Written evidence submitted by the Institute
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
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
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
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).
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;
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.
Between 1980 and 1984 Margaret Thatcher reduced
the civil service by 10%. The coalition announced much larger
cuts in Whitehall departmental running costswith reductions
of at least a third over four yearsat 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
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
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
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
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?
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
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.