Analysis of the Spending Reviews in the UK in Advancing Government Strategy - Essay Example

?Critical Analysis of the Spending Reviews in the U.K. in Advancing Government Strategy Introduction Public fiscal policy is a vital tool of government in bringing about the economic progress of the nation. In the private sector, financial management of businesses impacts immediately in terms of profits or losses, revenues or costs. In government finance, revenues are realized through various means, some of which are mandatory and oppressive such as taxation. It is therefore possible for poor public fiscal policies to be implemented for years before the need for reform is perceived. The table following graphs public receipts versus expenditures from 1997 to 2010, with forecasts provided to 2015. From the chart it is evident that in the past government’s total expenditure persistently exceeded, often to a great extent, public sector revenues, forcing it to resort to borrowings. This situation is necessarily a temporary measure, because prolonged reliance on increasing levels of borrowing increases the default risk to the firm or the government. To ensure a sustainable financial approach, it is therefore important to control expenditures, for which an effective and responsive spending assessment process must be adopted. SRs and PES: How the SR system compares to the old PES system Before 1992, the level of government spending was ascertained through what are called annual Public Expenditure Surveys (PESs). The approach was fragmented and piecemeal because the Treasury negotiated bilaterally with each department. This prevented the government from developing a strategic outlook on the overall level of public spending and the balance or prioritization among its components. Another element that the PES was unable to do was to account for cyclicities among spending – that is, it does not distinguish which spending is cyclical and which is non-cyclical. This caused the total spending to ‘creep up’. An example cited by Crawford, Emmerson and Tetlow (2009) is that a rise in discretionary spending after a recession may be concealed by a simultaneous drop in cyclical spending; or if the rise in cyclical spending during a recession could potentially crowd out public investment (pp. 8-9). In 1992, reforms were introduced to address these concerns by lengthening the duration between PESs to three years, managing aggregate public spending in a top-down approach by specifying a ‘control total’ (i.e., government’s total planned spending), and distinguishing between DELs (departmental expenditure limits) and AMEs (annually managed expenditures). DELs cover those expenditures which government argues can be controlled, while AMEs are expenditures driven by demand which the government cannot effectively plan for, such as social security payments, debt interest, and the spending by local authorities. The Labour government came into power in 1997, and a year later the control totals system was replaced with a system that required departmental spending to be fixed for three years in Spending Review (SRs). There had been five such spending reviews, shown in the following diagram. Before each SR, the Economic and Fiscal Strategy Report determines the Total Managed Expenditure (TME), which is the expenditure by the entire public sector and derived from the National Accounts. It is the TME which is divided into the two components earlier described, the DELs and the AME, and the DELs are thereafter allocated by departments. Both the DEL and the AME are divided each into capital spending, or spending that increases the public sector’s fixed assets, and resource spending which is spending on everything else. The Labour government criticized the control total method of budgeting under the 1992 framework as preventing departments from efficiently spending and investing money, based on the following reasons: (1) The control totals over three years is of an ‘indicative’ nature – that is, control totals for the second and third years are only advisory in nature, and may be, as they have often been, increased when felt necessary. (2) The totals were an aggregate amount which did not distinguish between capital and current spending. Therefore, when budgets became constricted, departments tended to reduce or postpone investments in order to defray unforeseen current expenses such as public sector workers’ wages. (3) If departments conclude the year with a budget surplus, the system does not allow them to carry the savings forward to the next year. Thus, the surplus is foregone, causing departments to adopt a ‘use it or lose it’ mentality in spending. Concerns are raised that the rush to spend towards year end is done wastefully. The SR process adopted in 1998 and described in the preceding section was meant to separate capital spending for DELs and AMEs from resource spending, thereby enabling the government to specifically target each spending activity. By specifying allocations for capital expense and precluding these from being spent for other purposes, the government is assured of making sufficient investments for the long term (Crawford, Emmerson & Tetlow, 2009). There is a disadvantage to this method, however, precisely because departments are denied the discretion to shift funds allocated for capital spending to resource spending. There may be instances when capital spending prospects are of low value, at which times department officials are powerless to shift the funds to higher-valued current expenditures. A change was also introduced in the year-end treatment of budget surpluses. Unspent budget allocations no longer were forgone at year’s end; instead, departments now have an end-year flexibility (EYF) entitlement whereby they can carry DEL savings from one fiscal year over to the next. The purpose of government in adopting the EYF entitlements system is to eliminate the tendency of departments to splurge in their spending towards the end of the year, SRs and Political Strategy SRs typically advance the ruling party’s political strategy by the manner it allocates spending and the source of spending. Under Labour, SRs adopted ‘the high-spending approach and redefined ‘investment’ away from capital spending to whatever current spending [Gordon Brown] chose to define as socially valuable’ (Bochel, et al., 2003, p. 31). Labour tended to target unrealistically ambitious growth targets which are not supported by current capacity (of manpower, facilities, information technology, etc.). For instance, it was mentioned in the final report to the HMT in 2002 that spending growth for health services which was set in 2002 at 7.1 to 7.3 per cent per year for the next five years presented ‘a considerable management challenge’ to ensure they were wisely spent. In setting the targets, the assumption had been made that significant workforce expansion planned for the future has already been realized, the information and communication technology expense has been doubled, and necessary capacities are met. ‘The risks of spending being ineffective rise with the spending growth rate’ (Wanless, 2002, p.80). The control mechanism under the PSA was supposed to be a strict one. Performance was to be monitored against targets quarterly by the Cabinet Committee on Public Expenditure and Public Services. Meetings were then to be conducted with the ministers who were unable to meet their targets, and the ministers would have been asked to account for their department’s discrepancies. Additional funding shall not be provided over and above what has already been allocated in the budget for departments failing to meet their targets but support and advice are provided by said Committee. However, being a political exercise these ‘advices’ were seldom neutral. In July 2002, Gordon Brown was not able to coherently defend before the Treasury Committee the manner PSAs were used, and admitted that instead of channeling money to where the PSA record shows money would have been most usefully spent, money was instead being channeled to those areas which the government considered as political priorities (Bochel, et al., 2003, pp.40-41). ‘The PSAs do not function as performance-related public expenditure, and the spending review are political struggles rather than synoptic evaluations’ (p.46). . In the course of conducting the Spending Review 2010, it was determined that the previous system failed to deliver the support systems needed by the poorest in society because: (a) it relied too heavily on a complex means tested system of cash transfers, and too many families find themselves trapped in a repeating cycle of welfare dependency; and (2) the system failed to provide the vital social services, such as effective education, in order to truly improve the prospects for disadvantaged families. The diagram following shows how the government intends to spend in the next budget and how it intends to finance the spending. Public sector net borrowing fills the gap between expenditures and receipts. Changes in the spending review under the Coalition aim to continue extending support for the poorest segment of society, but intend to improve fairness through: (1) Reforming and simplifying the welfare system to promote work and personal responsibility in lieu of welfare dependency. The Universal Credit will be introduced to replace the complex system of means tested working age benefits, to ensure that work always pays, and to reduce fraud and error, while ensuring a sustainable and affordable welfare system; (2) Make social programs more flexible to ensure that help will go to those who need it while such as withdrawing Child Benefit from families with high rate taxpayers, reforming Employment and Support Allowance, and capping benefits to no more than what an average family receives by going out to work; (3) Creating a more responsive, flexible and fair social housing program to serve more people who are truly in need, according to their housing needs and changing situation, coupled with a more modest capital investment in social housing; and (4) Allocating additional funding to support social care, coupled with a programme of reform and efficiency savings including a greater use of personal budgets, thereby improving outcomes without reducing eligibility for services (Spending Review 2010). Other reforms are intended to advance the Coalition’s principles of: increasing freedom and sharing responsibility through devolving power and funding to local authorities; reducing burdens and regulations on frontline staff; increasing the diversity of public services through payment by results, greater independent provision, and enabling communities and citizens to play a bigger role in services provision; and enhancing transparency, efficiency, and accountability of public services (Spending Review 2010). SRs and Linking Spending and Results The diagram on the page following provides an overview of the PSA framework and the structure by which the government’s aims and objectives are translated into targets. Under the Labour’s PSA system, there was an attempt by the UKCeMGA (the Office for National Statistics’ UK Centre for the Measurement of Government Activity) to link public service spending with the quality and/or quantity of the service offered to the public. Their measure of productivity was to compare output of public services (in terms of quantity, adjusted for quality where possible) with the inputs (spending, after allowing for pay and price increases). This method was still too difficult for some public services, and the absence of a market for public services means that there is no market price by which output of services could be valued. The graph following shows the UKCeMGA estimates of input, output, and productivity for total public services from 1997 to 2007. The economic crisis of 2008 exacerbated the effects of public overspending under the previous SR system. The UK economy relied primarily on public spending and elevated public borrowing. The revised system under the coalition aimed at targeting sustainable economic growth through an increase in private sector jobs, export growth, increased investment and enterprise. Under the Coalition, beginning with the CSR2010, In order to enhance the links between public spending and performance, each department of the Government shall publish a business plan which sets out the details of its plans, particularly with respect to: (1) its visions and priorities for 2014 to 2015; (2) a structural reform plan inclusive of actions and deadlines for implementing reforms over the next two years; and (3) the key indicators that against which data shall be published to measure the impact and cost of public services and activities of the Governmental activities. The determination of key indicators will undergo public consultation to arrive at the most robust and relevant indicators for Spending Review (HMT Spending Review 2010, p. 9). An Independent Challenge Group (ICG) of government-appointed Civil Service leaders and experts was established to challenge the Spending Review procedure and ensure that an innovative approach is employed in balancing priorities, reducing public expenditure without adversely impacting on public services. The chart following shows the size and composition of the consolidation plans of the Coalition Government, alongside the plan that was inherited from Labour. It includes the efficiency and AME savings earlier determined in the Budget and Spending Review. The aim is to eventually cover the deficit by increasing restraint in spending rather than increasing taxation, consistent with the economic objective of promoting growth and stabilizing debt (HMT Treasury SR 2010, pp.17-18). Included in the Coalition business plans, which were not present in the earlier PSAs, is the incorporation of milestones and the enhancement of accountability measures direct to the public (HM Government, 2012). Comparisons between British SR process and those of other countries The table following presents a bird’s eye-view of how different countries undertake their spending reviews and performance assessments. For the UK, the ministry of finance is in charge of determining the methodology and steering, supervision and review of reports (in conjunction with the line ministries), and the monitoring and follow-up, although the final decision-making resides with the prime minister’s office. The greatest weight of conducting the SR process is therefore vested in the ministry, which may be contributory to the politicization of the SR process thus compromising its partiality in certain circumstances. With the increased transparency and accountability measures adopted by the Coalition, however, this concern may be minimized. Lessons learned in the development of the SR process Battye (2009) identified ten lessons that may be drawn from the England’s spending review and performance management framework, to ensure effective spending. They are: (1) Strike a proper balance between planning and delivery. The plan fails when it is not capable of effective delivery. (2) Priorities should be set and followed. The pattern of spending should advance a strategy aimed at improving service delivery and economic development. (3) Targets should start from a citizen’s point of view. The living conditions of the citizenry are the primary objective of government spending and performance. (4) Avoid rigidity to motivate the people who deliver the services. Spending merely provides the fiscal means, but empowered people ultimately create the service. (5) Set up appropriate programs, ascertaining their impact and responding quickly. Foresight and leadership are necessary to create and implement the plan. (6) Seek synergies among systems that deliver services. Shared strengths and competencies may result in greater effectiveness with lower cost. (7) Use data to drive delivery. Information and communications technology (ICT) enhances empowerment and speeds up accurate decision-making through the rank-and-file. (8) Understand the cost, and maximize value for money. (9) Ensure clear accountability through transparency and communication. (10) Support government to deliver more efficient and effective social services. It is possible to make medium term spending and performance plans. The Coalition’s system of departmental business plans requires the identification and setting of milestones to track the progress of a long-term project such as this. References Battye, J. 2009 Ten Lessons from the Performance Management Framework in England and thoughts for the future. OECD Senior Budget Officials Network, December 2009. Bochel, C; Ellison, N; & Powell, M. Social Policy Review 15: UK and international perspectives. Bristol: The Policy Press, University of Bristol Chote R; Crawford, R; Emmerson, C; & Tetlow, G 2010 ‘Public Spending Under Labour,’ IFS Briefing Note BN43. Institute for Fiscal Studies. Available 18 December 2012 at http://www.ifs.org.uk/bns/bn92.pdf Crawford, R; Emmerson, C; & Tetlow, G 2009 ‘A Survey of Public Spending in the UK,’ IFS Briefing Note BN43. Institute for Fiscal Studies. Available 18 December 2012 at http://www.ifs.org.uk/bns/bn43.pdf HM Government 2011 ‘Department Business Plans updated.’ 10: the official site of the British Prime Minister’s Office. 13 May 2011. Available 18 December 2012 at http://www.number10.gov.uk/news/department-business-plans-updated/ HM Treasury 2012 ‘An Introduction to Spending Review.’ Public Spending and Reporting. Available 18 December 2012 from http://www.hm-treasury.gov.uk/spend_spendingreview_introduction.htm HM Treasury 2010 Spending Review 2010. Available 18 December 2012 from http://www.official-documents.gov.uk/ HM Treasury 2010 The Spending Review Framework. 2010. Available 18 December 2012 from http://www.hm-treasury.gov.uk/ Noman, Z 2008 ‘Performance Budgeting in the United Kingdom.’ OECD Journal on Budgeting, 8 (1), ISSN 1608-7143 Wanless, D 2002 Seeking our Future Health: Taking a Long-Term View. Final Report prepared for HM Treasury. The Public Enquiry Unit, HM Treasury, London Read More