Progress with VFM savings and lessons for cost reduction programmes - Public Accounts Committee Contents

3  Lessons for cost reduction

12.  The next spending period will involve substantial cash reductions over the next four years in most departments. Previously most departments could redeploy efficiency savings to spend on services, but the need to cut total cash costs in future increases the urgency of making improvements in efficiency. With expenditure on most programmes falling, it will become more obvious whether departments have kept within spending targets, and there will be less need for a separate savings target. The key test of value for money will be whether departments are able to maintain services.[23]

13.  Instead of headline targets, there is likely to be a greater emphasis on transparency with more information published to quantify inputs and outputs, which in turn is intended to lead to stronger public accountability and better decision-making. The Treasury aims to develop a structure that creates an incentive to free up resources for departmental priorities, but acknowledges that ways other than pay incentives will have to be found given likely pay constraints.[24] The Treasury argued that, while the measurement of efficiency was complex when budgets were increasing overall, clear spending allocations and falling baselines would simplify this task: it would be clear that costs had been cut, and it was a matter of testing whether service provision was maintained. However, there is clear evidence, for instance from police forces, that spending does not have to fall for efficiency to improve.[25]

14.  The Treasury also expects improvements in value for money to come from the spending review, when the programmes with the lowest rates of return are cut. This may work for capital projects with a monetary rate of return, but requires metrics such as unit costs to measure the relative efficiency of services. While this can be done in areas such as tax collection, the multiplicity of objectives in some departments makes it very challenging to develop appropriate metrics.[26]

15.  The experience of the current Programme shows that there are a number of challenges for departments in implementing cost reduction. The Programme focused departments on meeting their target at the expense of thinking more widely about how to improve value for money. The Programme has not resulted in departments working together effectively, with little evidence of collaboration. Departments will be more successful at making savings if they take value for money seriously at the highest level, and instil a culture of efficiency where people throughout the organisation are engaged in seeking improvements.[27]

16.  Most departments did not plan changes which would take longer than three years to deliver. Having a long-term framework helps create an environment where real structural changes can be made with a longer-term pay-off and there is more opportunity to embed changes. International examples of savings programmes had longer-term plans even where lower savings were targeted. There is a risk that a long-term target means action will be deferred, but it is clear that the current programme has not created incentives for major change in most areas. Few, if any departments have made much progress in redesigning services despite being aware that cost reductions would be needed in the future.[28]

17.  Departments also struggled to provide evidence of real savings where they were being delivered by the bodies they funded. The Treasury assumes there is capacity to drive up efficiency in front line services, but does not think central government should seek to influence how, for example, schools spend their money. Instead, the centre needs to design a system which creates incentives for improvements to be made locally. Even if such incentives are in place, performance data will also be needed to assess the impact of cuts to the cost of services.[29]

18.  Where savings were made by departments themselves, information systems were not always adequate to support them. Better monitoring of efficiency will depend on improvements in financial management in future years. The quality of leadership and decision-making in departments, and the management of disciplines such as procurement, will continue to be essential to achieving value for money.[30]

23   Qq 1, 24, 43, 46; C&AG's Report, para 4.1 Back

24   Qq 18, 34-35 Back

25   Qq 3, 18, 21, 40  Back

26   Qq 24, 43-45 Back

27   Qq 17, 19; C&AG's Report, paras 3.11, 4.2 Back

28   Qq 41-42; C&AG's Report, paras 3.11, 4.3 Back

29   Qq 20-21, 25, 35; C&AG's Report para 4.2 Back

30   Qq 37, 45; C&AG's Report para 4.2 Back

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Prepared 4 November 2010