Our first full coalition since the ‘40s has reinvigorated the cabinet committee system and energised officials, the cabinet secretary tells Matt Ross. Now the civil service will have to show that it can keep quality up as budgets fall

“For us, it’s absolutely fascinating,” says Gus O’Donnell. “These things don’t happen very often. It’s the first time in over 30 years that we’ve had this kind of situation”. Sitting in his roomy, wood-panelled office on Whitehall, the cabinet secretary is thinking back to the last hung Parliament, in 1974.

Back then, O’Donnell was a postgraduate, reading economics; like today, that period was an interesting time to study the subject. And like this year’s general election, the first 1974 poll gave no party an overall majority. Beyond that, though, parallels between 1974 and 2010 are thin on the ground. While the defeated prime minister Ted Heath did try to establish a coalition – offering Liberal leader Jeremy Thorpe a seat in cabinet and a Commons vote on electoral reform – they could not come to agreement, and Harold Wilson formed a minority Labour administration instead, later relying on the Liberals to back him on key votes.

Some commentators have found more convincing comparisons with the wartime coalition; certainly, with his talk of austerity and shared troubles, George Osborne uses language reminiscent of those times. But you have to go further back to find a closer historical comparison. Just as the 2008 credit crunch echoed the catastrophic banking collapse of 1929, our 2010 coalition government in some ways reflects the national government established in 1931.

Two years after the 1929 stock market crash, the resulting recession had pushed the national finances into deficit. The Labour government couldn’t agree how to balance the books, and collapsed – but there was no immediate general election; instead, Labour leader Ramsay MacDonald established a ‘national government’ under a cabinet drawn from all three main parties. Though many of his own MPs refused to back him, MacDonald went to the country and found that the population wanted to see a broad-based coalition making the difficult economic and fiscal decisions: his cross-party alliance won a massive majority.

Scottish precedent

Today’s coalition also benefits from a widespread feeling that politicians should be putting their rivalries aside to work together in the national interest. But Cameron’s government was born in less tumultuous circumstances than MacDonald’s and, with the pre-election polls suggesting an indecisive result, civil servants and politicians alike had more time to prepare. “We’d done a lot of work on scenario planning, so we were ready for an uncertain outcome,” O’Donnell recalls. “We were very lucky in having our devolved partners to give us the benefit of their wisdom. [Permanent secretary] John Elvidge from Scotland was absolutely clear. He said: ‘Whatever the polls are showing, get ready for all possible outcomes. Don’t prejudge it.’ So we took that to heart and thought through all outcomes, from minority governments with ‘supply and confidence’ agreements all the way through to full coalitions.”

With the election looming, O’Donnell also sought to learn lessons further from home. “I went to New Zealand to talk to them about the cabinet manual, and learned a lot about the importance of trying to get out some guidance and rules in advance,” he says. “So we basically copied their manual and put out the relevant chapter for this sort of experience ahead of the election.” The cabinet secretary plans to publish a full version in the months to come, he adds: “That will cover things like devolved administrations, the ministerial code – a whole range of issues.”

Immediately after the election, O’Donnell recalls, “the Conservatives and Liberal Democrats got together and we facilitated a process: we provided factual advice, office facilities. But we didn’t advise them or sit in on their negotiations while they were coming to a deal.” The civil service had to take a back seat at that point, he notes: “The key is how the politicians behave. We facilitated, but it takes the politicians to want to deal for it to be successful – and that’s what happened.” Only once the outlines of a deal had emerged did officials get stuck in, helping to draft the coalition agreement.

The existence of a detailed written agreement is another key difference with the government of 1931; one that gives today’s coalition far greater stability. “It’s very helpful for us as civil servants to have a very clear programme outlined so early in the government,” says O’Donnell. When potential disagreements arise between departments or ministers, “you can go back to your bible, the programme for government, and say: ‘Is this consistent with the programme?’”

The coalition’s operation also rests heavily on the use of cabinet committees, ensuring a far more formal decision-making process than civil servants have become accustomed to in recent years; Tony Blair’s ‘sofa government’ approach, in particular, involved settling key issues at informal meetings of top ministers and advisers. But nowadays the requirements of cross-party decision-making “put a lot of emphasis on cabinet committees; they’re your way of making [decisions] coalition-proof,” O’Donnell explains. “They have a chair from one party and a deputy chair from another, so the process of taking it through cabinet committee, virtually by definition, means that you’ve got coalition agreement. We do have a fallback: if they can’t reach agreement [in cabinet committees], it could go to the coalition committee. But as yet that hasn’t happened.”

“The private sector has been seeing wage cuts, and reductions in both hours and jobs – much more than the public sector, so far. What’s the mix going to be for us?”

Perhaps the most crucial element of effective coalition policymaking, though, is trust. “They need to trust each other; trust is at the heart of this,” says O’Donnell. And how can the civil service help foster that trust? “We can be honest brokers,” he replies. “This brings us back to our values of honesty, objectivity, integrity, impartiality; we can be seen as completely impartial. Our ability to present the evidence and say: ‘Here are the winners and losers, the pros and cons of this policy,’ becomes an even more desired commodity in coalition times.”

Giving power away

It is, of course, early days for this government in policymaking terms. The localism agenda is one clear cross-departmental theme, and O’Donnell says this is coming together: communities minister Grant Shapps, he says, “is going to be tasked with looking across government at policies and thinking about whether they’re consistent with devolving power, and looking at ways of achieving that objective”. Asked whether civil servants will find it difficult to let go of the levers of power, the cabinet secretary denies it. “There’s this myth that the civil service are the great centralisers,” he protests, “but we believe in implementing the policies of the government of the day, and providing them with advice.”

In this particular case, he adds, that advice will include telling ministers that local control over services will inevitably lead to geographical variations. “If you devolve, the whole point is that people will come up with different answers in different places, so there will be differences in outcomes around the country,” he says. “That’s the nature of it, and we should accept it.”

However, the government’s main focus is, of course, reducing the deficit. Given the swingeing departmental spending cuts announced in last week’s Budget, it is clear that the size of the civil service’s pay bill is set to fall dramatically – and O’Donnell hints that he favours splitting the reductions between pension contributions, job numbers, salaries and man-hours, rather than focusing on reducing the head count.

Emphasising that this is an issue for the wider public sector rather than the civil service alone, O’Donnell first insists that “throughout this, we need to be very careful about protecting the lowest-paid members of the civil service.” Then he suggests that “There is an issue about the mix between pay and pensions. There will be a political debate about that, I’m sure. For us there will be something of a trade-off between jobs and pay, and the question will be getting that trade-off right.”

After all, he continues, “the private sector has been seeing wage cuts, and reductions in both hours and jobs – much more than the public sector, so far. The way we need to approach this is to say: ‘How are we going to manage to save money, and what’s the mix going to be between these different elements for us? Those trade-offs exist, and will have to be part of the mix going forwards.”

Such painful decisions, however, may be made easier if the civil service can find substantial efficiency savings. “The more we can increase efficiency, the more we can protect frontline services,” notes O’Donnell, highlighting the crucial role of the Cabinet Office’s new Efficiency & Reform Group. Co-chaired by Cabinet Office minister Francis Maude and chief secretary to the Treasury Danny Alexander, the ERG will include “the various parts of the Cabinet Office that work across government in the professional functions: HR; communications; IT and CIO,” says O’Donnell. “And the Office of Government Commerce will transfer across from Treasury control.”

Once its chief executive has been appointed, the ERG will have to reconcile the government’s commitment to devolved decision-making with the opportunities to improve efficiency via greater central control of some civil service operations. “The phrase that Francis Maude uses is ‘tight-loose’: being tight on certain things but, within those constraints, giving people more freedom to operate to find those efficiency savings,” explains Sir Gus. As an example, he cites the purchase of A4 paper: departments could be forced to buy their paper through a single collective contract, ensuring that government gets the best possible price, but with decisions over how to reduce the amount of paper used left to local managers. “We might throw out some ideas, but we want innovation; different departments thinking up clever ways of reducing use,” he says. “We’ll let lots of people coming up with different ideas, and then we’ll all steal the best ones.”

In the past, I suggest, officials have often attempted to improve efficiency by buying a new IT system or upgrading infrastructure; with capital investment cash much harder to access, do we need a change in mindset? “We’ve had a lot of investment in public services over the last ten years,” O’Donnell replies. “There are efficiency savings to be made by reorganising your processes. I’ve seen a lot of places where they’ve said: ‘Actually, this hasn’t been about big IT investments. It’s been about changing the way we process things’.” The logic behind some existing systems, he adds, is “lost in the mists of time”; by working with staff to understand the real business requirements and identify efficiencies, organisations can significantly reduce waste while maintaining or even improving service quality. This message is, O’Donnell believes, already well understood within government. “The fiscal position is so challenging that I think people have already realised that this time it’s different,” he argues. “Necessity will be the mother of invention.”

Some efficiency savings, however, do require capital investment. Given the need to have every IT project worth more than £1m approved by Francis Maude, the ERG board and the Treasury, will departments be able to realise the potential benefits of online services? Sir Gus’s initial response is to point out that those benefits go far wider than simply reducing the cost of services. The government’s digital champion Martha Lane Fox has, he says, “completely convinced me that getting people online is not just about saving money, or even primarily about saving money; it’s about improving the life chances for a whole range of people who are currently not part of the digital network. So I’m a big believer in this, irrespective of the efficiency side.

“The question then becomes: how can we do it in a time of tight money? And I think that, for us, is really a question of prioritisation. In the past, people have talked about spend to save. I’ve reversed that and said: ‘Let’s save to spend.’ Where are we going to be saving money in our budgets so we can spend it on these things that will give really great returns and provide better social outcomes? That’s the challenge.”
So IT projects and the move to online services are not dead, it seems; where an online services project will result in much lower delivery costs, O’Donnell encourages people to make savings in other parts of their operation, then make a business case for investment in online services. “Really good spending review bids”, he says, will demonstrate that managers have cut costs in order “to allow some of these really worthwhile investments to take place.”

Spectre of protectionism

This is clearly a difficult time for the civil service – but it is also, the cabinet secretary believes, an exciting one. “I think the return of more cabinet committees, the increase in demand for us as honest brokers, has energised people,” he says. “The civil service is enjoying it, I would say. Obviously, they know that the over-riding policy is to get the deficit down. For some time, I’ve been saying to the Top 200 that the two challenges for us over the next few years are, one, to manage whatever the election threw at us – and that’s now behind us – and, secondly, getting the public finances back into a sustainable state.”

Certainly, the first of these hurdles seems to have been cleared with room to spare – but the second is, if anything, bigger still. And here the experience of Ramsay MacDonald’s coalition does not auger well: back in 1931, wage cuts prompted a mutiny in the Navy, Labour MPs deserted MacDonald, and the pound came off the gold standard. A fierce debate raged between ministers who wanted to cut spending, and those who favoured trade tariffs designed to raise revenue and protect British industry; eventually the latter won, allying Britain with a worldwide move towards protectionism that turned a deep recession into a disastrous global depression.

To date this risk, at least, seems to have been averted by international consensus on the need to protect trade and inject money into the economy – but we are not out of the woods yet: the deficit hawks’ approach has yet to be tested and this historic coalition will, no doubt, be faced with many political and economic shocks over coming months. Ultimately, as Sir Gus says, the government’s strength depends on the coalition partners’ commitment to their shared agenda: “If they want to make it work, and there’s a sufficient common programme between them, and they trust each other, then it will work.”

In the meantime, O’Donnell concludes, the civil service has plenty to be thinking about as the new government embarks on a spending review and begins to turn its policies into plans of action. The coalition partners and their officials are just getting to know one another – a process that will receive a major boost next week at Civil Service Live. “That will give us as the civil service some key opportunities to think about how we get ourselves right for the agenda that I’ve been talking about: the agenda that requires us to be more creative, more innovative, to take more risks, and to think about how we save money,” says Sir Gus. “It’s a perfect opportunity very early in the coalition government’s life to hit all of those targets in one place – and I’m massively looking forward to it.”

Written by Matt Ross