The Efficiency of Public Spending in the UK

An excellent new book by Christopher Hood and others^[1] takes its place alongside classic accounts of public financial management in the UK, notably Heclo and Wildavsky’s penetrating analysis of the UK’s budgetary practices fifty years ago, and Thain and Wright’s more recent study.^[2] It reviews the UK’s “fiscal constitution” – defined as “the constitutional and institutional arrangements for managing public spending” and how it operated during a 25-year period from the early 1990s to 2015. The book covers three periods of government – Conservative (1992-1997), New Labour (1997-2010), and the Conservative/Liberal Democrat Coalition (2010-2015).

The book focuses on how much change took place in spending control over this period and how fundamental and lasting were these changes. Some of the book’s most important findings for policymakers and practitioners – based on 130 in-depth interviews with ministers and officials of the UK’s finance ministry (HM Treasury) and an extensive review of the literature – are summarized below.

The book notes that the UK is a global outlier in some key aspects of public financial management. In particular, the draft budget (estimates) is not approved by Parliament until three months after the beginning of the financial year, allowing no opportunity for parliamentarians to review ex ante the budget proposals. Moreover, legislation on tax changes (adopted in the annual Finance Bill) is separated from decisions on spending. There were attempts both in 1993 and 2010 to rectify this anomaly by establishing a “single once-a-year fiscal event’ (i.e., an annual budget) in which all spending and tax proposals would be reviewed ex ante by the Parliament. But these attempts failed largely for political reasons and strong Treasury resistance. As the book observes: “even small changes in parliamentary procedure could be seen as presenting significant risks to executive government management of the budget process and the Treasury’s powers”.

The UK generally follows a top-down (or strategic) approach to budgeting (but with important bottom-up elements). But the definition of “top-down” has changed substantially over the period from the former “Planning Total” to the “New Control Total” and, since 1997, to a split between Department Expenditure Limits (DEL, replacing the New Control Total) and Annually Managed Expenditure (AME, which is subject to changes linked to the economic cycle, e.g., social welfare payments). Some interviewees were skeptical about the DEL-AME division since it implies that almost half of spending is outside the spending review process and interestingly few countries have followed a similar approach to the UK.

A fundamental review of the Treasury carried out in 1994 led to a new approach to spending control in which the Treasury’s spending divisions spend less time in micro-managing the departments they shadow and controlling the sub-components of their budgets. The review also entrenched the idea that the Treasury should be “lean and young … and largely staffed by graduate economists.” However, there remains an intellectual and organizational gulf between Treasury economists and accountants. Accountants were largely responsible for the establishment of the UK’s resource (accrual) accounting and budgeting framework (RAB) about which Treasury economists were generally skeptical, especially the notion of accrual budgeting (the “B” in “RAB”), a practice followed by very few other countries though many have implemented accrual accounting.

The period under review coincided with a huge growth in the UK’s Private Finance Initiative (PFI) (commonly known as “public private partnerships”). PFI projects quintupled in value between 1997 and 2010 but the related unitary payments never constituted more than one-fifth of overall capital spending. PFI was driven by politicians who wanted to promote investment without increasing public debt, but Treasury officials were persistently skeptical of the initiative which risked low value for money and rising costs of public spending over time. In 2018, the government announced that it would no longer use the PFI.

The book expresses strong reservations about the experiments in participatory budgeting that were undertaken by the Coalition Government in 2010 “to bring fresh ideas, experience and perspective” to the spending review that had been established to achieve massive cuts in public spending (“slamming on the brakes”) in response to a serious fiscal crisis. These experiments included the establishment of an “independent challenge group” of experts, wide consultation with public sector employees, and an even wider consultation with the private sector through a “digital interactive reality-TV approach”. None of these approaches successfully identified significant expenditure savings. The authors note that similar ideas for the “crowdsourcing” of fiscal policy decisions have not been taken up in the UK since the 2010 experiments.

Numerous changes in the classification and accounting rules that govern the spending control framework took place over the period, especially new rules introduced by RAB. Many of these conventions and rules were extremely challenging to execute both for the Treasury and the spending departments. There were vigorous (and unresolved) debates about how to define “front line service delivery” and “administration”. The new rules created many ambiguities and uncertainties in the classification of spending items or entities - for example, how to distinguish between “near cash” and “non-cash” expenditures. Gaming behavior by spending departments arising from these ambiguities was matched by gaming schemes devised by the Treasury itself and were an extremely wasteful use of officials’ time and expertise.

The Treasury’s approach to macroeconomic and fiscal forecasting changed hugely over the 25-year period. Initially, the Treasury continued to prepare and publish its own forecasts but with some oversight by a panel of experts (the “three wise men”). In a remarkable transformation of fiscal powers, the independent Office for Budget Responsibility (OBR) was established in 2010. The OBR took over responsibility for economic and fiscal forecasting from the Treasury as well as other responsibilities for overseeing fiscal policy, the analysis of long-term fiscal sustainability, and fiscal risks.

The book may cause public financial management practitioners who like to promote ideas of global “best practices” to think again. Defining clear points of reference in the UK will be extremely challenging. For example, “top-down” and “bottom up” approaches to budgeting have changed several times and are frequently intermingled. Similarly, accounting conventions and classifications have evolved continuously since the 1990s. And students of performance-related budgeting or models for fiscal federalism may find it difficult to extract clear lessons and messages from the UK’s experience. Concepts of “good” or “best” international practice are slippery and may need to be revisited.