Public Finance and Public Policy

Critically analyze how successful the British government’s use of Spending Reviews has been as a way of making government more “strategic”

Governments around the world every year are trusted with the task of efficiently and effectively managing taxpayers money. It is their responsibility to fairly allocate resources and stabilise the macro-economy with an overall aim to improve human wellbeing. One such process to allocate resources in the UK is called the Spending Review (SR). SRs were introduced in the UK when the New Labour government came to power in 1997. “They set firm and fixed budgets and departments then decide how to manage those budgets” (HM-Treasury). The UK enjoyed a period of economic growth from this time, whilst more recently has experienced a period of austerity, which resulted from the 2007 financial crisis. This essay aims to critically analyse whether SRs and other financial planning processes are a way of making government more “strategic”.
This first section of this essay will outline why Labour thought it necessary to make reforms and introduce the multi-year SR budgeting programme. The second section will discuss whether such reforms helped to make government more strategic through the period of economic growth (1998-2007) and then through the period of austerity (2008-Present). My opinions, ideas and conclusions throughout will draw from a variety of public government data such as Public Expenditure Statistical Analysis (PESA), HM-Treasury archives, personal accounts, blogs and online news articles.

Pre 1997 - The Public Expenditure System

The old spending system was known as the Public Expenditure Survey. Based around a total expenditure figure know as the ‘control total’, the system was central in planning and controlling public expenditure running up to 1998. Surveys took the form of a series of bilateral negotiations between the Treasury and each spending department. As outlined by John Major it was a marathon exercise. “There was not simply the period of negotiation in September and October, but a continuous one” (Thain and Wright, 1992, pp6). Firstly this made it difficult for the government to make strategic decisions on the overall level of public spending and on the priorities within the total. Secondly the system was not divided into current and capital spending meaning that, if budgets were tight, departments might were tempted to cut back on investment to meet more pressing needs such as public sector workers’ wages. Thirdly if departments did not spend their per-year allocated money, they were not able to carry it forward which understandably led to inefficient end of year surges (Crawford et al, 2009). An anecdotal account from a relative working in an education department in 1997 recalls, “We became creative in our accounting methods so surplus monies from one year’s budget were able to be legitimately carried into the next. This was often achieved by billing in one year for staffing in the next” (Greenwell, 2012).

1998 Comprehensive Spending Review

In 1998 Labour undertook a Comprehensive Spending Review (CSR) to decide future spending commitments and to implement the key spending reforms. Gordon Brown the Chancellor of Exchequer summarised, ‘The first innovation of the Comprehensive Spending Review is to move from the short-termism of the annual cycle and to draw up public expenditure plans not on a one year basis but on a three year basis . . . the review 's second conclusion is that all new resources should be conditional on the implementation of essential reforms, money but only in return for modernisation.’ (Brown, 1998). The key reforms included; the implementation of a fiscal strategy, the separation of Total Management Expenditure (TME) into Department Expenditure Limits (DEL) and Annually Managed Expenditure (AME), the introduction of 3-year Spending Reviews (SR) and the introduction of Public Service Agreements (PSA).

Their fiscal strategy was based on five key principles as laid out in the government’s Code for Fiscal Stability 1998 – “transparency, stability, responsibility, fairness and efficiency”. These principles were in turn implemented through observance of two fundamental rules. The ‘Golden Rule’ stipulating that government would borrow only to invest and not to fund current spending, and the ‘Sustainable Investment rule’ which held that public sector net debt would be maintained below 40% of GDP and that the deficit not fall below 3%. Public sector spending frameworks were subsequently tailored in order to adhere to these targets (Politics.co.uk, 2012).

In regards to the budget, Departmental Expenditure Limits (DEL) would cover the spending government could control while Annually Managed Expenditure (AME) were funds driven by demand such as benefit payments and debt interest. DEL was further split into capital and resource spending removing the ability to switch monies between these budgets.

Spending Reviews were set to be held regularly every 3 years and would be the starting point for decisions on the allocation of resources to different departments. Essentially they would contain qualitative information and set the basis for performance and efficiency targets found within Public Service Agreements.

Public Service Agreements were also negotiated every three years. Initially they set out aims, objectives, targets and named responsibilities through a top down structure. As they evolved through the years of the Labour government additional factors wee included such as “floor” targets and “standards” for performance targets (Noman, 2008). The details of the PSAs were reached after negotiations between ministers, departmental heads and experts in the field but it was recognised that the PSAs alone did not have any legal standing.
It is apparent when analysing spending reviews attention must also paid to these reforms. With this in mind the second part of my essay will critically analyse if the four key reforms made were effective in helping government to become more strategic in their activities and decision-making. When analysing on a departmental basis I will focus on Education and Health.

Strategy 1998-2007

So what is strategy in the context of this essay? As defined by Colin Talbot, government strategy falls into two categories, Fiscal Strategy and Spending Strategy. Fiscal strategy refers to the overall level of spending, taxation and borrowing, while Spending Strategy relates to the money allocation between departments, policies, current and capital budgets (Talbot, 2012).

As previously outlined Labour’s fiscal strategy was to abide by the Golden Rule, ensure public sector net debt is maintained below 40% of GDP and that the deficit does not fall below 3%.
Examining data from PESA, 2012 it is clear that Labour followed through with their strategy over the next 8 years (HM-Treasury, 2012). They significantly reduced public debt. The benefits were such that tax receipts outweighed public expenditure due to a reduction in debt interest payments between 1997 and 2000. The below graphs illustrates these two time points with the two arrows on the second chart outlining the period government held a positive account balance.

These outcomes are extremely positive, but are we able to say this resulted from the four key reforms or because reducing debt was relatively simple to achieve in the growth period? This is a difficult question to answer, which outlines a key issue with the analysis of the spending review process. There were so many different objectives, goals, aims and targets that it is very difficult to source from where positive or negative outcomes stem. Therefore looking into the spending strategy through the period of 1997 to 2007 may help to evaluate spending reviews and their consequent reforms more thoroughly.

Labour decided to focus their public spending primarily on two key departments, Education and Healthcare. As outlined in the 1998 Comprehensive Spending Review, “rigorous selection of priorities over the next three years will enable significant additional resources to be reallocated to education and health”. More specifically ‘Education will be our number one priority, and we will increase the share of national income spent on education as we decrease it on the bills of economic and social failure’. In regards to their plans for healthcare ‘we will rebuild the NHS, reducing spending on administration and increasing spending on patient care’ (Labour Party Manifesto, 1997

With this in mind Labour specifically set out to increase spending by 5% and 4.75% a year above inflation until 2002 respectively for Education and Healthcare.

Subsequent spending review target figures varied. Education and Health care respectively became 5.4% and 6.1% in 2000, 6% and 7.3% in 2002 and 4.4% and 7.1% in 2004 (CSR, 2000, 2002, 2004). This resulted in an average target between the period of 1998 to 2007 of 5.1% for Education and 6.43% for Healthcare.

Targets vs. Actual Data 1998-2007

Observing the data found in 2012 PESA we can clearly see on the below two charts that Labour did increase spending dramatically in Education and Healthcare, two fold in fact.

Furthermore, the below table presents actual real increases in spending per department until the year 2008 and 2011.

From comparing the targets to the actual spending increases, the first point to note is that after two years Labour decided to prioritise Healthcare over Education. In the SR 2000 they revised the target expenditure figures to 5.4% and 6.1% for Education and Healthcare. This highlights a flaw in the SR system; there is no legal obligation in place to hold a government to promises. However whilst the system must allow for change to accommodate different economic environments, ultimately the electorate will express their opinion by not voting a party back into power.

A second comparison I made using the data in Fig.6 is between the average yearly spending growth targets and the actual yearly growth for the two departments. For Healthcare, the target and actual amount between the years of 1997 and 2007 match at 6.3%. However Education differs markedly. The actual growth over the same years was 4.3% on average, whereas their target was 5.1%. This outlines the extent of the deviation from original promise of prioritising education.

So did the PSAs prove to be a good and useful way of spending public money strategically? Some of the performance targets for the PSA 1997 Education were to increase the proportion of 11 year olds meeting literacy standards from 63%to 80% by 2002 and in numeracy from 62% to 75% and to increase those aged 16 who achieve five or more GCSE’s from 45% to 50% (CSR, 1998).
In the SR 2004 Gordon Brown was able to confidently explain their strategy was working “over the past seven years the proportion of 11 year olds achieving expected levels of literacy and numeracy has risen by 12% and 11% respectively and almost 53% of 16 year olds achieved five or more A* to C grades in 2003 compared to 45% in 1997” (Brown, 2004)
Clearly the benefits were acknowledged to be that having measurable outcomes through performance targets was useful for initiating changes and this in turn improved an organisation’s efficiency and effectiveness.
However by 2007 whilst retaining the system of Spending Reviews, an overhaul of PSA target implementation was needed if they were to be ‘fit for purpose’. In a report from The National Audit Office to the Treasury Select Committee in 2007 detailed the system was too top-down and unwieldy e.g. 14 PSA targets for Health translated into 206 targets and measures for the NHS to implement. The data measurement infrastructure was inadequate resulting in time delays in producing useful and usable data (www.parliment.co.uk, 2007).
With so many targets and measureable criteria in place, which were often made by those far removed from their delivery, a distorted and malleable practice was possible whereby outcomes could be manipulated into achieving targets. This criticism was levelled at education when the numbers of core subjects increased some say to fit into target of 5 A to C grades.
Post-2007 Strategy

Continuing my strategic analysis for the years following 2007, the below chart outlines how Labour failed to maintain Net Public debt below 40% below GDP from 2007 onwards.

The extent of their deviation from the strategy is huge. However this can largely be put down to the global recession resulting from the 2008 financial crisis. More specifically the UK suffered a period of economic decline in 2009 of -0.4% of GDP (Trading Economics, 2012). Over the economic business cycle as discussed earlier, money allocated to the Annually Managed Expenditure pot would decrease to accommodate for unemployment benefits. The extent of this process at this time was so large that government had to borrow more to meet its financial obligations.

In regards to the spending strategy, at this time you would think that the government would perhaps revert to spending less. However basic Keynesian economic theory states that “in the midst of an economic depression, the correct course of action is to encourage spending and discourage saving” to kick start the economy back into growth (Keynes, 2012). Fig.1 outlines spending in education and healthcare in this period.

More specifically the SR targets of 2007 were 2.8% and 4.7%. Referring back to Fig.6 the Labour government increased average yearly spending in Education and Healthcare by 2.4% and 3.7% respectively showing that the targets were not met. Arguably based on economic theory these should have been exceeded, outlining the rigid nature of the spending system. Regardless, the public by 2010 had grown tired of the Labour government. Change was needed.

The Coalition The Coalition Government have now brought in measures in an attempt to bring debt under control – they have retained the Spending Review strategy although extended the review process by a year. They have abolished PSA’s, with much criticism of the dedication to ‘targetry’ by Labour these being replaced with Departmental Business Plans (DBP). However are they PSAs by another name and has this been a tinkering exercise? Colin Talbot undertook a counting exercise in 2012 and whilst acknowledging it was not quite comparing like for like he found under New Labour, departments had 95 targets, but under the coalition this has jumped to an average of 453 for the past two years. Education under New Labour had 6 targets and Health had 3 – these are now sitting at 25 and 33 targets respectively. It is accepted that the Coalition is measuring different outcomes and they are going to argue that they have been more strategic and focussed and their targets are a more meaningful accounting of spending public money – but a target is a target.

Conclusion

In conclusion has the use of spending reviews helped government to become more strategic?

Given that both Labour and the Coalition have used spending reviews and in their own ways linked spending to performance through the use of PSAs and now DBPs, it could be seen as an endorsement of this strategy, even if both parties argue against the other’s implementation. Such a system has allowed government to strategically align performance with overall spending and for the most part hold fiscal stability over the medium term. Labour did lose sight of its own fiscal rules in the latter part of its term in office resulting in the UK economy becoming more vulnerable to the recession.
To date the UK is seen as an investment haven in comparison to other European countries proven by all time low government bond yields. This recognises one success of our government’s navigation through the recent financial crisis and spending strategy.
Spending Review are a tried and tested process of allocating public money and have as demonstrated proved to be a strategic tool for both parties to a greater or lesser extent. However any robust system needs to have an inbuilt adaptability and inherent flexibility to be able to deal with the economic volatilities of the future.

Word Count: 2576
Word Count (with references): 2731

References
Brown,1998. Parliament speech. [Online: http://www.publications.parliament.uk/pa/cm199798/cmhansrd/vo980714/debtext/80714-05.htm

Brown, 2004. Spending Review-2004. [Online: http://www.hm-treasury.gov.uk/d/pbr08_finalefficiency_612.pdf]

Chote, Crawford, Emmerson, Tetlow, 2010. Public Spending Under Labour. Institute of Fiscal Studies.

Comprehensive Spending Review, 1998. A Comprehensive Review of Government Policies and Spending. Chapter 1. [Online: http://archive.treasury.gov.uk/pub/html/csr/401102.htm]

Crawford, Emmerson, Tetlow, 2009.A Survey of Public Spending in the UK. Institute for Fiscal Studies

Greenwell.S, 2012. Relative. Previous position: Operational Manager - Education Welfare. Private meeting: 05.012013

HM-Treasury, 2012. Treasury Budgets.[Online: http://www.ukpublicspending.co.uk/budget_ukgs.php

HM-Treasury, 2012. Public Spending and Reporting.[Online: http://www.hm-treasury.gov.uk/spend_spendingreview_introduction.htm

Keynes, www.maynardkeynes.org, 2012.[Online: http://www.maynardkeynes.org/maynard-keynes-economics.html]

Labour Party Manifesto, 1997. New Labour-Britain deserves better.[Online: http://www.politicsresources.net/area/uk/man/lab97.htm]

Noman.Z, 2008 Performance Budgeting in the UK. OECD JOURNAL ON BUDGETING.

Politics, 2012. Public Spending. [Online: http://www.politics.co.uk/reference/public-spending

Talbot, C, 2012. Public Finance and Public Policy (BMAN30171)Lecture 7.

Talbot, 2012. Targets? What Targets? [Online: http://whitehallwatch.org/2012/08/20/targets-what-targets-change-and-continuity-in-the-performance-regime-in-whitehall/]

Thain and Wright, 1992. Planning and controlling public Expenditure in the UK. Public Administration Vol. 70 PP.

Trading Economics, 2012. GDP Date.[Online: http://www.tradingeconomics.com/united-kingdom/gdp-growth]

References: Brown,1998. Parliament speech. [Online: http://www.publications.parliament.uk/pa/cm199798/cmhansrd/vo980714/debtext/80714-05.htm Brown, 2004 Chote, Crawford, Emmerson, Tetlow, 2010. Public Spending Under Labour. Institute of Fiscal Studies. Comprehensive Spending Review, 1998 Crawford, Emmerson, Tetlow, 2009.A Survey of Public Spending in the UK. Institute for Fiscal Studies Greenwell.S, 2012 HM-Treasury, 2012. Treasury Budgets.[Online: http://www.ukpublicspending.co.uk/budget_ukgs.php HM-Treasury, 2012 Keynes, www.maynardkeynes.org, 2012.[Online: http://www.maynardkeynes.org/maynard-keynes-economics.html] Labour Party Manifesto, 1997 Noman.Z, 2008 Performance Budgeting in the UK. OECD JOURNAL ON BUDGETING. Politics, 2012 Talbot, C, 2012. Public Finance and Public Policy (BMAN30171)Lecture 7. Talbot, 2012. Targets? What Targets? [Online: http://whitehallwatch.org/2012/08/20/targets-what-targets-change-and-continuity-in-the-performance-regime-in-whitehall/] Thain and Wright, 1992 Trading Economics, 2012. GDP Date.[Online: http://www.tradingeconomics.com/united-kingdom/gdp-growth]