Public spending

Departments manage their budgets in different ways. Some, like the Department for Work and Pensions (DWP) and Her Majesty’s Revenue and Customs (HMRC), manage services directly. Others sponsor public bodies, like NHS England, to do this on their behalf. Services can also be funded through grant systems, as is the case with the police, or through contracting, as happens with some prisons. Each approach has different implications for governance and accountability.

Government uses four broad models for delivering services: direct management, public bodies, grants and contracting. In deciding which approach is most appropriate in different contexts, departments must balance considerations of where accountability should lie, how much political oversight or independence from ministers is appropriate, and how to achieve the best value for money.

To manage resources effectively, government must also ensure that best practice for each approach is adopted. There are signs that this is beginning to happen; for example, the Government has taken steps to improve its management of grants, and has published guidance on how departments can establish effective relationships with their public bodies. But there is more to do elsewhere, in particular when it comes to improving the quality of contracting data, so that departments can monitor the performance of suppliers and identify risks to service delivery.

 

The way departments manage spending matters for accountability and efficiency

How departments manage their day-to-day budgets (Resource Del), 2017/18

Government departments use several approaches to manage their spending and deliver public services.

  • Direct management of public spending means departments having full control over how resources are deployed. This covers staff costs as well as spending on goods and back-office services.
  • Public bodies (otherwise known as arm’s-length bodies or sometimes quangos) are public sector organisations that receive funding from central government. They have varying degrees of day-to-day independence from ministers, but their strategic objectives are set by either government departments or Parliament.
  • Grants are payments made by departments to organisations that are independent of central government, such as local authorities, police and crime commissioners, or charities.
  • Contracting involves departments entering a contractual arrangement with a third party, such as a business or charity, which then runs or helps to run a public service on government’s behalf. Departments also use contracting to purchase goods, works and back-office services from third-party suppliers. Analysis in this chapter, however, focuses on contracting as a delivery model for public services.

At most departments, the delivery models used have been relatively stable since 2010. The most notable changes have been at:

  • the Department of Health and Social Care (DHSC), where most spending is now channelled through public bodies such as NHS England and Public Health England, rather than the health system being funded directly through grants
  • the Department for Education (DfE), where the rollout of the academies programme has resulted in more money being spent through contracting, and less through grants to local authorities
  • the Ministry of Justice (MoJ), where legal aid services are now contracted directly rather than overseen by an arm’s-length public body (the Legal Services Commission). Probation services were also contracted out in 2015, but the Government recently announced that these contracts would end early.[1]

Each approach has different implications for governance and accountability. For example, most spending on prisons is managed directly by MoJ. This means that the department and its ministers have more direct control over outcomes in prisons. The Prisons Minister, Rory Stewart, has gone as far as promising to resign if drug use and violence does not fall in 10 target prisons.[2]

In contrast, police forces are funded through a formula-based grant system, with payments from the Home Office to locally elected police and crime commissioners (or locally elected mayors in London and Greater Manchester). This means that, despite setting overall spending levels, central government has limited control over day-to-day policing activities. This approach can make accountability less clear, with Cabinet ministers and the Mayor of London appearing to blame each other for rising violent crime in the capital.[3] But it has advantages, for example, police funding per region is determined by a formula, making it less susceptible to political interference.

Having a clear picture of which different models are being used across government can also help in delivering services more effectively. By understanding where similar models are being used across different departments – for example, the use of contracting to run both disability assessments at DWP and immigration removal centres at the Home Office – the Government can more easily identify best practice and ensure that lessons learnt in one part of government are applied to other contexts where they are relevant.

 

Eight departments manage most of their resources directly

Directly managed spending as a percentage of total day-to-day (Resource Del) budgets, 2017/18

Directly managed spending can be split into two main components: administration budgets and programme spending.

Administration budgets cover core departmental functions such as finance, human resources and ministerial support. For most departments, this is a relatively small part of their total budgets, but the Department for Exiting the European Union (DExEU) and the Treasury are notable exceptions. These are two small yet powerful departments, with little direct responsibility for delivering services to the public but vital roles in co-ordinating other departments.

In contrast, several other departments spend most of their budgets on delivering government policies or public services directly (i.e. programme spending). These operational departments include:

  • the Department for International Trade (DIT), which supports UK-based companies to export, and attracts inwards investment into the UK
  • HMRC, which administers the UK’s tax system
  • The Ministry of Defence (MoD), which is responsible for the armed forces as well as a large civilian workforce
  • DWP, which runs job centres and administers the UK’s benefits system
  • MoJ, which runs prisons and courts (via HM Prison and Probation Service, and HM Courts and Tribunals Service, agencies that are managed directly by the department).

Excluding DIT, these are the four departments with the largest workforces. The fifth- largest department, the Home Office, also spends a significant part of its budget – almost £1.7bn – on directly managed services, such as the Border Force and UK Visas and Immigration.

Running one of government’s large operational departments can be particularly challenging for ministers. Reflecting on his time in Cabinet, Stephen Crabb said that “the idea that a secretary of state for DWP runs the DWP is a nonsense”, echoing comments by his predecessor Iain Duncan Smith that it took him “more than nine months to figure out how the system worked” due to the sheer scale of the department.[4]

 

The governance of public bodies is complex

Types of public body (adapted from Cabinet Office classifications)

Departments can sponsor several types of public body, which each have distinct characteristics and varying degrees of independence from ministers. These include executive agencies, non-ministerial departments and non-departmental public bodies (NDPBs).

In theory, the classification of a public body should reflect its functions and governance model, including the way its budget and strategic objectives are set. However, classification is not always consistent; a 2010 report by the Institute for Government found that this was creating a lack of clarity over public bodies’ roles and responsibilities. Since then, the Cabinet Office has published revised guidance on how public bodies should be classified, which is a welcome step. But some problems remain; there are still public bodies with multiple classifications (such as the British Council, which according to Cabinet Office data is both an NDPB and a ‘non-financial public corporation’), and there are more than a hundred organisations on the government website listed under a vague ‘other’ category, making it unclear what relationship they have with their parent departments.[5] In addition, the latest Cabinet Office data on public bodies is now almost two years out of date.[6]

 

NHS England accounts for three quarters of spending on public bodies

Government funding provided to public bodies, by department, 2016/17

NHS England – an NDPB established by the Health and Social Care Act 2012 – is by far the largest public body. In 2016/17, it received more than £100m in funding from central government – more than three quarters of all funding provided to public bodies and 13.5% of the Government’s total managed expenditure.

The size of NHS England – branded ‘the world’s biggest quango’ – means that it has a unique relationship with its parent department, DHSC. At no other department does a single public body account for so much (over 70%) of the overall budget.[7] This has made it difficult for NHS England to truly operate at arm’s length from the department and its ministers, which was the original intention of the Health and Social Care Act 2012. In the words of Jeremy Hunt, who was Health Secretary for NHS England’s first five years of existence: “People want to hold people like me, rightly, accountable, for over £100bn of public money. So there are always going to be times when the Health Secretary has to involve themselves in operational issues.” In a recent report, the Institute for Government and the King’s Fund concluded that the objective of limiting political interference and micromanagement in the NHS had not been achieved, with Hunt having been “as closely involved in the details of NHS performance and planning [as] his predecessors”.[8]

Number and type of public body by department, October 2018

Although DHSC accounts for the bulk of spending on public bodies, three other departments sponsor a larger number of public bodies with executive functions (that is, with powers to act directly on behalf of government, rather than just provide advice). These are:

  • the Department for Digital, Culture, Media and Sport (DCMS), which oversees 32 executive NDPBs (including the British Museum, National Portrait Gallery and UK Sport), two non-ministerial departments (the Charity Commission and National Archives) and an executive agency (the Royal Parks)
  • the Department for Business, Energy and Industrial Strategy (BEIS), which sponsors 21 executive public bodies, including the Competition and Markets Authority, the Nuclear Decommissioning Authority and UK Research and Innovation
  • the Department for Environment, Food and Rural Affairs (Defra), which oversees 18 executive public bodies, the largest of which is the Environment Agency.

Departments that rely heavily on public bodies to deliver services will need to establish effective working relationships with the organisations they sponsor. Guidance published by the Cabinet Office in 2017 highlights four specific aspects of the relationship that are crucial for success: clarity on the purpose and objectives of public bodies; assurance on their performance and on risks that could affect the department; a regular exchange of skills and experience between the department and its public bodies; and establishing open, constructive relationships based on trust.[9]

 

The number of public bodies has fallen

Number of non-departmental public bodies (NDPBs), 1979-2017

Governments often promise to reduce the number of public bodies, which can be perceived as costly and unaccountable.[10] Since 1979, the number of NDPBs – the only type of body for which a long-run data series is available – has fallen considerably, from more than 2,000 to just 245 in 2017.

Some of this reduction is due to classification changes; 132 Independent Monitoring Boards for prisons and immigration removal centres listed as ‘other NDPBs’ in 2016 were no longer listed in 2017. But there has also been a significant real reduction since 1979. Compared with 2009, there are now 83 fewer executive NDPBs (down 43%), eight fewer tribunal NDPBs (down 42%) and 282 fewer advisory NDPBs (down 70%).

This reflects several changes, including:

  • functions being moved in-house into departments (e.g. the National Measurement and Regulation Office’s previous functions are now performed within BEIS)
  • smaller public bodies being merged to create larger ones (e.g. in 2014, the Driving Standards Agency merged with the Vehicle and Operator Services Agency to create the Driver and Vehicle Standards Agency, under the sponsorship of the Department for Transport (DfT)
  • the Government no longer delivering things that were previously delivered by public bodies (e.g. when the UK Film Council – a DCMS public body – was closed in 2011, its functions were taken over by the British Film Institute, a charity).[11]

 

Brexit will place new demands on public bodies

Brexit will result in the UK Government taking on new functions, in areas such as trade and environmental regulation. This will have an impact on public bodies.

The creation of at least three new Brexit-related public bodies has already been confirmed. These are the Trade Remedies Authority, which will “investigate unfair trade practices and recommend actions in response”; a new environmental protection watchdog, which will “hold government to account on environmental standards”; and the Independent Monitoring Authority, which will monitor the UK’s implementation of EU citizens’ rights.[12]

Existing UK public bodies will also be affected, although the extent of the impact will partly depend on the type of deal that is agreed – or not agreed – between the UK and the EU.

UK bodies taking on new functions in the event of a 'no-deal' Brexit

Between August and November 2018, the Government published 106 ‘technical notices’ outlining what would happen in various policy areas in the event of a no-deal Brexit. Twelve of these name existing UK bodies that would take on additional functions.

The organisation most affected is the Health and Safety Executive (HSE), which would take on several new responsibilities relating to the regulation of chemicals, biocidal products and pesticides. DWP, which sponsors the HSE, is not one of the departments most often associated with Brexit. It received no additional funding to prepare for Brexit in the allocations for 2018/19, and there are nine departments with more Brexit- related workstreams.

Other public bodies affected include the Environment Agency, which would take on responsibilities relating to chemical regulation, and the Competition and Markets Authority (CMA), which would take on responsibilities relating to state aid.

While the technical notices describe what would happen in a no-deal scenario, the responsibilities of some of the public bodies mentioned in the notices are likely to expand even if a deal is approved. For example, the CMA will manage a significantly increased workload as it becomes responsible for competition cases currently falling within the remit of the European Commission. It has already received more than £20m to support preparations, and expects to need 240 new staff.[13] In contrast, the impact on the Civil Aviation Authority should be minimal if the UK secures associate membership of the European Aviation Authority, as the Government hopes.[14]

 

Most government grants are formula based

Most government grants are formula based

In 2017/18, grant spending across government totalled almost £94bn.[15] This was concentrated at a handful of departments, including:

  • DfE, which provides the dedicated schools grant to fund local authority-run schools
  • the Ministry of Housing, Communities and Local Government (MHCLG), which provides the revenue support grant to local authorities, used to fund services such as adult and children’s social care, waste collection and libraries
  • the Home Office, which provides grants to fund police and crime commissioners
  • the Department for International Development (DfID), which provides grants to organisations and projects that deliver international development activities.

Formula-based grants account for more than three quarters of government grants by value. They are mostly used when there is more than one provider of a public service, performing the same role in different geographic areas – for example, local authorities or police and crime commissioners.

In many cases, formula-based systems are designed to ensure that the geographic distribution of funding reflects some measure of local need or demand; they can also help remove the politics from routine budget allocations. Once established, however, funding formulas can be difficult to reform. This is because changing the formula will result in winners and losers, unless the total amount of available funding is increased. Since the 2017 general election, the Government has faced challenges in introducing reforms for all three of the main formula-based grant schemes – the police, local authorities and schools.[16]

‘General grants’ are most often awarded on a case-by-case basis, usually with a specific purpose in mind. They can be based on a competitive bidding process (for example, BEIS’s innovation grants to promote “the commercialisation of research and development”), awarded directly without a competition (such as DfT’s grant to the Greater London Authority), or based on some minimum criteria being met (such as Defra’s flood defence grants).

In 2014, the National Audit Office (NAO) criticised the Government’s management of grants data, noting that there was “no central good practice guidance and limited central data”.[17] The Government was once again criticised for its approach to awarding grants in 2015 following the collapse of Kids Company, a charity that had received more than £42m from successive governments. The Public Administration and Constitutional Affairs Committee found that there had been a failure to carry out adequate due diligence, and that “disjointed and limited reviews” had tended to “confirm a pre-existing and positive impression” of the charity.[18]

Since then, the Government has established new standards for awarding grants, and improved the way grant information is recorded. In 2017, comprehensive data for grant schemes across government was published for the first time, and in 2018 detailed data on individual grant awards was also published (to the respected 360Giving standard). According to the civil service chief executive, John Manzoni, this step will help “reinforce our drive for efficiency, effectiveness and transparency” by making it easier to scrutinise grants and identify inefficiencies or fraud – a strong endorsement for better data to improve effectiveness and accountability.[19]

 

Several key public services are outsourced

Some government departments use third-party providers (for example, companies or charities) to deliver public services. While this is not the dominant resource model for any department, outsourced public services account for 9% of day-to-day departmental budgets. This includes spending at:

  • DfE, where academies and free schools account for approximately 35% of the department’s day-to-day budget (resource DEL)

  • MoJ, where outsourced prisons, probation services and legal aid account for 34% of spending
  • DWP, where 6% of spending is on outsourced employment programmes or health and disability assessments
  • MoD, where 5% of spending is on service concession arrangements with third parties, including contracts to provide air-to-air refuelling capabilities and defence telecommunications systems
  • the Home Office, where 1% of spending is on privately run immigration removal centres.

The outsourcing of public services can also happen beyond Whitehall. Many local authorities procure social care services from private suppliers, and the NHS purchases services from GPs.

There are several reasons why outsourcing might be advantageous. Giving evidence to the Public Administration and Constitutional Affairs Committee this year, John Manzoni cited studies that show savings of “about 20%” when services are first exposed to competition from other providers (although some of this research appears to be decades old). Other evidence gathered for the same inquiry cites new ideas, greater flexibility and specialist skills as potential benefits.[20]

But entrusting public services to third-party providers can have downsides. For example, in August 2018, an unannounced inspection of HM Prison Birmingham – contracted out to G4S – found that there had been a ‘dramatic deterioration’ in conditions at the prison. This prompted the Ministry of Justice to announce that it would immediately step in to take control of the prison.[21] The collapse of the outsourcing group Carillion also illustrates the risk that government can expose itself to when contracting out services. This is particularly true when one provider is responsible for delivering services across several parts of government, or when the services outsourced are complex, making it difficult for other suppliers to step in quickly. Failures such as those highlighted have led to renewed debate about on the role of outsourcing in the public sector, with the Labour Party leadership now arguing that the outsourcing of public services has failed.[22]

In recent years, the government has taken some steps to improve its contracting, for example by establishing the Government Commercial Function to improve commercial capabilities in the civil service. But the Government needs to go further. A recent Institute for Government report found the quality of government data on outsourcing and procurement to be poor.[23] Improving the quality of its data, and then using it to develop a deeper understanding of what has or hasn’t worked for public sector contracting, would help the Government make better spending decisions.