Spending Reviews in the UK

1. Spending Reviews in the UK Richard Hughes HM Treasury 29 March 2007

2. Spending Reviews in the UK: Outline • Key Features of UK Spending Reviews • Some Recent Innovations in CSR07 • Lessons from UK Experience for Italy

3. Key Features of UK Spending Reviews • Medium-term fiscal rules and top-down spending limits • Department-centred spending control • Fixed multi-annual Departmental budgets • Bottom-up Departmental bidding process • Outcome-focused performance management

4. 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)

5. The Golden Rule and Current Spending

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

7. 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 Annually Managed Expenditure = £239bn • Departmental Expenditure Limits (DEL) • c. 60% of total spending • 3-year fixed Departmental budgets • End-year flexibility for underspends Departmental Expenditure Limits = £344bn

8. Ic. The Spending Review Cycle 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 SR2004 July 04 plans set for Year 1 Year 2 Year 3 CSR 2007 Oct 07 plans set for Year 1 Year 2 Year 3

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. Parliamentary Estimates Annual 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

17. Ie. Public Service Agreements (PSAs) 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. Comprehensive Spending Review 1998 CSR98 Spending Review2000 SR00 SpendingReview2002 SR02 Spending Review 2004 SR04 600 targets 160 targets 130 targets 110targets

18. II. Some Recent Innovations in CSR07 • Fiscal consolidation as an (implicit) objective • Long-term challenges and policy reviews • “Early” spending settlements • Comprehensive value for money programme • Further streamlining of PSA targets

19. IIa. Delivering fiscal consolidation

20. IIb. Long-term challenges and policy reviews

21. 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

22. IIc. Value for money: A comprehensive approach…

23. …with a single global target of 3% savings per year… Projected DEL pressures Pressures are running at ~4.5% real, also ~ the trend rate of DEL growth since 2000 Gap: £30bn or >3% nominal pa Projected DEL spend Unfunded Pressures Estimated CSR DEL envelope (1.5% AARG) 07-08 baseline CSR07 SR04

24. …a 5% annual real cut in administration… £1bn

25. …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

26. 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

27. III. UK Experience: Key advantages • Medium-term fiscal framework limited debate about overall level of spending and gave us 4 years to prepare for spending slowdown • Focus on DELs as control total empowers Departments to act as “mini Treasuries” • 3 year budgeting horizon allows scope for greater ambition on both outcomes and efficiency • Outcome-focused performance management frees up Departments to find most cost-effective route to deliver • Budgetary discipline reinforced by not having a Spending Review every year!

28. UK Experience: Key challenges • Building a collective sense of priorities - but had the advantage in CSR007 of Manifesto commitments, revealed preference of history and common sense. • Ministers’ sensitivity to accusation of “cuts in public services” • Moving beyond incrementalism and digging into Departments’ baseline budgets • Unpacking the “black box” that links spending – inputs – outputs – outcomes • Creeping return of input targets – spending as a share of GDP, spending per pupil, numbers of policemen

29. UK Experience: Lessons for Italy (I) • Start with a top-down, medium-term constraint – critical to keep the discussion focused on priorities and trade-offs • Personalise that constraint to those expected to make decisions – stop Departments from “gaming” the system by telling them the answer from the start • 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 • Use intuition to focus central efforts early – zero-based reviews covered 20% of spending where we expected to be able to find substantial savings • 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

30. UK Experience: Lessons for Italy (II) • Benchmark Departments against each other – identify top-performers early & challenge others to match their ambition • Don’t be too ambitious – difficult to imagine how any large organisation can shrink by more than 15-20% over 3 years • Use Ministers’ discount factors to your advantage – offer them cash in Year 1 for ambitious savings in Years 2 and 3 • Use the data you have – don’t wait for the perfect information system to set Departments’ performance or savings targets • Accept that spending outcomes relationship will always be a “gray box” – beware of utopian ideal of “integrated” financial and performance management