The only way to cut taxes is to reform public services

The first skirmishes in the Conservative leadership race were over tax cuts. But how do we pay them?

Both candidates seem to have rejected Reagan’s advice not to worry about the deficit, it’s big enough to take care of itself. Both Truss and Sunak have pledged to reduce the deficit and debt over the medium term. Growth will help, but even with growth, tax cuts will not pay for themselves.

When it comes to public spending, the government has little room for manoeuvre. Conservatives who hope to pay for tax cuts with welfare cuts will find this politically difficult. The war in Ukraine means that reduce defense to pay for utilities in our country, the preferred choice of governments of all stripes, does not seem reasonable.

A return to austerity? There’s probably no faster way to lose the red wall. Before the pandemic, a poll found that 72% of voters in the north think public spending cuts have gone too far. A similar number agreed in the Midlands. Even 64% of voters in southern England thought austerity had gone too far.

So the only viable way to pay for the tax cuts is to reform public services.

Reform must mean restructuring the way we deliver public services, empowering professionals and creating incentives for innovation. Fortunately, we know how it can be done. One of the most successful policy initiatives of the past decade has been to encourage ‘public service mutuals’. These are staff and community-run organizations that grew out of the public sector and gave people the freedom to try new ways of working.

A good example is Accelerate CIC. Accelerate was created by a group of East London nurses who wanted to transform wound and lymphoedema care. Wound care alone costs the NHS more than £8billion a year and Accelerate wanted to find ways to improve patient wellbeing and use resources more efficiently. By using new techniques and engaging with patients, they were able to cut per capita spending on dressings in Tower Hamlets by a third between 2012 and 2021. If Accelerate hadn’t been independent, this kind of transformation would not have been possible. This is not just an isolated example. Research on public service mutuals found that their productivity growth was 4.5 times that of the rest of the public sector between 2012 and 2019. If the whole of the public sector matched the productivity of these mutuals, it would free up £18 billion a year , the equivalent of 3p income tax.

In addition to integrating more mutuals and social enterprises into the delivery of public services, we need to empower communities. The Wigan Deal is an example on which we can rely. The deal saw an agreement between local residents and the council to work in partnership and use the assets, skills and networks of local residents to improve services. The deal has saved £115million over the past decade. Taking the example of health and social care, the King’s Fund found that life expectancy in Wigan was increasing, bucking the national trend of stagnation and high quality social care. Wigan has even managed something unique, to manage a surplus in its social care budget.

Wigan is not alone, there are many other examples of how giving money and power to communities yields better results. A study by Ernst & Young in January 2013 found that local budgets, which pool funding for local public services in an area around shared goals and allow greater flexibility on how money is spent on different agencies, could save up to £20 billion over a five-year period based on pilot projects taking place across the country. There are many areas where public services can be reformed if the government is prepared to do so. Truss and Sunak management teams would do well to read the brochure trust people written by a group of Tory MPs entering 2019 last year who called for a new ‘community conservatism’.

The next PM can also have an impact from day one by amending the Public Procurement Bill. The state spends more than £300 billion on purchases from external suppliers, but the search for a new scheme, Social Value 2032, found that up to £56 billion in additional economic, social and environmental value is not being claimed by not spreading best practice across the country. Getting the most out of procurement would equal funds, create tens of thousands of new jobs and improve community assets. Changing the Public Procurement Bill to create an obligation for all public bodies to maximize social value would cost nothing and could have an impact before the next election.

The next Conservative leader must tap into the party’s reform instinct. They may not be catchy slogans, but without them the promise of low taxes and high-quality public services is something the party can never deliver.

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Andrew O’Brien is Director of External Affairs at Social Enterprise UK.

The columns are the author’s own opinion and do not necessarily reflect the views of CapX.