Managing public spending

Departments manage their resources in various ways. They can spend directly, fund and oversee public bodies, provide discretionary grants or procure services from third parties. Each approach has different implications for spending, governance and accountability.

While most departments have a dominant resource management model, their spending is often allocated through multiple channels. All departments directly manage their core central government functions (for example, ministerial support), but some also manage large delivery operations. Other departments pass most of their resources to public bodies (although the number of public bodies has continued to fall) or allocate system and grant funding, which can be formula-based or competitive. Markets and contracting is not the dominant model for delivering public services at any department, although more data is needed to fully understand the scope and quality of outsourced public services.

Across Whitehall, departments manage resources in markedly different ways

Chart how government departments manage their planned 'day-to-day' spending budgets

There are several ways in which departments channel resources to meet their objectives:

  • direct management: full control over how resources are deployed. Includes costs, such as staff pay and pensions, that are line-managed within the department
  • oversight of public bodies: funding and overseeing arm’s-length organisations, which have varying degrees of independence
  • system and grant funding: making payments to individuals or organisations that are independent of central government, such as local authorities
  • markets and contracting: procuring or commissioning work from third parties, which then deliver services to the public on behalf of the government.

Every department has a dominant resource management model. For example, the Ministry of Justice (MoJ) manages 59% of its Resource DEL spending directly, while 74% of the budget of the Department for Digital, Culture, Media and Sport (DCMS) goes to public bodies such as museums and galleries. Most departments also have secondary channels through which they deploy resources, with 36% of MoJ’s budget spent on services that are contracted to third parties (e.g. some prisons, legal aid), and 20% of DCMS’s budget spent on grants (e.g. those made by the Office for Civil Society).

Eight departments manage more than half of their resources directly

Chart directly managed spending as a percentage of planned 'day-to'day' departmental budgets

Directly managed Resource DEL spending can be broken down into administration budgets and programme spending.

Administration budgets cover the cost of running core central government functions within departments, like providing support to ministers and corresponding with Parliament. All departments dedicate at least a part of their budget to administration, although this is a relatively small percentage of total spending in most cases. The exceptions are departments that focus mainly on policy or cross-government co-ordination, like the Department for Exiting the European Union (DExEU), the Treasury (HMT) and the Cabinet Office (CO). At DExEU, administration spending made up the entire £23m budget in 2016/17.

Departments can also directly manage their spending on policies and programmes, and several have large operational delivery functions. HMRC administers the tax system and directly employs tax officers, and DWP is similarly responsible for running job centres. The armed forces budget is controlled by MoD, which also employs a large civilian workforce, and MoJ runs prisons and courts (via HM Prison and Probation Service and HM Courts and Tribunals Service, agencies that are directly line-managed by MoJ). These four departments are also the ones that have the largest workforces. Even ‘direct management’ does not mean that ministers have a completely free hand; statutes and other checks and balances constrain what can be done.

The classification of public bodies is complex, but overall numbers are falling

Most departments pass on some of their resources to public bodies that they do not directly manage. Some of these have their objectives set by departments, while others have greater independence.

Chart types of public body overseen by government departments

There are many different classifications that government uses for public bodies, including executive agencies, non-ministerial departments and various types of non-departmental public body (NDPB).[1] In theory, these categories should indicate an organisation’s governance model and functions; in practice, the way organisations have been classified has often confused rather than clarified the landscape of public bodies (for example, some organisations are given multiple classifications).[2] The Institute for Government argued in 2010 that the Government should ‘implement a new, simpler taxonomy’, where ‘organisational form relates clearly to the function an ALB [arm’s-length body] performs’, removing the non-ministerial department classification and treating advisory NDPBs as expert committees with no independent legal existence.[3]

The Cabinet Office has recently taken its own steps to standardise the classification of public bodies, publishing guidance to departments in 2016. New organisations will no longer be given multiple classifications, no new tribunal NDPBs will be created, and the classifications of some existing public bodies have been reviewed. However, the Government has conceded that further reviews of public bodies may be delayed by uncertainty surrounding Brexit, despite several inconsistencies remaining in the way public bodies are classified and reported.[4]

Chart number and type of public body by deparment

The department that currently oversees the most public bodies with executive functions is DCMS, which sponsors 30 executive NDPBs (for example, the Natural History Museum, Arts Council England and UK Sport), as well as a non-ministerial department (the National Archives). The departments for Business, Energy and Industrial Strategy (BEIS) and Environment, Food and Rural Affairs (Defra) also oversee a considerable number of public bodies with executive or tribunal functions, such as the Nuclear Decommissioning Authority and the Environment Agency, respectively.

MoJ oversees the most public bodies overall – 77. This includes 44 Advisory Committees on Justices of the Peace. In 2016, 132 Independent Monitoring Boards for prisons, immigration removal centres, and short-term holding rooms were also counted as NDPBs overseen by MoJ, but these are no longer classified as public bodies.

Chart government funding provided to public bodies

Funding for public bodies, however, is concentrated at DH, largely due to NHS England’s considerable budget, which was over £104bn in 2016/17. This made up over three quarters of the government funding provided to public bodies, and 13.5% of the Government’s total managed expenditure.

Chart number of non-departmental public bodies

The number of NDPBs – the only type of body for which a long-run data series is available – has fallen considerably in recent decades, from 2,167 in 1979 to 245 in 2017, with the particularly large reduction between 2016 and 2017 being due to the declassification of Independent Monitoring Boards as NDPBs. Governments often promise a ‘bonfire of the quangos’ to reduce the number of public bodies, which can be perceived as unaccountable.

As Britain leaves the EU, it is likely that additional functions will need to be performed by public bodies in the UK. The extent to which this happens will depend on the nature of any eventual deal agreed with the EU. If the UK leaves any EU regulatory frameworks, then the functions performed by relevant EU regulators – such as the European Food Safety Authority, European Medicines Agency or European Aviation Safety Authority – will need to be re-established within the UK’s government machinery. The Government has already confirmed that one new organisation will be created – the Trade Remedies Authority – in the Trade Bill 2017–19, and it is possible that further changes will be announced. However, the Government has indicated that it will seek to ‘minimise disruption and costs’, and that of the EU regulatory functions that are transferred back to the UK, ‘almost all of these will be absorbed into existing government organisations’.[5] It is also possible that the UK and EU will agree on a final deal that retains UK membership of certain regulatory frameworks, reducing the amount of additional functions that public bodies in the UK would need to perform.

Formula-based grants at DfE, DCLG and HO are worth £77bn, while other departments use competed grants

Departments can achieve their aims by providing or awarding grants to organisations or individuals, or by providing resources to a set of bodies in the wider public sector that they do not oversee directly. For five departments – Education (DfE), Communities and Local Government (DCLG), the Home Office (HO), International Development (DfID) and the Foreign Office (FCO) – system and grant funding makes up more than half of their Resource DEL budget.

  • DfE provides the dedicated schools grant to local authorities (via the Education and Skills Funding Agency). This is ring-fenced funding for local authority-run schools.
  • DCLG provides the revenue support grant to local authorities. This is used to fund non-ring-fenced local services, such as waste collection and libraries.
  • HO provides police grants to Police and Crime Commissioners.
  • DfID provides grants to organisations and projects that promote international development.
  • FCO provides grants to international organisations, and to promote peacekeeping and conflict prevention.

Some departments use other components of their budget for grants; for example, BEIS spends a large part of its Capital DEL budget on research and development grants (via research councils).

Chart system and grant funding as a percentage of total managed expenditure

Departments approach system and grant funding in different ways. DfE, HO and DCLG use formula-based grants to fund schools, police forces and local authorities. Once established, these types of grant can help remove the politics from routine budget allocations. However, funding formulas are difficult to reform, because changes can often result in winners and losers. Since the 2017 election, plans to reform police funding and local authority funding have been abandoned, and opposition to the proposed new funding formula for schools has led the Government to make changes to the policy (in the form of a more generous offer).[6]

‘Competed’ grants involve multiple organisations submitting applications for funding, which are assessed against published criteria. This includes the £1.63bn awarded by DCLG via the Local Growth Fund, and the £813m of innovation grants awarded by BEIS for ‘the commercialisation of research and development’ and to support the Government’s industrial strategy. Other types of grant include those for which there is no competition, such as DfT’s funding for Transport for London, and criteria-based schemes such as BEIS’s Renewable Heat Incentive, which encourages the use of renewable energy. DfID publishes data on its official development assistance (ODA) grants to standards set by the International Aid Transparency Initiative, but does not currently record whether these are competed by applicants.

The National Audit Office found in 2014 that Government has ‘no central good practice guidance and limited central data’ on grants, which prevents departments from implementing more effective programmes.[7] Since then, government grant data has improved, with a commitment to make better data available as part of the Open Government Partnership National Action Plan, and the launch of the Government Grants Information System to standardise the recording of information.[8] But government could further improve the information available, for example by recording whether overseas aid grants are competed, extending the use of the respected 360Giving standard for grants data, and better distinguishing between different types of grant recipient.[9]

Better data is needed to understand the benefits – and risks – of outsourced public services

Whitehall can directly procure or commission others to deliver public services on the Government’s behalf, although this is not the dominant resource management model in any department. The use of markets and contracts for Resource DEL spending is most prevalent at:

  • DfE, where academies account for 30% of spending
  • MoJ, where contracting and commissioning by HM Prison and Probation Service accounts for 17% of spending, and legal aid services for 19% of spending
  • DWP, where 10% of spending is on outsourced employment programmes or health and disability assessments
  • MoD, where 6% of spending is on service concession arrangements with third parties, including contracts to provide air-to-air refuelling capabilities and defence telecommunications systems.

There is no centrally collected data outlining the scope, cost and quality of contracted public services across government. Nonetheless, we know that Whitehall departments account for only a portion of outsourced service delivery, which can also happen further downstream after departments have provided funds to public bodies (for example, the purchasing of services from GPs by the NHS) or local authorities.

Wider government contracting includes back-office outsourcing by departments and the purchase of goods they use in the delivery of public services (e.g. paper, energy), as well as privately run public services. In 2015/16, £192bn was spent by government on goods and services, of which £70bn was spent by local government, £65bn by the NHS and £9bn by public corporations, with central government departments and other public bodies accounting for the remaining £49bn.[10] While some contract data is published, the Institute for Government and Spend Network have previously highlighted gaps in transparency – including on contractual terms, performance and the supply chains of third-party service providers.[11] The Information Commissioner has said that the public should have the same right to know about public services whether the service is provided directly by government or by an outsourced provider.[12]

The National Audit Office has noted that contracting out public services can ‘significantly reduce costs and help to improve public services’.[13] However, these benefits are not always realised, and when contracts are not properly designed or monitored, costs can escalate and the quality of public services can deteriorate. In 2016, the Public Accounts Committee concluded that the outsourcing of health disability assessments at DWP had resulted in claimants ‘not receiving an acceptable level of service from contractors’, while costs per assessment had increased significantly.[14] Similarly, in 2013 MoJ found that it had been overbilled in relation to contracts worth £722m.[15]

High-profile failings in outsourcing have led the Government to focus on improving the management of commercial relationships. A new Government Commercial Function has been established to improve the commercial capabilities of the civil service, and a chief commercial officer appointed to lead this effort. While the recent reforms have shown early promise, their long-term success will depend on the focus being sustained, and on whether ministers and other civil servants heed the advice of commercial experts.16 The collapse of Carillion highlights many of the existing issues, and should encourage a renewed focus on solving them.