The Use of Spending Reviews as a Way of Making Government More Strategic - Essay Example

The use of Spending Reviews as a way of making government more strategic Introduction The British government uses Spending Review as a strategic tool to frame potential spending policies and hence to improve its benefits to the general public. Spending Reviews can be referred to a governmental process carried out by the UK HM Treasury for the purpose of setting clear expenditure limits and to identify the key improvements that would contribute to the public welfare. Comprehensive Spending Review (CSR) has been developed to scrutinise the government’s spending practices more closely (Comprehensive Spending Review, 1998). Generally, a Spending Review gives specific attention to one or more aspects of public spending whereas a Comprehensive Spending Review particularly focuses on spending requirements of each government departments. According to the OECD Public Governance Reviews, “spending reviews look not only at the effectiveness and efficiency of programmes at current funding levels but also at the consequences for outputs and outcomes of alternative funding levels” (OECD 2007, p.59). In contrast to many other OECD countries, UK’s Spending Reviews are used to evaluate all programmes simultaneously. Since this tool can be used to analyse the effectiveness of different policies in the light of financing and to develop more cost effective policies, the UK government considers Spending Reviews as an integral part of its budgeting process. This paper will evaluate how successful the British government’s use of Spending Reviews has been as a way of making government more strategic. The paper will give particular focus to Spending Reviews executed during the periods of growth (1998-2007) and austerity (2008 onwards). Spending reviews during 1998-2007 (periods of growth) For the period 1998-2007, three Spending Reviews and a Comprehensive Spending Review were carried out by the HM Treasury. As per the information provided by the HM Treasury, the 1998 Comprehensive Spending Review framed spending policies and Public Service Agreements for the period 1999-2000 to 2001-2002 whereas the 2000 Spending Review did the same for the period 20001-02 to 2003-04, the 2002 Spending Review for the period 2003-04 to 2005-06, and the 2004 Spending Review for the period 2006-07 to 2007-08 (HM Treasury). The 1998 Comprehensive Spending Review framed some strong three year public spending policies and designed a key spending control system. This was the first time such a large scale Spending Review had been introduced in the UK. This Comprehensive Spending Review addressed a ‘zero-based analysis’ of each government department’s spending programmes and a close evaluation of different departmental aims and objectives in order to identify the best way of accomplishing the government’s objectives ; and the 1998 Comprehensive Spending Review particularly focused on the stable growth and employment and sustainable public services in the nation (ibid). It was also planned to move from short-termism and to set public spending plans for a three-year period. The UK regulators developed some spending priorities and they forecasted that the “current spending will grow no more than 2 ¼ percent” (ibid). The 1998 Comprehensive Spending Review planned to significantly increase educational spending over the next three years with intent to develop an efficient economy. Another plan was to improve investments in research and technology, transportation, housing, and infrastructure. In total, the 1998 Comprehensive Spending Review specifically focused on UK’s sustainable economic development. The operational outcomes for the three-year period were awesome. For instance, the country could post GDP real growth rates of 1.9%, 3%, and 1.6% for the years 1999, 2000, and 2002 respectively (Index mundi). Unlike the 1998 Comprehensive Spending Review, the 2000 Spending Review did not repeat the comprehensive scrutiny of each spending programme; instead, it reviewed some issues deeply ‘15 Cross-Cutting Review of policy areas’ that affect conventional departmental boundaries (HM Treasury). However, it is a continuation of the 1998 CSR because it rolls forward the spending plans proposed by the 1998 CSR. In addition, the 2000 Spending Review improves the control system and introduces ‘a new accruals budgeting system’. It introduced some new features including ‘Service Delivery Agreements, cross-departmental review, Resource Budgeting, and Departmental Investment Strategies’ (ibid). The thoughtful spending strategies developed in the 2000 Spending Review assisted the UK to achieve attractive GDP growth rates of 2.2% and 3.2% respectively in 2003 and 2004 (Index mundi). According to the Chancellor of the Exchequer, the theme of the 2002 Spending Review is ‘opportunity and security for all’ (HM Treasury). It set some specific performance targets for departments in order to secure the investments being made. Under this Spending Review, the UK regulators allowed local decision makers to enjoy increased freedom and flexibility in addition to setting long term goals. In order to ensure that the implemented spending plans were meeting their desired objectives, the government suggested ‘independent audit and inspection and externally validated reporting’ (HM Treasury). Improving productivity, extending opportunities, and building strong and secure communities were other major provisions of the 2002 Spending Review. This governmental process was also very effective in enhancing the growth of the UK economy. The 2004 Spending Review was just a continuation of the previous one. The major theme of the 2004 Spending Review was ‘stability, security, and opportunity for all’ (HM Treasury). It paid particular attention to building the country’s long term future. This Spending Review specifically emphasised the needs of various groups such as children, employees, employers, and patients. In addition, it also focused on areas like public sector, national and regional sectors, international security and prosperity, and environmental sustainability. The 2004 Spending Review included provisions for increasing public spending over the next three years. This Spending Review could also meet its goals and therefore the country achieved a considerable GDP growth rate in 2005 (1.9%), 2006 (2.8%), and 2007 (3.1%) (ibid). Spending reviews from 2008 onwards (periods of austerity) For the period 2008 onwards, a Comprehensive Spending Review and a Spending Review were carried out till date. According to the information published in the HM Treasury website, the 2007 Comprehensive Spending Review developed spending polices for the period 2008-09, 2009-10, and 2010-11 while the recently published 2010 Spending Review is intended for the period up to 2014-15 (HM Treasury). It is clear that the previous four Spending Reviews (1998, 2000, 2002, and 2004) were carried out in a prosperous economic period where the UK economy’s public growth rose from 37% in 1999-00 to 42% in 2007-08 (Spending Review Renewable…). However, the situation notably changed by the time of the 2007 CSR. As scholars pointed out, the UK’s fiscal rules like Golden rule and the sustainable investment rule began to produce some negative impacts by the end of the 2007-08 fiscal periods. As a result, the UK government, through 2007 CSR, decided to cut down the public spending from 4% p.a. to 2% p.a. over the next three years (Public Expenditure Statistical Analysis. HM Treasury). According to the CSR 2007, increased old age dependency ratio and growing consumer expectations about public services are turning out to be some major challenges to the UK economy. This CSR also anticipated that the intensified cross border trade competition together with shift of global economic activities toward emerging markets like India and China is likely to affect the growth of UK economy over the next decade. In addition, the degree of innovation and technological diffusion, threat of international terrorism, and the level of environmental pollution are expected to shape the UK’s next decade economy. The CSR 2007 specifically analysed long term opportunities and challenges for the UK. This CSR has suggested potential resources to address the identified challenges ahead. As part of this Comprehensive Spending Review, value for money across various departments was scrutinised. The UK government realised that its economy would not succeed unless it plans for the long term, and therefore the 2007 CSR paid particular attention to long term spending policies. While analysing the UK economy over the 2008-11 period, it is clear that the 2007 CSR was not much effective because it failed to save UK economy from the recent global recession. The UK economy’s real GDP growth rate was 0.7% in 2008 and it dropped to -5% by 2009; however, the country could improve the rate in 2010 (1.3%) (Index mundi). The latest Spending Review was recently published by the coalition government in 2010. Instead of raising people’s living standards, the 2010 Spending Review pays specific attention to government spending cutting with intent to reduce budget deficit, which is mounting as an impact of the recent recession. The spending cuts announced were the biggest since the World War II. As BBC reports (20 Oct 2010), according to the 2010 Spending Review, an amount worth £81 billion will be cut over the next four years, including 19% departmental cuts. The government has also planned to cut nearly £7 billion in welfare spending and to make some additional spending cuts in housing credits and other tax benefits. As per the report, it will increase employees’ public pension contributions by £3.5 billion. In addition, cuts to public bodies’ funding have been also planned (ibid). To illustrate, 25% cuts for Home Office, 7% cuts for local councils, and 8% cuts for the Ministry of Defence (ibid). According to a forecast by the Office for Budget Responsibility, the 2010 Spending Review will result in a loss of nearly 490,000 jobs in public sector by 2015 (the guardian, 20 Oct 2010). Evidences suggest that this Spending Review is not really assisting the UK economy to recover from the global economic turmoil. For instance, the economy experienced a decline in the real GDP growth rate from 1.3% in 2010 to 0.7% in 2011 (Index mundi). Fiscal strategy and spending strategy The UK’s Spending Reviews give particular importance to setting fiscal and spending strategies for the country. Under the fiscal strategy, overall levels of spending and taxation and borrowing rates are defined. As discussed already, Spending Reviews over the period 1998-2007 set relatively higher rates of spending and borrowing in order to take advantages of the favourable economic situation. UK regulators hold the view that higher mortgage ratios would aid the economy to fuel economic growth because increased borrowing might boost developmental operations. In addition, those Spending Reviews had made provisions for huge taxation benefits with intent to foster fast economic growth. In order to address the austere economic situation, the 2007 Comprehensive Spending Review and the 2010 Spending Review trimmed down government spending and taxation benefits. The UK government believed that this type of regulations would be effective to reduce the country’s mounting budget deficit. Likewise, the government imposed restrictions on mortgage ratios throughout this austerity period. The spending strategy is particularly related to allocations of government funds between various departments and sectors. Evidently, setting of spending strategies is a key function of Spending Reviews. While framing a spending strategy for the upcoming three years, the government pays specific attention to the country’s current economic performance. In sum, it can be claimed that UK’s spending strategies play an inevitable role in determining the country’s economic status. Linking spending to performance While analysing the British government’s Spending Reviews historically, it is clear that each Spending Review gives particular reference to the country’s financial performance for the previous year. Hence, each Spending Review plays a vital role in shaping the UK economy’s future. The UK government has framed some specific mechanisms to measure its economic performance and hence to property structure Spending Reviews. The British performance management model insists the country’s lower tier organisations to submit performance reporting data periodically (Talbot 2010). The Public Service Agreements Systems (PSAs) have been developed by the UK government to set clear performance targets with respect to budget process (ibid). This system greatly assists the government to evaluate whether the planned targets have been met or not. Since 1998, the core of the performance policies developed by the UK government has been PSAs (ibid). It is interesting to note that both Conservatives and Liberal Democrats support PSAs and refuse the strategy of setting targets for public sector performance (Talbot 2012). In the country, PSAs are considered as the pinnacle of the whole system as it drives performance policies, measuring, monitoring, and reporting. In addition, PSAs enhance overall development through public services. Since the PSAs are used to measure the performance, it can be argued that PSAs greatly assist the UK government to link spending to performance. More precisely, if the country fails to achieve its performance targets properly, the government can make needed changes to its spending policies to improve the situation. PSAs are widely regarded as the contract between “the people and Parliament” regarding what the government would provide in terms of services. Hence, the formation and implementation of PSAs must be in a way that would adequately meet public expectations about government services. Therefore, this economic tool would greatly assist the UK government to confirm whether or not it could secure public interests. Public Services Agreements give a clear view of what the government is striving to achieve. “They set out the government’s aims and priorities for improving public services and the specific results government is aiming to deliver” (Talbot 2010) . In short, PSAs are an integral part of the UK budgeting process and Spending Reviews; and hence the UK government uses this tool to measure its overall economic performance. It is identified that the UK government links its performance to expenditure in an effective way. While analysing the country’s Spending Reviews since 1998, it is clear that UK government was interested to spend more on public services during the periods of growth. Over the 1998-2007 period, the government invested huge amounts in education, research and innovation, transportation, infrastructure development, and employment sector because UK regulators had strongly believed that increased public sector spending would enhance further economic growth. However, the country’s economic landscape considerably changed by 2007 and the country’s fiscal policies began to produce some adverse effects. As a result, regulators decided to cut down its spending in public services and Spending Reviews prioritised policies that would promote the nation’s stable economic growth. From the UK experience, it can be concluded that excess public spending is likely to lead to worse economic conditions like budget deficit. Hence, a well planned performance based spending is necessary to drive stable and sustainable economic growth. Conclusion From the above discussion, it is clear that the British government’s Spending Strategies have been assisting the UK government to be more strategic. Evidently, the four consecutive Spending Reviews since 1998 have greatly benefited the UK economy to attain a significant position in the world. Since the country had favourable fiscal policies and growth opportunities over the period 1998-2007, the Spending Reviews increased the level of government spending on public sectors. In contrast, the government cut spending rates and other taxation benefits since 2007 so as to get the economy recovered from the impacts of the global recession. In addition, the UK government specifically tries to make a connection between performance and spending. The government uses PSAs to measure the country’s economic performance and thereby sets spending limits. Finally, Spending Reviews also focus on the development of fiscal as well as spending strategies because those policies play a significant role in shaping the country’s economic future. References BBC News. (20 Oct 2010), ‘UK Politics. Spending Review 2010: George Osborne wields the axe’. [online] available at http://www.bbc.co.uk/news/uk-politics-11579979 [accessed 1 Jan 2013]. Comprehensive Spending Review; Aims and Objectives. (14 July 1998), HM Treasury. HM Treasury. (n. d.), Spending Reviews. The National Archieves. 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