Managing Budgeting in Government - Public Accounts Committee Contents

2  Informed decision making across government

4.  Commitments made by the Government, such as to increase overseas aid, maintain health spending and provide some form of protection to other budgets (for example education) meant that its scope to cut resource spending was limited. Departments accounting for approximately 40% of resource spending, including local government and the justice departments, therefore bore the brunt of spending cuts.[5] There were also other constraints which limited departments' flexibility when it came to cutting public spending. The Treasury told us that contractual rights of staff meant that their cost could not be cut out overnight. The Treasury also explained that to reduce wages the government would have to enact legislation and that successive governments had been reluctant to do this.[6]

5.  Over the spending review period resource spending on programmes and administration is decreasing in real terms; however, in cash terms there is a small increase from £333 billion in 2009-10 (the year before the Spending Review) to £346 billion in 2014-15. This is in contrast to capital investment which was cut significantly in nominal terms—from £57 billion in 2009-10 to £41 billion in 2014-15. If these figures are adjusted for inflation they show a cut in departmental capital spending from £60 billion to just £38 billion—a real terms cut of over a third.[7]

6.  We asked the Treasury about the decision to cut capital spending so significantly as it seemed to undermine the Government's objectives of securing jobs and economic growth. The Treasury explained that the decision to focus the biggest cuts on capital spending was in part driven by existing spending and political commitments. Decisions to defer or cancel new capital projects were easier to implement than cutting current spending which would often involve wage and benefit cuts. The Treasury acknowledged that, with hindsight, it would not have cut capital spending as significantly as it did and that the Chancellor's more recent injection of £6.3 billion for infrastructure represents a reversal of the some of the decisions taken during the Spending Review.[8]

7.  The Treasury told us that cuts to public spending were difficult and could appear to be crude.[9] We recognise the difficulties in the prioritisation process but expect decisions to be made on a rational basis.[10] We have previously identified many examples where short term cuts have resulted in, often unanticipated, negative impacts over the longer term. For example, the Ministry of Defence's decision to delay projects, resulted in increased costs in the longer term; the UK Border Agency's decision to reduce staff quickly, despite progress on immigration case work being slower than expected, resulted in the Agency having to rehire staff to process the backlog; and cuts to spending on flood defences which may result in increased costs from flood damage in the future.[11]

8.  A limited planning horizon, such as those for spending reviews, creates a risk that short-term priorities take precedence and that these decisions may have perverse impacts in the longer-term. The Treasury told us that the work of the Office for Budgetary Responsibility in producing long-term projections of fiscal sustainability and the introduction of the Whole of Government Accounts were helping to address this issue. The Treasury maintained that it was now better at considering the long-term costs of policy options, such as capital investment, and that a long-term view had informed pension reforms. However, it acknowledged that more could be done to encourage governments to focus beyond the current Parliament.[12]

9.  The Treasury was proud of its innovative approach to rank capital spending on the basis of their economic returns and considered that it had resulted in a better allocation of scarce capital resources. However, it acknowledged that this exercise had only covered a small proportion of departments' spending (6% of all DEL). There had also been weaknesses in the availability and quality of the evidence used. Information on the value delivered by resource spending had been weaker still. In many cases, departments could not demonstrate what returns they were expecting or receiving from spending, and officials could not present Ministers with comparable information to enable them to compare options for spending, or the implications of cuts.[13]

10.  Departments also lacked the sorts of management information vital to demonstrating what outcomes they expected to achieve for each pound of proposed spending. For SR10, none of the departments looked at by the National Audit Office initially supplied cost effectiveness or unit cost information and the Treasury admitted that compliance had been mixed. The Treasury did not initially request information on the value of spending or the impacts of cuts and subsequently found it difficult to gather this important evidence quickly. The short timescales may have hindered the collation of such information. However, information which could aid improved understanding of value for money such as data on unit costs, cost effectiveness and productivity is not commonly part of the key management information used in departments; and not routinely shared with the Treasury.[14]

11.  The Treasury told us that, in some cases, it suspected that departments deliberately withheld information that may have proved inconvenient. It considered that in a number of cases departments had been gaming the system as they were unwilling to reveal that they had no evidence of any link between increased spending resulting in improved outcomes. The Treasury believed that in some spending areas, such as policing, skills and education, increased spending had resulted in poorer outcomes. For example, while teaching assistants were valued by teachers and parents alike, the Treasury considered they had a negligible, if not negative, impact on outcomes. The Treasury maintained that it was now doing much more expert analytical work on public sector productivity, for example, in health care, so that it would be better prepared for the next spending review.[15]

12.  There were also clear limits to the extent of cross-government working for SR10. The budgetary system does little to encourage or facilitate cross-government working. Engagement between departments and the Treasury spending teams are typically bilateral. While departments may be rewarded for good spending control, for instance by being given more flexibility to carry unspent money forward into the new financial year, they are not similarly incentivised to work together. The Treasury agreed that cross-government working on spending settlements was an area that needed to improve and told us that the demanding timetable for the Spending Review was one of the reasons that this had not happened as much as it might have. In addition, some departments felt that they could not work collaboratively unless given explicit permission. The Head of the Civil Service told us that it was the intention of civil service reforms to address cultural barriers to cross-government working through open policy making, the expansion of shared services, and recognition for staff that collaborate.[16]

13.  The Treasury told us that the next spending review would need to be held by December 2014 at the latest and accepted that preparations should already be underway. The Treasury wanted departments to act now to identify how they can work together, but explained that uncertainty over the timing of the spending review meant that departments were reluctant to do this. Cross government working, like the use of management information, is not currently routine: incentives are needed so that departments feel empowered to identify opportunities outside of periodic spending reviews.[17]

5   Q 13 Back

6   Q 1 Back

7   Q 1; HM Treasury, Public Expenditure Statistical Analyses 2012, July 2012, Table 1.1 & 1.7 Back

8   Qq 1 - 7, 9, 13, 38  Back

9   Q 33 Back

10   Q34 Back

11   Qq 39 - 40; C&AG's Report, The UK Border Agency and Border Force: Progress in cutting costs and improving performance, HC 497 (2012-13), para 2.14 Back

12   Qq 11,15 Back

13   Qq 3, 4, 37, 39, 45, 52, 54; C&AG's Report paras 2.14 - 2.15, 2.19 - 2.20 Back

14   Qq 37, 39, 52 - 59; C&AG's Report paras 2.2 - 2.7, 2.28 Back

15   Qq 53 - 54 Back

16   Qq 20-24, 31- 32, 45 Back

17   Qq 20 - 21, 24, 25 - 28  Back

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Prepared 8 March 2013