Select Committee on Treasury Minutes of Evidence


Memorandum submitted by Professor Colin Talbot, Nottingham Policy Centre, University of Nottingham (13 July 2004)

INITIAL COMMENTS ON SPENDING REVIEW 2004—PERFORMANCE, CHOICE AND EFFICIENCY?

INTRODUCTION

  This memorandum represents a very quick response to the publication of Spending Review 2004, the Public Service Agreement's White Paper and the Gershon Review. Rather than present a complete analysis it raises a series of issues which might be of interest to the Committee in their consideration of these announcements.

  I am grateful to the Committee for the invitation to comment once again on the Spending Review process.

PUBLIC SPENDING—THE BIG PICTURE

  According to SR2004 public spending is expected to level off at about 42% of GDP and the Chancellor believes there is no substantial hole in the public finances if growth continues as he predicts. We will leave it to others to comment on this. We want to start by just putting the spending plans into historical and international perspective.

Figure 1

UK PUBLIC SPENDING AS A PERCENTAGE OF GDP 1963-2007


Central flat dotted line indicates average over whole period. Tory (1979-1996) and Labour (1997-2007) averages in short flat lines.

Source: derived from Public Expenditure Statistical Analysis 2003 and Spending Review 2004.

  Public spending in the UK has averaged about 43% of GDP over the past 40 years or so. The high point was reached under—not surprisingly—a Labour government in 1975 when it reached 49.9% of GDP. Its lowest point was—very surprisingly to most people—also under Labour, in this case "New Labour", when it shrank to just 37.4% of GDP in 1999. Also perhaps surprising to most people would be to know that highest sustained period of public spending took place under Margaret Thatcher when it soared to around 48% a year after she took office in 1979 and stayed at or above this level until 1984. It was 1987 before she managed to force it back below the average public spending over the past four decades.

  New Labour's new apparent preferred spending levels is about or marginally above 42% of GDP. This puts New Labour's plans not only below the four-decade average but below the average for the Tory governments of 1979-97 which ran at 44%.

  Gordon Brown can justifiably point out that high Tory spending in the early 1980s was caused by the massive costs of unemployment and borrowing to pay for both them and to cut direct taxation. Today, the Government argues, we are spending far less on unemployment (hence the possibility of the massive job cuts in the Job Centres) and only a fraction of what the Tories spent on interest on public debt. More of the Chancellor's 42% of GDP is finding its way to actual public services and this is true. However, as the following chart shows—it is only just becoming true. Health and education spending dipped along with other public spending under Chancellors' Clarke and Brown in the late 1990s and only started to grow and overtake previous spending levels in the current decade.

Figure 2

HEALTH, EDUCATION AND WELFARE SERVICES SPENDING AS A PERCENTAGE OF GDP


Source: calculated from Public Expenditure Statistical Analyses 2003.

INTERNATIONAL COMPARISONS: STEADY IN MIDDLE OF THE ROAD

  How does the UK compare internationally? We seem to be steadfastly glued to the middle of the road. Amongst largish OECD countries there are a group of high spending Scandinavian and northern European countries above us—Sweden 52% of GDP, Denmark 49%, France 48%, Germany 45% and a group of low spending "anglo" countries below us—Australia and the USA on 32%, Canada 37%, and New Zealand 37%. We are above the OECD average which is 38% but below the EU average which is 44.3%.

  One thing economists have struggled with for a long time is trying to come up with convincing explanations of the part public expenditures play in economic performance. Arguments have been made on both sides but the evidence just does not tell a clear picture. Policies popular in many developed countries over the past two decades for "rolling back the frontiers of the state", to use the famous Thatcher dictum, were certainly not based on any uncontested or incontestable evidence. Not that it has actually happened very much.

  When this revolution was in full swing in 1985 average OECD public spending stood at 37.8% of GDP—exactly where it is two decades later, to the decimal point. There have been changes—Australia knocked 6% off its spending, Canada 8%, New Zealand a staggering 15%. But at the same time others grew—some dramatically. The south-east Asian economies of Japan and Korea added 9% and 7% respectively bringing them up to 38% and 25% (which they have sustained despite their economic problems of recent years). The country which cut most from public spending was one not at all associated with the so-called "New Public Management" reforms—Ireland, which at 18% had the biggest fall (from 51% to 33%).

  So the UK is not unusual in any respect—our public spending has hovered around the low 40s of GDP—more or less average for OECD countries—for most of the past four decades. The only times we have deviated substantially have been due to economic crises (as in the mid-70s and early 80s) or because Chancellors have radically depressed spending—as first Ken Clarke and then more ruthlessly Gordon Brown did in the late 90s. We are settling back, it seems, to around about the norm for most of the second half of the 20th century. Nothing too radical there then. The fact that the argument between the two main parties now seems to have settled on whether we should spend 42% or 40% of GDP on public services suggests not a lot will change in the foreseeable future either.

REFORMING THE PUBLIC EXPENDITURE PLANNING SYSTEM?

  The Chancellor's claim is that he has fundamentally restructured the way public finances are managed. Some of these changes pre-date New Labour, such as the introduction of resource accounting, whilst others are pure Brown—the whole paraphernalia of Spending Reviews, separating annually managed spending (AME) and three year plans (DEL), capital and current, resource budgets and of course Public Service Agreements. Last but not least are the "Golden Rule" and "sustainable investment rule".

  When this new system was introduced in 1998, scrapping the old Public Expenditure Survey (PES) system which had lasted for almost four decades, many saw this a revolutionary set of innovations—indeed "revolutionary" was the apt word as they were deeply reminiscent of Soviet-style planning with its Five Year Plans and Production Quotas.

  The system was designed, as a whole, to force government spending departments to adopt more strategic planning. It was meant to make them consider carefully where and how to spend capital (resource accounting and PFI), to plan over longer time periods (three year plans and greater end-year-flexibility), to work towards clear strategic goals in terms of delivery (PSAs and Service Delivery Agreements), and so on. A big advantage was also meant to be that the three-year cycle would allow Departments and their "sponsored" bodies' to plan more securely.

  SR2004 announces that "departments will seek to cascade their three-year 2004 Spending Review settlement down to all those public sector bodies that they fund to the maximum extent possible" (para 2.9). Whilst this is to be welcomed, it has to be asked why it has taken since CSR 1998 for this to happen? And even now it is only "to the maximum extent possible"—given how reluctant Departments have been thus far to relinquish annularity in dispensing their funds to subordinate bodies this seems not exactly ironclad.

  Has this overall new system worked? The main evidence that this has not can be summed up in two words: Gershon and Lyons.

GERSHON AND LYONS

  The Gershon review of efficiency in the public services and the Lyons review of location are both based on the assumption that Departments are not making the best use of their resources. Gershon detects £20 billions worth of savings from headquarters overheads, back-office staff and improved processes. Leaving aside for the moment how realistic this is, how can any strategic planning system be working if it misses anything even remotely like this level of potential savings? Similarly how can accounting for capital investment and resource accounting be working if Departments can house 20,000 jobs in London and the south-east that could be more cheaply located elsewhere, as Sir Michael Lyons has concluded (after a mighty struggle with Departments)?

  Gershon's target of £20 billion, increased by the Chancellor to £21.5 billion, seems extremely ambitious to many. The history of efficiency reforms does not bode well in this regard. The Rayner Scrutinies, the Financial Management Initiative, Market Testing and Executive Agencies were all trumpeted as major sources of efficiency savings in their day. Each promised savings of around half-a-billion pounds. It should be noted that this figure is dwarfed by the Gershon/Chancellor target of in excess of £20 billion. It should also be noted that none of these reforms produced anything like the amounts promised—the usual result was about 50%[11]

  One further small point about the relocation drive. During the long period of Conservative Government from 1979 to 1997 there were similar periodic drives to move Civil Servants out of London and the South East. When we looked at this in some depth[12]over the whole period we found that there was a strong correlation (+0.63) between the number of marginal Tory constituencies in a region and the shift in civil service numbers in that region. Correlation is not causation, but there is enough anecdotal evidence to support the view that this was indeed an "emergent" if not a deliberate policy. Hopefully the present Government can avoid such risks.

PSAS AND MEASURING PERFORMANCE

  A great deal is being made of the Government's determination to cut back on the number of targets and especially the reduction of PSA targets to only 110. This commitment has to be viewed sceptically for several reasons.

  There is little doubt that the existing system of targets and measures has been in some ways dysfunctional. The government itself has now—belatedly—admitted that its targeting system was too top-down, unwieldy and was leaving huge gaps and some perverse incentives.

  The National Audit Office flagged up these problems three years ago[13]but it took a hard-hitting but well researched report from the Public Administration Select Committee last year[14]to finally spur the Government into a proper review of the system—the "Devolving Decision Making Review—I: Delivering better public services: refining targets and performance management" published alongside the Budget 2004.

  However, the current emphasis on supposedly reducing and eliminating targets and measurement is misleading and misplaced.

  Firstly, it is important to distinguish between "targets" and "measures". The latter, as the name implies, simply measure some aspect of an activity whilst targets suggest setting a level of achievement which is expected. Both are useful if used properly.

  It is obvious that excessive top-down setting of targets, without consultation and "ownership" by those who have to implement them, can be counter-productive. There has been some improvement in this process in the SR, as evidenced in the consultations referred to in the PSA White Paper (para I.15). However, this consultation is still very limited, uneven, and continues to exclude any role for Parliament, and especially Select Committees, from the process, which would seem an obvious step and has already been tried in Wales, Scotland and many other places.

  It is also obvious that "cascading" targets from top to bottom can be a difficult process. Documents published alongside the 2004 Budget show that of the 206 targets and compliance requirements placed on front-line health bodies less than 40% bore any relation to the high-level Public Service Agreement targets for health. For policing the figure was less than 20% out of 207 targets. The whole system simply broke down between top and bottom of the chain.

  Nevertheless targets do have a role as objective setters, steering mechanisms if you will. The complaint is often heard that "targets distort behaviour" but what is really meant is that they distort behaviour in a negative and unwanted way—they should indeed distort behaviour but in the required direction. Targets can signal the direction of travel and priorities, and for this they are useful. Moreover without targets—or at least without measurement—it is impossible to know what is being achieved.

  Measurement is even more crucial. Without measures of process, outputs and outcomes, and the quality of all three, we have no idea what is being achieved by the resources being deployed for public services. Such information is important for multiple constituencies: policy-makers need it to know if objectives are being met; Parliamentarians and citizens need it for holding the Executive to account; public managers need it to know how they are doing; and finally and most significantly in the current debates about "choice"—users need performance measures so they can make informed choices.

  All of these reasons mean that simply slashing away at what is vaguely called the "targets culture" is a misplaced policy. And realistically, it will simply not happen. A good example is the recent trajectory of the Health Service. The Secretary of State has declared a policy of cutting back on targets. But every time an issue arises which requires action—for example the controversy over MRSA and hospital based infections—the tendency is to set targets, demand inspections and require reports.

  The actual PSA targets set in this SR are alleged to have dropped from "250 to 110" (p1) and to be even more focussed on outcomes. This is again misleading. The so-called "targets" are often actual multiple targets lumped together as one. For example, the DoH has PSA target as follows:

    4.  To improve health outcomes for people with long-term conditions by offering a personalised care plan for vulnerable people most at risk; and to reduce emergency bed days by 5% by 2008, through improved care in primary care and community settings for people with long-term conditions.

  It is fairly clear this is actually three targets:

    a.  To offer a personalised care plan for vulnerable people most at risk (with no measurement).

    b.  To reduce emergency bed days by 5% by 2008.

    c.  To improve care in primary care and community settings for people with long-term conditions (with no measure.)

  The focus on "outcomes" is also less than is suggested. An analysis of the Health and Education PSA targets (see Figure 3) shows that only 58% and 71-75% of their targets, respectively, are about outcomes and actual number of targets is far higher than the "official" level.

Figure 3

ANALYSIS OF PSA TARGETS 2004: EDUCATION AND HEALTH
HealthEducation
Official number of targets8 14
Actual number of targets26 24
Outcome targets1517-18
% Outcome targets58% 71-75%
Process targets114-5
Output targets01
Input targets01


  It should be noted that Health has started a trend which will probably see elsewhere—"targets" redefined as "standards", whilst remaining actually targets (albeit for minimum standards of service delivery). In the DoH case there are six such "standards".

PRODUCTIVITY AND EFFICIENCY

  The target set in SR2004 is for a 2.5% per annum growth in efficiency in the public sector.

  How efficiency is to be calculated is unclear—so-called "efficiency savings" have traditionally been treated by Treasury simply as reductions in Departmental budgets and not really measured at all.

  The debate of public sector productivity and efficiency which is currently a key theme in political circles requires information about what is changing, or not. Until fairly recently we had very little such information and we remain woefully ill-informed. The Office of National Statistics (ONS) has been struggling with the problem of how to calculate public sector outputs (in the absence of the monetary measures used for the private sector for most public services) since 1999 and has had to set up the Atkinson Review to try to resolve it. It remains to be seen how this will develop, but it is part of an international trend.

  Productivity for the economy as a whole over the period 1961-2003 averages just a 2.1% increase[15]Whilst productivity and efficiency are not exactly the same this is an interesting contrast. Productivity figures for the whole economy include many capital intensive sectors where productivity gains are much easier to achieve than in labour intensive areas such as "human services", which most of the public sector consists of. A target of 2.5% efficiency gains sounds, in this context, to put it mildly "ambitious".

CULLING THE BUREAUCRATS?

  The most headline grabbing aspect of SR2004 (and Budget 2004 before it) seems to have been the promise to "cull" the Civil Service by as many as 100,000 posts.

  It has to be said that we have been here before—governments (especially the early Thatcher government) have often attempted to slim down Whitehall by head-count based targets for reduction. They sometimes succeed superficially, but rarely achieve a lasting improvement in efficiency and often cause great damage. This why over the recent past Governments have steered away from purely head-count focussed reforms (although contrary to official statements they have never completely vanished)[16]

  The problem with making staffing numbers the centre of attention is that it is so easy to manipulate. In the early 1990s two particular "dodges" were highlighted as ways in which seeming staff cuts in the Civil Service hid actual continuation of work and spending in other ways.

  The first was to simply out-source as many jobs as possible. Norman Flynn has pointed out that whilst civil service numbers in Departments were declining during this period Departmental running costs budgets remained relatively static—the jobs were still being paid for but no-longer as Civil Servants[17]

  The second was the enormous growth in the use of consultants. Departmental spending on consultants mushroomed and was often hidden in "programme" expenditure (thus avoiding running costs controls as well as staffing controls).[18]

  Besides these obvious problems with "headcount" based reductions there are many other ways of obscuring precisely what is happening. I am reminded of a conversation I had with a very senior Civil Servant during the mid-1990s Senior Management Reviews (which sought a 25% reduction in Departmental senior staff). He asked me "we know it's all done with smoke and mirrors, we just want to know what smoke and which mirrors." It not at all clear from current announcements exactly how much is "smoke and mirrors" and how much are real reductions. On past performance I would expect Whitehall to do its best to keep it that way.

POLITICS AND PLANNING

  Both the planning and targeting systems have been most undermined by the Government themselves. The supposed three-year planning cycle for Spending reviews quickly became a "three year planning cycle reviewed every two years" (in Treasury words Sir Humphrey would be proud of). The Chancellor has announced substantial increases in public spending in Pre-Budget and Budget statements rather than Spending Reviews whilst the Prime Minister even memorably announced big changes to long-term health spending in a TV interview not related to any planning cycle at all. The Chancellor's most recent Budget statement pre-empted some of the main conclusions of the SR2004. The problems with targets mentioned above comes—at least in substantial part—from Ministries announcing new initiatives and targets outside of any planning cycle and more geared to the news cycle. In short politics triumphed over planning, as it all too frequently has in the past.

  Because most of these changes have been in an upward direction there has been little complaint from within public services. It has only been when the Chancellor started to announce large cuts and job losses in specific Departments and areas in the Budget that complaints have been heard around Whitehall that this was "outside of the system" and why hadn't he at least "waited until SR2004 in July".

  It is clear that politics cannot (indeed should not in a democracy) be removed from the planning process but there are better and worse ways of including political considerations. Other jurisdictions recognise this formally[19]by giving their legislatures a much greater role in determining public spending details and, more latterly, performance targets as well. Whilst it is probably not applicable in the UK to go as far as "the President proposes and the Congress disposes"—the separation of powers—Parliament could be given a much greater role in consultations about spending and performance as I have argued elsewhere.[20]

CHOICE AND EFFICIENCY?

  I want to conclude with some comments about an issue which is not specifically focussed upon in SR2004 but which is clearly dominating the national debate about public services—the issue of "choice".

  The so-called "choice" agenda, now championed in slightly different ways by both Government and official Opposition has consequences for efficiency which both are also promoting.

  Choice involves greater autonomy for individual schools, NHS Trusts, etc. However the experience has been that this autonomy can undermine the sort of efficiency measures being proposed by Gershon and the Chancellor. For example, the Financial Times reported that:

    "a £100 million-plus investment since 1999 in shared services [in health] has failed to deliver the £400 million-plus savings envisaged after ministers decided not to order [NHS] trusts to use it as that clashed with the devolution of power and the creation of foundation hospitals."[21]

  Many, indeed most, of the Gershon proposals rely on increased centralisation of back-office functions and especially purchasing. It is yet to be explained how this fits with the "further flexibility to those delivering services" (PSA Foreword) which is being advocated.

  Choice also involves, as many commentators have pointed out, a degree of excess capacity in whichever system is involved—there must be more hospital beds or school places than are needed for real choice by patients or parents to be exercised. This is clearly inefficient. It is not that such "inefficiency" might not be justified by the advantages of increased choice, but the expenses have to be factored in to any calculation of costs and benefits.

  There is a consequence of the current movement towards decentralisation and autonomy, linked to the issue of choice—such as foundation hospitals and schools, which is being largely ignored. This is curious because a great deal of public sector reform in the 1980s and 1990s was driven by the notion of "producer capture"—that is that those who work in public services tend to distort priorities and shift resources to meet their own needs rather than those of users or tax-payers. It is presumed, I think, that the elements of "choice" introduced in the current reforms will counter-balance any tendency to producer capture caused by decentralisation and "foundation" status. This is at best unproven and the experience of previous attempts to improve the power of users has been at best patchy and at worst a failure (one only has to think of the Citizen's Charter). There are then severe risks from decentralisation which do not seem to be being adequately addressed.

  The tension between "choice" and "efficiency"—which both Government and Opposition are making central planks of their public service agendas—are very real and the debate has so far failed to address these problems at all. These problems cannot however be ignored and they will surface if the ambitious plans for both choice and efficiency reforms in public services are implemented as currently envisaged.

References

Comptroller and Auditor General (2001). Measuring the Performance of Government Departments. London, National Audit Office.

Flynn, N (1997). Public Sector Management (3/e). London, Prentice Hall.

Public Administration Select Committee (2003). On Target? Government by Measurement. London, House of Commons.

Talbot, C (1997). "UK Civil Service Personnel Reforms: Devolution, Decentralisation and Delusion." Public Policy and Administration 12(4).

Talbot, C (2002e). "A Treasury Equation." White Paper 1(1).

Talbot, C (2002f). "Pennies, Performance and Politics." New Economy 9(1).

Talbot, C (2004). "Executive Agencies: Have They Improved Management in Government?" Public Money & Management 24(1).

Talbot, C and Cole, M (1997). "The Geographical Distribution of Civil Servants: The Politics of Change." Teaching Public Administration 17(2): 41-50.

Talbot, C and Johnson, C (2003). Budget Setting and Financial Scrutiny: Experiences in Devolved/Regional Governments—"Open, Accessible and Accountable to the People of Scotland". Edinburgh, Scottish Parliament (Paper 810).


11   Talbot, C. (2004). "Executive Agencies: Have They Improved Management in Government?" Public Money & Management 24(1). Back

12   Talbot, C. and M. Cole (1997). "The Geographical Distribution of Civil Servants: The Politics of Change." Teaching Public Administration 17(2): 41-50. Back

13   Comptroller and Auditor General (2001). Measuring the Performance of Government Departments. London, National Audit Office. Back

14   Public Administration Select Committee (2003). On Target? Government by Measurement. London, House of Commons. Back

15   Calculated from ONS Statbase (LNNP Output per filled job: Whole economy: % change per annum SA: UK, Seasonally adjusted, 2001 = 100, updated on 30 June 2004. Back

16   Talbot, C. (1997). "UK Civil Service Personnel Reforms: Devolution, Decentralisation and Delusion." Public Policy and Administration 12(4). Back

17   Flynn, N. (1997). Public Sector Management (3/e). London, Prentice Hall. Back

18   The Government's Use of External Consultants: An Efficiency Unit Scrutiny-Cabinet Office; and Purchasing Professional Services-Comptroller and Auditor General 2001 (HC 400). Back

19   See for example Talbot, C and Johnson, C (2003). Budget Setting and Financial Scrutiny: Experiences in Devolved/Regional Governments-"Open, Accessible and Accountable to the People of Scotland" Edinburgh, Scottish Parliament (Paper 810). Back

20   Talbot, C (2002e). "A Treasury Equation." White Paper 1(1), Talbot, C (2002f). "Pennies, Performance and Politics." New Economy 9(1). Back

21   "Job Cuts May Not Achieve Proposed Savings", Nicholas Timmins, Financial Times 12 July 2004, p3. Back


 
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