Public service provisions
In the context of so-called austerity there is an assumption that there is a need to reduce public services. This is only true if the macroeconomic management is inappropriate.
This note explains how the Real Incomes Approach can reduce the costs and augment the productivity of public services.
Real incomes, the implicationsIt should be noted that the impact of PPP (Price Performance Policy) on the macroeconomy is a direct result of the outcomes of operational decisions taken at the level of individual enterprises. This occurs as a direct result of their control of their Price Performance Ratios (PPR), the main policy instrument. The PPR establishes, in each case, the total revenue of the firm as a result of the prevailing market conditions (price elasticity of consumption) and the Price Performance Levy (PPL) whose value is determined by the value of the PPR.
PPP is geared to sustaining the value of the currency through stable or falling unit prices and by establishing productivity bonuses that relate to the degree that companies augment the purchasing power of customers. Thus the general trend in unit prices and income compensation results in a stable or rising general level of real incomes.
The implications of this fact is that the nominal sums required to fund the purchase of products and services either remain stable (a fixed nominal sum) or decline (requiring a smaller nominal sum).
A constitutional economic element
In terms of public choice, PPP leaves economic units free to select the most advantageous operational state according to individual circumstances and access to resources and the social constituency's freedom of choice of more accessible products and services is augmented. Thus the operation of PPP has an important constitutional economic element.
The National Health Service requires a long term reduction in its costs trajectories and rising quality of service - PPP can help deliver this
Under PPP public services are subject to the same regime as private sector companies.
Here public services will be free to select the most advantageous operational state according to individual circumstances and access to resources and the social constituency's freedom of choice of more accessible products and services is augmented. Success in responding to the PPP incentives is the result of driving technical capabilities and human resources capabilities to productivity frontiers that are advanced by achieving market penetration rates dependent upon the price elasticity of consumption2.
All sectors can sustain long term productivity enhancement and competivity under PPP
In the end, because public services, like companies under this regime, are price-setters any competition is less about other producers of products and services and more about the response to consumer needs. Thus the ability to reduce unit prices to lower public outlays contributes to the real purchasing power of government budgets and this relies on a detailed knowledge and interpretation of each segment of the population served. In essence services are competing with themselves. The overall logic of this form of productive evolution follows the logic of the Production, Accessibility and Consumption Model (PAC Model) as opposed to the Aggregate Demand Model (ADM) that dominates the orientation of conventional policies (see "The PAC Model of the economy").
A considerable proportion of public service supplies and services are produced by private firms so the PPP environment not only enhances the efficiency of public administration it also helps reduce the unit prices being offered under public tenders for supply contracts.
The PPL (Price Performance Levy) is not a fiscal or government revenue-generating tax but it is exclusively an incentive mechanism that uses the cash flow of services and companies. There is therefore no subsidy involved in its operation. All government revenue is generated from personal income taxes and there are no corporate or business taxes. The government revenue reduction arising from the elimination of corporate taxes needs to be compensated by a transfer of focus on the basic pay of individuals plus a margin to pay income tax on a progressive basis and deducted at source through a PAYE scheme. This avoids tax evasion and avoidance. The replacement of the profits category in the accounting requirements by investment in technology and human resources and the use of real incomes as the indicator of public service and corporate success eliminates the destructive impact of the profit paradox.
Finally, a significant difference between PPP and conventional policies is that the public services are subject to the same PPR and PPL regime as the private sector. Public service revenues are paid from the government revenue pool generated from personal income tax. Since the public services will operate on the same basis as the private sector the operational emphasis will switch to productivity and stable or falling unit prices or higher real product per pound spent on public services. Thus the public services would contribute to the rise in real incomes through more efficient production and stabilization or augmentation in the value of the pound.
Just because the UK government has serious problems with debt and deficits, there is a danger that the other significant problem of private debt is overlooked. Austerity policies appear to be an exercise in adjustments in relatively static balances between government revenues and public provisions. This is an extremely inefficient and therefore ineffective way to reduce debt; it is also destructive. It is more productive to emphasize incentives for productivity that cost the government nothing while benefiting the economic and social constituencies with rising real incomes as a result increasing efficiency and a stabilized currency. Bank of England interest rates setting is a failure since most money is flowing into assets as opposed to productive investment and extraordinarily, even during a recession, the government is giving some emphasis to subsidized real estate purchases that drive this asset market and rental values upwards. The paradox is that the policy "benefit" is almost completely wiped out by "housing benefits" that flow, in many cases, to rentiers.
The government needs to give urgent consideration to the generation of efficient production of goods and services in the private and public sectors rather than to the interests of asset holders and rentiers and resorting to cuts and reductions in public service provisions.
A recent relevant essay on a related topic is: "Leaving austerity behind - the prospects for the UK".
1 Hector McNeill is director of SEEL-Systems Engineering Economics Lab.
2 Dimensioning of the market within public services domains is straightforward and the analysis need to concentrate more on the feasible competitive prices services can attain. Rather than public services working to expand their budgets their incentive would be personnel income related which would encourage unit price reductions so as to maximize income bonuses over and above standard career structure salaries.
Updated 24th June, 2015: typos and added content to improve clarity without altering the sense of the essay.
Updated 26th June, 2015: added text section linked to footnote 2, and surrounding text.
Updated 9th August, 2015: added reading list.
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