Spending Cuts without the Cheese Slicer!

Posted by Bat-el Berger[1]

There isn’t a household in Holland which doesn’t have the handy cheese slicer to cut a Calvinistically thin slice from a big Dutch piece of cheese. In Dutch public finance the term “cheese slicer” has become synonymous for across the board expenditure cuts needed to achieve deficit targets. These cuts are easy from a bureaucratic point of view—all ministries share equally in the fiscal pain—and can be rationalized as cutting away government increases of productivity. However, ministries often play games with these kinds of cutback tools; at best priority and non-priority spending are hurt equally. In the hands of line ministries the cheese slicer is not really suited for weeding out ineffective expenditure programs or fundamentally changing the direction of government policies. For that a more fundamental analysis of government expenditure is needed.

Given the broad agreement in Dutch society that fiscal consolidation was needed after the 2008 economic crisis, the Dutch government ordered a new type of in-depth spending review (“brede heroverwegingen”, abbreviated BHO) in September 2009. The objective was to investigate more clever ways to cut public expenditure. No topics were declared off limit. Studies included entitlements levels, civil service cutbacks, tax expenditures, and social security, housing market and health care reforms. After 6 months, just before the new elections, it resulted in a “menu” of spending cuts from which a new coalition government could choose (a) its total amount of “fiscal consolidation” and (b) the expenditure and tax composition of that consolidation, according to the political priorities of the winning coalition. The release of the review on the first of April, 2010, was timed to allow political parties to incorporate the findings of the review in their programs for the election in June the same year. Some parties campaigned on how much they would cut back the welfare state, other on how little.

The preparations for the spending review were done by 20 study groups under the supervision of the Inspectorate of the Budget of the Dutch Ministry of Finance. Each study group was responsible for its own policy area, was led by an independent chairman and included civil servants from multiple relevant ministries. Where needed the groups were assisted by external experts such as from the Netherlands Bureau for Economic Policy Analysis (CPB) and the Netherlands Environmental Assessment Agency (PBL). Their task was to analyze and summarize possible austerity measures, for example by:

-          Harmonizing, merging and simplifying existing policy arrangements;

-          Strengthening of consistency between policy instruments;

-          Review of current policies and practices on their purpose, necessity and effectiveness;

-          Streamlining of organizations and the cooperation between organizations;

-          Reducing administrative costs and promoting efficiency;

-          Promoting the responsibility of citizens and internalizing spillovers.

The study groups were not restricted by existing legislation, ministerial policy, the existing coalition agreement or other agreements of the ruling cabinet. No area was off limits for investigation. The exercise resulted in 20 chapters that each offered at least one option to cut 20% of costs in that category of expenditure. Total spending reductions were proposed of €35 bln. structurally per year in total, or about 12 percent of central government expenditure (including social security).

Eventually all the big political parties included measures from the spending review in their programs. The graph below shows the percentage of budget cuts from spending reviews incorporated in election programs of the various political parties in the Netherlands for the elections of June 2010 (from the political left to the political right).

The BHO-operation was considered to be very successful, which could be attributed to several factors:

-          The financial crisis gave the exercise a sense of urgency. Whereas in “normal” times the ministry of Finance has a hard time stressing the importance of solid public finances, the prospect of exploding debt figures encouraged spending departments to cooperate with the spending reviews.

-          The assignment for the study groups was very clear: come up with options to cut spending by 20% in each policy area.

-          A non-veto rule stated that an idea suggested by study group members could not be blocked by other members, any sound idea was up for investigation. The advantages of this rule were that not much time was lost on seeking consensus and that multiple options were presented.

-          The study groups were chaired by senior officials who were not responsible for the policy under review, so there was no conflict of interest there.

-          As the reviews were written without any political restrictions, the options can cater to a wide range of political views; proposals that are not considered by the current coalition might still be useful for a next one.

-          Help of independent experts provided specialized expertise and increases credibility of the results.

About twenty of the proposed cuts in the spending review were eventually included in the coalition agreement of the current coalition, such as cost-covering court fees, privatizing public transport in big cities, lowering or abolishing contributions to NGO’s and reducing child care compensation.

Though the political parties and eventually the coalition did use the spending reviews as inspiration for their own programs and agreement, the biggest suggested cuts were left aside. These included major reforms in social security (cuts of up to €8.9 bln), the housing market/interest rate deduction scheme (cuts of up to €12.5 bln.) and health care (another potential €12.5 bln.). Apart from producing the biggest potential savings, these three subjects are also about as controversial as Dutch politics gets. Therefore it is not very surprising that those proposals did not make it into the coalition agreement.

[1] Bat-el Berger is a visiting scholar at the IMF’s Fiscal Affairs Department PFM 1 Division. She has previously worked as an inspector of the budget at the Dutch Ministry of Finance.

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