Deloitte State of the State 2015

The State of the State 2015-16
Recalibrating government
UK Public Sector | #stateofstate

Now in its fourth year, Deloitte LLP and Reform have once
again collaborated to analyse material from a wide range
of public sources, including the government’s accounts,
public spending data, departmental reports and official
economic figures. We augment that data with insight
from roundtable discussions and interviews with leaders
from across the public services to produce a report that
is grounded in the realities of our public finances and
constructive in its thinking.
Read the full report: www.deloitte.co.uk/stateofstate

Government in numbers
This financial year, the UK Government will raise
£673 billion and spend £742 billion. The difference
between what the state earns and what it spends –
the deficit – is funded by borrowing and this financial
year, the Government is expected to borrow £69.5 billion.
The cumulative effect of that borrowing over time
means that the Government’s debts have risen almost
threefold since the global financial crisis in 2008 to
£1.5 trillion in 2015.
The Government’s latest balance sheet shows
£1.337 trillion of assets including land, the road
network and military equipment and liabilities of
£3.189 trillion including public sector pension schemes
and government borrowing. The state’s net liability –
the difference between what the Government owns
and what it owes at an accounting year end – rose by
£224 billion to reach £1.852 trillion at last count for the
2013-14 financial year.
£billion
Income tax 170
National insurance 115
Excise duties 47
Corporation tax 42
VAT 133
£billion £billion £billion
Business rates 28
Council tax 28
Other taxes 65
Other 44
Social protection 231
Personal social services 30
Health 141
Transport 28
Education 99
Defence 45
Industry, agriculture 24
and employment
Housing and environment 28
Public order and safety 36
Other 48
Debt interest 36
Government income will be £673 billion in 2015-16 Government will spend £742 billion in 2015-16
Source: Budget 2015, HM Treasury

The state of public finances
After a five-year programme of deficit reduction,
broadly 80 per cent through public spending cuts,
the deficit is expected to stand at £69.5 billion this
financial year. The Coalition ultimately reduced it
by half, leaving the remaining half to be reduced
in this UK Parliament. Under the new Conservative
Government, the target date for the deficit’s
elimination and a shift to a surplus is now 2019-20.
The austerity decade (right) shows the outlook for
Resource Departmental Expenditure Limits, a good
guide for spending on public services and running the
state, for this UK Parliament. As the figure also shows,
that outlook changed substantially between the
Coalition’s March Budget and the Conservative’s July
Budget. In March, spending cuts scheduled for 2016-
17 and 2017-18 were twice as deep as the deepest
annual cuts in the previous parliament, which would
have eliminated the deficit by 2018-19.
By July, with the election returning a Conservative
majority government, the Chancellor delivered a
new Budget that effectively cancelled £83.3 billion
of spending cuts from the March Budget. But the
Government is making that possible by running a
deficit for one further year, eliminating it by 2019-20.
2
0
-2
-4
-6
2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21
1
-1
-3
-5
Summer Budget
March Budget
Source: Ofﬁce for Budget Responsibility
Figure 5. The austerity decade
Change since 2007-08 (per cent of GDP)

In the past year, signals have emerged that some local
public sector organisations – councils, NHS bodies,
police forces and further education colleges – could be
facing financial distress as a result of funding reductions
and shifting patterns of demand for their services.
Sector-wide warnings suggests that more than 200
frontline public sector organisations in the NHS, local
government, police and further education could be at
risk from financial distress and require intervention in
the course of this UK Parliament. Around half of those
are NHS trusts.
These financial distress signals suggest a turbulent
period ahead for our local public service organisations
and some may require performance intervention
from within their sector or remedial financial support
from central government. While mergers can be a
workable solution in many cases, organisations with
long-standing, multiple problems may not be attractive
propositions for merger with high-performing peers
unless central governments provide incentives and
support. Each of the UK’s administrations need to be
clear on the risk of financial failure across the public
services and plan for intervention.
In the past year, signals have emerged that some
local public sector organisations – councils, NHS
bodies, police forces and further education
colleges – could be facing financial distress
The state of public finances (continued)

Government through business lenses
Government is not a business.
But applying ‘business lenses’ to
the public sector can allow for
distinctive perspectives and fresh
thinking. Our analysis suggests that
as the Government continues to
recalibrate the public sector to a
lower level of spending, it should
consider reform through three such
lenses: a productivity lens, a talent
lens and a balance sheet lens.

Productivity gains can help the public sector maximise
its efforts, focus on the impact it delivers and make
the most of its funding. We suggest that every hour of
public sector staff time saved in a year through better
productivity is worth £57.7 million to the public sector
in England, £2.9 million in Northern Ireland, £7.2 million
in Scotland and £4.3 million in Wales – a total of
£72 million to the UK’s public purse.
Research for The State of the State assessed public sector
reform programmes and high-performing organisations
around the world to identify common themes and
behaviours. That analysis points to seven characteristics
of highly productive public sector organisations.
These seven characteristics may not be applicable to
all organisations but are intended as simple reference
points to help guide the pursuit of better productivity.
They are:
The productivity lens
123456
7
Talented people with a licence to deliver
Citizen-centric forces shape services and attract resources
Form follows function
Technology helps people
work smarter and cheaper
Insight informs deployment and demand
management
The journey never ends
No repetition, hesitation or deviation
Recommendations through a productivity lens
The State of the State concludes that looking
through a productivity lens, the UK Government
and devolved administrations need to:
accelerate the use of digital technology through
‘invest to save’ funding for public services and
procurement reforms establish a meaningful
framework through which organisations can agree
definitions on productivity, pursue gains, and share
best practice
generate productivity gains through departmental
co-ordination, and through continued local
devolution that integrates services and
organisations back evidence-based reforms that
may challenge widely-held beliefs on funding
priorities, giving leaders across the public services
license to make bold decisions that will improve
productivity encourage the use of user reviews,
social media and other research to access
continuous user feedback on public services.

The talent lens
Advanced governments around the world are
increasingly alive to the importance of talent but
unfortunately, austerity has taken its toll on the public
sector workforce. As our interviews with public sector
leaders in the next chapter show, redundancies, pay
freezes and reduced promotion opportunities have
affected morale. But as public sector organisations
continue to reduce their headcount, redesign their
operations and seek productivity gains, public sector
leaders know that they need skilled and motivated
employees more than ever.
Deloitte research suggests that the government leaders
of the future will demonstrate a series of new abilities
and behaviours that encompass multiple skill sets.
They will be adept at connecting people, information
and resources to deliver through complex networks.
They will operate with a default level of transparency
towards their colleagues and citizens, and use social
media to engage both continually. Their decisions will
be informed by evidence and they will test out their
thinking by iterative processes as part of innovation.
These kinds of behaviours and abilities – rather than
individual skills – need to be nurtured by governments
that want to shape their future talent.
Beyond leadership roles, if the public sector continues
to shape around citizen expectations, some technical
professions may need to become more customer-
orientated or organisations will need to decide where
customer care is centred within their workforce.
Recommendations through a talent lens
through a talent lens, the public sector needs to:
• ensure that further headcount reductions are
considered in relation to medium-term plans so
that public sector organisations retain the talent
and skills that they need
• recognise the role of reward in attracting and
retaining talent, especially where specific and
highly-marketable skills are needed
• develop leading-edge abilities in future talent,
recognising that the public sector needs new
behaviours as well as specific skills sets.

The financial statement lens
Viewed through a financial statement lens, the
Government faces a debt reduction dilemma. Paying
down its £1.5 trillion debts as quickly as possible would
reduce exposure to risk and debt servicing costs,
but could require a continuation or acceleration of
austerity measures. Conversely, with interest rates low,
there is an argument to let high debt levels continue
and pay debts down over decades, allowing for
greater public spending and investment. Of course, the
reality is complex, and it is far from a binary choice;
continuing or increasing borrowing while interest
rates are low is likely to have a longer run effect on
underlying interest rates, thereby increasing repayment
costs overall.
The Chancellor’s Summer Budget implies that the
Government favours a longer-term, organic approach
and is planning to reduce its debt over decades
by running an ongoing budget surplus. While that
provides more scope for investment, the Treasury’s
modelling suggests that debt might not return to its
pre-financial crisis level until beyond 2035, assuming
optimistic economic conditions.
… debt might not return to its pre-financial crisis
level until beyond 2035
Recommendations through a financial
statement lens
through a financial statements lens, the
government needs to:
• Evaluate new ventures to assess whether they are
likely to be classified as part of the public sector
and would therefore add to the public sector
balance sheet
• ensure that policy decisions are assessed for
implications on liabilities, and act to drive down
the state’s net liabilities over time to manage the
UK’s exposure to risk and unsustainable trends
• continue development of Whole of Government
Accounts in line with National Audit office
(NAO) guidance so that they become a single
view of the state’s financial position, used across
Government to inform policymaking.

Local voices: In the words of public sector
chief executives
The UK’s local public service leaders –
including council and NHS chief executives,
chief constables, chief fire officers, and directors
of children’s services – are uniquely placed
to provide a view on the state of the state.
As in previous years, Deloitte and Reform
have commissioned Ipsos MORI to capture
their attitudes and outlook through in-depth
interviews. This summer, they interviewed
public sector leaders from across England,
Northern Ireland, Scotland and Wales who are
collectively responsible for £16 billion of public
spending. Consensus views emerged on seven
areas in those interviews: austerity, risk, people,
technology, local devolution, politics and the
future. This chapter shares insight, along with
quotes, from the interviews.

What public sector leaders told us about austerity
The majority of public sector leaders interviewed for
The State of the State were confident in how they
had changed their organisations in response to
budget reductions.
Most spoke with a sense of pride about what their
people had achieved since 2010, and while none
suggested that change was easy, many described
their organisations as fitter and more focused as
a consequence of austerity measures.
Police NHSLocal Government
If you had asked local government in 2010 to become as productive as we’ve
become, we probably couldn’t have done it. We wouldn’t have known how
to do it, but by forcing us to become more productive, we have.
I think we have made the best of it. It has meant that we have had to go
through an enormous amount of change, constant reorganisation and so
looking at all our demand.
There’s no doubt, back in 2010, things were pretty inefﬁcient.

What public sector leaders told us about risk
Some of the public sector leaders we interviewed
told us that austerity measures had increased their
organisation’s exposure to risk and the prospect of
adverse events – and they warned that those risks
could rise as cuts continue.
Civil Service NHSPolice
The Government is ‘salami slicing’ but this will affect the safety of the public.
A process of seeking efficiencies, managing a smaller budget and delivering
with a smaller workforce is possible but we will need to manage that within
a very short timeframe which brings many risks as you don’t have time to
plan things, you just have to do the best you can.
Financial constraints are clearly compromising patient quality. We are taking
more risks than we should. We cannot fill staffing template for wards with
our own staff so we have to use temporary staff, and we will have to use
more health care assistants and not nurses.

What public sector leaders told us about their people
Our interviews suggest that people issues are a
significant preoccupation for public sector leaders.
Some said that their staff were demoralised after years
of cuts, including a police chief constable who told
us that he struggles to maintain morale among staff
experiencing pay freezes and a drop in promotions.
Another simply said, “the workforce has lost
motivation”. Some interviewees told us that headcount
reductions in recent years had increased the workload
for remaining staff.
Fire NHSLocal Government
We need to be much more closely attuned to thinking about what will attract
and keep staff who are capable of doing great things with limited resources.
Most of the people in the organisation now work ﬂat out as the organisation
has shrunk.
One challenge is going to be retaining and motivating top quality directors
and senior management because it’s a fairly thankless job being a director of
a hospital trust, and with no money being put in to the system it’s going to
get increasingly tough.

What public sector leaders told us about technology
Many of our interviewees spoke about the importance
of technology in making savings, working more
productively and meeting citizen expectations.
Harnessing digital technology is seen as particularly
critical. One local government director summed up the
consensus view that digital is “cheaper, quicker and it’s
what the public want from us.”
Mobile technology is also seen as vital to the future of
public services. Many interviewees told us that their
frontline staff in the field were increasingly equipped
with mobile devices to help maximise their productivity
and reduce downtime.
Fire PoliceCivil Service
The individuals within the organisation are a constraint. While many are
perfectly able to use technology, we are not an organisation made of the
digital generation that see technology as an intrinsic part of day to day life.
So that represents a barrier for us.
We have restricted funding so are therefore less ambitious than we would
like to be. It would be better to be more mobile and tech based.
It is hard to get ofﬁcers to understand that they can use their devices to stay
out in the community and that they don’t need to come back to the station.

What public sector leaders told us about politics
Politics matters in local public services. Nationally, decisions
taken in Holyrood, the Senned, Westminster and Stormont
have far-reaching implications for people managing
the public sector. Locally, democratically-accountable
organisations are led by politicians who make a profound
difference to their success and their connection to citizens.
NHS PoliceLocal Government
In the past there has been an expectation to deliver services with local
councillors as the point of contact, but this new way with less funding will
place tensions on those relationships. We need more real leadership.
What you have got is a government that is not as committed to the NHS as it
like to make out it is. I think they make a lot of decisions that are not very
well thought through. There is a lot going on that they aren’t thinking about
the impact further down the line.
The Government needs to tell the public that there won’t be Police and
Community Support Ofﬁcers in the neighbourhood. Do they want patrolling
on the street or the net, because they can’t have both.

What public sector leaders told us about local
devolution
Unsurprisingly, most local public sector leaders were
supportive of the UK Government’s move towards greater
devolution to local areas. Most saw the main benefit as
more joined-up, redesigned public services.
PoliceEducation Fire
In many parts of the country, there is no real identification with the region.
In Manchester and the North East, people do identify strongly but in this part
of the world, people do not identify with the region. That’s a challenge.
The main benefit is the opportunity to redesign public services at local
level. To break out of the silos. I think the drawback is that it’s such a
huge and complex thing to get your head around in terms of being able
to deliver that degree of change. If anything, you scratch your head as to
why we have still got so much of the public service designed on what
feels like very much a Victorian model.
There are two elements to it: there’s a political element – to use the
example of the Northern powerhouse, it’s about making the North feel
valued by Westminster in political terms. But there’s also a finance and
efficiency aspect of it because there is something, I think, to be said for
making sure that local people get the local decisions that they need.

What public sector leaders told us about the future
When we asked our interviewees to tell us how
they saw their organisation in 2020, three common
expectations emerged. First, they expect their
organisations to retrench into core activities. Local
government interviewees were clear that discretionary
services will be increasingly scaled back as authorities
focus on their statutory duties.
Second, public sector leaders expect greater cross-
sector collaboration and a greater variety of providers
over the next five years. Third, our interviewees expect
their organisation to be designed differently by 2020,
with a renewed sense of mission – and most see that as
a positive development.
PoliceLocal Government
All of the ‘nice to haves’ will have gone. It will be harder to get complex
families into work. The threshold for support for vulnerable people will rise.
It will be harder in 2020 than in 2010. For example police cannot go to
a burglary straight away unless they absolutely need to.
We would need to merge with other forces and work more closely. Close
police stations to keep ofﬁcers out and about in the community. Increase
the number of mobile data devices.

Around the UK
The UK’s devolved government
arrangements as we know them today
began in the late 1990s with the Good
Friday Agreement of 1998, Scotland Act
of 1998 and Wales Act of 1998. The
most significant steps towards greater
devolution since then are now underway,
triggered to a great extent by 2015’s
close-run independence referendum
for Scotland. However, those steps are
not restricted to Scotland’s relationship
with Westminster as the referendum has
stimulated devolution debates in each of
the administrations.

England
Public Spending
Annual public spending per head is lower in England
than in the other UK administrations. At £8,678 per
head, citizens in England receive around three quarters
of the amount spent on citizens in Northern Ireland on
their public sectors.
From 2009-10 to 2013-14, which are the most recent
figures available, annual spending per head in England
went gone down by six per cent compared to four per
cent in the other administrations.
Public Sector employment
England has the lowest proportion of public sector
employees in the UK as a proportion of the total
workforce. Some 16 per cent of the workforce is
employed by the state, equalling 4,204,000 people.
Since 2010, public sector headcount in England has
reduced by seven per cent, or 320,000 people.
England
£8,678 £10,961
Northern IrelandWales
£9,924£10,275
Scotland
Figure 10. Across the UK
Public sector spending per head
Public sector as a percentage of total employment
16.1%
England
26.0%
Northern Ireland
21.4%
Wales
20.5%
Scotland
England
£8,678 £10,961
£9,924£10,275
Scotland
16.1%
England
26.0%
Northern Ireland
21.4%
Wales
20.5%
Scotland

Northern Ireland
Public Spending
Annual public spending per head is higher in Northern
Ireland than anywhere else in the UK. At £10,961 per
person, Northern Ireland residents each receive £2,283
more in public spending per year than those in England.
Since 2009-10, annual spending per head has gone
down by £472 in real terms, or four per cent. That is
the same level of austerity reduction seen in Scotland
and Wales when measured as spending per head, but
slightly less than the six per cent in England.
Northern Ireland has the highest proportion of public
sector employees in the UK. Some 26 per cent of the
workforce is employed by the state, equalling 208,000
people and since 2010, headcount has reduced by less
than five per cent, or around 10,000 people.
England
£8,678 £10,961
£9,924£10,275
Scotland
Public order and safety
Spending reductions per head across the UK
Areas of main spending difference
16.1%
England
26.0%
Northern Ireland
21.4%
Wales
20.5%
Scotland
Map shows spending
reductions per head in
real terms from
2009-10 to
2013-14
-4%
-4%
-5%
-5%
-5%
-3%
-5%
-4%
-4%
-4%
-
Scotland
Northern
Ireland
North
East
Yorkshire
and The
Humber
South West
South East
London
Eas
Engla
East
Midlands
West
Midlands
North
West
Wales
England
£8,678 £10,961
£9,924£10,275
Scotland
Economic affairs
Spending reductions per head across the UK
Areas of main spending difference
16.1%
England
26.0%
Northern Ireland
21.4%
Wales
20.5%
Scotland
Map shows spending
real terms from
2009-10 to
2013-14
-4%
-4%
-5%
-5%
-5%
-3%
-5%
-4%
-4%
-4%
Scotland
Northern
Ireland
North
East
Yorkshire
and The
Humber
South West
South East
London
Ea
Engl
East
Midlands
West
Midlands
North
West
Wales

Scotland
Public Spending
At £10,275 per head, annual public spending in Scotland
is the second highest across the four UK countries.
However, that has reduced by £453 per head since
2009-10.
Scotland has the highest spending per person on
health in the UK at £2,151, some £157 more than is
spent in England. It also spends substantially more than
any other country in the union on economic affairs,
including economic development and transport, at
£1,069 per head compared to £516 in England.
Scotland has the second lowest level of public sector
employment in the UK. Some 21 per cent of the
country’s workforce are employed by the public sector,
amounting to 532,000 people.
Since 2010, Scotland’s public sector headcount has
gone down by 7 per cent, or 42,000 people.
England
£8,678 £10,961
£9,924£10,275
Scotland
Pub
Spend
Areas
16.1%
England
26.0%
Northern Ireland
21.4%
Wales
20.5%
Scotland
Map s
reduct
real te
2009-
2013-
-4
England
£8,678 £10,961
£9,924£10,275
Scotland
Pub
Spen
Areas
16.1%
England
26.0%
Northern Ireland
21.4%
Wales
20.5%
Scotland
Map
reduc
real te
2009
2013
-4

Wales
Public Spending
At £9,924 per head, public spending in Wales is the
second lowest in the UK. Since 2009-10, it has gone
down by £415 per person in real terms.
Wales is the only UK country without any outlying
public spending levels. The only area of public services
in which Wales spends more than the other UK
countries is education, where spending per head is
£1,520 compared to £1,410 in England, £1,428 in
Scotland and £1,503 in Northern Ireland.
Wales has the second highest proportion of public
sector employment in the UK. Some 21 per cent of the
total workforce is employed by the state, amounting to
293,000 people.
Since 2010, headcount has reduced by 9 per cent or
32,000 people.
England
£8,678 £10,961
£9,924£10,275
Scotland
Spending reductions per head a
Areas of main spending differen
16.1%
England
26.0%
Northern Ireland
21.4%
Wales
20.5%
Scotland
Map shows spending
real terms from
2009-10 to
2013-14
-4%
-5%
-3%
-4%
Scotland
Northern
Ireland
South
Wales
England
£8,678 £10,961
£9,924£10,275
Scotland
Economic affairs
Spending reductions per head a
Areas of main spending differen
16.1%
England
26.0%
Northern Ireland
21.4%
Wales
20.5%
Scotland
Map shows spending
real terms from
2009-10 to
2013-14
-4%
-5%
-3%
-4%
Scotland
Northern
Ireland
South
Wales

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Deloitte
Mike Turley
Vice Chairman
UK and Global Public Sector Leader
020 7303 3162
mturley@deloitte.co.uk
Ed Roddis
Head of Government Research
020 7007 2920
eroddis@deloitte.co.uk
@DeloitteUKGov
Reform
Andrew Haldenby
Director
020 3327 1186
andrew.haldenby@reform.co.uk
@reformthinktank
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