How have public sector spending cuts affected Government outsourcing?

Serco sauce - putting the sauce into outsourcing

In the wake of the financial crisis of 2007-8, Britain found itself with one of the largest budget deficits in the developed world. In 2009/10 the deficit peaked at 11.3% of GDP, the highest since the levels of borrowing required to finance the Second World War. Inheriting such unsustainable levels of borrowing, the Coalition Government came to power in 2010 on a promise to undertake a significant program of retrenchment. But what is the effect of austerity measures on government outsourcing?

Despite the association of outsourcing with cutting costs, one might expect government spending cuts to result in less outsourcing, as fewer new contracts become available. Indeed, the surge in outsourcing predicted by many failed to materialise in the immediate aftermath of the 2010 election; the number of government contracts awarded actually fell by 13% between 2009 and 2011. However, the entire value proposition of firms like Serco, G4S and Capita is that they can provide the same level of service provided by the government for less money. Thus, outsourcing services and functions should be seen as key to mitigating the impact of public sector spending cuts on services. In fact, despite the initial dip in the number of contracts awarded, the total value of government contracts awarded has doubled since the financial crisis, rising from £9.6 billion in 2008 to £20.4 billion in 2012. Austerity, then, has quite sensibly resulted in more outsourcing.

The scale of the cuts is also seeing outsourcing make inroads into areas where it has not yet penetrated. Barnet Council, for example, is in the process of outsourcing around 75% of its functions, including core services such as planning and environmental health; the next logical step for the government’s education reforms would be allowing for-profit enterprises to run schools in the state sector; and in March 2012, the Cabinet Secretary, Sir Jeremy Haywood, even suggested that it was time to end the monopoly of Civil Service mandarins on providing policy advice to ministers, opening the function up to competition. Austerity is thus seeing a greater range of services and functions being outsourced than ever before.

However, with more outsourcing will also come greater scrutiny, and a pressure for ‘smarter’ outsourcing, especially as outsourcing firms profit while the public finances ail. In an early example, shortly after coming to power, the Cabinet Office Minister, Sir Francis Maude met with 19 outsourcing firms for discussions to press for better terms. Similarly, in 2010, Sir Phillip Green’s efficiency review criticised government procurement “for failing to leverage both its credit rating and its scale.” Multiple contracts for services have been signed with major government suppliers by different departments at different prices. Serco, for example, runs prisons for the Ministry of Justice, air bases for the Ministry of Defence and hospitals for the Department of Health on a large number of different contracts. Austerity has brought pressure for rationalisation. As a result, we should begin to see fewer, but larger government contracts, allowing the government to take advantage of economies of scale.

Smarter outsourcing also means introducing new models of outsourcing. The model currently looked upon most favourably in Coalition circles is Payment by Results, which links returns to outcomes. This is hoped to drive improvements in service quality, and represents better value for money for commissioning bodies, as they pay less if intended outcomes are not achieved; it can also ease pressure on budgets by staggering payments over longer time periods. Payment by Results schemes are quickly becoming entrenched, the most prominent example being the multi-billion-pound Welfare-to-Work scheme, which links payments to providers to service users staying in employment. Other examples include the Serco-run HMP Doncaster, where 10% of the contract price during the first four years is conditional on Serco reducing the reconviction rates of offenders within a year of release by 5%. Similarly, Social Impact Bonds, which promise returns funded by commissioning bodies to private investors if certain social outcomes are met, are currently being used to tackle homelessness in London and reoffending in Peterborough.

In conclusion, austerity has resulted in a greater number and variety of outsourced services, and a pressure towards a rationalisation of contracts and new models of outsourcing such as Payment by Results.

The role of a Conservative backbencher under a Coalition Government

The traditional view of the British backbench MP is as something of a miserable creature. A strong party system ensures that party leadership is dominant. The role of MPs is to march loyally through the division lobbies, supporting their government’s legislative programme (or opposing it in less fortuitous times). If this is done with flair and competency, they may be lucky enough to find themselves sitting on the front benches.

This view has been subject to revision recently. The House of Commons, and Parliament as a whole, is having something of a renaissance with respect to its power vis a vis the government. Under the Blair government, the Select Committee on the Modernisation of the House of Commons advocated a number of reforms, later adopted, that have put power in the hands of backbenchers. These include the introduction Public Bills Committees, with the power to take oral and written evidence, to replace Standing Committees; the introduction of systematic programming for government bills as an alternative to the use of guillotines; and salaries for Select Committee Chairs, offering an alternate career path to Government office. The recommendations of the Wright Committee, set up in the wake of the expenses scandal, have further empowered backbench MPs. Firstly, in June 2010 Select Committee Chairs were elected by secret ballot of the House of Commons for the first time, while members of the committees were elected through internal ballots of the parties, thus removing Select Committee membership and chairmanship from the hands of the whips. Secondly, the introduction of the Backbench Business Committee has given backbenchers more control over Parliamentary time, allowing issues to be debated that would not have been debated if the two frontbenches had their way, such as the EU Referendum debate of October 2011. Thus, the story of the last fifteen years has been one of an enhanced role for the backbench MP.

  

I have painted two conceptions of the role of an MP. The first is as mere lobby fodder, desperately grasping at the lower rungs of the ministerial ladder. The second is as a more independent minded and autonomous creature, empowered by a decade and a half of reforms to the House of Commons. By and large, it is for each MP themselves to decide what role they will stake out for themselves, depending on their own career aspirations and prospects. However, the advent of the Coalition partly shapes this choice, making Conservative MPs less likely to take the path of dutiful obedience.

The single most important reason for this is that coalition government inevitably results in greatly diminished powers of patronage for the party leadership. MPs are willing to march through the division lobbies so long as the prospect of ministerial advancement is a live possibility. But under the auspices of coalition a significant portion of ministerial posts must go to the junior coalition partner. Further, as Nick Clegg’s agreement is required for changes in many posts, government reshuffles will be less frequent. Thus the loyalty of Conservative MPs is less likely to be rewarded with ministerial office. With the increasingly fleeting prospect of government office as the Parliament progresses, those very capable MPs who might have found themselves in a frontbench role in a single party government are likely to try to acquire status in other ways. Be that speaking out on Select Committees like Andrew Tyrie, or organising rebellions as Jesse Norman did on Lords reform.

We live in an age in which Parliament is reasserting itself. Reforms to the House of Commons have empowered MPs; disaffection with the mainstream political parties means that idiosyncratic politicians are more likely to be looked upon favourably by the public; and the increasing importance of social media has rendered the command and control communications characteristic of the Blair-Campbell years impossible. The formation of the Coalition has conspired with these factors to create a Conservative backbench more autonomous, more outspoken, and, of course, more rebellious than ever before.     

Come Dine With Me - All Time Favourite From History Edition

If the best thing about a dinner party is the food something has gone seriously wrong. This was the truism missed by the BBC Four flop, Dinner with Portillo:

I was recently asked who my dream dinner party guests would be, and unsurprisingly neither Michael Portillo nor George Galloway feature in my list, as they do in the above video.

 All of history, four guests... It's Come Dine With Me All Time Favourite From History Edition! 

Melvin Bragg – The broadcaster, author and Labour Peer Melvyn Bragg would be my first dinner party guest. Since beginning to host The South Bank Show in 1978, Bragg has been a staple of British cultural life. He also presents In Our Time on BBC Radio 4, in which he and three experts discuss a topic in science, history, philosophy or culture. The polymathic scope of the radio and television shows Bragg makes would almost be enough to satisfy my intellectual curiosity on its own, and having him as a dinner party guest would provide enough variety of conversation to keep everybody entertained. Moreover, his experience of chairing the discussions in In Our Time makes him the ideal person to bring order to the conversation around the dinner table.

David Cameron – Prime Ministers do not get to the top of politics by being boring dinner guests. Moreover, dinner with a sitting Prime Minister offers a unique insight into the major political issues and public policy challenges of our age. There is also the attractive proposition of being able to give David Cameron my two cents on what his government is doing. The idea that one can influence government policy over a few courses and a glass of sherry is sometimes thought to be an outmoded and mistaken model of how policy making is done; yet many people have donated substantial amounts of money to the Conservative Party for the privilege of dining with David Cameron, and there is an entire industry of lobbyists and advocates. Surely, they are not entirely wasting their time and money?

Hillary Clinton – From present Prime Minister of the United Kingdom to future President of the United States? Perhaps. But however one rates Hillary Clinton’s chances in 2016, she can justifiably claim to be one of the most powerful women in the world, and would still be an excellent dinner guest. Hilary has spent the last twenty years at the forefront of world politics, initially as First Lady to Bill Clinton, then as an impressive politician in her own right. During her four-year stint as US Secretary of State she visited more countries than any other Secretary of State, and more than most people on the planet. If eight years in the White House, a close-run Presidential nomination campaign, and visits to 112 different countries does not make for an excellent raconteuse, then surely nothing does.

Wittgenstein – The Austrian Philosopher Ludwig Wittgenstein would be my final choice of dinner guest. As well as being widely recognised as one of the most incisive philosophers in history, Wittgenstein was renowned for an extraordinary and intense charisma that deeply impacted those he came into contact with, often eminent men and women in their own right. Wittgenstein was also idiosyncratic in his own habits and way of life. Shortly after inheriting a great fortune upon the death of his father, he gave it all away to his (already exceptionally wealthy) siblings and henceforth led a life of extreme frugality; during a meeting of the Cambridge Moral Sciences Club he attacked the guest lecturer, Sir Karl Popper, with a fire poker, giving rise to the best-selling book, Wittgenstein’s Poker; and despite being largely apolitical, he considered moving from Cambridge, where he was undertaking philosophical research, to Stalin’s Russia to become a manual labourer, even making an expedition to the Soviet Union to explore the possibility. Every dinner party should have an eccentric oddball – Wittgenstein would be mine.

A Postcard from Eastleigh

Waking up to the surprising results of the Eastleigh by-election, here are my first thoughts.

 

The most conspicuous aspect of the result is that UKIP have pushed the Tories into third place in the kind of seat that they really need to be winning if they are going to get an overall majority at the next election. This will re-energise those who think the party needs to tack to the right to win in 2015, and undermines the idea that Cameron dealt with the EU issue with his referendum promise.

 

However, that is the wrong lesson. The poor showing of the Conservatives was largely to factors that were particular to this election, and thus, extrapolating from the result to conclusions about national politics, and even the next general election, is a mistake. Firstly, the Conservatives ran a spectacularly bad campaign. Speaking to a prominent Tory MP who had been in Eastleigh in the run up to polling day, he tells me that rather than shaking hands, kissing babies and actually speaking to potential voters, the local campaign had MPs shoving leaflets through letterboxes in residential back-streets. After a few initial gaffes, the Tory candidate was not allowed out without her minders. The local party’s insight into the issues that concerned local people was also appallingly bad. There was a story in this week’s economist about Grant Shapp’s turning up on voters’ door steps on one street, and each and every one of them demanding to know, “What are you going to do about the Rats?!” This is the sort of issue that the party’s local councillors would normally be alive to… if the Tories had managed to get more than four councillors elected in Eastleigh. And last but not least, mid-term by-elections rarely go well for governing parties, especially when the economy is doing badly, and spending is being cut.

 

The second thing worth noting is that although the Lib Dems won the seat, their share of the vote fell by 14.5% - more than that of the Tories. I have always been sceptical of the idea that the Lib Dems will be decimated at 2015 election for the simple reason that people who have become exasperated with the two main parties and abandoned them for the Lib Dems are not plausibly going to go running back to Labour or the Conservatives. That has been born out. Despite the Tories and the Lib Dems losing 28% of the vote between them on their 2010 shares, the Labour Party gained only 0.2%. These figures should not only arrest premature sighs of relief, they should also make Ed Miliband question his prospects of winning a majority in 2015.   

 

Really, what the Eastleigh by-election points to is not a crisis for the Conservatives, but a crisis for all three main political parties, and our political culture more generally. Despite promises of a “New Politics” at the inception of the coalition most people are still sceptical and increasingly disaffected. Politics and public discourse has long been disconnected from the deeper moral and philosophical questions that politics is supposed to be secondary to. This led to the cynicism fostering, sound-bite politics of the Blair-Campbell years, and the largely correct public perception is that very little has changed.

Faster Horses, Please!

We are currently in the worst economic downturn since the Great Depression. This demands a response on a par with that of Keynes’s in the 1930s in terms of scale and imagination. Yet, the state of our nation’s finances means that we cannot spend or borrow our way to growth. Rather than being dependent on a financial industry that stretches no further than the boundaries of the City of London, we should look for new sources of growth in the industries of the future to secure a strong and sustainable recovery that brings the whole country with it.

In the wake of the financial crisis, it has become apparent that much of the economic growth we have enjoyed over the previous two decades was underwritten by an unsustainable credit bubble. The health of the whole economy became far too dependent upon the health of the financial services industry. Banking boomed, while the real economy, those in the business of making and selling products and services that the world actually needs, was ignored. The collapse of this arrangement has left us with a national debt of over £1 trillion, and an unsustainable deficit.   

The regions were also neglected during the boom years.  Between 1997 and 2010, Gross Value Added, a measure of output similar to GDP, rose by 61% across England’s northernmost regions, the North West, the North East and Yorkshire & Humberside. By contrast, in the South East and London, the centre of the financial services industry, Gross Value Added expanded by 92%. Moreover, whereas job creation in the South was spurred by a growing private service sector, the north has been heavily dependent upon government spending. Between 1998 and 2007, the state was directly or indirectly responsible for 64% of jobs created in the North, compared to only 38% in the South.

At the recent Labour Party Conference, Ed Miliband attempted to take on the mantle of One Nation Conservatism. However, Labour’s legacy speaks for itself. The direct consequence of Labour’s prawn cocktail offensive is that regions outside the South East of England were ignored and neglected by a party in government more interested in wooing financiers in the City. A truly One Nation response to the financial crisis would rebalance our economy away from London-centric banking and finance.

To do this, the government needs to support growth in new businesses and the industries of the future. Unlocking our innovation economy, and finding new engines for prosperity is vital for a sustainable recovery that is driven by growth in all parts of the country, not just central London. This means encouraging industries such as pharmaceuticals, energy, agricultural science and aerospace, which technology is reshaping into the building blocks of tomorrow’s knowledge economy, and where we already have a head start.

Although, Britain does not have the cheap labour of China, or India, it does have some of the finest universities and research establishments in the world, and a historically deep seated entrepreneurial spirit that saw our small island become the workshop of the world in the 19^th century, exporting more goods across the globe than any other nation. Today, we should be using our know-how and passion for creativity and innovation to get strong foothold in emerging markets. With some emerging economies almost doubling in size every decade, our economic fortunes depend on developing strong trade links with them.

Take pharmaceuticals, for example. Having recently implemented better protection for intellectual property, India’s market for pharmaceuticals is expected to grow to $74 billion by 2020, and other developing countries are in a similar position. Even a small slice of this market represents a huge opportunity for growth for UK firms. Similar opportunities present themselves to our agricultural science sector. With the world’s population expected to rise to 9 billion over the next 30 years, agriculture around the world must use advances in technology to increase agricultural productivity. In these areas and others, the government must support British business in entering these markets, for example, through diplomacy and foreign policy, and making a commercial success out of British research.

Our lead in innovation is not just important in giving us an edge in emerging markets – it can even be harnessed to bring new, unforeseen markets into existence, and displace existing ones. Henry Ford said, “If I had asked people what they wanted, they would have said faster horses.” Yet, by developing the methods to mass-produce automobiles, Ford not only transformed people’s conceptions of what was possible, he also made the market for horse-drawn vehicles practically redundant.

Government cannot plan for innovation of this kind. To a large extent it is spontaneous and depends upon the genius and foresight of particular individuals. However, what government can do is create an environment that encourages innovation. First of all, the government should cut regulation to make it easier for entrepreneurs to start and operate businesses. Initiatives such as start up incubators, and hubs such as Tech City in East London, where entrepreneurs can collaborate and share ideas, should also be encouraged.

Our competitors, such as the US and Germany, are also investing in science, research and innovation. However, if we act now we can still unlock the full potential of our innovation economy, and make our advantages count. A focus on the knowledge-based economy, emerging markets and innovation will ensure growth is sustainable, and prepare Britain for the 21^st century. Without it, any recovery we see in the next few years will be nothing but a false start on a broader path of long-term decline.  

Two Futures for America

In 2008, an electorate wide eyed with the sort of enthusiastic earnestness only Americans can affect, propelled Barrack Obama into the White House. In 2012, after four years of grandiose promises of “hope and change” running up against the realities modern government and a recalcitrant economy, that idealism has subsided. The 2012 Presidential election will be fought in a spirit of dispassionate realism.

This is something for which we should be grateful.  The last time two candidates were divided by such a wide gulf in terms of their vision for America’s future was 1964, when Barry Goldwater, a Republican with libertarian views, ran against LBJ. Goldwater carried only six states. Today there is less harmony in the electorate. Like the candidates, America itself is divided by an unbridgeable chasm on the direction in which America should be going. Better that Americans choose their path with their heads rather than their hearts.

Romney and Obama disagree on almost every area of policy. More so than anything on the issues at the centre of the election: the economy and the size of the state.  A Romney administration would be one that rolled back the frontiers of government. There would be lower taxes; drastically lower spending on just about everything but the military; and a balanced budget amendment to the constitution would also be on the table. Romney has also pledged to repeal (at least part of) Obama’s healthcare reforms. Nor is the rest of the welfare-state safe. Social Security and Medicaid, the healthcare program for the poor, would see deep cuts, while Medicare, the much beloved but completely unsustainable healthcare program for the elderly would be turned into a voucher scheme.       

Unsurprisingly, Obama disagrees with all of the above. Obama has presided over a fiscal stimulus program that has seen government spending reach levels unsurpassed since the Second World War; he has bailed out the car industry; and his healthcare reforms constitute an enormous rebuff to the power of the market in favour of the power of government. Though he too wants to reduce the deficit, his plan involves higher taxes and fewer loopholes for the wealthy, and less draconian spending cuts than Romney’s. His positive program, involving modestly higher spending on education and infrastructure hardly sets the world alight. Ironically, Obama has become the candidate of continuity and gradual progress, while Romney is the candidate of radical change - though, perhaps not of hope.

In other key areas the candidates are similarly divided. Romney wants a ban on gay marriage, and abortion in almost all circumstances. Indeed, Paul Ryan, Romney’s running mate, has co-sponsored a number of anti-abortion bills in the House of Representatives. Most ominously, the appropriately nicknamed “Let Women Die” Bill, which would have allowed hospitals to refuse women abortions, even when necessary to save their lives. Another, the Ultrasound Informed Consent Act, would have required women to be given a mandatory ultrasound involving an invasive vaginal probe before allowing an abortion to take place. Obama, on the other hand, put an ended the out-dated ‘don’t ask, don’t tell’ policy on gays in the military, and, after much vacillation, came out in favour of gay marriage. He has also signed into law legislation that makes it easier for women to sue for equal pay, and his healthcare reforms mandate that birth control should be offered to women at no extra-cost.

On foreign policy, Obama has sought to build bridges with those nations that were left out in the cold during the Bush era. On taking office he ‘reset’ relations with Russia, and he has attempted to position America at a distance from Israel, while reaching out to the Arabs. Neither policy has been successful. Romney, by contrast, intends to brand China as a currency speculator on his first day in office; he is more hawkish with respect to Iran; and he has already offended much of the Arab with his comments during his recent trip to Israel. Such an aggressive approach will do even more to damage America’s international position.

Perhaps the one area of policy that the two candidates agree on is the environment and energy. Both candidates essentially propose to change little. However, this is not a position converged upon through a shared perspective on the issues, but ankle-deep agreement on one goal: to get the economy moving. In an ideal world, Obama would like to do more to encourage renewables, and curb CO2 emissions. However, over the past 5 years there has been a boom in oil and gas, which has had more to do with technology and the market than government policy. Obama is loathe to put at risk one of the few healthy sectors of the US economy through burdensome legislation and taxes. For Romney and Ryan, the issue of climate change is simply too far down their agenda to matter.

The choice, in short, is between big government and small government. This may seem nothing out of the ordinary. However, with the rise of extreme movements such as the Tea Party, the candidates’ positions have become exaggerated caricatures of those that have been put forward in recent decades, with little common ground between. Once implemented, policies like Obamacare or the voucherisation of Medicare will be costly and difficult to reverse. This election, therefore, will determine the character of the US state for decades to come.