10 commandments of policy-making

By Gus O'Donnell, Published The Straits Times, 11 May 2012

I WILL review some of the lessons I have, sometimes painfully, absorbed over my time in the civil service. I will start with policy triumphs and failures and then consider the implications for how the public sector is run and how it needs to evolve.

There is as much to be learnt from success as from failure. Accountability, if it is to work well, needs to encourage well managed risk-taking not to promote risk aversion. So let's start with some triumphs, first in economic policy as this is the area I know best.

Triumph No. 1: Labour government's decision not to join the euro

IT IS easy to look back at this decision and say it was obvious. But many senior members of the government, including prime minister Tony Blair and leading commentators, were strongly in favour of the United Kingdom joining from the start or as soon as possible. The decision not to join was a triumph of politics in that the politicians made the right decision and was a triumph for economic analysis.

The test carried out by HM Treasury was a comprehensive cost-benefit analysis of the pros and cons of joining. It has stood the test of time. If only it had been translated into Greek. And having given credit to the last Labour government for deciding not to join, I should also add that they would not have had that option if it had not been for Mr John Major's success in getting the UK an opt-out from monetary union.

The lesson I draw from this is the need to have an objective, thorough analysis of key economic decisions. Indeed I would go further and suggest that future decisions of similar importance should have their analysis cross-checked with the Office of Budget Responsibility.

Triumph No. 2: Establishment of an independent monetary policy committee to set interest rates

THIS was an interesting and rare example of politicians ceding power to technocrats. It has succeeded in de-politicising this subject and has enhanced accountability. The greater openness, with voting made public, regular press conferences and scrutiny from the Treasury Select Committee, has worked well. Of course, monetary policy has not been perfect. It never will be whatever the institutional arrangements, but I believe the new arrangements have produced better results than would have been the case under the former arrangements.

Triumph No. 3: Microeconomic examples

THERE are so many it is difficult to choose one: the use of differential taxes to persuade everyone to convert to unleaded petrol; the contrast between lung cancer rates in France and the UK resulting from successive decisions by Chancellors to increase taxes on cigarettes; the abolition of exchange controls; the privatisation of companies like Cable and Wireless, BT, British Airways that led to massive increases in productivity; and, more recently, having started to exploit advances in behavioural science that are incredibly promising.

Some of these triumphs represent the application of well-accepted economic principles. Others, like removing exchange restrictions and privatisation, were hotly contested at the time. The lesson I draw from both examples is that there is an important place in applying standard economic solutions to many public policy issues, but there is also a case for well-managed, but risky, initiatives.

I am delighted that a lot of the work of the so-called 'nudge unit' is being taken forward using carefully constructed experiments in different parts of the country.

Now the disasters.

Failure No. 1: Poll tax

THE first I would choose is the poll tax, or community charge to give it its official name. Economists have long argued that poll taxes are the least distortionary of all taxes. However, as good economists know, they went on to argue that it may well be necessary to offset any adverse distributional impact by other means.

The poll tax would have resulted in 'a pensioner couple in Inner London paying 22 per cent of their net income in poll tax whereas a better-off couple in the suburbs would pay 1 per cent'. A report by Department of Energy officials described the poll tax as 'completely unworkable and politically catastrophic'. The Treasury were firmly opposed to its introduction. The poll tax did indeed prove catastrophic for the then Prime Minister Margaret Thatcher.

So what lessons should we draw from this episode? The first I call the Irish axiom: Don't start from the wrong point. Successive governments had allowed the financing of local government to become more and more centralised. This destroyed local accountability. The problem is still with us and I would be surprised if it is solved at all soon. The problem is that radical changes are now needed and that means large numbers of winners and losers. And the iron law of tax changes is that the losers scream and the winners remain silent.

The second lesson is the need to have the Treasury on your side if you are making big changes. Money will be needed to compensate the screamers. If the Treasury aren't supportive, the money will not be forthcoming, the policy will fail, and the Treasury will be the first with the 'I told you so' response.

I have heard some argue that the poll tax was the triumph of economics over politics. I think you have to take a very narrow view of economics to make that case, but it certainly reinforces the point that, where distributional issues are important, it is vital to have clear political decisions which have Cabinet support.

Failure No. 2: Financial crisis of 2008

THE second disaster must be our failure to spot the financial crisis of 2008 and the associated failures in the regulatory system. It is clear the regulatory system created incentives for excessive risk-taking in part because it was believed that the government would bail out the banks if the crisis was large enough. I take my share of the blame for this episode; I thought the banks knew what they were doing. That was wrong.

Some lessons are clear: We need to revise the regulatory system, ideally in a globally coordinated way; we need to have ways of handling banks deemed 'too big to fail'. There is a lot to be learnt from countries like Canada that weathered the storm remarkably well.

Failure No. 3: Lack of agreement on planning system

FOR my third failure I will use a microeconomic example; namely, the failure to agree on a planning system that achieves our desired goals. Every time there is a recession, or even of a reduction in growth below trend, there is a call for more 'structural reforms'. Top of the list is always the planning system. It is blamed for holding back growth and development. The problem is, in fact, a classic example of not being clear about the outcome that is desired. If it is to boost GDP, then the answer is simple: Concrete over the South East. But that's not what we want because you would have to be an idiot to want to maximise GDP. It's a highly flawed measure and I am pleased that we are at last starting to think more broadly about how as a society we measure success.

Good policy-making

AS I look back on all these events over my 30 years in the civil service, some patterns emerge of what brings success. My 10 commandments of good policy-making are listed below:

- Thou shalt be clear about the outcomes that you want to achieve.

- Lack of strategic clarity, of knowing the problem you are trying to solve, is a cardinal sin.

- Thou shalt evaluate policy as objectively as possible.

You need to be clear about how you are going to determine success. It is essential to relate the success measure to the desired outcome. This may sound obvious but far too often it is not done.

- Thou shall not bear false witness against thy neighbour's policies.

Most important policies operate across departmental boundaries so be sure to have collective buy-in, and ownership of, the policy. We can't tackle the problems of an ageing society or obesity or climate change simply by operating in one department.

- Thou shall not assume the government has to solve every problem.

We have models in our heads, and sometimes written down, about how we think people, companies and governments make decisions. These models are probably embarrassingly naive. As Keynes said, many of us are slaves to some defunct economist. These three types of model failures must all be addressed.

- Thou shalt not rush to legislate.

It is a fact that all our ministers sit in either the House of Commons or the Lords which are bodies that spend a very large amount of time legislating. My experience suggests legislation should be something of a last resort to be used when all the other possibilities have been tried and found wanting.

- Honour the evidence and use it to make decisions.

There are now lots of excellent think-tanks. We also have the Internet and masses of academic research. If the policy submission doesn't cover, for example, what works in other countries then send it back. (There is a lot to be said for coveting thy neighbour's policies). The only proviso is to be clear that most of the time the evidence will not be clear cut. So perhaps the right answer is to generate more evidence by the use of experiments. In every case judgment is needed. That is the most valuable skill needed by ministers and their senior officials.

- Thou shalt be clear who is accountable for what and line up the powers and the accountabilities.

If ministers want someone else to be directly accountable to Parliament for a specific area then they need to cede power over that area to the 'someone else', having obeyed commandments (1) and (2).

- Thou shalt not kill the messenger.

Nobody's perfect and every organisation needs a way of providing constructive feedback to the senior decision makers. If you don't encourage internal debate, then the first time you will learn about your mistakes will be from your enemies, not your friends.

- Thou shalt not forget that it is a privilege to serve.

In government, the taxpayers pay our salaries and they deserve good value for money and to know we will always strive to follow the codes that encapsulate our values.

- Thou shalt keep a sense of proportion.

Or in the words of a wise, now former, minister: 'Thank God it's only a game.' For some, every bad headline is a crisis. Keep a focus on what the real impact is on people's lives.

Sir Gus O'Donnell is a former British senior civil servant who, between 2005 and 2011, was the Cabinet Secretary (the highest rank in the British Civil Service), head of the Home Civil Service and permanent secretary at the Cabinet Office. This is excerpted from a speech delivered at the London School of Economics and made available on the British Politics and Policy at LSE blog.