Steve Richards: If you want public service reform, pay for it

Free-market reforms may raise standards and save costs – but not automatically

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Instead of those silly pledge cards paraded by New Labour figures in advance of the 1997 election, every leading politician should carry a leaflet with the following two sentences in the build-up to the next campaign: "Public-service reform costs money. Reform cannot save money in the short term and may never do so." Once this message is accepted it will be possible to have a grown-up debate about how much we are willing to pay for public services and what shape they should take. Until then we are stuck in a fantasy world in which public services are supposed to magically improve while saving the taxpayer billions of pounds.

Take the case of the NHS. As The Independent's Ian Birrell has argued persuasively on these pages in recent weeks, the NHS is often inefficient, poorly managed and treats some patients with complacent disdain. His solution is more choice, competition from private providers, the scrapping of targets, a less "statist" approach and a cut in public spending. He also argues that treatment should still be free at the point of use, with a more market-based approach addressing inefficiencies and creating substantial savings.

But his support for a system in which treatment is free at the point of use has massive consequences which his free-market solutions do not address. A relationship between provider and patient in which there is no cash transaction means the government is still responsible for raising the overall level of spending that is available and the policy framework in which healthcare is delivered. Ultimately, therefore, the government must answer for a service available to more than 60 million people who could fall ill at any time, and which, with an ageing population, will make increasingly high demands on any system.

There is no bigger responsibility and the decisions a government takes on our behalf in relation to the level of health funding are highly sensitive politically. Tony Blair and Gordon Brown took a huge risk when they raise taxes in 2003 to pay for higher investment in the NHS. Blair briefly feared it would cost Labour the following election. Similarly, although it is the least risky option for David Cameron he will come under immense pressure if he wins the next election as a result of his pledge to increase NHS spending.

Many on the right will call on him to cut spending on health, along with the other swingeing cuts he is vaguely pledging to make. In government Cameron will therefore need to prove that his decision to increase investment in this one area is vindicated by improvements in the service. As a politician wary of the state he might wish to stand back from the institution, but as a leader who has already taken a controversial spending decision he will not be able to do so.

I am fine about this. It is called accountability. In the end national politicians must be held accountable for the decisions they take about how they are planning to spend our money. But those who loathe the state want politicians to keep out of the way while expecting them to put their necks on the line by raising the cash to maintain a system that is free at the point of use.

Obviously a Prime Minister and his Chancellor cannot keep their eyes on how every penny is being spent. That means others must do so. They are called bureaucrats. There are too many of them in the NHS and other public bodies with a guaranteed income. I know the dangers – I worked at the BBC for many years. But some bureaucrats are necessary to monitor how the money is spent. There are no cash transactions between patient and provider. Therefore, there must be other intermediaries. Without them, even more money would be blown unaccountably.

If the health market is opened up fully to private providers a hundred thousand new bureaucrats would rub their hands with glee. New companies would be established to advise the private bidders on how to get the best deal from normally gullible Whitehall negotiators. Armies of lawyers would be involved in the negotiation of contracts, seeking the deals with the most profitable treatments. Accountants would have a field day. In order to establish genuine choice for patients a surplus of decent places in hospitals and GP surgeries must be available. There is no point in having a theoretical choice only to discover that the decent hospital is full.

The free market reformers argue that competition will raise standards and save costs. Perhaps it will over time, although the evidence in other fields does not suggest this will automatically be the case.

After the privatisation of the railways the costs for the taxpayer soared, partly because so many more outsiders were involved, often making the delivery of the service much worse. What is certain is that such drastic reforms would cost a lot of additional money in the short term and the government would still be heavily involved because it is responsible for raising the cash.

At least there is a fragile political consensus about the need for real-term increases on health. Of more immediate interest is how the Conservatives plan to fund their reforms of schools. The Conservatives propose to allow the establishment of so-called free schools based on the Swedish model, set up by parents or other providers. They would be funded entirely by the state. The proposal raises many issues – one of them is cost. In the short term at least there would be a surplus of schools, as free schools would be funded in new buildings with a full staff. Existing schools would continue to function, presumably becoming sink schools fairly quickly, dealing with the troublemakers who would not be welcome in the new free schools.

The proposal is well intended and over time perhaps standards would be raised across the board, although I would not bet on it. If it is done properly I would gamble a fortune on it costing more than the current spending on schools.

Those who claim "reform" will save money immediately and improve public services have learnt nothing from the experiences of the past thirty years here and from other countries, including Sweden, which are more used to accepting that improvements cost money.

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