How the UK will wield the razor

[Marc Robinson]

The new British government has just released a document explaining the process it will use to achieve drastic fiscal consolidation during this year’s Spending Review. The process will be closely modeled on the successful Canadian program review of 1994-95. Read more at ....http://blog.pfmresults.com/wordpress/

[Martin Johnson]

Thank you Marc for some very interesting thoughts on, to understate slightly I guess, a very topical issue. Lots of interesting stuff in there indeed.

I have found the discussion around the situation facing the UK and the apparent desire to emulate what happened in Canada interesting. Lots of similarities and some key differences. Perhaps the most important difference being the coordinated negative fiscal stimulus in neighboring countries that the UK economy will face compared to the growing markets that Canada's economy would have been exporting to. Clearly the UK cannot simply do exactly what Canada did and expect the results to be exactly the same. But there are some important lessons in there with regard to both process and hard-nosed decisions.

I liked your reference to wielding the razor rather than the axe - a reference I presume to the search for yet more efficiency savings rather than programme cuts (delivering salami rather than a full side of beef). Actually, I think there is another side to efficiency savings that does not seem to be given the attention it deserves. What are 'across the board efficiency savings' once the pips have been squeezed other than arbitrary budget cuts by another name? We have been purposefully moving away from advising Governments to plan resource allocation in this way over the last 20 years. They will deliver some savings, of course, but at what cost? There are already signs in some cases that increases in 'efficiency' (more with less) are being paid for by weakening effectiveness (less being achieved in practice when the 'more' is weighted properly by a measure of quality).

One of the paradigm shifts in budget preparation advice these last 20 years has been to allocate ceilings to ministries and agencies within which they plan. If they are given the correct latitude to make programme budget decisions, the budget ceiling can then be allocated in a manner that delivers a combination of 'efficiency savings' (that the ministry feels it can deliver without compromising the policy delivery itself) and programme restructuring. In some cases, this could even mean that funding for some programmes increases ... but as you infer in your article, it would inevitably mean that whole outputs within some programmes would need to be scaled back (and perhaps whole programmes even).

It seems to me from what I have read and understand that the UK government may be entering into a major programme of cuts without the benefit of establishing expenditure ceilings first. If so, this would run directly against the paradigm of standard budget preparation over the last 20 years - with the risk that it delivers substantial slices of salami that spread poor quality across the board rather than engaging properly in an exercise of prioritisation with policy parameters set at the top (through ceilings) and decisions on how the cuts would be effected in practice taken at the bottom (through decisions by ministries over outputs to be delivered by their programmes). One thing that is worth bearing in mind in this regard is that any reference to the advent of the programme and performance budgeting system in Canada always states that it was their fiscal crisis that was the catalyst for its creation. Results-placed planning very much has its place here.

Back to the UK though. Given the above, I think your point that one cannot expect a sufficiently comprehensive expenditure review to be completed over the coming weeks goes through. Politically, of course, the new government has to demonstrate credibility with regard to cuts. Delaying decisions whilst a review takes place would be read as prevarication and the markets would jitter appropriately. But I am also a bit baffled about how swift decisions on cuts can sit easily with the government's stated intention of involving stakeholders (i.e. the public, unions, etc.) in determining trade-offs. I actually think this idea makes sense, and is very much as the Canadians proceeded, both internally (requiring recalcitrant ministers to identify extra cuts in other programmes to retain their own funding) and externally (ensuring that the public were absolutely clear what the opportunity cost in certain services would be if cuts were not imposed in others). Unfortunately, a process like this takes time. But it has the potential to give the new government the authority that public support bestows to determine what a new pattern of expenditure ceilings for medium term budget preparation would be. Which in turn would allow a properly prioritised set of cuts to be implemented to deliver economy, efficiency and effectiveness.

One last thought. Potentially the biggest sin that the new government could commit would be to 'waste a good crisis'. There is much to feel uneasy about in some key parts of the UK's spending. The efficiency of spending in some aspects of the health service, for example (which cannot be addressed through the salami slicing of efficiency gains), or the perverse incentives in parts of the benefits system, not to mention the abuse in parts of both the benefits and tax systems that many of us in the UK have come to regard as pretty much the norm. It has been some time since the nation was presented with a situation where much needed reform has been possible within an environment where the vast majority of the country can be led to see that it is in the interest of us all. Let us see how skillful our new government proves to be.

[Napodano]

What I like of the approach Canada adopted was the decision to impose budget cuts not only in the first year but to make an assessment in the second year and then further reducing expenditures.

Apart from the logic of analysing the impact of the first wave of cuts before 'wielding the razor' again, I believe that gives a clear signal to spending units that the Government is serious about the fiscal consolidation.

In several countries, including mine (sic), cuts are only temporary or on paper. A real efficiency gain drive should be based on structural reduction of expenditures.

[petagny]

The razor is a useful tool for carefully removing unwanted hair without causing (excess) damage to one's features, but something substantially more robust is needed for major cosmetic surgery - something to cut through bone for that nose-job and a good thick blade to remove that double-chin! And while we normally shave ourselves, DIY cosmetic surgery is not to be recommended - we just wouldn't have the courage to cut deep enough and it hurts too much! So, can we always rely on spending agencies to do their own surgery within top-down ceilings or is a helping hand needed from finance ministry surgeons?

Yesterday the Treasury attempted what looks, at first sight, like some major surgery. 217 projects and programmes approved between 1 January and the election have been reviewed. Out of a total value of £34 billion, £2 billion has been cut and £8.5 billion suspended for deeper review. Sounds impressive! But look more closely. Of the £2 billion, only £370 million represented savings not already identified. Of the £8.5 billion, £7 billion represents replacements for the RAF's ageing search-and-rescue helicopters (some of which have been in service since 1978) and £1 billion for the upgrading of the A14 (a very busy road, which is one of Britains's main links to the Continent via Felixstowe): at best this is only delayed expenditure in areas where there is a genuine public sector role. In reality, it's perhaps surprising how little pre-election 'pork barrel' spending there was - thanks to Alisdair Darling keeping the lid on things according to some of last weekend's newspapers. The £34 billion figure was also somewhat misleading as it was for the lifetime of the project/programmes - so just how many years does this spending spread over?

No, I'm afraid the whole exercise is going to be a lot more difficult than trawling through a list of projects and picking out the dodgy ones or squeezing out 'efficiency savings' (which more often than not will mean delayed maintenance on the capital stock). If the deficit reduction targets are to be met, we're talking about radically curtailing some entitlements and cutting cutting back or dropping some services. And as I've said before, the whole exercise has been made all the more difficult by promises to protect certain services and some badly targeted entitlements. In these circumstances, can spending ministries be expected to do the honourable thing without some forceful 'assistance' from the finance ministry? Yesterday, for example, the Minister of Defence, after having said there would be no 'sacred cows' went on to say that radical cuts would be made while preserving all his programmes intact. Neat trick! All to be done by renegotiating procurement contracts with the defence industry, apparently.

Ceilings, yes: but in these situations, finance ministries also need to be active and, at the risk of over-using the metaphor, up to their arms in blood. And Governments have to make some fundamental choices about what the public sector does: this can't be left to spending ministries alone.

This is all about the 'how': for more on the 'why', or rather 'why now?', read Samuel Brittan in today's FT:

'In an agenda-setting speech on June 7, Mr Cameron gave three arguments for wanting to cut the Budget deficit quickly...The most populist argument was to translate the official projection of a near £70bn annual interest payment on the national debt by 2015 into “schools ‘n hospitals” forgone, as every demagogic politician does to bully people into accepting his policies. Never mind that these payments already amount to £40bn and even the most draconian budget will not be able to freeze it at that level. More fundamentally, how many “schools ‘n hospitals” will we lose if government policies prolong recessionary conditions unnecessarily? His second argument is that investors “do not have to put their money into Britain”. This ignores the fact that, in contrast to Greece, at least two-thirds of government borrowing is financed internally. An expanding economy itself generates most of the savings required to finance Budget deficits, and much else.'

[John Short]

Stumbled across this piece.  It argues for no ring fencing for health inter alia and prescribes cuts in all areas.  The above average cuts advocated for north of the border will raise hackles there.  It recognises the impact of the Barnett formulae which Lord Joel (the "inventor") wants scrapped and those who live just south of the border see as a subsidy which gives an unfair distribution of expenditure between the North East and Scotland if expenditure were to be correlated to need.

http://adamsmith.org/files/the-party-is-over.pdf

[Napodano]

Now the answer is out for every PFM Boarder to comment

Budget statement: George Osborne's speech in full at http://news.bbc.co.uk/democracylive/hi/house_of_commons/newsid_8751000/8751754.stm (some lively exchanges from the benches especially when VAT increase was announced)
Plus the entire budget 2010 document attached below.

- Average real terms budget cuts of 25% over four years  (departmental cuts amount to £17bn by 2014-15). WOW!
- Except for health and international aid! double WOW!

[harnett]

Only a single wow! For international aid - when the public was asked by the government for areas to identify for budget cuts in the UK, International Aid came out as number 1!!!  The ideal excuse for the present government to review it's ringfencing decision.  Watch this space.  Or ......... ringfence aid but divert funds towards Foreign Office/MOD objectives (and cut the Foreign Office budget?  Surely William Hague wouldn't wear that?!) - such as a 40% increase to Afghanistan and halving the number of counties receiving aid

http://www.guardian.co.uk/society/2010/jul/18/international-aid-under-threat-cuts

[petagny]

Some feedback from a DFID insider is that this government might be leaning towards a return to project aid. The practical implications could be that while the aid budget might be notionally ring-fenced, disbursement could end up being the problem because DFID has stripped away its capacity to deliver project aid.

In relation to this post and Harnett's recent posts on corruption I recommend Robert Calderisi's book 'The Trouble with Africa: Why Foreign Aid Isn't Working'. As a former World Bank country director he has some interesting insights. He suggests focusing aid on a very much smaller number of countries that are serious about reducing poverty and making the aid more flexible. The problem is deciding which ones. Calderisi suggests Uganda, Ghana, Mozambique Tanzania and perhaps Mali. Do readers agree?

[Napodano]

Petagny,

That selection would mean abbandoning countries in a state of fragility, such as Zimbabwe and in the past Mozambique and Angola.... to easy a way out, I believe.

[petagny]

The argument made is that aid in the wrong context only makes matters worse - we are talking about development assistance here, not humanitarian aid. One of the book's 10 recommended ways to change Africa is to 'cut direct aid to individual countries in half'. Calderisi's thesis (in brief) is that 'Abundant aid offers false hope, dampens the initiative to develop the continent's own resources, including its people, and calms Western consciences while dulling them to even greater horrors that lie ahead'. Other recommendations include suspending aid to countries that lock up journalists or refuse to hold internationally supervised elections!

We are somewhat off the original subject here, except that ideas like the above might not have been too difficult to sell to the UK electorate if the opinion survey is accurate. Which brings us back to Harnett's original interesting question as to why development assistance has been made untouchable in the UK.

[John Short]

Report of Scotland's Independent Budget Review Panel in http://www.scotland.gov.uk/Resource/Doc/919/0102335.pdf suggests no ring- fencing and changes in approach to "free" provision that apply only to Scotland in the main.  It also points to wage freezes and job cuts.  The approach looks more like the one Ireland has taken and it will be interesting to see if it influences the forthcoming UK spending reviews. 

Linked to another Board topic: "The Panel also concludes that there is a need to move towards a more outcomes-based
approach to public service management and to improve the quality, availability and application
of evaluation, monitoring and reporting data and information in relation to outcomes across the
public sector in order to ensure that resources are applied to full benefit. This is vital if the Scottish
Parliament is to exercise an effective monitoring and scrutiny role."

[STONE]

On the aid budget issue.  DFID's Structural Reform Plan has a target....
1.1(yes it's top of the list)  Honour UK commitment to spend 0.7% of GNI on overseas aid from 2013, enshrine this commitment in law and encourage other countries to fulfil their aid commitments

The plan has an end date of November 2011.  Work started in May 2010.  The August Structural Reform Plan Monthly Implementation Update indicates "work ongoing".  Looks like the the aid budget is going to have hairy legs.

[harnett]

On the issues suggested by Caldarisi (thank you petagny!), it saddens me to say so, but I also think that restricting aid to countries achieving a certain measure of good governance is the only way forward.  My visit to Zambia earlier this year led me to believe that aid does little more than fuel corruption in the present environment.  I'm sure that is the case in plenty of other countries.  Donors have little sway in Zambia when Chinese aid and good copper prices are factored into the equation.  Even when corruption is uncovered, the response is a technical fix (advance PFM reform) rather than dealing with the root cause of the corruption problem.  In fact it appears that donors are not even willing themselves to reveal the full extent of the ineffectivenes of aid in Zambia.

Further to that, wouldn't it be interesting to concentrate aid monies in fewer countries and go for a level of aid that could really make a difference?  If Zambia's aid budget were to be reassigned to Mozambique, for example, wouldn't that reestablish a bargaining tool for donors, send a message to corrupt governments, and also reward those which have embarked on (and implemented) a positive reform path?

As a brief coda:  yes, this would perhaps unfairly penalise one set of poor (in Zambia) for the benefit of others (in Mozambiaque), but interestingly, after the cessation of disbursements into the Health sector in Zambia between May and November 2009, there is little evidence to suggest that service delivery to the poor suffered (so bad was it anyway - as a result of corruption!).  In fact the district hospital I talked to was unaware of any change in drug deliveries or other goods and services during this period, despite the GOZ's claims that donor behaviour had resulted in deaths!

Certainly an argument that is worth following - I shall read the book with interest.  It seems the days of MDG targets + Paris/Accra are numbered as it presumes a level of governance in many poor countries will not take advantage of the donors' position.  I, for one, would be sad the return to project aid, but in the context of Zambia.....?