The UK’s Fiscal and Budgetary Framework
Before getting onto what was new this time around, a quick bit of background on the fiscal and budgetary framework put in place by the incoming Labour Government in 1997.
At the macro-level, tax and spending policy in the UK is anchored by two medium-term fiscal rules:
- a golden rule which requires the Government to keep the current budget in balance or surplus over the economic cycle; and
- a sustainable investment rule which requires the Government to keep public sector net debt below 40 percent of GDP.
To underpin the achievement of these medium-term objectives, strengthen the link between the new Government’s priorities and the allocation of public spending and facilitate longer-term planning on the part of departments (line ministries), the regime of annual “incremental” Public Expenditure Surveys which the UK had operated for three decades was replaced with a biennial cycle of “comprehensive” Spending Reviews undertaken every other year starting in the summer of 1998.
Spending Reviews are a detailed, bottom-up examination of each department’s budgetary requirements for the coming three-year period in light of existing spending pressures, opportunities for improving efficiency, and the costs of new policy proposals. The review process is coordinated by the Treasury but led by departments themselves (though sometimes with input from independent experts) who submit detailed three-year resource requests to the Treasury three months prior to the conclusion of the exercise.
Spending Reviews are not, however, a purely bottom-up exercise. The preparation and assessment of departments’ resource requests takes place within two global expenditure “envelopes” for total current and capital expenditure by the public sector. These top-down constraints are fixed in the preceding Budget in March so as to ensure that the resulting spending plans are consistent with meeting the Government’s fiscal rules over the medium-term. Within those global envelopes, total public expenditure is classified into two categories for planning purposes:
- Annually Managed Expenditure (AME) which is deemed too volatile, demand-led or sensitive to the economic cycle to plan on a multi-year basis. This category includes debt interest, social security and a number of smaller items. While the Spending Review includes a bottom-up forecast of the deferent components of AME, it does not fix any nominal limits for this category of expenditure and forecasts are updated in subsequent Budgets and Pre-Budget Reports; and
- Departmental Expenditure Limits (DEL) which covers the bulk of conventional public services such as health, education, transport, policing and defense for which the Government sets three-year nominal expenditure ceilings split into current and capital expenditure. These ceilings impose a Treasury-enforced limit on each department’s parliamentary appropriations in those years and are generally only adjusted between Spending Reviews to reflect classification changes or unforeseen contingencies (for which the Government sets aside a small DEL Reserve).
A full forecast of Annually Managed Expenditure and 3-year Departmental Expenditure Limits for the 25 main UK Government departments are set out in the Spending Review White Paper which is presented to Parliament in the summer or early autumn of a Spending Review year.
These expenditure plans are accompanied by multi-year Public Service Agreements (PSAs), which articulate the key outcome-based performance objectives that the Government is committed to achieve with that expenditure over the three-year period. Since coming to power in 1997, the Government has conducted five spending reviews in 1998, 2000, 2002, 2004 and 2007.
What was new in the 2007 Comprehensive Spending Review?
So, what was unique about this spending round by comparison with the four previous exercises?
A more challenging fiscal environment
The first new development was that the 2007 CSR represented the first real test of the capacity of the Spending Review process to plan and deliver a discretionary fiscal consolidation in the UK. The previous four Spending Reviews took place within a context of an overall public expenditure envelope that was steadily growing as a share of the economy from 37% in 1999-00 to 42% by 2007-08.
However, as both the UK’s fiscal rules began to bite, the UK needed to halve the real rate of growth in public spending from 4% p.a. over the last decade to 2% p.a. over the next three years – a ½% below than the trend rate of growth of the economy. This is, of course, a modest fiscal consolidation by international (and indeed UK historical) standards. However, it nonetheless posed a challenge for a Spending Review process which had been used to having a rapidly growing pie to divide between competing priorities.
How did the Spending Review process measure up to the challenge? There is a tendency for budget allocations to converge during a period of consolidation as Government’s favor sharing the burden more or less equally across line ministries above more strategic considerations. While it was inevitable that the larger services such as health, education and local government would need to see some slowdown in the growth of their budgets in line with the total, it is notable that:
- Despite a halving in the real increase in overall resources available over the CSR07 period, some departments actually fared better in this spending round than in the last (notably those responsible for overseas aid, the intelligence agencies, defence and the environment) in recognition of their instrumental role in responding to the “global challenges” such as poverty, conflict and climate change that were an explicit theme of the 2007 CSR;
- Furthermore, the spread in real growth rates between these big winners and the biggest losers from the exercise actually increased (social security and tax administration and the Treasury itself) from 12 percentage points in the 2004 Spending Review to 16 percentage points this time around;
- Despite an even more dramatic slowdown in overall public sector net investment from the double digit real growth rates seen in past spending rounds to 4.5% p.a. over the CSR07 period, the Government managed to finance within this envelope two of the largest infrastructure projects in UK history. Both in London, they are: (i) the five-year, £9.3bn (US$18.5bn) project for the construction of the park, venues and facilities for the 2012 Olympic Games in the city’s East End; and (ii) - the eight-year, £16bn (US$32bn) project for a new high-speed, cross-town rail service known as Crossrail which will link Heathrow Airport in the west to the growing commercial and residential centers in the Thames estuary and is due to begin service in 2017.
- Finally, in the face of competing demands for increasingly scarce resources, the Treasury managed to increase the size of its central contingency Reserve by £1bn to around 1% of total DEL by 2010-11 in recognition of the increased pressures on the Government’s expenditure plans in this more tightly-constrained environment.
So anecdotal evidence would seem to suggest that despite the slowdown in overall resources available, the UK’s comprehensive, bottom-up approach to multi-year expenditure planning managed to keep the focus on prioritization and prudence.
A major extension of multi-year certainty
A second noteworthy development in the 2007 CSR was a marked extension in the length, breadth and depth of certainty that the UK system now provides to managers about their future budgets. Taking each of these in turn:
- The length of budget certainty: The first four Spending Reviews between 1998 and 2004 were on a biennial cycle in which DELs were set for three-years but reviewed every two, so that the final year of the preceding exercise remained indicative and served as the first year of the next. The 2007 CSR marked a break with this tradition by leaving the final year of the preceding Spending Review period (2007-08) fixed and setting new budgets for the subsequent three years (2008-09, 2009-10 and 2010-11) with no overlapping year between the two exercises. As such CSR07 marked the move to a cycle of three-year fixed expenditure limits reviewed every three years.
- The breadth of budget certainty: At the time of the first Comprehensive Spending Review in 1998, the split of total public expenditure between Annually Managed Expenditure and three-year Departmental Expenditure Limits was roughly 50/50. Since then the Treasury has sought to progressively increase the proportion of expenditure included within DEL. The 2007 CSR was preceded by a further such reclassification exercise which took the DEL/AME ratio up to 60/40 for the coming three years.
- The depth of budget certainty: As Departments became more comfortable with operating within multi-annual budgets themselves, the Treasury has encouraged them to cascade that certainty to their delivery agencies. This cascading process began in 2003 with the introduction of three-year budgets for each of the UK’s 300 local primary care heath trusts. The 2007 CSR took this two steps further with the establishment of three-year budgets for every local authority and every school in the country.
Taken together, these three developments mean that from April of this year, about a third of public spending in the UK will be transmitted directly to frontline managers as guaranteed budgets for the next three years.
A further (r)evolution in the PSA framework
Finally, the 2007 Comprehensive Spending Review saw a major streamlining of the UK’s public service performance management regime in which 110 largely departmental-based Public Service Agreements were consolidated into 30 explicitly inter-departmental PSAs articulating the Government’s top priorities for the coming period such as:
- increasing adult literacy and numeracy;
- boosting the overall rate of adult employment
- halving child poverty; and
- raising the long-term supply of housing.
Each of the 30 new model PSAs was placed under the purview of an interdepartmental Cabinet committee and underpinned by a published delivery agreement setting out the role of each contributing department in delivering the agreed outcomes for the next three year period.
This slimming down of the number of objectives set by the center was coupled with a clearing away of the undergrowth of over 1200 performance indicators that had grown-up at the local level. From 2008, local authorities in England will only be required to report against 198 performance indicators of which a maximum of 52 can be set by central government departments. The remainder will be determined at the local level through Local Area Agreements drawn up between elected councils and local partners.
Has the UK Spending Review model stood the test of time?
A decade on from the first Comprehensive Spending Review, the 2007 CSR demonstrated how the UK’s “top-down meets bottom-up” approach to multi-year expenditure planning has continued to develop and adapt to the changing demands being placed upon it by macroeconomic and political factors. However, fixing public spending plans is the easy part - like the theory part of the driving test. The real test of the resilience of the Spending Review process is whether the UK can stay within the yellow lines during the practical part of the exam between now and March of 2011…
2007 Comprehensive Spending Review
