general expenditure policy spending reviews in the uk richard hughes hm treasury 29 march 2007

General expenditure policy

Spending Reviews in the UK

Richard HughesHM Treasury

29 March 2007

General expenditure policy 2

Spending Reviews in the UK: Outline

1. Key Features of UK Spending Reviews

2. Some Recent Innovations in CSR07

3. Lessons from UK Experience for Italy


1. Key Features of UK Spending Reviews

a. Medium-term fiscal rules and top-down spending limits

b. Department-centred spending control

c. Fixed multi-annual Departmental budgets

d. Bottom-up Departmental bidding process

e. Outcome-focused performance management


Ia. Medium-term fiscal rules

Golden rule

Over the economic cycle, the Government will borrow only to

invest and not to fund current spending

Sustainable investment rule

Debt as a proportion of GDP will be held over the economic

cycle at a stable and prudent level (below 40% of GDP)


The Golden Rule and Current Spending

Current Receipts vs. Current Spending (% of GDP)

35%

36%

37%

38%

39%

40%

41%

% o

f GD

P

Current Receipts % of GDP

Current Spending % of GDP (RHS)


35%

36%

37%

38%

39%

40%

41%

% o

f GD

P


Current Spending

-1%

0%

1%

2%

3%

4%

5%

6%

Rea

l Gro

wth

%

33%

34%

35%

36%

37%

38%

39%

40%

% o

f GD

P

Current Spending real growth (LHS)

Current Spending % of GDP (RHS)

Surplus on the Current Budget

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

% o

f GD

P

Average current surplus from 1997-98

Average current surplus from 2006-07

Current Surplus % of GDP


Sustainable Investment Rule & Capital Spending

Having set the current spending envelope to meet the Golden Rule, we set the capital spending envelope to keep net debt below 40% of GDP…

Capital Spending

40.85%

-10%

-5%

0%

5%

10%

15%

20%

Real

Gro

wth

%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

% o

f G

DP

Year-on-year real capital growth (LHS)

Net Investment as % of GDP (RHS)

Public Sector Net Debt as % of GDP

28%

30%

32%

34%

36%

38%

40%

42%

44%

46%

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

% o

f G

DP

…which implies a big slowdown in investment growth following a period of rapid “catch-up”


Ib. Department-centred spending control

Annually Managed Expenditure (AME)

• c.40% of total spending

• Volatile or demand-led expenditure

• Managed centrally on an annual basis

TransportDCLGLocal Govt

Home Office

Defence

Trade & Industry

Work & Pensions

Chx's Depts

Scot, Wales & NI

OtherReserve

International Development

Health

Education

BBC

Student loans

Pensions

Net EU payments

AME margin

Other

Public corps

Tax credits

Social security benefits

Debt interest

Non-cash items

Departmental Expenditure Limits (DEL)

• c. 60% of total spending

• 3-year fixed Departmental budgets

• End-year flexibility for underspends

Annually Managed Expenditure

Departmental Expenditure Limits

= £239bn

= £344bn


Ic. The Spending Review Cycle

July 04 plans set for

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

Year 1 Year 2 Year 3

SR2004

Year 1 Year 2 Year 3

CSR 2007

Oct 07 plans set

for


Id. Spending Reviews: Objective and Process

Objective: Resource the Government’s public service objectives, while staying within the fiscal rules and delivering value for money for taxpayers.

Process

• Review Dept’s DEL budgets to identify pressures, explore scope for efficiencies and identify future priorities

• Allocate the available DEL envelope of to Dept’l budgets to address pressures and meet priorities over next 3 years

• Set outcome-based PSA targets to be delivered with those budgets


SR Process: Inputs (3 months before SR day)

Departmental submissions• Baseline is cash budget in previous year on which

Dept identifies:– Existing pressures– Scope for efficiency gains/re-prioritisation– New priorities

• Updated objectives, outcome-based PSA target and reforms

• Highlight how responding to cross-government issues

Independent reviews• Wanless on health• Stern on climate change• Eddington on transport


SR Process: Scrutiny Phase (last 3 months)

Official level assessment and challenge:• HMT Spending Teams• HMT General Expenditure Policy

Independent scrutiny and challenge• Efficiency Review (Gershon)• Policy Reviews

Ministerial scrutiny and challenge:• PSX Cabinet Committee Meetings


SR Process: Endgame (last few weeks)Chancellor – Prime Minister discussion

Chancellor gives Ministers their Settlement Letters setting out:

• Resource and Capital DEL for next 3 years• New PSA and efficiency targets• Other conditions

– Ring fences– Policy reforms– Administration cost limits– Cash and non-cash budgets– Departmental unallocated provisions– Dual key budgets

Settlements are final and fixed for 3 years


SR Process: Spending Review Day

Chancellor statement to Parliament

Spending Review Publication:• Departments DELs for next 3 years• PSA and efficiency targets• Key policy measures

Departments announce in parallel what this should buy


Interactions between Spending Reviews

Departments given 3 year fixed DEL settlements

Departments accountable to HMT for expenditure control and delivery of their PSA targets

Depts given freedom to:• Transfer resources between (unringfenced)

programs• Switch resource into capital• Carry forward underspends


Adjusting Department’s allocations b/w SRs

In practice some in-year adjustments in the form of claims on:

• DEL Reserve (w/ HMT approval) – £1 / 2 / 3bn• AME Margin (forecast revision) - £1 / 2 / 3bn

Depts have accumulated £8bn worth of EYF “entitlement.”

Some discretionary DEL and AME measures in Budgets and Pre-Budget Reports

Fiscal prudence to deal with major contingencies on expenditure and revenue side


Parliamentary EstimatesAnnual process with Spring and Winter Supplementary Estimates

Parliament Sole legal authority for departmental spending

Rare in practice for Parliament to amend an Estimate: Departments just submit DEL for the year

Treasury can refuse to allow an Estimate to be presented to Parliament if not consistent with DEL

Departments care about avoiding Excess Votes


Ie. Public Service Agreements (PSAs)

Comprehensive Spending

Review 1998

CSR98

Spending Review

2000

SR00

SpendingReview

2002

SR02

600 targets 160 targets 130 targets

Spending Review

2004

SR04

110 targets

Health: Reduce health inequalities by 10% by 2010 as measured by infant mortality and life expectancy at birth.

Crime Reduce crime by 15% and further in high crime areas by 2007-09.

Environment: Eliminate fuel poverty in vulnerable households in England by 2010 in line with the Govt’s Fuel Poverty Strategy objective.


II. Some Recent Innovations in CSR07

a. Fiscal consolidation as an (implicit) objective

b. Long-term challenges and policy reviews

c. “Early” spending settlements

d. Comprehensive value for money programme

e. Further streamlining of PSA targets


IIa. Delivering fiscal consolidation

Total Managed Expenditure (TME)

-1%

0%

1%

2%

3%

4%

5%

6%

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

Re

al G

row

th %

34%

35%

36%

37%

38%

39%

40%

41%

42%

43%

% o

f G

DP

Year-on-year TME growth (LHS)

TME % of GDP (RHS)


IIb. Long-term challenges and policy reviews

Trend Challenge Policy review

Global economic integration and technological change

Increased importance of investment in skills and transport

Leitch on skillsEddington on transport

Increased importance of sub-national economies

Subnational growthBarker on planning

Increased pressure on equality and social cohesion

Children and Young People Mental health

Demographic and socio-economic change

Large increase in elderly population

Public services for over 85s

Population shift to South and East

Housing infrastructure

Environmental change

Climate change and energy security

Stern on climate changeEnergy Review

Global uncertainty Security at home and abroad Counter terrorism & security

Devolved decision-making

Empowering local communitiesThird SectorLyons on local govt finance


IIc. Early Settlements: Seizing Opportunities

March 2006• Home Office: 0% real• DWP, HMRC, HMT & CO: -5% real

December 2006• Constitutional Affairs: -3.5% real

March 2006• Education & Science: 2.5% real• Attorney General: -3.5% real


IIc. Value for money: A comprehensive approach…

Zero-based reviews

Operational efficiencies

FocusPolices &

programmesProcesses

Departmentby

Department

Input costs

Programmes

Organisations

Systemic issues

Procurement

Corporate services

Productive time

Transactions

Cross-Department

al

Cross-cutting policy reviews

Varney Review of service transformation


200

220

240

260

280

300

320

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

To

tal n

ear

cash

res

ou

rce

DE

L £

bn

(ex

clu

des

Bar

net

t)

…with a single global target of 3% savings per year…

07-08 baseline

Estimated CSR DEL

envelope (1.5% AARG)

Pressures are running at ~4.5% real,

also ~ the trend rate of DEL growth since 2000

Gap: £30bn or

>3% nominal pa

SR04

Projected DEL pressures

Projected DEL spendUnfunded Pressures

CSR07


Admininstration Budgets

13,200

13,400

13,600

13,800

14,000

14,200

14,400

14,600

14,800

15,000

15,200

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

£m

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

% o

f Pu

blic

Sp

end

ing

Administration Costs (LHS) Admin as % of public spending (RHS)

…a 5% annual real cut in administration…

£1bn


0

50,000

100,000

150,000

200,000

250,000

To

tal P

ay £

m

46%

51%

56%

61%

66%

71%

Pay

bill

as

% o

f RD

EL

Pay bill

Pay bill at trend grow th

Paybill w ith 2% headline & 1% w orkforce

Pay bill as % RDEL (trend)

Pay bill as % of RDEL (2% headline & 1%w orkforce)

…and a 2% target for pay settlements.

• macro stability: headline settlements in line with 2 % CPI target

• value for money: taking into account historic and private sector benchmarks

• affordability: paybill growth consistent with likely range of DEL settlements


IIe. Further streamlining PSAs in CSR07

• Reducing the number of PSAs from 110 to 30

• Focusing PSAs on cross-Departmental outcomes

• Emphasising consultation with the delivery chain

• Reducing underlying data burdens on frontline

• Building user voice into performance management


III. UK Experience: Key advantages1. Medium-term fiscal framework limited debate about

overall level of spending and gave us 4 years to prepare for spending slowdown

2. Focus on DELs as control total empowers Departments to act as “mini Treasuries”

3. 3 year budgeting horizon allows scope for greater ambition on both outcomes and efficiency

4. Outcome-focused performance management frees up Departments to find most cost-effective route to deliver

5. Budgetary discipline reinforced by not having a Spending Review every year!


UK Experience: Key challenges1. Building a collective sense of priorities - but had

the advantage in CSR007 of Manifesto commitments, revealed preference of history and common sense.

2. Ministers’ sensitivity to accusation of “cuts in public services”

3. Moving beyond incrementalism and digging into Departments’ baseline budgets

4. Unpacking the “black box” that links spending – inputs – outputs – outcomes

5. Creeping return of input targets – spending as a share of GDP, spending per pupil, numbers of policemen


UK Experience: Lessons for Italy (I)1. Start with a top-down, medium-term constraint –

critical to keep the discussion focused on priorities and trade-offs

2. Personalise that constraint to those expected to make decisions – stop Departments from “gaming” the system by telling them the answer from the start

3. Create a sense that change is inevitable – “long-term challenges” were an attempt to create a sense of urgency during a period of relative fiscal plenty

4. Use intuition to focus central efforts early – zero-based reviews covered 20% of spending where we expected to be able to find substantial savings

5. Get Departments to take responsibility for tough choices – require them to nominate programmes for review and agree them with Treasury not the other way around


UK Experience: Lessons for Italy (II)6. Benchmark Departments against each other – identify

top-performers early & challenge others to match their ambition

7. Don’t be too ambitious – difficult to imagine how any large organisation can shrink by more than 15-20% over 3 years

8. Use Ministers’ discount factors to your advantage – offer them cash in Year 1 for ambitious savings in Years 2 and 3

9. Use the data you have – don’t wait for the perfect information system to set Departments’ performance or savings targets

10. Accept that spending outcomes relationship will always be a “gray box” – beware of utopian ideal of “integrated” financial and performance management

general expenditure policy spending reviews in the uk richard hughes hm treasury 29 march 2007

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