Memorandum submitted by Professor David
Heald (13 July 2004)
SPENDING REVIEW 2004: MORE DIFFICULT TIMES
1. Under the post-1998 public expenditure
framework, the Budget in an even-numbered year sets the spending
envelope for the two "new years" (eg 2006-07 and 2007-08)
of that year's July Spending Review. There was sufficient material
in the 2004 Red Book (Treasury 2004a) to indicate that the Treasury
had set the envelope for Total Managed Expenditure (TME) for 2006-07
and 2007-08, the two "new years" coming into Spending
Review 2004 (SR 2004), and also for the year beyond. The following
table was implicit in Table C4 of the 2004 Red Book (Treasury
2004a, page 252):
Table 1: Derivation of Total Managed Expenditure
from Budget 2004
|Total Managed Expenditure (TME)||419.0
Note: 2002-03 is outturn; 2003-04 is estimate; and 2004-05 to
2008-09 are projections.
TME was projected to 2008-09, the second year of SR 2006
and the fourth year in office of a Government elected in 2005.
As a result, the public expenditure plans of Opposition parties
can be portrayed as involving public expenditure cuts, even when
they incorporate year-on-year real growth.
2. SR 2004 (Treasury, 2004b, para 1.10) provides the
more conventional presentation of TME, demonstrating that there
have been no shifts in aggregates in the period between Budget
2004 and SR 2004.
Table 2: Components of Total Managed Expenditure from
|Departmental Expenditure Limits (DEL)||279.3
|Annually Managed Expenditure (AME)||208.3
|Total Managed Expenditure (TME)||487.6
Note: DEL is measured net of depreciation.
3. Significantly, programme totals had by Budget 2004
already been set for the SR 2004 period for education and health,
programmes which, taking the United Kingdom as a whole, constitute
a significant proportion of total public expenditure on services.
The Treasury website explains this in the following way:
The Chancellor's Budget on 17 March 2004 announced early spending
decisions in a number of key areas including Health and Education.
To reflect the high priority the Government attaches to education,
the Budget announces that spending will grow by 4.4% a year, on
average, from 2004-05 to 2007-08. UK education spending will be
£8.5 billion higher in 2007-08 than in 2005-06. This will
ensure that recent progress in raising educational standards and
achievement is sustained and that new challenges can be addressed
over the coming years. In Budget 2002, the Government also announced
a record increase in NHS funding of 7.2% a year in real terms
over five years to improve health outcomes so that people live
longer, healthier lives.
4. The main programme numbers contained in SR 2004 appear
in the analysis of total DEL by department (Table 1.2) and in
the analysis of Total Managed Expenditure (Table A1). A fundamentally
important point is noted in paragraph A6. How much is available
for distribution as DEL depends on the forecasts for AME. At the
time of a Spending Review, the claims made by AME on the TME totals
set at the previous Budget determine how much room there is for
DEL. Of particular importance in this regard are the paths of
debt interest and benefit expenditure. One of the characteristics
of a Spending Review is that it only provides programme totals,
with most of the detail appearing in ministerial/departmental
announcements in the days after the formal announcement.
5. Two features of the run-up to the SR 2004 announcement
on 12 July 2004 are worthy of comment. First, there has been the
familiar pattern of media briefing. Concerns about how governments
present information about public expenditure are certainly not
new. What is significantly different is the atmosphere of distrust
surrounding many government statistics, including financial ones.
The reasons why this has occurred are partly rooted in contemporary
British political culture, particularly the antagonistic relationship
between governments and media. Paradoxically trust in government
numbers has diminished as rhetoric about transparency has exploded
and there have been genuine improvements in practice. Examples
of bad practice include the release of SR 2004 details ahead of
the Parliamentary statement and the introduction of changes to
the methodology for calculating certain public sector outputs
on a timing that would inevitably be interpreted as beneficial
to the Government.
6. Second, the launching of five-year plans for education
and health, within the totals set in Budget 2004 or before, has
been widely taken to indicate conflict within Government. Some
spending departments seem to have used the protection of 10 Downing
Street as a tool against Treasury intervention in their programmes.
Whilst there are grounds for concern that an over-intrusive Treasury
has damaged the policy-making and implementation capabilities
of line departments, there are also doubts as to whether well-thought
out policy is likely to emerge from secretive and isolated arrangements.
Moreover, particular announcements about DEL beyond the current
SR period pre-empt other DEL, a feature that would be intensified
if AME developments ceased to be favourable.
7. The debate between centralisation and decentralisation
has a long history in both political science and management theory.
An obvious distinction is between political decentralisation to
bodies with their own legitimacy and managerial decentralisation
within structured hierarchies that impose strong obligations of
vertical accountability. Government rhetoric now stresses devolution,
both managerial and the so-called "new localism". Yet
there is widespread criticism of the present Government as being
unprecedentedly centralist, with claims about devolution often
being greeted by disbelief. As on the topic of the Private Finance
Initiative (see below), what managers and professionals in the
public sector will say privately differs enormously from what
they will say on the public record. There is much sensible managerial
advice in recent guidance (Cabinet Office and Treasury, 2004a),
but recognition of the above tensions and dilemmas is missing.
8. This matters fundamentally for two reasons. First,
it is difficult to square greater managerial devolution with the
barrage of central initiatives, including Lyons (2004) on public
employment relocation and Gershon (2004) on efficiency savings.
Whatever the long-term merits of the recommendations emerging
from central reviews, they can undermine devolution and impose
significant transactional costs. Second, increased fragmentation
of public service delivery raises concerns about regularity and
also about the capacity of bodies with supervisory and regulatory
roles. For example, if there is to be more direct central government
funding of schools, the demands upon departmental capacity will
increase rather than reduce.
9. The search for continuous improvement in the efficiency
of public services is an immensely important task, for which the
Treasury naturally has the lead role. Technological change and
learning from developments in the private sector should facilitate
cost reduction, a process that needs to be systematic and cumulative.
Disbelief is the initial response to the Government and Opposition
competing to claim dramatic cost reductions, achievable quickly
and with no impact on service quality. It becomes more serious
when these are factored into forward expenditure plans and are
partly based on a hypothesised reduction in regulation. There
is much support for a reduction in regulation in general, but
also much clamour for increases in specific regulations. When
it becomes so politicised, "releasing resources to the frontline"
becomes a dangerous slogan. Fighting forces depend on military
logistics, with the latter risking being viewed as "waste".
A proper definition of efficiency savings would emphasise reducing
resource inputs for given outputs, without recourse to dangerous
labelling. Whilst there is much that is constructive in the Gershon
Review (Gershon, 2004), the labelling of only one of six work-streams
as "productive time" will feed populist caricatures
of the other five as "unproductive".
10. Chart 1.1 (Treasury 2004b, page 4) indicates that
the margins on the golden rule are likely to be very narrow in
the next economic cycle. Much clearly depends on the performance
of the economy and on good performance limiting pressures on AME.
There is a danger that meeting the golden rule becomes such a
matter of credibility for the Treasury that the integrity of the
forward fiscal projections comes into question. There are already
concerns about the way in which certain assets and liabilities
are kept off the public sector balance sheet. The National Audit
Office (2004) has calculated that 57% of PFI assets are on-balance
sheet for the public sector client and 43% are off-balance sheet.
However, if the London Underground is excluded, the percentages
are 20% on-balance sheet and 80% off-balance sheet. Whereas a
substantial proportion of central government PFI assets are on-balance
sheet, very little is on-balance sheet in the local government
and health sectors. Moreover, 24 out of 27 local authority and
health PFI projects examined by the National Audit Office were
on the balance sheet of neither the public sector client nor the
Special Purpose Vehicle.
11. Chart 1.5 (Treasury 2004b, page 8) shows that PFI
and asset sales make a considerable contribution to total investment
plans. The Chancellor's SR 2004 statement indicated that asset
sales would generate £30 billion in the period to 2010. More
information is certainly required as to the composition of these
asset sales because of their importance to the fiscal arithmetic.
Cabinet Office and HM Treasury (2004) Devolving Decision Making:
1 Delivering Better Public Services: Refining Targets and
Performance Management, London, Cabinet Office and HM Treasury.
Gershon, P (2004) Releasing Resources to the Front Line: Independent
Review of Public Sector Efficiency, London, HM Treasury.
Lyons, M (2004) Independent Review of Public Sector Relocation,
London, HM Treasury.
National Audit Office (2004) Supplementary Evidence provided
by the Comptroller and Auditor General following the Public Accounts
Commission's Meeting on 24 February 2004, London, mimeo (forthcoming
in the Commission's 12th Report).
Office for National Statistics (2004) Overview of Today's Economic
Statistics, News Release, 30 June, London.
Statistics Commission (2004) Recent Revisions to Economic StatisticsStatement
by Chair of the Statistics Commission, Press Release SC/PR/2004/04,
5 July, London.
Treasury (2004a) Budget 2004Prudence for a Purpose:
A Britain of Stability and Strength, HC 301 of Session 2003-04,
London, Stationery Office.
Treasury (2004b) 2004 Spending Review: New Public Spending
Plans 20052008, Cm 6237, London, Stationery Office.
Table 1 was constructed using the alternative definition of TME
as current expenditure + depreciation + net investment. Back
The minor differences between the TME figures in Table 1 and Table
2 for 2006-07 and 2007-08 are presumed to be technical in origin,
rather than involving policy changes. Back
The issue here is not the merits of particular changes, rather
the effects of unexpectedly introducing them ahead of public discussion,
especially when, as in the recent case of National Health Service
output data, these are beneficial to the Government. The Statistics
Commission (2004) has indicated its concern at the changes introduced
by the Office for National Statistics (2004), in advance of both
the publication of the Atkinson Review on the measurement of public
sector output and of consultation on proposed changes. Back
Witness media graphics of civil servants wearing bowler hats. Back