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One of the puzzling aspects of the financial crisis is why it has taken so long for the shockwaves reverberating around the private sector to rock the foundations of the public sector. It was always clear that there would be a time lag between the private sector recession and its public sector equivalent: the last government’s policy of fiscal stimulus ensured public sector organisations were protected until after the 2010 general election

..But two years have passed since then – two years in which deficit reduction has become a mantra for the coalition government.

There are several explanations. After a decade of generous funding, there was enough of a buffer in the system to allow many public sector bodies to cope with the first round of cuts without having to make fundamental changes in the way they operate. Additionally, the cuts have been phased over a long period.  Indeed, according to the government’s own estimate, public sector net debt will not start to fall as a percentage of GDP until 2015-16.  There may also have been a belief in some parts of the public sector that more money would be found if the going got really tough.

Whatever the reason, it has taken time for the leaders of public sector organisations to recognise that they will need to make radical changes in the way they operate if they are to survive an age of austerity that will last for many years. So it is encouraging that we are beginning to see evidence of public sector leaders at last embracing the need for change.

KPMG’s latest annual survey of 3,000 business leaders suggests that public sector bosses now appreciate the enormity of the task that confronts them. Four out of five public sector respondents  agree – and accept – that they must make dramatic improvements in productivity in order to meet current and future challenges. This has led them to be even more willing than their private sector counterparts to contemplate big changes. Almost two-thirds of the public sector executives in the survey identified the need to ‘change business operations’ (for example by opening services up to competition), compared with just over 40 percent of those in the private sector. And as many as one-third of public sector bosses are now preparing their organisations for changes in the way they operate, compared with only one in four in the private sector.

There is, however, one key area in which public sector leaders still lag behind their private sector counterparts.  Only 21 percent see ‘improving cash and working capital management’ as a critical priority, compared with 33 percent in the private sector.  This suggests that recognition of the need to reduce spending has not yet translated into a single-minded focus on the minutiae of financial control.

That is a cause for concern, because a successful deficit reduction strategy is crucially dependent on the quality of day-to-day financial management within public bodies. There will be many tough and controversial decisions to be taken as the pressure on budgets increases, and these need to be underpinned by a thorough understanding of the costs as well as the benefits of public expenditure programmes.  Anything less and we may be unable to protect the most important public services.

Written by Alan Downey
Friday, 20 April 2012 10:10

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