If Osborne sticks to Plan A, Councils need a Plan B

George Osborne’s announcement in the Autumn Statement that Government spending cuts would continue at least until 2017/18 on the same trajectory as the Spending Review came as no surprise;  there were plenty of people who had been predicting an even longer freeze. 

The announcement brings the realisation that, even after budgets have been balanced for 2013/14  (and balancing the budget is not always the same as delivery) the budgets local authorities are setting right now probably take us less than half way through the squeeze.

From the start the problem has been one of increasing productivity.  It’s truism that if you want to continue to provide the same level of service with less resource, then resources need to be more productive.   The trick is to improve the efficiency of the process  - creating the services that people need – without affecting the efficiency of distribution- getting the services to the people who need them.

The first few years of austerity have brought cuts, of course, but probably to a lesser extent than we harbingers of doom would have predicted back in 2010.  To a surprising degree the job of downsizing in local authorities has been helped on its way so far by tackling the ‘local governmentitis’  of the Noughties, the extent of which was not clear until we started turning over stones looking for it. 

Everyone has their own favourite example but the manifestation of the disease that I am most pleased to see go is the mountain of 200 page glossy strategies-which-are-not-a-strategies, together with the armies of people who used to write them.    A favourite example is one I discovered on a park notice board in one of our major cities which said that if anyone wanted more information on the herbaceous borders they could apply to the Council for a copy of the ‘Floral Planting Strategy’.  

The result is that the majority of local authorities look pretty much the same now as they did in 2010, just a fair bit thinner.  For most local authorities, though, these opportunities have dried up and everyone who is left appears to be working very hard.  So now for the really hard bit.   

The issue that economists call allocation – which services is it necessary for us to provide- has a political aspect which is above Chubby Cat’s pay grade, but focusing on process and distribution there are two areas where there is still a lot of benefit to be gained.

One is making the core of the business work as efficiently and effectively as we can, and the second is redesigning services around better access channels.

A big part of the answer to the first is process reengineering- making sure that the essential workings of the organisation, which includes the administration of front-line services, works using processes which make best use of automation, avoid duplication and over-engineered controls, self-monitor quality to avoid rework and minimise hand-offs.

For example, most local authorities are still heavily departmentalised, and you understand the reason for that when you look at the scale and scope of what  local authorities do.  The trouble is that the size of the back-office team in a typical local government department can look reasonably small, until you multiply that number by the number of departments and realise that much of the time those people are liaising with others in similar jobs in other departments. 

It doesn’t come as a surprise that it is so difficult for local authorities to enter into shared service agreements with other authorities when some can barely manage to share processes across their own departments.

The other potential gain is in the customer interface, and again it requires systems and processed to be redesigned to accommodate better and well as cheaper access to services.  This has the advantage for politicians of being what many people actually want. Would anyone who has experienced internet, banking for example, now go back to queuing, or sending cheques through the post in preference?

There is enormous scope for efficiency in this sphere, and again departmentalism can be a blocker.  As a former colleague of mine points out, why does the parking department need you to prove that you live at your address when the Council Tax department is satisfied enough on that point to keep debiting your bank account every month?  My friend was particularly amazed that he needed to take a photocopy of his Council Tax bill to the parking people as proof of address.

Getting the core of the organisation right and remodelling the customer experience are two sides of the same coin. Both involve fundamental review and reform of the way services work. Many authorities are on this journey, but it isn’t easy.

As well as the skills and capacity to undertake work on this scale, a practised, independent eye is also required, which means that the choice of business support partners is vital.   We don’t need consultants who borrow your watch to tell you what time it is;  we need those who can help us take the watch apart and make it work better.

Local Government’s Plan A in response to Osborne’s A for Austerity has been to cut waste,  with more than a little success, and then too often to resort to the same old cheese-paring solutions used in the past.  To address ongoing austerity we need a new sense of realism and new skills. 

It was 50 years go today....

(Chubby Cat breaks new ground with this post to celebrate an important cultural anniversary.  I couldn’t let it pass)

Fifty years ago this month,  yet another new band hit the big time,  probably to burn brightly for a few months, a year or two if they were lucky, and then just become another golden oldie on the juke box.

The band were called the Beatles, and in January 1963 their second single, Please Please Me,  was released with some anticipation and fanfare, but with little hint that the world was watching the birth of a Twentieth Century cultural phenomenon.  For those who looked closely enough, though, there was enough there to suggest that maybe the Beatles were a bit different.

The Beatles first release had kicked around in the UK charts for a couple of months at the end of 1962, peaking just inside the Top 20.   A jaunty two-and-a-half chord number called ‘Love Me Do’,  it hadn’t exactly created a stir, but for a while it had refused to go away and it got the Beatles their first national recognition.  

Nevertheless, to have heard of the Beatles by the beginning of January 1963, you would probably have to have been a particularly keen follower of popular music or a music industry insider.  Despite this, the Beatles released Please Please Me with some optimism,  buoyed up perhaps by George Martin’s throw away remark at the end of the recording session the previous November; ‘Boys, you’ve just made your first Number 1’.   The fact is the Beatles always thought they were the best and that success was only a matter of time. 

The song itself was a step up in sophistication from Love Me Do, although there are lots of similarities musically and lyrically.  This is the point at which it might have looked as if the Beatles career would follow a formula;  the simple chord sequence, the catchy opening harmonica riff, the two part vocal harmony.  Even the lyric is again about a young man pleading with his lover. 

In Love Me Do it is a simple plea for affection (“Love, love me do. You know I love you. So please love me do”).   Listen to the lyrics carefully and you realise the song is about a boy on the prowl (“Someone to love. Somebody new”)  but otherwise it comes across as the kind of non-threatening  stuff that in 1962 you would be happy to have your teenage daughter listen to.

In Please Please Me,  the whole theme suddenly becomes more adult (“You know you never even try, girl. Please please me, like I please you”). According to Ian MacDonald,  Capitol records in the US wouldn’t release the record partly because they thought it was about fellatio- and you have to say that although the words aren’t explicit, they don’t provide  much room for ambiguity.

Please Please Me was also cleverly equipped with an ascending chord sequence that added extra drama to the insistent pleading (“Come on, come on, come on, come on”), something that Love Me Do never got round to.  There was also an exponential increase in the chord count.  Already in their second release, you could hear that the Beatles were on a musical journey. 

While we may now think of the Beatles early output as twee and unsophisticated, it never was the case.   The band had been professional musicians for a number of years (even George, who was still only a teenager in January 1963) and they had been exposed to everything that a life on the road, a growing band of adoring girl fans and three residencies in Hamburg’s red light district could offer.  That could hardly fail to come through in the songs, with the result that the band could appeal simultaneously both to teenagers and to a slightly older, more experienced audience and, crucially, to boys as well as to girls.

The Beatles ended 1962 by finishing up at the Star Club, Hamburg and then returning to Liverpool for more dates at the Cavern and a tour of small venues around Britain during January,- venues such as the Town Hall Ballroom, Whitchurch and the Assembly Hall, Mold,  with the nightly battle through one of the worst winters on record.  Please Please Me was their first single released in the US, where it made absolutely no impression at all.   As plans for world domination go, Brian Epstein’s was getting off to a slow start.

But something about the Beatles captured the imagination. There was nothing particularly ambitious about the songs- not at this stage - but they were clever and sounded fresh; nothing great about the band in terms of musicianship, but they were tight and far more energetic than a lot of  similar outfits;  nothing particularly prepossessing about the boys- the good looking one, the drummer,  had recently been dropped in favour of  a short bloke with a big nose- but they were charming and funny and the media liked them.   The package came together during the course of 1963 and by October the term ‘Beatlemania’ had been coined.

And it may be a cliche, but the rest, as they say, is history. 

Local tax reforms begin to impact

Behind the cloud of austerity that obscures so much, a quiet revolution is happening in local government finance in England. 

Authorities are currently setting their budgets for 2013/14 and they are only at the start of the formal process, but anecdotally the abolition (after eighty years or so) of a needs based general funding formula and its replacement with a system of partial retention of business rates income is having a more immediate impact than many thought it would.

Over time it is fully expected that authorities in areas where the economy is growing will do better than those areas where it is contracting or stagnant. The assumption up until now has been that the first year of the new system will see relatively little effect, because funding in year one is supposed to be the same as the funding each authority would have received had the Formula Grant still been in place.

But some authorities are already planning to collect more business rates next year than the Government ‘baseline’ predicts, while others are indicating that they will struggle to meet the baseline figure.  This is because the baseline is calculated on an average of several years past performance, and the business rates system is surprisingly volatile in the amount of cash it generates. 

This is interesting because it increases the prospect that rates retention will make a noticeable difference to local government spending decisions quite quickly – probably before the next round of Council elections, and what is more, before the next General Election.  

For authorities that see their futures are residential rather than commercial, rates retention is mirrored by the New Homes Bonus, which provides extra income on a temporary basis to authorities that grow their council tax base and again is intended to act as an incentive to authorities to allow and encourage the tax base to grow.

What is completely unknown, of course, is how the new system will change things in the longer term.  The mechanics of the new arrangements will alter the distribution of funding, but the impact of this will be watered down by periodic ‘resets’ which on the face of it are intended redress some of the balance in favour of authorities in greatest need.  This avoids the ‘Detroit’ effect in which economically moribund areas gradually lose their capacity to generate tax income.  But if the new system is kicking in more quickly than many expected, more change can be expected between resets than might previously have been assumed. 

Not that the old system ever adequately provided for need. The introduction of damping arrangements over recent years had already broken any last link between the analysis of need and the amount of money authorities actually received.  When resets take place they are also likely to be hedged round with arrangements that stop the funding of individual authorities changing too much in any one year. 

So in one sense the new system could be the worst of all worlds. It will have provide an imperfect relationship between funding and spending need but also an imperfect relationship between funding and economic growth.  Over time it is hard to see how a ‘postcode lottery’ of local authority provision can be avoided.

At least under the new system it should be clearer to local authorities what they need to do to get more money.  The Government hopes for a sea change in the way local authorities see their local economies and engage with the Government.  The old system of needs related grants was seen as a disincentive for authorities actively to manage economic development but also encouraged authorities constantly to approach the Government with the begging bowl.   In future, the Government  expects local authorities to look closer to home to meet their income needs.   That should be a considerable shot in the arm for local government.  

It would be nice to think that the changes will encourage local authorities to take a harder look at how their activities can create wealth.  Unfortunately, even in areas where the local economy is growing strongly,  the effect of austerity will mean that all authorities will still be making cuts, but some authorities will have to cut further, deeper and more quickly than others.  This probably means the begging bowl will not be consigned to the attic just yet.

Another consequence is that local government finance has suddenly become a whole lot more complicated, which will make it harder for everyone, including governments and voters to understand what is going on.

The old system was supposed to work in such a way that differences in spending choices were reflected in the relative levels of Council Tax.  Under the new system,  authorities will still differ from each other according to how they manage costs, but they will also now differ more strongly than in the past in the way they manage tax income.  This means that if my authority now sets a higher Council Tax or makes bigger spending cuts than  its neighbours, it might be because they are profligate and inefficient, or it might be because the Council next door is the one with the new estate and the out-of-town shopping centre.

Rates retention will change the way we all think about local government finance in England in unpredictable ways, and the indications are that it may have a more immediate impact than expected.

Too small to fail

Perhaps this blog ought to be called ‘Too Small to Succeed: Too Important to Fail’.    The saga of the small District Councils the sustainability of which has been called into question by cuts in Government grants rumbles on. 

I wrote a few weeks ago about West Somerset, the nation’s smallest District  Council which has revealed that its finances are unsustainable in the long term because the pressures for growth on its expenditure cannot be matched by an increase in income.   This is the problem for the whole of local government in microcosm unless grants one day start to increase again, although some lucky authorities with growing Council Tax and Business Rates tax bases may escape the ultimate consequences.   The smallest Districts are hit first because their overheads are highest in proportion to overall spend.

 

Since what may become known as the ‘West Somerset Question’ was posed, the Government has come up with its chosen solution, which it is reported is to suggest West Somerset become a commissioning Council, outsourcing provision of services to others and reducing its overhead costs to a minimum.

This kind of things works- up to a point.  Clearly larger providers, such as neighbouring authorities or the private sector  can spread costs more easily and arguably the private sector has more acumen and more leverage when it comes to reducing costs.    But this can only be a temporary solution if austerity continues because it does not address the fundamental issue of growth in demand outstripping growth in income. 

Which underlines the problem, not just for small Districts but for all local authorities, that the often expounded solutions such as outsourcing and shared services in themselves do not do much more than buy time. There are limits to what even the most enterprising provider can do to keep making services more and more efficient.  Two other downsides to arms length provision- the cost of contract management and a risk of loss of democratic accountability are worth mentioning in passing and perhaps we will return to them in the future. 

Economists make the point that service industries, being people based, find it difficult to become more productive other than by managing access channels and moving to greater self-service.   Thus the doctor no longer visits you; you visit the doctor, and the bank offers better terms on investments if you agree to manage the account online.   Productivity improvements in services come from redesigning processes and asking people to do more for themselves.   This is the way forward, in my view, but in the public sector there is a limit to the pace at which this kind of change can be accomplished, the main blockers being ‘The Two V’s’ –the vulnerable… and votes.  

That doesn’t mean arms length providers are not worth considering, of course, because bringing in commercial expertise and the capacity to innovate can help find the longer term solutions, but simply changing the name of the provider is not going to be enough.

Just because a local authority is small in size doesn’t mean that is not vital to its community, and it would be shame if local authorities were forced to become less local in order to become more efficient.  Chubby Cat’s initial suggestion for the small Districts, which was to provide extra grants subject to the small authorities showing they had taken certain efficiency measures has been scotched by Government.  No more money.  Instead we have a solution which kicks the can down the road again – perhaps far enough for the economy to recover and bail us all out. Let us hope so. 

The public sector is built on moral foundations

With resources dwindling, the moral questions behind public spending and taxation have been thrown into sharp relief.   It must always be remembered that the post war consensus known of Butskellism, which has been a feature of most of Britain’s history over the last fifty or sixty years, was formed in an environment of relative prosperity.   As we move through a period of austerity the moral differences between left and right become more evident.

In the last couple of weeks, for example, we have heard the Public Accounts Committee talk about the morality of companies avoiding tax and, just last week, Chancellor George Osborne told Councils that putting up Council Tax is morally unacceptable.  The inference that all politicians who advocate the opposite position are therefore immoral represents a raising of the stakes in political rhetoric.  Will the next General Election campaign be about politicians trying to out-moralise each other?

This is an awkward one for public servants, who are supposed to be politically neutral.  Would George Osborne have me question my own morality before I advise politicians to put up taxes, or am I entitled to set the moral issues aside and think solely about the cash? 

With all that in mind perhaps public servants should be thinking more about the moral side to public provision and how we pay for it.  To help us, the psychologist Jonathan Haidt and his team believe they have discovered the foundations of human morality. Inherited from man’s earliest ancestors who lived for generation after generation in extended family groups,  these are the psychological traits that supported this way of life and are still the basis on which human cultures are built.

The six foundations, wickedly paraphrased for the sake of this blog, are;  care for others; a sense of fairness, a desire for liberty, group loyalty, respect for authority and a sense or purity or sanctity. 

Without going into too much detail (there is a great deal of good stuff on the internet for those who are interested),  genes that support these traits have survived in the gene pool because they help human beings work together and optimise survival rates.  Groups that didn’t look after each other, that turned in on themselves too easily and that weren’t competitive enough with their neighbours dies out.  Hence the moral foundations exist, Haidt believes, in every human population anywhere in the world.

Of course the moral foundations are only genetic tendencies, and like all other such tendencies, they are shaped and moulded by culture, religion, upbringing, experience and, last but not least, freedom of choice for the individual.  

This is important because, fairly evidently, there are moral dilemmas implicit in the moral foundations. Group loyalty and care for others, for example, works best when the people we are called upon to care for are inside the group.   A strong commitment to group loyalty also explains why we have a tendency to be antagonistic towards people different from ourselves, to a point that often descends into violence.   But going to war sooner or later kicks up the dilemma of when to stop trying to kill the other side and when to show mercy and compassion to the wounded and displaced.  Culture and religion attempt to solve these dilemmas and not surprisingly they are solved in different ways in different populations.

One of Haidt’s fascinating pieces of work around the moral foundations studied how people with different political views take different practical attitudes to the six moral foundations.  ‘Conservatives’  tend to have more respect for authority, greater group loyalty and a greater sense of what is pure than ‘liberals’,  for whom care for others and fairness tend to trump everything else.

But the implication of this is that the stuff of politics is not in the moral foundations of the human species, which are universal, but the way cultures and individuals interpret them.

It seems that pretty much everything the public sector spends money on, and hence for which we pay our taxes, appears to have a basis in one or more of the moral foundations.  Economists may justify public expenditure in terms of  such matters as market failure and the need for public goods, but these are not the kind of things people think about when they pay their taxes.   It is likely that the broad consensus we have over what things we are prepared to give up some of our earnings to pay for is based on some fundamental agreement amongst ourselves over what is morally right.

I am not yet sure what the implications for moral foundations theory might be for the public sector, but I am pretty sure that if the theory turns out to be true they are there to be found.  There has already been a piece of work designed to help charities use moral foundations to improve giving.

I will continue to permit myself a wry smile from the sidelines when I hear politicians talk about morality., but if this debate leads us all to give more consideration to moral questions then it won’t be a bad thing.

Merry Christmas to all my readers!

The morality of taxation is a taxing issue

The economic news in the UK before this week’s Autumn Statement was about the morality of tax avoidance by companies.    Chair of the Public Accounts Committee, Margaret Hodge, was widely quoted, coming down particularly hard on what she called ‘completely and utterly immoral’  tax avoidance schemes.

As a seasoned politician Hodge is well aware of the value of a sound bite, but her full comments were measured and realistic, suggesting that Government should be more aggressive in testing the law, negotiate harder where this was called for, simplify the tax laws and make sure there is more transparency in the tax dealings of companies.

Nevertheless the idea of the ‘moral company’ is worth reflecting upon.      

After all, the limited liability joint stock company is not an institution that has well conceived if morality is the goal. The whole principle of the beast is that people get to take risks with other people’s money while limiting their personal liability, while the investors in the business get to take a morally ambiguous arms length position in relation to the decisions of its management. 

Allow for the fact that the shareholders in most traded companies are largely other companies and it isn’t hard to see why moral judgements as part of company decision making might be hard to achieve.

On the question of tax avoidance, a company’s management has a duty to optimise shareholder value, so it is hardly going to volunteer to pay taxes if it doesn’t need to pay them.  At the same time, shareholders, if they choose, can turn a blind eye to what the management may be doing.

But let’s put it another way.  Let’s say a Finance Director of a major listed company is in his private life a deeply moral man; he aims always to do the best thing, fastidiously teaches his children right from wrong, does a lot of work for charity, may even by a pillar of his religious community.   Let’s say that he does not leave his morality at the door when he comes to work but he also tries to live by his personal standards in all his professional dealings.

Let’s also assume that he has a simple choice – a certain amount of the revenue his firm makes either goes to government in taxes or it is paid to shareholders as a dividend. 

Which is the moral choice?  Pay the money to the Government where, let us say, it will go entirely towards building a better society for us all, or repay the investors for the risk they have taken – some would say the faith they have shown- in financing the company?  On the face of it are they not both deserving causes? 

Of course I realise there will be plenty of people who take exception to this over-simplification but what I think it demonstrates is that what is moral in relation to commercial decision-making probably depends on your point of view.  Do we have a shared view of morality in relation to these complicated issues?

Margaret Hodge is right when she imputes responsibility for resolving the puzzle to the Government.  The Government is elected among other things to reflect society’s view of moral boundaries and its job is to make the case for taxing large corporations,  to make the tax laws as watertight as possible and to demonstrate transparently that the tax revenues raised- along with all other tax revenues – are used, if you like, for ‘moral’ purposes.

But companies also need to demonstrate that they work to high moral standards as most people would recognise them, and perhaps a bit more transparency in the dealings of public companies – an extension of the Freedom of Information Act in relation to the private sector's dealings with the public sector,  for example- would not be a bad thing.    

Planning for the Apocalypse

A couple of weeks ago, I wrote about the case of West Somerset, England’s smallest District Council which, an LGA report says, will inevitably become financially unviable within a few years.  

The problem for West Somerset is that its capacity to raise additional cash in the teeth of further funding cuts is not sufficient to meet the growing costs of services.  No doubt there are people at CLG who would call this ‘apocalyptic’ but every time one picks up a paper these days, the end of austerity seems to be another year away. In those circumstances, sooner or later an authority is going to run out of wriggle room.

It begs an interesting question that we may need to broach more than once over the coming years; what happens if a local authority goes bust?

This is my view – and the disclaimer is that I am not a lawyer, and neither have I had the time to research the law at length, just to confirm one or two things I thought I already knew.   This is what I think.

The most likely way for a Council to get into financial hot water is to be unable to set a balanced budget.   Unless an unforeseen disaster occurs which leaves a local authority with unaffordable additional costs (in which case the emergency funding arrangements called the Bellwin scheme may well kick in),  local authorities are unlikely to become insolvent in the way businesses do.

There is no such thing as bankruptcy or administration for local authorities but if authorities get to the stage where they start to run out of cash and are sued by their creditors,  things will have gone seriously wrong with the alarm system. It’s much more likely that officers of the Council or its auditors will see the situation coming and warn that the Council is unable to set a legal budget. The threat should  normally be visible at least a year or two ahead.

If that happens, the chief finance officer is duty bound to issue a warning notice to the Council and for a period, until that warning notice is dealt with, all major spending decisions are on hold.

Imagining a situation in which the authority is unable to solve the problem itself, the threat of the commissioners is a sanction that gets mentioned from time to time. As far as I can see, Eric Pickles has no power to take over an authority just because it is in financial difficulties.  Indeed, this is a sensible way for the law to be framed because it could become an easy way out for local authorities to spend all the money and then throw the problem at Minsters to sort out.

The Secretary of State does have powers, on the other hand, to take over the running of services if the Council is failing to perform.    But is it sensible to wait for the impact of financial ruin to bite before intervening? 

If there is nothing the Council can do within the law to correct the financial position, which would be the case if the authority is financially unviable, then it probably won’t be long before everybody ends up in a room at the Department for Communities and Local Government, and the solution will come down to good old realpolitik- the English constitution at its best. 

But even this would be a failure in relation to authorities like West Somerset, whose problems have been highlighted several years in advance of impending doom, with plenty of time for Government – and it does come down to Government - to address the problem.

If the past is anything to go by, perhaps the answer for authorities like West Somerset lies in the local government finance system, with its seemingly endless capacity for tweaking, to produce the desired outcome.  The Isles of Scilly and the Corporation of London already have special grant arrangements because of their challenging size.  One possible solution is that small Councils will be given extra funding in some way, and that could likely be linked to some strings, such as a requirement to share certain costs with neighbouring authorities.

Of course, this interesting thought experiment leaves out several important groups of stakeholders, the authority’s staff, its contractors, and last but far from least, its residents and service users. The potential impact on these largely innocent bystanders underlines the importance of forward planning and West Somerset should be praised for doing its job in that respect.