Alexander rules OK?

26 Apr 12
Alan Finch

Plans by the chief secretary to the Treasury to introduce new contingency requirements across Whitehall risk creating unhealthy competition and introducing a blame culture

Chief Secretary Danny Alexander’s announcement that all government departments must keep a 5% contingency against new spending pressures may be evidence that the latest fad for behavioural economics has reached even as far as the Treasury.

The theory is simple enough.  It is about encouraging departments to take responsibility for budget risk and not to be constantly asking the Treasury for dibs into the national reserve.   There may also be a shot across the bows for ministers who might be tempted to make unaffordable spending commitments as the election edges that bit closer, expecting the Treasury to pick up the tab.  This is a perfectly valid way of running things, but it carries some risks.

The response from spending departments, fairly inevitably, seems to have been to brief the press that in order to create these contingencies there would need to be cutbacks on current spending.  That would explain the way this was reported, as the Treasury imposing further cuts, even though Alexander made it clear in his speech that departmental budgets were not affected.

That is the downside of the Alexander Rule. If every department keeps a large contingency, does that tie up more resources across the whole of government than is strictly needed to cover risk, thus denying resources to front-line delivery? Presumably the Treasury thought of that when they set the 5% threshold.

Outsiders will also be intrigued to see what happens to any contingencies that remain unspent at the end of the fiscal year.  Local government has been pleasantly surprised but also rather annoyed recently at the tendency of some departments suddenly to find a bit of money for new grants towards the end of the financial year, presumably from under spending elsewhere.

Can we now expect a late redistribution of unspent contingencies as well, or will these be snaffled up by the Treasury?

The main criticism one could level at the new rule is that, if anything, government departments should be looking to work more closely together now to make sure limited resources are optimised.

Indeed, you don’t need to look to modern ideas of behavioural economics to find this in the literature.   As early as the 1950s, the pioneer of organisational behaviour Chris Argyris studied the impact of budgetary control systems and concluded that control exercised too tightly had a tendency to create unhealthy competition between departments for limited resources and a blame culture.

Fortunately there is none of that in Whitehall.

Alan Finch is head of financial services, risk & accountability at the London Borough of Tower Hamlets


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