Are Spending Reviews losing their Bite ?

Spending reviews are an important and relatively successful PFM reform that have been introduced in many advanced economies, especially after the 2008-2009 global financial crisis. Many emerging market economies and developing countries are now also getting interested in this reform. But some countries are struggling with the capacity and resource requirements of these expenditure “deep-dives”, and also with defining their most useful scope and focus.

Should spending reviews be program, agency or process focused (it can be any one of these three)? Should they be targeted selectively at certain spending areas (yes) or be comprehensive and cover the whole budget (no, zero-based budgeting doesn’t work).^[1] Could they review cross-cutting issues such as spending on IT or external consultants (yes, definitely)? Should they be done jointly by finance ministries and involve line ministries with support of independent outside experts (preferably, yes), and should the timeline be integrated with the budget cycle (yes). Should the reviews have an explicit budgetary savings goal (perhaps)? In the past the answer to this last question was a definite yes, but it is not so clear any more based on some recent advanced country experience and new OECD guidance material.

Spending reviews were originally developed as in-depth reviews of ongoing budget expenditure, the so-called expenditure baseline, usually led or coordinated by finance ministries. The aim was to support fiscal consolidation though development of savings options and cutbacks on ineffective and low priority spending. In recent years, they have become more and more an instrument focused on improving the quality of spending though better alignment of expenditure with government priorities and increasing expenditure efficiency (with a smaller emphasis on expenditure effectiveness).

The OECD does still euphemistically refer to one of the aims of spending reviews as “managing the aggregate level of government expenditure” which probably points to their fiscal consolidation and retrenchment roots.^[2] A package of expenditure savings is however no longer a requirement for a spending review, as it was a decade ago.^[3] On the contrary, spending reviews in some countries now include upfront investment (i.e., additional spending) for expected, but uncertain, better “performance” down the road. This used to be a big no-no in spending reviews. Savings needed to be concrete and upfront. Savings targets were an integral part of the terms of reference of the review team.

The trend towards spending reviews losing their bite and in effect becoming normal, albeit high-profile, policy evaluations is a step backwards While there is of course nothing wrong with better alignment of spending to government priorities and improving efficiency, these should be part and parcel of normal policy evaluation processes of which there are usually many in government on a repeating cycle. In advanced countries, program and policy evaluations are carried out in their hundreds every year. Bureaucracies typically use evaluations to mildly criticize (or congratulate) themselves, request more resources, but most of all to keep the status quo. They are usually carried out by line ministries and agencies themselves or by independent evaluators such as the country’s Supreme Audit Institution. Most evaluation processes are strong in analysis but weak in follow through.

Ministries of finance of course have their own role in improving the quality of spending. They have (or should have) a “challenge” role in the budget review process and in monitoring program performance. However, should they use their valuable and limited policy analysis capacity to push program and policy effectiveness without a clear benefit for fiscal sustainability, i.e., by cutting back baseline spending? Is expenditure policy not primarily a task of line ministries and especially their political leadership?

Expecting the finance ministries to be the mother hen of both financial and policy management is not a role to which they are well suited. It is a sign that regular evaluation instruments have become ineffective and line ministries are not doing their job to reform and modernize. It may also point to weaknesses in the coordinating role of ministries of planning and/or the prime minister’s office.

Aside from the issue of roles and responsibilities in government, the main reason for having savings targets in spending reviews is that many countries require baseline expenditures to be trimmed on an ongoing basis. This is needed either to redress previous expansionary policies, create fiscal space for new policy initiatives, or to address spending pressures that are almost always inherent in public sector spending. Expenditure baselines tend to grow faster than revenues in major policy areas such as social spending and health care, especially in countries with aging populations. Some policies reflect past priorities and need to be weeded out. Bureaucracies tend to become bloated without a regular process for reviewing their efficiency and effectiveness.

Spending reviews are an excellent instrument for cutting back on expenditure baselines based on an in-depth analysis of effectiveness, efficiency, and policy priorities. By comparison, the alternative of across-the-board budget cuts is usually a terrible way to reduce expenditure and often leads to a general impoverishment of public service delivery. So for now let’s keep the bite in spending reviews. Some anxiety and impetus to change in the realms of bureaucracy can be a healthy thing.