LEADING ARTICLE: The benefits of radicalism

It is surprising that a government so obsessed with reducing the size of the state should have learnt so little about how to do it. The scale of the public sector will not be reduced until its role in our lives is redesigned. That means thinking radically about how we want to organise and fund everything from health care to education. Without redesigning the services it will be impossible to redesign how they are delivered and so to cut costs dramatically.

That is the lesson the public sector should draw from the many successful programmes in the private sector to reduce costs and increase productivity. Japanese car producers became so much more efficient at producing cars because they were prepared to redesign how they were made and what they were made of, from the bottom up. The same approach needs to be applied to public services. Without redesigning the product, it is virtually impossible radically to redesign how it is made.

The Government has yet to understand this simple point. It is seeking "efficiency savings". The pay increases agreed by the Cabinet yesterday for teachers, doctors and other public servants are not to be funded by extra public spending. Instead they will be paid for by productivity increases. In the Government's search it may get desperate to fund pre-election tax cuts, and "efficiency savings" are now being implemented across Whitehall. The Social Security Secretary, Peter Lilley, admitted yesterday that his department was to face a 25 per cent cut in running costs over the next three years.

This is an ambitious target by any standards. Few organisations could sustain such cuts without a dramatic overhaul and immense pain. The social security system will be no exception. Administration costs are currently about pounds 3.4bn. Last year's spending plans for the department already included staff cuts of 8,400 by 1997-98. Now they will have to go considerably further.

It is almost certainly possible to run the social security system more efficiently. Advancements in computer technology should allow applications to be dealt with much more speedily. But it will not be as simple as that. There will be clashes between the drive for cuts and some policy initiatives. For example, means-tested benefits are considerably more expensive to administer than contributory benefits: so the new Jobseekers Allowance will be more expensive to administer. Cutting down on benefit fraud will become far more difficult if staff are cut.

Substantial efficiency savings will only be possible if the entire benefit process is redesigned, as other parts of the welfare state have found. The internal market and the purchaser-provider split in the NHS have had a huge impact. Compulsory competitive tendering has delivered considerable increases in productivity for local authorities.

Mr Lilley does not appear to have a radical proposal to make. His officials are toying with more new technology to simplify benefits, self-assessment for some claimants and a private finance initiative. These are unlikely to generate the quick savings the Treasury wants. Nor does the DSS seem to have the skilled, driven and entrepreneurial management it needs to guide an organisation through periods of radical change.

Shaving costs and squeezing pay bills is Chancellor Kenneth Clarke's strategy to make savings while leaving welfare services intact. That conjuring trick will be hard to pull off as anything other than an entertainment for the voters ahead of the general election.

Savings will only be made when radical and imaginative ideas are implemented by professional managers.