Grasping the nettle: Labour's challenge on public sector reform

As the Conservatives struggle with a series of ill-conceived and incompetently implemented public sector reforms, it is worth reviewing Labour's record in office and considering the lessons which it needs to learn in preparation for another term. Labour often struggled to push through important reforms, and the centre-left today has still not reconciled itself to the need for radical modernisation of Britain's public services.

Lessons from government

The first and probably the most significant political lesson from Labour's experience in government is the need to understand the process of reform itself.

It is obvious that reform is difficult. It cannot be achieved simply by a speech, a white paper or a new law, or even a prime ministerial diktat, necessary though these things may be. It requires the right structures, the right culture, an approach of partnership with employees and stakeholders, and a commitment to engage fully with the inevitable controversy. Each particular reform needs its own clear strategy and timescale. The entrenchment of large-scale change takes time, energy, consistency of purpose and leadership.

Failures of preparation and strategy will be exposed by a process of parliamentary scrutiny and challenge which is far more rigorous than many cynics acknowledge. The experience of the current government's health and welfare proposals shows this clearly. Although this might seem obvious, these requirements were not always in place for a number of Labour's major reforms.

It was particularly serious that the most senior levels of government were not united. The fundamentally different attitudes of Tony Blair and Gordon Brown when prime minister are now well documented. The former largely favoured a 'social entrepreneurship' model in which 'trust schools' and 'foundation hospitals', for example, were locally responsive units which would mobilise energy and drive improvements in performance and accountability. The latter favoured a Fabian Webbite model, pulling levers in Whitehall in the hope that this would effect change on the ground.

In practice, this difference meant that some of the measures required for successful reform were frustrated. Public sector pay needed to be set locally, user-charging (like student tuition fees and road charging) needed encouragement, as did hypothecation of revenues to particular uses (like the London congestion charges going to fund improvements in buses). Moreover, some of the inherited systems of controlling public sector borrowing could have been relaxed, at least after the early years of office.

In addition John Prescott, then the deputy prime minister, strongly resisted any significant reform to local government - for example, in relation to funding of education or health - essential though that was to any transformation of the public sector. A vacuous commitment to 'new localism' was not enough.

These political weaknesses meant policy flowed inconsistently and incoherently from the three main organs of central government leadership: the Prime Minister's Office, the Treasury and the Cabinet Office. Although rapid progress was possible when they acted together, the centre of government was in practice characterised by confusion and division. For example, 'pilot projects' often replaced a serious process of reform. Within the Labour party, a combination of trade union and local government opposition to change formed a formidable political hurdle.

A second key lesson is that a serious effort should have been made to work together with the pro-reform elements of the professions. Reformers were marginalised while the professional associations generally opposed almost every proposal for change, as they do now.

In the hope of mobilising support from the service users - parents and patients - who would benefit from change, the government fell too easily into the trap of portraying itself as the tribune for change, fighting the recalcitrant professions. This entrenched conflict and gave the government serious political problems on a range of issues such as the introduction of 'performance-related pay' in education and foundation hospitals and 'drop-in surgeries' in health.

In the end, the disillusionment which resulted from these half-hearted efforts at reform alienated too many, including sometimes the most active supporters of reform.

The 'party of the public sector'

This lack of central political unity in support of a coherent reform strategy was a consequence of more deep-rooted resistance from many parts of the Labour party. The reasons for this are fairly straightforward.

Over the past 50 years, Labour has steadily become more the party of the public sector than, say, an ideologically driven democratic-socialist party or a party committed above all to fighting poverty and social exclusion. Voting behaviour reflects this. Recent MORI data (made available to the author) shows that the proportion of private sector employees voting Labour declined from 46 per cent in 1997 to 24 per cent in 2010 (a fall of almost half), whereas support from public sector employees fell by only a third, from 52 per cent to 34 per cent.

Over the same period, private sector trade unionism has steadily declined. Labour's trade union base has shrunk into an inward-looking and defensive public sector enclave. The proportion of private sector employees who are trade unionists has declined from 21.4 per cent in 1995 to 14.2 per cent in 2010 (down 33.6 per cent). In contrast, the decline among public sector employees was just 8.2 per cent (from 61.3 per cent to 56.3 per cent). Consequently, from 1995 to 2010 the proportion of trade unionists working in the public sector has increased from 52.1 per cent to 62.1 per cent.

Labour is increasingly becoming the party of the public sector. As such, it naturally reflects the resistance to reform among public sector workers which inevitably arises as change increases pressures upon them. Good examples are key performance indicators, outsourcing and competitive tendering. These are all at best difficult for many in the Labour party and at worst anathema. Such Labour concerns were intensified by other aspects of reform like the private finance initiative and financial consultancies. Any proposal for competition, for example between schools (through league tables), universities (variable fees) or hospitals (publication of data) was extremely unwelcome.

Moreover, many in the public sector found it psychologically difficult to acknowledge that the motivation for reform was a direct consequence of the failure of the public sector as a whole to confront difficult managerial challenges. There were outstanding exceptions, but they really only went to prove the general rule that fundamental reform was essential to improve public sector performance.

Furthermore, from 1997 until about 2005 the bitter pill of reform was sweetened by both electoral success and increased resources, which led to significant pay increases and larger number of employees throughout the public sector. These changes did of course improve the quality of public services - but they didn't help make the case for reform. If anything, they suggested that higher quality services only needed more resources and that reform was an unnecessary and distracting luxury.

Reform and austerity

The chequered political background of the last Labour government's attempts at reform, and continuing Labour scepticism, cannot hide the need for further public service reform. The next Labour government will need to grasp this nettle.

The danger is that the cuts in public spending will simply reinforce the understandable defensive response of those working in the public sector. The opposite response is needed: the reductions in spending actually strengthen the need for significant reforms.

Quite simply, the existing system will not be able to meet the requirements of an ageing population and increasing (and welcome) expectations of health, education and police services, when technology is expanding possibilities and horizons. Reform of the public sector is an essential contribution to reducing the poverty and social exclusion which is so individually distressing and socially costly. Without reform at a time of limited public resources, every public service faces slow decay. One illustration is provided by the state of universities prior to the 2003/04 student tuition fee reforms which brought in essential extra resources.

The progressive case for public sector reform is that such change is the only way to maintain high-quality public services for those who most need them. Decline inevitably leads to increased socially divisive private provision of the sort the Tories wish to encourage.

But this case does not simply rest on the need to protect what already exists. Progressives should be seeking to expand public provision, for example to create the universally excellent under-five childcare system which currently does not exist, or better primary schools which enable every child to start secondary school able to read and write well, or high-quality social care in old age, which has eluded successive governments.

This is why now is the time to be working through the kinds of reform which are likely to be most successful, gaining the political support which will make implementation possible and establishing the political unity in action which is essential. It goes without saying that simply opposing the Conservative proposals of the moment is insufficient as a way to set out the direction and description of the action which will define a progressive Labour government.

These will need wide discussion. However my own policy prescriptions for such reforms would include:

• Tight control of public spending, with three-to-five-year budget settlements for the whole public sector, including pay
• Careful extension of user-charging throughout the public sector in order to increase resources, where this can be done in a socially equitable way
• Permitting governmental organisations to develop supplementary income streams and to receive 100 per cent of any efficiency gains they generate, rather than having to pay most of it back to the Treasury
• Steady introduction of hypothecation of taxation, to increase transparency and efficiency of spending
• Giving local government extra strategic and regulatory responsibilities (such as NHS commissioning) while increasing its funding basis and reducing its engagement in direct provision of services
• Reopening dialogue with the professions to seek agreement on their modern role
• Use of competition within an ordered framework which protects the overall public interest and alongside cooperative and mutual reforms
• Working with the public sector trade unions to achieve proper skills development, fair pensions and flexible working arrangements for carers.

Each of these policy approaches has its own difficulties. They will be opposed by conservative vested interests in the public sector. However, they are essential if our public services are to be strengthened, rather than left to wither away, at a time when they are needed more than ever. Labour should start by capitalising upon the public support which already exists for high-quality, fair public services.

Labour needs to establish the economic framework, specify the policies, and develop the political alliances which can bring into effect the necessary changes. Labour must not allow vested interests, even including some of its own members and supporters, to prevent the change which is needed. This approach offers a vision for the future which is the best prospect for Labour's electoral victory.