21 September 2007
After the fallout from Northern Rock, next month's Comprehensive Spending Review has suddenly become a lot more interesting. Colin Talbot charts the changes ahead for public spending and targets – and the challenges facing the new chancellor
Events, dear boy, events. The famous words of Prime Minister Harold Macmillan, when asked what worried him most, must be echoing in the ears of new Chancellor Alistair Darling. As if the new New Labour government hadn't had enough of a baptism of fire – or rather of bombs, floods and foot and mouth – now it has a financial crisis.
In a few weeks (October 16 is pencilled in), Darling was due to announce what should have been a fairly unremarkable Comprehensive Spending Review and Pre-Budget Report (the two being rolled up together this year because of the late appearance of the CSR). The broad parameters of the review are already well known – a significant slowdown in spending increases and a small drop in public spending as a proportion of national wealth. Many departments settled their plans with the Treasury months ago and these were announced in last year's PBR and this year's Budget.
It even looked as if the CSR would be fairly uncontroversial as David Cameron's Conservatives decided to 'do a Gordon Brown' over the summer and commit themselves to sticking to the CSR spending plans if they came to power, in the same way that New Labour stuck to Tory spending plans in 1997/98.
The only real unknowns for CSR 2007 then were the priorities the government would be setting for the next three years in the departments' Public Service Agreements and, of course, whatever rabbits Darling could find to pull out of his hat to make it look interesting.
All that appears to be a little more uncertain this week after the turmoil in the financial sector and, more importantly, its political fallout. The Conservatives' assault on 'public and private debt' after the Northern Rock debacle surely raises issues about their commitment to sticking to the CSR. They can hardly simultaneously hold the view that the spending plans are OK and that the government is running up too much public debt – unless of course they want to opt for tax increases to reduce the borrowing. More likely is that if they stick to their 'too much debt' line they have to start arguing for reductions in spending plans. Either way, the debate around the CSR looks set to be a bit more heated than anyone had expected.
Since its birth in 1998, the whole CSR process has been centred on the idea of 'money for delivery' – more money from the Treasury to spending ministries and public services in return for modernisation and, especially, improvements in services. More recently, efficiency has been added to the mix since the 2004 Gershon Report.
Delivery above all meant delivering against the centrally set PSAs. These were supposedly the pinnacle of targetry – central government holding its own departments to account for delivering and they in turn demanding better performance from the areas of public service they were responsible for.
Both the CSR and PSAs were hailed by their originators as radical innovations and seen internationally as part of a trend towards what has variously been called 'outcome-based governance' or 'budgeting for outcomes'. Before then, the UK central government had operated for more than 30 years with an annualised budgetary system known fondly as 'PES' – for Public Expenditure Survey.
The new system took a 'zero-based' approach to all spending programmes and the first CSR and PSAs covered spending for the three years from April 1, 1999, through to March 31, 2002.
Among the other significant changes were a split between capital and current spending and between 'annually managed expenditure' (AME) and 'departmental expenditure limits' (DELs). The former was fixed for only one year and covered volatile, non-discretionary areas of spending, such as benefits and contributions to the European Union. The DELs were fixed, supposedly, for three years ahead.
Departments were also to be given much greater flexibilities between years, allowing them to bring spending forward or push it back, as long as they kept within their three-year envelope.
This was all supposed to provide much greater stability in public finances, create opportunities for strategic management within departments, allow for long-term investment planning, and so on. Above all, it was meant to end the tyranny of so-called 'annualisation' – being able to plan only one year ahead.
The PSAs were meant to focus on the eventual outcomes of policy and hold departments to account for delivery of these outcomes. Outcomes in this context are the social or personal effect of government activities – having a hip operation is an 'output' or service, being able to walk again is an 'outcome'.
From the start, though, it was a little confusing about how the PSAs were supposed to work. They were talked about as 'quasi-contracts' but it was unclear whom the partners were. In one set of explanations, PSAs were an agreement between the Treasury and the 'spending departments', in another they were a contract between the government and 'the people and Parliament' about what New Labour would be delivering for all its extra public spending. Indeed, the government duly announced it would start producing an annual report setting out how it was doing against the PSAs and other targets.
Since 1998, there have been Spending Reviews in 2000, 2002 and 2004, ie, every two years. Then there has been a three-year gap until the 2007 review, which is also only the second one described as 'Comprehensive'.
The two-year Spending Reviews might have occurred every two years but they were still three-year reviews. For example, the 2000 one set out spending plans for the three years from April 2001 to March 2004. As a result, year three of each Spending Review from 1998 to 2002 turned out to be meaningless as it was superseded by the next review. So the whole process became known – in a classic bit of 'Sir Humphrey' Whitehall-speak – as 'a three-year spending cycle reviewed every two years'. You could not make it up.
What caused these deviations from the original policy? The simple answer is politics. If the original three-year cycle had been adhered to, the next Comprehensive Spending Review would have appeared in the summer of 2001, but Labour planned to hold a general election in the spring of 2001. As the new CSR was due to announce important extra resources for public services – especially health and education, two key political battlegrounds – having the announcement several months after the election would have been a bit fruitless. So CSR2001 became SR2000 and so on.
The reasons for the three years between the last review and the 2007 one might also be political – CSR2007 will be Gordon Brown's first one as prime minister rather than chancellor and offers other political benefits. If PM Brown is not forced into an early election, then a new two-year SR in summer 2009 (with hopefully better public finances and more largesse to dispense by then) would be ideal for an autumn 2009 or spring 2010 election.
Far-fetched? Possibly, but no more implausible than the whole SR/CSR explanation.
The timing issues have not been the only problems. The new system has not introduced quite as much stability at the macro-level as desired – there have been periods of both substantial underspending and significant overspending, especially in health recently. And while longer-term budgets might be good for Whitehall departments, there is little evidence that this has 'trickled down' to frontline services, where budgets seem just as volatile as ever.
PSAs have had a similarly rocky history. Despite their initial aim, until recently they were more about outputs and processes than outcomes. Thankfully, this has now changed but this has created new problems. First, outcomes are difficult to measure and the NAO's 2005 report, Public Service Agreements: managing data quality, and a follow-up found significant problems with the published data. Secondly, they are generally long term and even more difficult to attribute to government action.
What happens to the whole CSR/PSA system under the Brown premiership will be very interesting. The chances are it will not be dumped – the previous chancellor has too much invested in the system for that – but we might expect substantial modification.
The first and most important issue will probably be who does the CSR and PSAs. They have until now provided the Treasury and the chancellor with some very strong levers over the rest of Whitehall. It is doubtful that PM Brown will welcome these powers remaining in the Treasury, so some shift towards Number 10 and the Cabinet Office seems possible, if not likely.
Secondly, we are unlikely to see much change to the structure of the spending system and a probable reversion to two-yearly reviews.
But there is going to be some substantial change to the PSAs themselves. The reduction will continue – down from the hundreds of targets in 1998 to around 30. In previous Spending Reviews there have been a few 'cross-cutting' PSAs but it is expected that most of the new slimline set will be cross-government.
This doesn't mean departmental targets will have gone away – each ministry will now have a set of 'Departmental Strategic Objectives', which will be partly based on PSAs, partly on fallout from the recent highly critical Departmental Capability Reviews.
And PSAs themselves will not be quite as simple as they appear. Underneath them will be a set of 'Delivery Agreements', which will supposedly involve all the key actors in the 'delivery chain' for each PSA and include targets for outputs.
How this whole new set of PSAs, DSOs and DAs will work in practice remains to be seen. It is likely there will be just as many data-collection systems for the new setup as there were under the old. So spinning this as a 'reduction in targets', as the government has been doing, is mildly misleading. It is certainly a major change in the shape of the system, but not at present a reduction.
In the recent past, Treasury officials were complaining – privately – that the old system gave them insufficient control over departments. They said that outcome-based PSA targets were too long term, too difficult to measure, too unrelated to resources and too easy to fudge because of external factors.
The new DSOs and DAs are supposed to be much harder-edged tools for holding spending ministries to account. Whether they have achieved this, we'll see in outline when the CSR is published. It will take a lot longer before we see if the Treasury really has got a better tool kit in practice.
Colin Talbot is the director of the Herbert Simon Institute at Manchester Business School. This article is based on an extract taken from The Alternative Comprehensive Spending Review, published by Manchester University Press, which will be launched at the House of Commons on October 9. If you wish to attend, please contact Gillian Appleby on 0161 275 05656
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