The difficult task of putting a value on the public sector

Under the new resource accounting system, every department will have to set out a list of everything it owns, from buildings to teacups and bullets

Any business or household has a rough idea of what assets it has. Companies have to be able to put a value on their assets, whether machine tools or goodwill, for their published accounts. Individuals know, even if very vaguely, how much their house and pension are worth, and how many TVs and chairs are covered by their contents insurance. But the public sector, making up two-fifths of national output, has never known what it is worth or even exactly what it has been spending its money on. Until now.

One element of a radical reform that is under way in accounting for government expenditure is a tally of public sector assets. For the first time, under the new system of "resource accounting", every department will have to set out a list of everything it owns, from buildings and laboratories to teacups and bullets.

The project, begun by the Conservatives, has been given a higher profile by the Labour Government's Comprehensive Spending Review, for which Chief Secretary to the Treasury, Alistair Darling, recently set out the terms.

For the review's aim of setting clear priorities in public spending, of deciding what is essential and what can be sacrificed for the sake of more important areas, could not go ahead without a register of what the public sector owns or a detailed breakdown of what it does. Astonishingly, this information has never been available before.

The Government's plans involve more than the basic matter of getting value for money in spending taxpayers' money. They will cement a change in the way we think about government. They ought, eventually, to restore the public support for public-sector activities whose disappearance during the past two decades is reflected in the unwillingness of voters to pay more taxes because they do not trust politicians to spend the money.

These are the ambitions, certainly, behind the announcement earlier this week of a White Paper on better government, in which the Treasury will be heavily involved. Getting the most out of public spending and finding out what services people want are two of the key elements to be addressed.

Ultimately, therefore, the rather dry accountancy reforms will provide Gordon Brown with the escape route from the ultra-tight public expenditure plans whose realism almost every expert has cast doubt on. In the normal run of the public spending round, it would have been difficult to switch spending from one area to another of higher priority. Pamela Meadows, director of the Policy Studies Institute and a former senior government economist, has pointed out that it is possible to axe schemes ministers do not care about, even if they work, but not to cut schemes on which the ministers have staked political capital, no matter how ineffective they are*.

Straightforward budget-cutting is therefore extremely difficult. Root and branch reform of the public finances offers the best bet for redirecting expenditure towards voters' real priorities and increasing spending on important areas.

During the autumn the Treasury will send MPs examples of how resource accounts will look. One feature will be that departments will have to link their spending directly to its results, which involves them setting out what they are trying to achieve, such as a rising proportion of the population going into tertiary education or achieving NVQs, or an increase in the time advisers in the Employment Service spend with lone parents who want to go back to work, or whatever it may be. The new departmental reports will force civil servants to say what the expenditure is for.

The introduction of resource accounting will involve developing extra performance indicators and measures of public sector output, a process already well under way with the delegation of much government work to agencies with contractual targets for their output and productivity. A paper delivered to the OECD recently by Henry Neuburger, an expert at the Office for National Statistics, itself an agency, points out that such indicators will make it possible to measure the efficiency of the public sector to a degree that has not been possible before.

He notes that this reflects a shift away from thinking of government as a matter of ideology, and towards thinking of it as a matter of economic efficiency. Whereas it used to be thought that what the government spent taxpayers' money on was a matter of political decision-making, it is increasingly a question of whether the government or the private sector can deliver a given service better, at higher quality and with most value for money.

Is healthcare best provided by the public or private sector? It is in order to answer that question, and so set a new boundary between private and public sector, that resource accounting and the Comprehensive Spending Review are going ahead.

The ONS will use the new data provided by resource accounting to develop better measurements of the public sector's overall productivity. This in itself will encourage the tendency to see government as more than ideology, for in the past the convention in the national accounts has been to measure the output of the public sector as equal to what it spends on inputs such as the wage bill and running costs, making public sector productivity growth zero by definition. This was never necessary - it would always have been possible to estimate productivity in public services using the same techniques applied to private-sector services.

Rather, it was a convention which implicitly made efficiency irrelevant, and accepted government spending decision as a political choice. Simply having a more realistic measure of public sector productivity will mean people will want to see it increasing.

The Government's ambition to deliver better public services for limited increases in taxes and spending will depend on improvements in public sector productivity. It is the only way Mr Brown can escape from the uncomfortable arithmetic of making tight spending plans, limited tax increases and tough borrowing targets add up to meeting high expectations about what Labour can achieve.

Government spokespeople tend to put this naively - there is nothing that invites cynicism like a bald claim that health service red tape will be cut to fund front-line care, or that bad headteachers will be replaced with good ones at no extra cost. But it is too early to write off the project of changing how we think about what our government should be doing with our money. Who knows, one day the electorate might decide to vote for a party that says it wants to increase taxes because we trust it to spend wisely.

* In `Public Expenditure: Effective Management and Control', ed. Dan Corry, Dryden Press.