The Effectiveness of the UK Spending Review as a Strategic Fiscal Control Tool - Essay Example

?The Effectiveness of the UK Spending Review as a Strategic Fiscal Control Tool Introduction The economic downturn has created constrains in the allocation of limited public funds in the pursuit of seemingly limitless public needs. What was originally a measure adopted in 1998 to maximize the effectiveness of the attainment of goals has, in 2007 when the nation was in the cusp of an economic crisis and recession, gained more urgent relevance as a means of controlling the spending of precious public funds. The Spending Review mechanism has been resorted to since 1998, been adjusted in 2007 and revised in 2010, as the tool for fiscal discipline in the U.K., and a determination must be made as to the wisdom of the course of its development. The aim of this research paper is to determine how successfully the Spending Reviews of the British government have enabled it to strategically attain its goals. Definition and history of Spending Reviews The Spending Review is ‘the HM Treasury led process that allocates public expenditures.’1 It is intended to ‘set a clear direction for reform, focused on shifting power from central government to the local level.’2 In the late 1990s, the New Labour government came into power in the U.K., and embarked on several reforms whereby public spending may be made more effectively. One of these reforms is the introduction of medium-term spending reviews. The first Comprehensive Spending Review was conducted in 1998 and published in July of that year. Three subsequent spending reviews were conducted in the years 2000, 2002 and 2004. The subsequent Comprehensive Spending Review was conducted in 2007, and the next after that in 2010.3 The diagram on the following page shows the progression of Spending Reviews from 1998 when the process was first adopted and the first Comprehensive SR was conducted, to the next CST in 2007. From 1998 to 2004, the number of targets was pared down from 600 to 110, while the refinement of the review process was also gradually undertaken during SR00, SR02 and SR04. By CSR07, a more radical change was adopted in a reformed framework where there was a decentralization of control and devolution of the review process to the departments. The purpose was to better engage users in the process of spending control and strategic prioritisation. Source: OECD Senior Budget Officials Network4 The adoption of the CST98 was in line with the public sector reform for that year, which introduced the three year spending plans, as well as the use of resource based accounting and budgeting. The review stressed greater protection for capital spending, proper asset management, and was anchored on outcome-focused performance targets.5 In 2009, the Government borrowed one pound for every four pounds it spent. As a result, the cost of debt servicing (which is comprised of interest payments on public debt) exceeds what the Government spends for England’s schools in one year.6 Significance of spending reviews as strategic tool for government Spending reviews provide government a tool for controlling public spending in two ways: (1) that during the budget planning process, proposed spending could be more effectively aligned with the strategic goals of government; and (2) that interim reviews could act as a monitoring tool to ensure that the actual expenditures are consistent with the budgeted allocations and, if not, that justification could be found which nevertheless serves the strategic goal, and where none could be found, that further spending could be halted along this line before runaway expenses could be incurred. There is a fundamental difference between the Comprehensive Spending Review conducted in 1998, 2007 and 2010, and the spending reviews conducted in 2000, 2002 and 2004. The CSR is a fundamental strategic review of spending priorities, while the SR creates ‘merely incremental changes to existing priorities.’7 There is a distinction between two types of public expenditures that are provided for in the spending reviews. The first is the annually management expenditure (AME) that includes the demand-led or volatile expenditure which are best managed on an annual basis (e.g. social security and debt interest). The second type is the departmental expenditure limits (DEL) which comprise 60% of total spending; these include health, education, policing, and the bulk of conventional public spending. It is mostly on DEL that the spending reviews focus on.8 The old system involved preparing fixed multi-year budgets and greater flexibilities. Under the new spending review system, departments were required to set down clear objectives, targets and measures in the form of PSAs, or Public Service Agreements that also covered the CSR/SR three-year settlement period. The PSA framework was eventually abolished by the Conservative/Liberal Democrat coalition government, and in its place is now ‘a system of departmental business plans, milestones, and input and impact indicators.’ The results are thereafter recorded in a white paper, and individual settlement letters are sent out to departments included in the review process.9 Analysis of Spending Reviews During a period of growth (1998-2007). A study highlighted the method of expense planning in the UK, in particular the Spending Reviews, specifically the 1998/2007 reviews and the more limited reviews in 2000, 2002 and 2004. The SRs aimed towards increased expenses on government priorities, increased capital spending from 0.75% to 2.25% of GDP. During the 2007 Pre-budget report, the fiscal rules were barely conformed with and small deficits were forecasted to improve to small surpluses by 2010.10 During a period of austerity (2008 onwards). While the 2007 Pre-budget report expected small deficits to improve to small surpluses in 2010, the actual developments did not realize this. By 2009, the goal was ‘Building Britain’s Future’ although deficits approached 9% of GDP (cyclically adjusted to 6%) and the debt-to-GDP ratio neared 80% which is twice 40%, the level prescribed by the Golden Rule of fiscal policy.11 For Spending Review 2010, HM Treasury recognized the imperative to reduce the deficit and so has adopted a different approach, by: (a) thinking innovatively, even more expansively, concerning the role of government in society; (b) deciding collectively through the stewardship of the Public Expenditure Committee composed of senior Cabinet Ministers and appointed by the Prime Minister and chaired by the Chancellor; and (c) consulting with experts and the public to gain their feedback and suggestions, and seriously consider these information in their planning. Additionally, an Independent Challenge Group (ICG) of Civil Service leaders and external experts was appointed by the Government, to pose challenges to the Spending Review procedure. Its purpose is to ensure that an innovative approach is employed by the Group in order to effectively reduce public expenditure and balance priorities to minimize any adverse impact that reductions will impose on public services.12 A number of programmes under the auspices of the Treasury have targeted value for money improvements in the various departments in the bureaucracy. The most recent of this was the Comprehensive Spending Review of 2007 which aimed for a ?35 billion total saving by 2011. In Spending Review 2010 (SR10), the approach of the Government focused on cost reduction, and required that Government’s activities in public service reform should exhibit efficiency and value for money, instead of relying on Treasury-led value-for-money (VFM) programmes. Some of these public service reform undertakings include: (a) reducing the administration budget by 34%, effectively saving the government ?5.9 billion per annum by 2014-2015; (b) adopting value-for-money improvements in crucial components such as tax collection and health, with little or no reductions in overall spending; and (c) reducing spending by improving coordination throughout the government, such as in procurement, estate management, and major projects.13 In its 2007 review, the Government targeted public spending reduction by ?6.2 billion in the year 2010-2011, and by an additional ?81 billion four years later at 2014-15. These savings are required of most departments through significant reductions in actual spending. Cuts will be realized through the cancellation of a number of planned and existing programmes, reducing entitlements, freezing pay rates and recruitment, and adopting efficiency measures and reforms. There are no detailed plans as to how these savings will be attained by increasing efficiencies rather than reducing the provision of services to the public. It does, however, specify actions, input and impact indicators, and milestones, which would allow the public to monitor how the public service reforms are implemented.14 Spending Review 2010, unlike the two review periods which preceded it, has no centrally managed savings targets, nor does the Government intend to create a new VFM regime driven by new targets and criteria. For SR10 and presumably succeeding review periods, the responsibility to monitor their budgets agreed with the Treasury and to abide by them, and simultaneously implementing the necessary cost-cutting measures in a structured manner. There are three main monitoring mechanisms: (1) the Parliament supply system and independent audit of accounts; (2) departmental business plans and reports; (3) key efficiency and other indicators developed by departments, published as part of the transparency agenda of the Government.15 The 2010 Spending Review resulted in cuts in welfare budget; increase in retirement age, cuts in government departments, stopping child benefit for high income earners.16 International or historic examples as comparators Spending reviews are employed by several countries; however, they tend to differ from one country to the next. Spending reviews are characterized by scope, level of review, time frame or periodicity, and resulting savings options. Scope may cover discretionary or mandatory expenditures, the sectors reviewed, and the level of government involved. Level of review may pertain to sector programmes, organisations, horizontal policies, or the totality of government. Time frame/periodicity may be either fixed period or rolling basis. Finally resulting savings options may be in terms of staff or funding, or in absolute or percentage terms. The two following tables situate different types of spending reviews as to primary objective and responsibility, designating them by the country in which they are implemented. Source: OECD Budgeting & Public Expenditures Division17 In the foregoing typology, the UK’s spending review is classified as strategic rather than functional. The primary criterion employed in functional reviews is efficiency and is centred on identifying the manner by which fewer resources may be used in existing policies. Strategic reviews on the other hand additionally include a prioritisation or ranking of the activities government should attend to, and which it should forego based on their contribution towards the attainment of the strategic goal. Source: OECD Budgeting & Public Expenditures Division18 The second diagram shows the agency or level of the bureaucracy where responsibility for the different stages of the Spending Review vests. For the UK, the Ministry of Finance takes charge of the methodology and steering, the preparation of reports (together with mixed working groups), supervision and review of reports, and monitoring and follow-up. The line ministries share in the responsibility for supervision and report review, while the Prime Minister and/or his cabinet are responsible for the final decision making. A 2009 study compared the fiscal policies and performance of the UK system of informed budgeting vis-a-vis that of New Zealand.19 The Spending Reviews process and the fiscal policy of UK in general were criticized as being too centralized in the HM Treasury and that Parliament had complained about the loss of useful information for it to perform its role in accountability. In Australia, comprehensive expenditure reviews have been periodically conducted by the government. They are not continuous in nature, but are instead done on an ‘as needed’ basis. Expenditure reviews are differentiated from strategic reviews. While expenditure reviews are conducted only when the need for them arises, strategic reviews are regularly undertaken in the Australian government’s budget process and a means for ministers to directly set target policies and programmes. The Australian government views monitoring and evaluation as tools for fiscal policy and budget development. Its aim is not to conduct reviews in a centralized manner, but by integrating monitoring and evaluation as regular aspects in policy implementation and delivery, whilst making information available to the ministries and central agencies.20 Looking forward The Coalition Government has commenced (though unofficially) activities leading to Spending Review 2013, which is one year earlier than expected based on SR10 ‘plan A’. Apparently, SR10 was based on faulty economic and fiscal assumptions. During that time, the Coalition assumed that the economy would recover from the recession of 2008, but this had not taken place as expected and ‘dire’ effects have impacted on public finances.21 It is surmised, however, that the early SR is considered preferable in order for the parties to establish a shared public spending/cuts platform well before the May 2015 General Election, to give them ‘the chance to part company in good time to establish their separate policy identities.’22 The early holding of the SR is generally taken to be kept unofficial and secret, many in government preferring to call it an adjustment of ST10 rather than an outright SR13, to avert admission that expecting the SR to last four years was ambitious.23 Conclusion The study set out to determine whether or not the UK spending reviews operate as effective tools: (1) to control of public spending, and (2) to ensure that spending is used to effectively and efficiently meet government’s strategic goals. There is evidence to suggest that the spending reviews have contributed to the effective control and use of public spending. Assessment of the results of spending reviews have given way in several occasions to changes in spending levels across departments. The reviews also provide venues for fiscal performance assessment by strategic unit. One example is in the outcome of CSR07, overseas aid, defence, environment, and the intelligence agencies performed better in the expense assessments than the other departments, and were deemed to have effective accomplished their roles in responding to challenges worldwide including the problems of poverty, political conflict, and climate change, the main themes of 2007.24 There have been commentaries particularly in the social networks, expressing doubt on the full effectiveness of linking spending with performance in the manner enforced by the Spending Reviews. A search for corroboration among more reliable sources have not, however, produced proof in this direction, although it is conceivable that the past reviews would have been found wanting in certain aspects. After all, the fundamental change adopted in CSR07 allowed for the decentralisation of control and devolution of monitoring and assessment to the departments. The continued adjustments may be viewed in the manner of a work in progress, but the fact that the Spending Review process continues to undergo fine-tuning is evidence that a significant benefit is derived from it, particularly during a time of austerity. Targeting spending objectives ensures that what available funding there is goes to provide the best possible results for the attainment of government’s goals. References Battye, J. ‘Ten Lessons from the Performance Management Framework in England and thoughts for the future.’ OECD Senior Budget Officials Network. December 2009. Retrieved 26 October 2012 from http://www.oecd.org/gov/budgetingandpublicexpenditures/44291124.pdf Boyle, R. ‘Better Use of Public Money: The Contribution of Spending Reviews and Performance Budgeting.’ State of the Public Service Series. Institute of Public Administration, October 2011. Retrieved 26 October 2012 from http://www.ipa.ie/pdf/BetterUseofPublicMoney.pdf De Ness, B. ‘The Great British Spending Review…’ Bardiness. 21 October 2012. Retrieved 26 October 2012 from http://blogbard.typepad.com/bardiness/2010/10/the-great-british-spending-review.html Great Britain: National Audit Office. The Efficiency and Reform Group’s Role in Improving Public Sector Value for Money. 2011. HM Treasury ‘Spending Review.’ HM Treasury – Public spending and reporting. 22 November 2010. Retrieved 26 October 2012 from http://www.hm-treasury.gov.uk/spend_index.htm HM Treasury. ‘Spending Review 2010 – the Government’s approach.’ Newsroom & speeches. 08 July 2010. Retrieved 26 October 2012 from http://www.hm-treasury.gov.uk/press_10_10.htm Lau, E. ‘Proposal for analysis of spending reviews.’ 7th Annual meeting of SBO Network on Performance and Results. Oganisation for Economic Co-operation and Development. 09-10 November 2011. Retrieved 26 October 2012 from http://www.oecd.org/gov/budgetingandpublicexpenditures/49041813.pdf National Audit Office. Managing Budgeting in Government. 16 October 2012. Retrieved 26 October 2012 from http://www.lgcplus.com/Journals/2012/10/17/h/x/w/NAO-Budgeting_in_govt.pdf OECD. Value for Money in Government: Australia 2012. Organization for Economic Cooperation and Development. (OECD) Publishing. 2012 Retrieved 26 October 2012 from Scott, G. ‘The Structure and Performance of the New Zealand and UK Public Sectors: A Comparative Commentary.’ 23 July 2009. Retrieved 26 October 2012 from http://www.iscr.co.nz/notion/share/download.asp?cid=514&mdid=14982&file=%2Fupload%2Fnotion%2Fcontentfiles%2F14982_UK_and_NZ_public_managment_reform_compared.pdf Shah, A. ‘Budgeting and Budgetary Institutions’ Public Sector Governance and Accountability Series. Washington, DC: The International Bank for Reconstruction and Development/ The World Bank. 2007 Talbot, C. ‘#SR2013 Watch No.2: Is it Really Going to Happen?’ Whitehall Watch., July 8, 2012. Retrieved 26 October 2012 from http://whitehallwatch.org/2012/07/08/sr2013-watch-no-2-is-it-really-going-to-happen-2/ Talbot, C. ‘Spending Review 2013Watch #SR2013.’ Strategy in Government – from Growth to Austerity. 26 September 2012. Retrieved 26 October 2012 from http://strategyanddeliveryingovernment.wordpress.com/ Tyson, J. ‘UK Case Study: The Public Service Agreements System.’ Performance Budgeting Seminar. Fiscal Affairs Department, Expenditure Policy Division, International Monetary Fund, 2007 Read More