Public services face 'significant squeeze' due to economic downturn » Local Government » 24dash.com

The economic downturn could have a "significant" impact on the quality of public services, as declining tax revenue combines with rising unemployment, increasing crime and extra demand for social care and housing, a report warned today.

With the Treasury projecting a 3.3% fall in tax and National Insurance revenue in 2009/10 and councils expecting a decline in income from charges for services like planning, both Whitehall departments and local authorities face intense pressure to cut costs, said business advisory firm Deloitte.

But the recession also offers an opportunity for public sector bosses to force through change which they could not achieve in less straitened circumstances, said the report.

Tough economic times can be a "catalyst" for reform, encouraging managers to find innovative ways of saving cash, like sharing back-office functions with other public sector bodies, clamping down on sickness absence or selling off mothballed assets.

Today's report, entitled Turning the Tide, notes a range of factors combining to put the squeeze on public sector finances and warns: "While not immediately catastrophic, a downward spiral of diminishing resources and increasing demand for services over the next five years could force public sector organisations into a position of permanent fire-fighting."

The Treasury is predicting a £17 billion reduction in tax and NI contributions in 2009/10, notes the report. The collapse in the housing market means revenue from stamp duty alone will fall by 40% in 2008/09 and declining commercial activity means receipts from business rates are likely to come in £300 million below the 2008 Budget forecast.

Meanwhile, inflation has reduced the real value of Government grants to councils in England and Wales by £500 million a year and authorities have paid out an additional £374 million on energy bills due to high gas and electricity prices.

Tumbling stock markets are putting pressure on public-sector pension funds, whose net liability Deloitte warned could increase to an "unsustainable" proportion of national income.

On top of these financial pressures, the economic downturn threatens to add to the burdens on the public sector, with commentators predicting unemployment may rise to 3 million and demand for social housing to 5 million.

Meanwhile, one in 10 councils in England are experiencing increased demand for school places as private education becomes less affordable, and there are fears the NHS and local authorities may find themselves forced to cope with the withdrawal of private firms from the market for long-term care.

Public sector organisations are also facing "unprecedented" risks from financial failures like the Icelandic banking collapse - estimated to have cost local government nearly £860 million - said the report.

"Unchecked, new tensions between expenditure reduction and increased citizen requirements and expectations could lead to a reduction in quality across key public services," it warned.

But Mike Turley, head of Deloitte's public sector practice, added: "While economic uncertainty presents a threat to the public sector, it also represents an opportunity for public sector managers to drive through reforms they could not normally carry out in easier times.

"Public sector leaders should view the downturn in that context and seize the opportunities it presents."

In a period of crisis, previously "unthinkable" reforms may come to seem the "least worst option", said Deloitte. The fundamentally altered environment requires public bodies to "take radical steps to emerge as leaner, more commercially savvy entities".

This could involve changes in the delivery of services; renegotiation of contracts to reflect the fact public bodies are now the "customer of least risk" for the private sector; and cost-cutting by removing levels of management, selling surplus assets, scrapping projects and scaling back spending on temporary staff and contractors.

"The downturn provides a chance for public-sector organisations to drive through reforms they could not necessarily achieve in more prosperous times," said the report.

"To think tactically at this time will only defer the damage caused by an underlying tension between public expenditure decline and rising costs and citizen expectations.

"Public-sector leaders need to confront this tension and transform their organisations into leaner, fit-for-purpose entities by implementing strategic reforms. The time to respond to these opportunities is now."