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The state of the state 2012 village

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Anti-clockwise from infrastructure

Government has identified 500 projects worth over £250 billion for implementation as part of work to modernise the UK's infrastructure. Flagship programmes such as High Speed 2 are among the most prominent.

Government faces specific challenges against this target. In light of a lack of public sector investment, a flat PFI market and ongoing investor uncertainty, policymakers need to develop a set of new financing solutions to build a pipeline of viable projects. This will be essential to support economic renewal. The largest and most complex programmes must sequence together key skills through an elaborate mix of stakeholders and incentives.

Health clinic
The role of GPs is changing. Pathfinder consortia now cover most patients in England. However, some of these continue to merge and others have been advised that their structure is not appropriate because they cross local authority borders.

Consortia will go through a rigorous authorisation process. It is possible that a minority of new commissioners will not be ready in time for the April 2013 deadline. Despite these changes, many may end up being managed by the ex-leadership of PCTs.

Job centre
Launched in June 2011, the Work Programme delivers welfare-to-work services through a range of private, public and voluntary sector organisations. It operates on a payment by results basis – a method of performance contracting where suppliers are paid on the basis of the outcomes they achieve.

Eighteen prime contractors have won contracts to provide welfare-to-work services worth £3-5 billion over five years. The DWP estimates that about 3.3 million jobseekers will pass through the Programme over five years. It expects 36 per cent of these to find work – saving £1.95 in benefit payments for every £1 spent on the Programme.

State benefits
Government will pay out £209 billion in benefits and tax credits in 2012-13. From 2013, Universal Credit, a single means-tested benefit, based on family income will replace many existing benefits. Government faces several challenges on Universal Credit. It must:

  • Communicate to ensure recipients, local authorities and professional advisers understand the changes.
  • Focus on fraud. Organised fraud is a key risk. Councils will play a vital role.
  • Keep things flexible. Universal Credit must be responsive to individual claimant needs.
  • Develop the advice market. Financial advice to recipients will be important to drive behavioural change.
  • Implement the technical solution. Data sharing between the DWP, HMRC and local authorities will symbolise new levels of joint working within Whitehall.

In 2012, primary and secondary education faces several interlocking challenges:

  • Schools in England need to provide around 180,000 additional school places by 2015.
  • Most of the demand is concentrated at primary level. London accounts for 80,000 places of this shortfall.
  • England's school estate is worth £110 billion. Between 1998 and 2009, capital spending on schools increased by 12.9 per cent per year. The cost of the consolidated repairs backlog has risen to around £8.5 billion.
  • The largest drag on the free schools market is the availability of upfront capital. Building costs for existing free schools will be around £124 million. One option to accelerate market growth may be to leverage private finance.

The economy
The OBR GDP growth forecasts are 2.3 per cent next year, 2.8 per cent in 2014-15, and 3.1 per cent in 2015-16. The toughest years of the 2010 Spending Review are also those with high growth forecasts. To meet these forecasts, business investment must increase by an average of 7.2 per cent over the next five years.

Liquidity within UK corporates is in place to support this forecast. UK businesses now collectively hold around £750 billion in cash. The latest analysis from Deloitte's quarterly survey of Chief Financial Officers (CFOs) shows that, despite a sharp rise in corporate risk appetite in 2012, rising levels of optimism have not yet led to more expansionary policies or capital spending among UK businesses.

The introduction of Police and Crime Commissioners later this year heralds a new era in British policing. PCCs will also have strong influence on local public services beyond policing. Conventional service provision by local agencies might evolve into a range of delivery models that better reflect local needs.

Collaboration between forces, public-private joint ventures, and greater uses of business process outsourcing are some of the ways PCCs could bring about fundamental changes to local public services.

The Winsor Review proposed radical changes to how police officers and staff are recruited, assessed and paid to target £150 million in savings.

£89.9 billion of spending by primary care trusts goes on hospital-based treatment. Despite recognition that hospital-based care is expensive, spending here is rising by about 15 per cent while spending on community based care is increasing by five per cent.

The NHS must find £20 billion-worth of efficiency savings each year by 2014. The need for better productivity also comes as a time of acute financial pressure on some providers. Estimates suggest that around 20-40 hospitals are not financially sustainable over the course of this Parliament.

Monitor has warned that the target to make all NHS trusts foundation trusts by 2014 is at "significant risk". Separate surveys indicate that merger rates between hospitals are increasing to ensure sustainability of key organisations.

The UK's role in global security issues will change fundamentally over the next 10-20 years. Ongoing challenges of procurement and asset management continue to occupy defence leaders. Progress against these and efficiency targets will be vital. For every £1 spent, the MOD could gain an additional £1.75, if improvement programmes can be executed effectively.

Defence procurement is complex. The MOD spends around £20 billion each year with suppliers. This market is highly concentrated: almost 40 per cent of MOD procurement expenditure was with just ten suppliers in 2011.

The MOD has one of the largest property holdings in the UK with around £22.7 billion worth of land and buildings in 2011. Its asset base is one of the most complex in government.

Prison and probation
A supply side revolution is planned in custody and offender management services. By April 2012, 10 per cent of prisons in England and Wales will be run by private companies.

Government may open up the £820m-a-year probation service to competition. The introduction of Police and Crime Commissioners could shake up control of probation trusts.

Payment by results could feature heavily in new delivery models. As well as improving reoffending rates, the government plans to cut the £1 billion cost of running probation services.

Around 129 higher education institutions in England face cuts to grant funding and changing demand flows in response to the revised tuition fee cap from 2012-13.

HEFCE data shows that attrition is likely to be highest in the ‘mid-market' group of institutions. Russell Group universities typically have strong balance sheets and fundraising capacity that brought in the lion's share of the donor income market (£560 million in 2010-11). Institutions at the low-cost end of the market will also be allowed to expand under new regulations.

Student loans are now ‘on-balance sheet', appearing as assets in government accounts. Student loans are projected to increase net debt by up to 4.3 per cent of GDP (£63 billion in today's terms) by the early 2030s, falling to 3.3 per cent of GDP (£49 billion) by 2060-61 as the value of repayments rises relative to the value of new loans made.

Public finances
The key target is to eliminate net borrowing by 2016-17. 2012 Budget data show small improvements in the last six months on borrowing and net debt. 2011 will be remembered as the year net debt exceeded £1 trillion. Another milestone will be when the UK surpasses £1 billion per week in its debt interest payments (early 2014). In 2009-10, the UK government was running a £1.2 trillion net liability on its balance sheet.

Net debt and public sector pensions are the two biggest items on the liabilities side. Despite a peak of national debt in 2014-15, that year will not be the most expensive for the UK in terms of the cost of credit. Debt interest will continue to rise to about £64 billion by 2016-17.


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