Spending Review 2010 - Treasury Contents


Written evidence submitted by the Institute for Government

  This note covers three related issues:

    — How the decision to stick to the fixed cash spending plans in Spending Review 2007 and to have (explicit and implicit) ringfences in Spending Review 2010 have interacted, changing the structure of UK spending. The resulting pattern raises questions about the "time consistency" of UK's fiscal policy making.

    — The impact of the Spending Review on Whitehall itself, and how reductions of a third or more can be managed without causing major harm to civil service, or undermining longer term reform priorities.

    — How the Spending Review process itself has operated over the past months, and in particular how this compares to the propositions the Institute put forward in December 2009.

TIME CONSISTENCY IN POLICY MAKING: FIXED CASH PLANS AND RINGFENCES

  The decision by the last government to stick to the fixed cash spending plans that emerged from the 2007 spending review, together with the (explicit and implicit) ringfences in last month's spending review, has changed the structure of public spending.

  Most commentary has focussed on the scale of reductions implied by the 2010 spending review. But expected spend as share of GDP in 2014-15 is almost identical to actual spend in 2006-07 (ie before the recession), at 40.8% versus 41.0%. What this disguises is a big shift in what we spend our money on. On the way "into" the recession, sticking to the cash plans meant big effective increases in spending as share of GDP, with the NHS and education as big winners (along with benefit recipients). On the way "out" of recession, ringfencing helps protect health, pensioners and DfID.

  The resulting percentage point GDP changes in spending between 2006-07 and 2014-15 are shown in Figure 1. Expanded areas are debt interest, retirement pensions (the basic state pension and SERPS), the NHS (for now, we can only do the England numbers as the rest depends on devolved governments) and DfID. To finance these expansions, we have contracted the resources going to other areas. The big contractions are the law and order departments and local government, with MoD, DfE, DfT all taking serious hits (especially DfT given its relatively small baseline).

Figure 1

CHANGE IN SPENDING AS % GDP, 2006-07 to 2014-15



  There is a question as to whether these changes illustrate a "time inconsistency" problem in policymaking, whereby the decision-makers makes the best decision at a each moment in time, but the cumulative effect of those decisions is not one they would have chosen ex-anti. The outcome above is consistent with a government in 2006/07 pursuing a policy of:

    — financing expansions in the share of our national income spent on pensioner benefits, the NHS and overseas aid through reduced spend on education, law and order, defence; and

    — in the event of an unexpected recession, financing the additional debt interest we would have to pay through further reductions in the same areas of spend.

  These are not positions people argued for at the time. Rather spending decisions have been taken incrementally, with political and policy pressures exerting themselves at each point. Three year cash spending plans are a sensible idea in most circumstances, and were indeed thought to be a major step forward over annual settlements. But they produce unplanned expansions in real spending if stuck to in a deflationary recession. If subsequently a government feels politically obliged to commit to protect these areas, irrespective of how well they have fared relative to other areas (as arguably the new Coalition government did with the ringfences on health, aid and commitments to pensioners), we can end up with a radically different structure of public spending to anything which we would have consciously planned. This may be because we never stand back and take a look at the cumulative impact of individual decisions and ask whether that is the outcome we want.

THE IMPACT OF THE SPENDING REVIEW ON WHITEHALL

  Between 1980 and 1984 Margaret Thatcher reduced the civil service by 10%. The coalition announced much larger cuts in Whitehall departmental running costs—with reductions of at least a third over four years—at the same time as civil servants and their agencies are charged with taking £81 billion out of annual state spending by 2015.

  There are few precedents, in Britain or abroad, for orderly downsizing on this scale and timetable. The Swedish and Canadian deficit reduction programmes of the 1990s did not lead to savings on remotely the same scale. Sweden deliberately avoided radical changes to the government machine, lest this undermine the implementation of programme cuts. In Canada much of the headline staff reduction came from transfers through privatisation and decentralisation.

  If this reduction is to avoid becoming a "slash and burn" exercise, a number of steps must be taken including:

    — Rapid progress is needed on the agenda set out by Sir Philip Green last week for centralising procurement and asset management.

    — Whitehall leadership needs to be strengthened, for example by making a reality of proposed new management boards for each department engaging ministers, senior officials and non-executive directors from the private sector, able to provide clear strategic direction.

    — A repeat of the 1980s collapse in civil service prestige and attractiveness as an employer is also a real threat, so a focus on retaining and recruiting top talent is vital.

  It is also important that the cuts agenda does not deflect from wider reforms. Lord Adonis recently highlighted in the Financial Times three key areas from his experience that must change:

    — Civil service and ministerial tenures need to increase.

    — Devolution to Edinburgh, Cardiff and London has been a success in the past decade, and should be extended within the rest of England, starting with elected mayors in major cities. Central government needs to delegate functions and taxation, and then reform itself into a machine suited to a more decentralised state.

    — Parliamentary accountability needs to improve to increase pressure on Whitehall to raise its game. Parliamentary scrutiny of departmental policy, programmes and spending is haphazard, especially in the House of Lords.

  See attached article by Lord Adonis in the Financial Times and the Institute's briefing note on Transforming Whitehall: Smaller and Better?

THE SPENDING REVIEW PROCESS

  In December 2009, the Institute published a briefing note that looked at how government should go about the process of fiscal consolidation. The note drew on a series of high-level seminars run by the Institute throughout 2009, discussions with senior policy makers in the UK and abroad and the rapidly expanding literature on how to manage fiscal consolidations.

  The success or otherwise of the Spending Review process (and the wider fiscal consolidation of which it is part) can only be judged in several years hence, when we will see if there has been a sustained improvement in the state of the UK's public finances. Here we provide some reflections which we hope will be of use to the Committee.

  The UK's spending review followed a fairly traditional route. The spending review committee was designed as a "star chamber", there to act as judge and jury. This was a form of committee structure that the UK is use to employing, and in the relatively short timescales it could be argued it was the only choice.

  The UK did not follow the model used in somewhere like Canada, were the ministerial committee was charged with devising the plan, and deliberately contained those members of the cabinet who were most likely to be "difficult" in the process. The logic was that, by building the plan in this way, there would be more political support for taking on the difficult political challenges involved in implementing the plan (see Bourgon 2009).

  There were some attempts to involve the public in the process itself. In particular, the Treasury launched a Spending Review website, which allowed the public to provide suggestions. There were some results from this process, but on a relatively minor scale. There was potential to go much further in involving the public, and thereby understanding their concerns. For example, PWC convened a Citizen's Jury in July (24 members of the public spent three days considering the issues involved in the spending review) which provided some insights into how people considered the tradeoffs inherent in the Spending Review. As an example, there was considerable support for limiting the child benefit available to higher earners, which foreshadowed the high polling support for this measure when it was announced. More interestingly, the group's initial reactions followed the general polling result that pensioners should be protected in the spending review. However in more detailed discussion, there were high levels of support for cutting back non-state pension provisions (ie free bus passes and winter fuel allowance) from higher income pensioners. See the attached commentary piece and related links for further discussion of the findings of the Citizen's Jury.

  Finally there appears to have been relatively little action to counter the siloed nature of UK government. The spending review process was mainly done along traditional departmental lines, with limited exceptions (one obvious one was around National Security). Also there were relatively limited moves to give local areas more control over public spending in their areas. The Community Budgets only cover spending on the most "hard to help" families, rather than the entirety of spending as envisaged in Total Place. It is clearly very early to judge where this agenda will end up, but the Spending Review may have been a missed opportunity to make major progress on this important issue.

November 2010





 
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