Transcript Spending Review

Spending Reviews in the UK
Richard Hughes
HM Treasury
29 March 2007
General expenditure policy
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
General expenditure policy
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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
General expenditure policy
3
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)
General expenditure policy
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The Golden Rule and Current Spending
Current Receipts % of GDP
Surplus on the Current Budget
41%
3.0%
Average current surplus from 1997-98
2.5%
40%
Average current surplus from 2006-07
2.0%
% of GDP
% of GDP
Current Surplus % of GDP
1.5%
39%
38%
Current Receipts % of GDP
37%
1.0%
0.5%
0.0%
-0.5%
-1.0%
36%
-1.5%
-2.0%
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35%
Current Receipts vs. Current Spending (% of GDP)
Current Spending
41%
6%
Current Spending real growth (LHS)
40%
40%
Real Growth %
% of GDP
39%
38%
Current Receipts % of GDP
37%
Current Spending % of GDP (RHS)
5%
39%
4%
38%
3%
37%
2%
36%
1%
35%
0%
34%
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General expenditure policy
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36%
5
33%
% of GDP
Current Spending % of GDP (RHS)
Sustainable Investment Rule & Capital Spending
Public Sector Net Debt as % of GDP
46%
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…
44%
42%
% of GDP
40%
38%
36%
34%
32%
30%
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28%
Capital Spending
20%
3.0%
40.85%
2.5%
15%
2.0%
1.5%
1.0%
5%
0.5%
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0%
% of GDP
Real Growth %
10%
…which implies a big slowdown
in investment growth following
a period of rapid “catch-up”
-0.5%
-5%
Year-on-year real capital growth (LHS)
-1.0%
Net Investment as % of GDP (RHS)
-10%
General expenditure policy
-1.5%
6
Ib. Department-centred spending control
Annually Managed Expenditure
Annually Managed Expenditure (AME)
AME margin
Public corps
Debt interest
Net EU payments
•
c.40% of total spending
•
Volatile or demand-led expenditure
•
Managed centrally on an annual basis
Pensions
Other
Social security
benefits
Non-cash items
= £239bn
Student loans
Tax credits
BBC
Departmental Expenditure Limits
Other
Departmental Expenditure Limits (DEL)
Reserve
•
c. 60% of total spending
•
3-year fixed Departmental budgets
•
End-year flexibility for underspends
Scot, Wales & NI
Health
Chx's Depts
Work & Pensions
= £344bn
International
Development
Trade & Industry
Education
Defence
Home Office
Local Govt
DCLG Transport
General expenditure
policy
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Ic.The Spending Review Cycle
SR2004
July 04
plans
set for
2004-05
Year 1
2005-06
Year 2
2006-07
Year 3
2007-08
2008-09
2009-10
2010-11
CSR 2007
Oct 07
plans set
for
General expenditure policy
Year 1
Year 2
Year 3
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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
General expenditure policy
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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
General expenditure policy
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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
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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
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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
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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
General expenditure policy
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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 PreBudget Reports
Fiscal prudence to deal with major contingencies on expenditure
and revenue side
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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
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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
Spending
Review
2000
Spending
Review
2002
Spending
Review
2004
CSR98
SR00
SR02
SR04
600 targets
160 targets
130 targets
110 targets
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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
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IIa. Delivering fiscal consolidation
Total Managed Expenditure (TME)
6%
Year-on-year TME growth (LHS)
43%
TME % of GDP (RHS)
42%
5%
41%
40%
3%
39%
2%
38%
37%
1%
36%
0%
35%
General expenditure policy
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34%
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% of GDP
Real Growth %
4%
IIb. Long-term challenges and policy reviews
Trend
Challenge
Policy review
Increased importance of investment in
skills and transport
Leitch on skills
Eddington on transport
Increased importance of sub-national
economies
Subnational growth
Barker 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 change
Energy Review
Global uncertainty
Security at home and abroad
Counter terrorism & security
Devolved decisionmaking
Empowering local communities
Third Sector
Lyons on local govt finance
Global economic
integration and
technological change
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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
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IIc.Value for money: A comprehensive approach…
Zero-based reviews
Operational efficiencies
Polices & programmes
Processes
Focus
Department
by
Department
Input costs
Procurement
Programmes
Corporate services
Organisations
Productive time
Systemic issues
Transactions
CrossCross-cutting policy
Departmental reviews
General expenditure policy
Varney Review of service
transformation
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…with a single global target of 3% savings per year…
Total near cash resource DEL £bn (excludes Barnett)
320
Projected DEL pressures
300
Pressures are running at ~4.5% real,
280
Gap: £30bn or
>3% nominal pa
also ~ the trend rate of DEL growth since
2000
Projected DEL spend
Estimated CSR DEL
envelope (1.5% AARG)
260
240
07-08 baseline
CSR07
SR04
220
200
2004-05
2005-06
General expenditure policy
2006-07
2007-08
2008-09
2009-10
2010-11
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…a 5% annual real cut in administration…
Admininstration Budgets
15,200
3.5%
15,000
3.0%
£1bn
2.5%
14,600
£m
14,400
2.0%
14,200
1.5%
14,000
13,800
1.0%
13,600
0.5%
13,400
13,200
0.0%
2004-05
2005-06
2006-07
Administration Costs (LHS)
General expenditure policy
2007-08
2008-09
2009-10
2010-11
Admin as % of public spending (RHS)
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% of Public Spending
14,800
…and a 2% target for pay settlements.
250,000
71%
Pay bill
Pay bill at trend growth
• macro stability:
headline settlements in
line with 2 % CPI target
Paybill with 2% headline & 1% workforce
200,000
Pay bill as % RDEL (trend)
66%
61%
100,000
56%
50,000
51%
0
46%
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/0
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-6
20
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-7
20
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20
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20
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20
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-1
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Total Pay £m
150,000
General expenditure policy
Pay bill as % of RDEL
Pay bill as % of RDEL (2% headline & 1%
workforce)
• value for money:
taking into account
historic and private
sector benchmarks
• affordability: paybill
growth consistent with
likely range of DEL
settlements
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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
General expenditure policy
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III. UK Experience: Key advantages
1.
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!
General expenditure policy
27
UK Experience: Key challenges
1. 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
General expenditure policy
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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
General expenditure policy
29
UK Experience: Lessons for Italy (II)
6.
Benchmark Departments against each other – identify topperformers 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
30