Taxing times

Taxing times

Deloitte's David Harker outlines the drastic financial realities the public sector must confront, and some of the bearing it may have on the private sector.

A lot of attention about the effects of recession has centred to date on dilemmas of the private economy, where many jobs have already been shed. But the public sector, through the drain likely on state income, will also affect everyone significantly, both in business and private life.

Research from Deloitte on the impact of reduced tax revenue on public services and finances, in a report called Turning the Tide, suggests that as the economic downturn intensifies, increased demand for public services may affect the public sector profoundly. This pressure may stem from factors such as rising unemployment, increasing crime and more demand for social care and housing.

Turning the Tide warns that, unchecked, new tensions between reduced spending and increased citizen needs could lower quality across key public services. Analysis to date has focused on economic indicators: consumer spending, the property market and UK business, but impact on the finances, operations and policy making of public sector organisations may be equally significant.

This is important. The health of public finances and the ability of government to deliver services are highly relevant to the public interest and the economy. Turning the Tide urges the public sector to bring in tactical measures to manage immediate risks and vulnerabilities, and to ensure that government continues.

But this alone is not seen as enough. There is a need to take forward a series of strategic reforms to adapt to the new climate. These include: Targeting services on a granular basis to maximise impact and deliver them in the most effective way: This includes harnessing valuable customer data from across government to improve the way services are planned and delivered and anticipate changes in demand and uptake of public services.

Managing the organisations that government depends on to deliver public services: Parts of the supply chain may now be vulnerable to failure. Contracting models must reward delivery and the public service industry (that delivers public sector services) needs to be managed to ensure continued service.

Exploiting their status as a ‘customer of least risk’: The comparatively strong credit rating that public sector organisations enjoy can be used to obtain better value for money and negotiate cheaper contracts.

Building new capabilities to adapt and survive the recession: Many public sector finance directors (like many of their private sector counterparts) are facing their first recession.

Across government organisations, finance functions may need to acquire new capabilities to oversee a strategic cost optimisation programme, assess supplier capabilities and risks, and develop new approaches to planning in an uncertain evironment.

Implement permanent cost savings: Steps could include a renewed focus on shared services, greater collaboration and joint strategic partnerships, in addition to changes to traditional human capital management to reduce ‘fixed’ costs.

In wake of the downturn, public sector organisations will have to change tactics immediately to assure their financial health and operational continuity.

A programme of wider strategic reforms will also be vital if government bodies are to navigate successfully through this challenging period.

While economic uncertainty presents a threat to the public sector, it also presents an opportunity for public sector managers to drive through reforms they could not normally carry out. Public sector leaders should view the downturn in that context and seize the opportunities it presents.