Efficiency swipes

This is what happens in election campaigns. Within days, the debate between the parties is said to "hinge" on a complex statistical argument which no-one had heard of a few weeks ago - and few people understand.

The mind-bending skirmish this week is over efficiency savings: specifically, the £12bn of them which the Conservatives have said they will deliver in 2010-11.

You'll remember they've said they'll reinvest half of those in the NHS, overseas aid and Defense. The remaining £6bn they'll put towards avoiding most of next year's planned rise in National Insurance.

Labour now says that the Tory plans "have the strength of a house of cards". Their argument boils down to this: we are already making the savings that the Tories are talking about; their own advisor doesn't think it's possible to do a lot more this year; therefore, George Osborne will be forced to cut frontline services to make his plans add up.

What is the truth? The short answer is that no-one knows: hand on heart, no-one on either side of the debate can predict exactly what a Tory government might be able to deliver. But I've now done you the favour of reading the Final Report of the Government's Operational Efficiency Programme (OEP) from April 2009, which Dr Martin Read - now a Tory advisor - helped to write. (Trust me, that's a big ask.) That's led me to some interesting conclusions.

For those that suspect a contradiction in terms in that last statement ("interesting? A year-old government report on operational efficiencies!?"), I'll give a sneak preview.

I don't think there's much doubt the Conservatives could find net cuts of £6bn in 2010-12. That's about half a percent of GDP. I've just come back from Ireland, where they cut spending by more than 4 per cent of GDP in 2009 alone. In my next post I'll tell you more about the Irish case, and the lessons for the UK.

I'm also confident that many of those savings might be classified as "efficiency savings".

But here's the rub: unlike Labour's efficiencies, that £6bn will be coming directly out of budgets that Departments had expected to spend this year. Whether 'efficient' or not, they will be cuts. They might or might not represent a better way to cut borrowing than raising national insurance, but like that tax rise, they are unlikely to be pain-free.

Now, for the lovers of detail, some facts.

First, it is true that the government is already planning to save money, this year, in many of the areas that the Tories highlighted in their plan: for example, by cutting back office operations and IT projects, negotiating better deals on contracts, and better managing government property. These were the focus of the OEP, and roughly £6bn of the £15bn in savings planned for 2010-11 are lifted straight from there.

Interestingly, for the Tories, the Report suggested there were more savings to be found - about £9bn of them. Many of those are included in the £11bn of efficiency savings for 2011-12 which the Chancellor announced in the Budget.

The Conservatives have pilloried the government for wilfully allowing this waste to continue another year. Labour says it's not feasible to do more right away, and they say the independent advisors who wrote the Report agreed. One, Gerry Grimstone, publicly supported the government on this point, in the pages of today's FT. The Report itself was less strident, but it did say that further savings "will take time to deliver", suggesting a target of 2013-14 for the full amount.

So, yes, only one year ago, Dr Read, one of the main standard-bearers for the Tory plan, seems to have put his name to a report suggesting that savings of the order of £12bn would not be possible in 2010-11. But he, and the Tories, have a few get-outs.

First, even in that report, it's striking that the chapter Dr Read was closely involved with - on back office and IT - points out, more than once, that the three year timescale for achieving total saving in those areas of about £7bn "is at the upper end of private sector experience".

Dr Read might well argue that a new government, less beholden to civil servants, would be able to ram the changes through more quickly. In fact, Sir Peter Gershon has said a new government should up the ante, by promising to outsource back-office functions to the private sector if officials don't come on side.

There are other areas where the Tories might find some wiggle room: for example, the report suggests that an extra £5.7bn could be gained from more collaborative procurement as soon as 2011-12 (basically getting different parts of government to club together to negotiate with the private sector). It doesn't seem beyond the realm of possibility that some of those gains could be achieved a few months earlier.

So, the Report suggests that a determined Conservative administration might find another few billion in savings in 2010-11 from the measures outlined in the OEP.

It's worth noting, too, that there are items on their list that aren't explicitly included in the government's programme: notably, controlling recruitment, and cuts in "discretionary spending".

It's true, as Labour says, a large share of of the new hires in the public sector in the past two years have been in the NHS, which the Conservatives would protect. But Dr Read says the turnover rate in the public sector is typically 8%. There are about 3 million people working for central government, of which about half a million are in the civil service. If he's right about the turnover (I'd welcome some independent verification), that would mean more than 40,000 people civil servants leaving their jobs every year.

There's no doubt that cutting those jobs would save quite a lot of money. What we don't know is whether the colleagues left behind could easily fill the gap.

The same goes for cuts in 'discretionary spending' (apologies for those who are now losing the will to live. But come election time, I become the 'boring but important detail' correspondent.)

Labour says that these kinds of savings are, in fact, embedded in the £15bn efficiency savings they planned to achieve in 2010-11, because those were to include a 5% cut in administrative budgets.

But there's nothing to stop the Conservatives making it 10%. Again, the point is not whether they could do it. It's whether we - or the economy - would feel the difference.

I return to the point I made when the Tories first announced their plans last week: back office staff spend money too. When they lose their jobs, they spend less. When IT companies lose public sector work, that hits their bottom line as well.

As we've seen, Labour's efficiency savings would have had many of the same effects. The difference is that under the Conservatives there would be £6bn more, which departments won't get to spend.

Where does all this leave us? Well, Labour is right that there's substantial overlap between the Conservatives' £12bn and the government's £15bn in savings for 2010-11. But the Conservatives are probably right that you could save more within this financial year - quite a lot more. And you might say they don't need to find an extra £12bn in efficiencies - only the £6bn they are actually planning to take off unprotected budgets. (Of course, to keep their promise they need to find the full £12bn, but they only need £6bn to be able to fund the national insurance cut.)

So, it's possible. But, to return to where I began, that £6bn will be a real cut: a cut in the amount of public sector demand in the economy, and a cut in in the number of people employed directly or indirectly by the government. For the departments affected, it will represent a real terms cut in their budgets of 2.8%, on top of the 2.4% cut they were already expecting under Labour.

There is no way to know whether or how that cut will affect the way the government does its job - not to mention that vaunted "frontline" of public services.

However, it's interesting to note that Labour announced a similar £5bn cut in spending on public services for 2010-11, back in the 2008 Pre-Budget Report.

Looking back at his speech, I see that Alistair Darling didn't suggest those cuts would be painless: he said they were the result of "tough choices, but necessary choices." I wonder if Labour would change its tune, if Mr Osborne used the same phrase today.