In 2019, the Government will announce new spending plans for public services and investment. These will need to cover, at least, the 2020/21 financial year, for which there are currently no plans in place. On the normal pattern of the past 20 years, the review should extend over at least the two following financial years as well.
Spending reviews serve the obvious function of ensuring there is a set of plans for departments which fit within the total amount of spending that the Government decides it can afford, which is a vital part of the Government’s economic management. They are also a chance for the Government to set out its vision for the country and show how its policies support that. They shape investment which supports economic growth. They should be an opportunity to pursue efficiency and reform in public services.
Spending reviews are a necessarily political process. They represent choices between different priorities. When national finances are tight, as now, those can be tough choices. Recognising that is central to considering how spending reviews could work better.
Spending reviews: what works and what doesn’t
The spending review process does some important things well. By international standards, the UK has a good track record of sticking to the spending allocated to each department. Past spending reviews have also been an effective way for politicians to bring about big change in spending and the shape of public services, for example the injection of significant additional resources into public services and investment after 1997, or the shift to retrenchment brought about by the 2010 Spending Review.
However, there are many concerns which are widely shared:
- Spending reviews too often consist of ministers jostling with the Treasury (and with each other, often through the media) about marginal increases or reductions in their department’s budget. This gets in the way of any high-level strategy being fully reflected in decisions across government. It discourages departments from acting together, or the Treasury from using the review to solve problems that stretch across departments (such as health and social care, or police resources and mental health). It prevents the review process from being able to look at spending overall and find the best opportunities for greater efficiency or for reform.
- Departmental spending plans are not reliable. There is a tendency towards optimism bias, too little focus on risk, and there are incentives to shunt costs between programmes. There is now an unfortunate history of using accounting devices to flatter the numbers. There is not enough independent scrutiny or validation of the plans. There is too little focus on the long term and on the trends – and foreseeable problems – which may affect these plans.
- Discussions between the Treasury and departments over the money they will receive largely confine themselves to that spending allocation. They do not pay enough consideration to the results of spending, performance and efficiency. For a decade after 1998, there was a process that did consider performance explicitly, but since 2010, the Treasury has largely retreated from it. There are welcome signs of a revival of this approach – but very likely, it will flourish too late for the 2019 Spending Review.
- The Treasury’s staff are widely characterised as bright, hard-working problem-solvers, but they also lack experience and key skills. Although they have access to Cabinet Office expertise in procurement, project management and digital, spending teams rely heavily on young generalist civil servants, who move between jobs frequently; a model that has some benefits but brings many risks. Turnover of staff means spending teams tend to lack deep insight into public services and projects, and lack the contacts who would help inform them.
- The Government has made significant efforts to strengthen professional finance skills across the civil service, including in the Treasury, and finance professionals now have more influence in Whitehall than before 2013, which is welcome. But the Treasury has abandoned a key element of its own 2013 Financial Management Review: the bringing together of the role of the lead official for spending with leadership of the ‘finance function’ – the group of officials who specialise in finance. This omission risks weakening the influence of finance professionals, and undermining the quality of financial management.
- Documents setting out spending and performance plans and reporting back on what has happened are confusing and omit essential data. That prevents Parliament and the public from using them.
- The Treasury is increasingly isolated from public services and their leaders. One public service leader said: “[The Treasury] reaches a view without engaging outside government, above all with leaders at the sharp end of public service delivery. Not only does this mean its view lacks grasp of the real world, it also insulates itself too much from politics.”
Concern about these issues is longstanding. Some of these elements were captured vividly in the Fulton Report 50 years ago.1 From time to time, the Treasury has acknowledged them and has made important changes for the better, but it has not gone far enough. Its current operating model has very deep roots, certainly back to William Gladstone’s reforms as Chancellor in the 1860s, and it has proved remarkably impervious to attempts to force change on it, even from prime ministers.
Challenges of the 2019 Spending Review
To describe the context in which next year’s review will take place as ‘challenging’ would be an understatement. The Government does not have a parliamentary majority. It will be taking decisions (most likely) in the immediate aftermath of the UK’s exit from the European Union (EU). Brexit will continue to place huge calls on the attention of the Prime Minister and the Chancellor after 29 March 2019, whether or not there is a deal with the EU. Brexit throws a fog of uncertainty over the timetable for the next Spending Review; we understand the Government is still considering whether a one-year spending review is all that is reasonable to prepare. Meanwhile, some public services are under great strain after two previous rounds of spending reductions, even if they have achieved big improvements in efficiency (as our Performance Tracker2 report shows). There is a widening gap between public expectations of public services and the money available to provide them.
The 2019 Spending Review: how to run it
Our proposals fall into five groups. Many of them could be implemented as part of the 2019 review, although there are also many changes that would have to be pursued over a longer period to have effect.
- The Government should clearly set out its fiscal targets – how much money it intends to spend and to raise in tax (and is prepared to borrow). It needs to resolve the current ambiguity around how much it intends to reduce the deficit by, and by when. As part of this, it should set out its vision for the UK, including life after Brexit. That means explaining its priorities for public services (beyond the NHS), and for investment. The clearer it is about its agenda, the easier it will be to justify the difficult choices it needs to make.
- The review needs to focus on performance, not just on allocating money to be spent. It needs to look at the results of that spending – what it does for citizens. A clear statement about the plans agreed by the Treasury and departments in the Spending Review in terms of performance and outcomes, as well as spending, should be published. The National Audit Office (NAO) should comment on whether the modelling and assumptions on which these statements are based are robust.
- The Treasury should look beyond individual departments and use the review as a chance to solve problems that extend across departmental boundaries. Brexit is the most prominent. The future role played by local government and the funding needed to support it is another. Techniques of identifying and managing financial risk would benefit from consistency. Above all, the pursuit of value and efficiency is best co-ordinated from the centre of government.
- The Government should publish more information about its intentions in terms of spending and performance, and once the review is implemented, what actually happened. It should present it in ways which interested, but non-expert, citizens can understand. The Institute for Government will contribute to the current Procedure Committee inquiry on the scrutiny of spending plans, and will look to work with government and Parliament to support improvements in documentation and processes.
- The Treasury should set about strengthening the skills and expertise of its staff. Most immediately, it should make use of expert panels, and selected short-term external hires, to improve its insight into the most challenging issues facing the 2019 Spending Review. Beyond that, it needs a sustained push to raise the number of its staff with financial skills. It needs to recruit more staff with experience in delivering public services and to reduce turnover of officials in their jobs. It needs to ensure that pay and benefits are enough to recruit and retain the necessary mix of professional backgrounds and ability.
Beyond the 2019 Spending Review
Many of these improvements will need to be strengthened further beyond 2019. They also raise important questions about the role of the Treasury (and the Cabinet Office and No. 10), as well as the management of public spending. One is whether the UK is right to combine its management of economics and of public spending in one ministry. The model has endured for more than 150 years, but there are alternatives, as those uneasy about the shortcomings of the present system point out.
The ideas that have inspired the past three decades of public management are also being challenged. Notions of how to pursue efficiency, the role of the private sector and competition, and a view of the public as consumers, not citizens – which have enjoyed a remarkable consensus through Labour, Coalition and Conservative Governments – are now being questioned. And as we approach the twentieth anniversary of devolution to Scotland, Wales and Northern Ireland, so too is the success of that project and the progress of decentralisation in England.
The centre of government – crucially, the Treasury in the current configuration – needs to take the lead in thinking about these questions. They are not a reason to be defensive; they reflect the shifting perspectives of our time – the sense of a need, at a time of some turmoil, to take stock of the record of recent decades. They also reflect public unease with the quality and responsiveness of government and with some of the reforms made in recent years.
These bigger questions are easily lost in the usual tussle of a spending review, with its point-scoring, media leaks and last-minute negotiations. But the leadership on this thinking can only come from the Prime Minister, the Chancellor and the officials who support them. Precisely because the 2019 Spending Review will take place in such uncertainty, it is a time to give thought to the answers.
1. The Civil Service (1968) Vol. 1, Report of the Committee, 1966-68, Cmnd. 3638, HM Stationery Office, retrieved 4 September 2018, www.civilservant.org.uk/library/fulton/fulton1.pdf. More available here: www.civilservant. org.uk/library/1968_fulton_report.html
2. For the latest report, see Andrews E, Lilly A, Campbell L, McCrae J, Douglas R and Bijl J (2017) Performance Tracker: A data-driven analysis of the performance of government, Institute for Government, retrieved 22 August 2018, www.instituteforgovernment.org.uk/our-work/performance-tracker