The new British government has just released a document explaining the process it will use to achieve drastic fiscal consolidation during this year’s Spending Review. The process will be closely modeled on the successful Canadian program review of 1994-95. As in Canada, all ministries will be asked to review their expenditure on the basis of a set of defined criteria. The UK will also follow the Canadian model in setting up expenditure review committees at the ministerial and top bureaucratic level. The latter will mark a particularly radical change in the UK, where spending review was – particularly when Gordon Brown was Chancellor of the Exchequer – a function carried exclusively by the Treasury and its Chancellor, with even Prime Minister Blair told to mind his own business and stay out of it. Under a coalition government, things will perforce be very different. Ministerial spending review committees have worked extremely well not only in Canada, but in a number of other countries including Australia.
All of this – together with many other features of the proposed process – make good sense. At the same time, however, there appear to be certain weaknesses in the process envisaged.
The first is that there is too much emphasis on efficiency gains as the source of savings, whereas the focus should have been primarily on program cuts. Thus the number one objective of the new “strategic approach to spending” outlined in the government’s document is a “step change in the drive for efficiency and value for money in the public sector” – with specific mention of operational efficiencies, contract renegotiations, benchmarking and the maximization of collective buying power. Substantial quick reductions in public expenditure can, however, only come about by eliminating or scaling back whole programs. The savings from efficiency improvement tend, in general, to be more gradual. This is likely to be particularly the case in the UK, where the former Labor government conducted a number of major efficiency reviews, making it likely that much of the “low lying fruit” has already been picked.
One notes in this context that the nine criteria which ministries will be asked to apply in reviewing their expenditure are not as single-mindedly focused on the identification of program cuts as was the case with the six tests applied in the Canadian program review process, but instead wander into the areas of improving the targeting and effectiveness of programs. To be fair, the government document does mention welfare spending as a key focus of the spending review, and this is very important. But overall, there needs to be a much greater focus on program review.
The second potential weakness in the process is that it may not be “top-down” enough. The mechanisms to ensure that the savings identified by ministries add up to the aggregate target for spending cuts are not, at least at this stage, clear. There is no indication that the government intends to set savings targets for specific ministries, as was done in Canada (where, in the most striking case, the transport ministry was told to cut its budget by 50 percent). Instead, the British document says rather vaguely that ministries will be asked to “prioritize” their expenditure on the basis of the nine criteria. On the surface of it, this sounds like an exercise in zero-base budgeting – a proven failure in public budgeting method if there ever was one. A ZBB exercise n which ministries are asked to rank all of their programs – rather than simply to focus on identifying program cuts sufficient to meet a target – would divert a lot of energy into the pointless ranking of programs which the government would not consider cutting, while also inviting ministries to play games to protect their programs. Maybe this is not what the government means when it refers to “prioritization”. Certainly, it will have to be a lot clearer about how this will work when the process really gets under way.
The Canadian program review featured two other top-down elements which the UK government would be wise to copy. One was banning – during the fiscal consolidation process – new spending proposals. The other was the informal rule that any spending minister violently objecting to the elimination of a specific program would be obliged to come up with equivalent savings in other programs. I’ve critiqued elsewhere the notion that budget preparation can be wholly top-down, and more specifically the notion that bottom-up new spending proposals can or should be prohibited. I stand by those comments, but note that major fiscal consolidations are not like the “normal” budget process, and must necessarily be greatly more top-down.
The third potential problem with the UK process is that the government will be required, essentially, to identify right now – in a single spending review lasting a couple of months – all of the cuts necessary to achieve its desired fiscal consolidation. This is because the government intends that this year’s review should – as was the practice under Labour – make firm medium-term budget commitments to spending ministries. Indeed, the government plans now to make these commitments for the full five-year term of the parliament, rather than three years as under Labor. In principle, this is a good idea. But the timing is not right, because commitments to spending ministries will make it essentially impossible to have a second round of cuts next year. While it makes excellent political sense to front-load spending cuts as far as possible, it may not practically be possible to do all of the necessary spending review work this year. Under the Canadian program review, while the majority of cuts were made in the 1994 budget, there was a smaller second round in 1995. It may, under the UK’s circumstances, have made greater sense to defer new MT budget commitments to spending ministries under 2011.
* On this and other technical aspects of the Canadian Program Reviews, see David A. Good’s excellent The Politics of Public Money: Spenders, Guardians, Priority Setters, and Financial Watchdogs in the Canadian Government (University of Toronto Press, 2007).