether top-down public services, overseen by the Treasury, can really be the right way forward.

Don't underestimate the Treasury. It is a tiny department but has some of the brightest and best young people in the land. It has a can-do culture a million miles from the Yes, Minister image of Whitehall. Understandably the rest of Whitehall fears and hates it. But the Brown approach to public spending flies in the face of the experience in large corporations that you should push responsibility down as close to the operating companies as possible. It also runs counter to the direction that most other countries' public sectors are trying to go: to become as flexible as possible in responding people's needs but also to push responsibility to back to the people, rather than trying to make their decisions for them.

Will it work? Well it may work for Mr Brown. Not so sure about the rest of us.

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