How can Governments succeed?

All over the world, contemporary governments find themselves in a triple bind. Citizens demand ever-higher performance from public services; taxpayers are reluctant to pay more, understandably in an era when median incomes have been, at best, rising slowly; and the burden of debt following the financial crisis remains high, imposing an immediate cost in interest payments and a significant burden on the next generation. Also as global prosperity rises, a growing proportion of people want to take greater responsibility for the decisions that affect their own lives.

Under these intense pressures, how can governments succeed? The answer is, to borrow a judicious phrase from the Prime Minister Theresa May, by focusing on ‘the good that government can do’. What this requires, above all, is to ensure the best possible value for citizens from every tax pound or dollar a government spends.

In economic jargon that means enhancing the productivity of the public sector.

Take the United Kingdom; it spends over £800 billion every year, around 40% of GDP. If the government were able to maximise the ‘good’ this sum delivered, if public services were consistently of high quality, if markets were always effectively regulated, if opportunities for innovation were more often seized, if risks and threats were well-managed, then social mobility would be enhanced, opportunity would be opened up, the country as a whole would be more productive and many more people would lead fulfilling and productive lives.

And these gains could be delivered without raising or spending a single extra tax pound.

In short, the potential prize for ordinary people from enhancing government productivity is huge.

To maximise ‘the good that government can do’ in this way demands that government and public services demonstrate their productivity and set out systematically to improve these. This is no more than common sense.

So why doesn’t this happen systematically all over the world? What’s the problem?

Firstly, measurement of public sector productivity has proved elusive, in spite of the sterling efforts of top economists, such as the late Sir Tony Atkinson, over recent decades. What is relatively straightforward in the private sector, where both cost and price are clear, is much harder in the public sector. To illustrate the point, the difference in quality between one teacher or nurse and the next cannot be quantified in money terms, but as every student or patient knows is hugely significant for quality and outcomes.

Secondly, incentives in the public sector have traditionally been, to put it mildly, ambiguous.

Ministers’ performance tends to be judged on the size of the budget they negotiate with the Treasury, rather than how much they deliver or innovate. Civil servants tend to get bigger rewards and more status for managing more people or bigger budgets. Departments don’t call time on budgets that aren’t delivering. They rarely, if ever, go to the Treasury with ideas for spending less, even if, through innovation, doing so could improve outcomes. Some years ago, when I volunteered to return part of a budget I had realised I wouldn’t need, the relevant Treasury officials almost fell off their chairs in surprise — no-one ever did that, they commented.

Meanwhile, beyond Whitehall, public sector workforces tend to advocate simultaneously both more spending and less accountability for outcomes, thus reinforcing these counterproductive tendencies. The media often also reinforces them by focusing on inputs — numbers of doctors, teachers or police officers, for example — rather than on what is being delivered for citizens.

Moreover, the Treasury has also historically placed greater emphasis on inputs rather than outcomes, perhaps necessarily during the decade following the financial crisis.

Of course, it is right that the Treasury should count the pennies — someone has to — but that should surely not be its only focus, even in hard times.

There have been a variety of attempts in the last forty years to broaden the focus beyond inputs but these have tended to be episodic initiatives and have not led to irreversible change in either the core processes of budget allocation and monitoring or the underlying culture.

My review for the UK Treasury, published in 2017, was undertaken explicitly to try to address these longstanding flaws. It had been commissioned precisely because Treasury ministers and officials, to their credit, recognised that radical change was needed. Since then, the National Audit Office has added its powerful voice to the demand for greater focus on, and clarity about, outcomes as well as inputs.

It would be arrogant, as well as inaccurate, to suggest that my report solved these profound historic problems at a stroke. It did, though, propose clear practical steps in the required direction of travel.

It suggested a new basis for dialogue between the Treasury and departments, one based on the outcomes being delivered as well as budget allocation.

Without suggesting that the Treasury weakens its control on the inputs — on the contrary in fact — it also suggests a way of reviewing whether productivity (or public value) is being delivered and a means of benchmarking programmes on their productivity, including those that cut across departmental boundaries.

Crucially, it defines public value as having three elements over and above fair and efficient use of inputs:

1. Achieving medium term goals — within areas such as cutting crime or improving healthcare

2. Strengthening legitimacy with taxpayers and engagement of service users

3. Last, but not least, stewardship — the idea that it is the task of public servants to leave the institutions they are responsible for better than they found them.

The public value framework in the report is based on precisely these elements. It provides, for the first time, a rounded definition of public value, drawing on the work of leading academics such as Mark Moore and Christopher Hood.

It ensures medium and long-term perspectives not just short-term ones and sees citizens as active participants not just recipients.

The report points out that there should be no excuse, at the end of the second decade of the 21st century, for not having good, reliable, timely data to enable effective monitoring of this range of outcomes.

It also argues that continuous improvement — marginal gains, if you prefer — and disruptive innovation (substantial improvement in performance at significantly less cost) should not be optional extras but embedded in the way business gets done in government.

The Treasury or Finance Dept has every right to demand both marginal gains and disruptive innovation from every spending department.

These changes in turn would alter incentives — ones which reward more and better for less, rather than bigger budgets or more staff.

In other words, the report makes the case for a change of culture as well as process across government and the public services, a change that if successful would affect ministers, officials and all those who work in the public sector.

It would put the benefit to ordinary people’s lives and aspirations at the heart of policymaking and budgeting.

Given the history, cynics inevitably say none of this will ever happen. Some argue that the state should simply hand the money over to public servants and get out of the way — without a shred of evidence that this would lead to progress. While others argue that only the traditional Treasury approach will ensure the necessary grip, and that, in any case, the culture is too deeply ingrained.

Of course, if we concede to either of these cynical views, they will become a self-fulfilling prophecy.

I am arguing we can and should do much better. We could seize this moment to change course — cultures can and do change. For something of such significance, however, I’ve also argued that it cannot be rushed at.

Consultations during the preparation of the report found widespread frustration with the input-based approach and, more tellingly, genuine enthusiasm for trying something radical and different.

We, therefore, recommended building on this positive foundation by trialling a new approach before requiring it to be implemented across the board.

Subsequently the Public Value Framework was piloted by the Treasury in partnership with five different government departments. The pilots went well and we learnt a lot about how to build the dialogue about public value within government, as well as how to use the Framework.

And indeed we learnt more about the Framework itself. The result has been clarification and simplification — and most importantly of all, continuing enthusiasm for a new approach.

In March 2019, as part of his Spring Statement, the Chancellor of the Exchequer Philip Hammond, published the revised Public Value Framework and new guidance on how to use it. He also made clear that it would inform the forthcoming Spending Review.

While the media and most politicians are of course totally focused on Brexit and its consequences, it is important for public servants not to miss this radical reform.

Conversations with leaders in other governments — I have spoken with colleagues in Canada, Australia and the Netherlands, for example — suggest that this innovative approach to public value could make the UK a global leader and trend-setter as every government around the world seeks to demonstrate that public money is well-spent and delivers real value.