BRITISH GOVERNMENT’S SPENDING REVIEWS

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BRITISH GOVERNMENT’S SPENDING REVIEWS

From the later years of the 1960s to 1998, the British Government spending was put under the annual limits that arose from an annual process that was known as the Public Expenditure Survey. However, in June 1998, the Government introduced a new regime for planning and managing public expenditure. It introduced a new aggregate for spending plans, Total Managed Expenditure that had two elements including the Annually Managed Expenditure and the Departmental Expenditure Limits. In terms of the Departmental Expenditure Limits, the departments were required to set strong and realistic multi-year limits that were intended to assure greater certainty and flexibility for long-term planning and management. On the other hand, the Annually Managed Expenditure included other spending that fell within the Total Managed Expenditure that could not be accorded firm multi-year restrictions, for instance, locally financed expenditure, social security benefits and government debt interest payments. This was set to be a function of a regular review outside the context of the Spending Reviews (Crawford, et al., September 2009, p. 8).

With respect to the Departmental Expenditure Limits, the Government drew up three-year plans that would run up to 2001-2002 period. This was set out in the 1998 Comprehensive Spending Review. Further reviews were done that made more three-year limits to be set in the Spending Reviews of 2000, 2002, and 2004. These were placed under a system understood as Three Year Planning Cycle reviewed within the period of every two years (Mitchell, 1998, p. 56). The Spending Review of fiscal management came into existence after the Labor Government that took power in 1997 stated that the Total Control method that was being used for budgeting purposes was not effective because it denied departments the chance to invest and spend money in a calculated and efficient manner. The government gave three reasons behind its argument. First, the it argue that the indicative nature used in the control totals to predict two or three years ahead had the meaning that it could be revised substantially to another year. This meant that an uncertain environment of operation was created for departments while planning their expenditure. Secondly, the totals were being separated into capital and current spending. This meant that departments would have to cut back on investment if their budgets were stringent. They would do this in order to meet certain pressing needs. This brought about a negative effect on the quality and quantity if public services. Thirdly, the government argued that when departments failed to use the funds allocated to them in a certain year, they were unable to carry forward the funds to the next year. This issue brought about the ‘use it or lose it’ idea that made departments rush spending especially towards the end of financial years. This issue encouraged failure of planning and a further misuse of allocated funds. The government outlined all the factors given above to be the causes of underinvestment and inefficient public services (Crawford, et al., September 2009, p. 14).

The plan established since the year 1998 was not followed to the end. If it had been followed, the next Spending Review that came after the one put for 2004 would have been arranged for 2006. On his first appearance before the committee in the then parliament, Rt. Hon. Gordon Brown MP., the Chancellor of the Exchequer made an announcement that there would be a Comprehensive Spending Review in 2007 that would introduce expenditure totals within the Departmental Expenditure Limits for three more periods including 2008-2009, 2009-2010 and 2010-2011. This meant that the review of 2007 would be taken back to the initial Review of 1998 (The Treasury Committee, June 2007, p. 12).

The government initiated the 2007 Spending Review with the view of spending from a Zero base. The Government stated that the main significance of the zero-based reviews was to bring in a new departmental baseline expenditure that would reflect the changing priorities that had been realized since the usage of the first Comprehensive Spending Review (Mitchell, 1998, p. 45). This was a strategic move by the Government in the sense that the past Spending Reviews had laid a focus on the allocation of incremental budgets in expenditure. This means that the new plan would set new long-term objectives in the Comprehensive Spending Reviews  and provide an opportunity for reallocation within and across departments with most past objectives having been realized. The new plan was strategic for the Government in the sense that it would allow the government realize its main goal of achieving value for money issues as set out in the July and November2006 documents (Crawford, et al., September 2009, p. 13).

The new regime of Spending Reviews for planning and managing public expenditure was initiated in 1998 through a new fiscal arrangement created to ensure that public finances would be managed on a long-term sustainability basis (The Treasury Committee, June 2007, p. 14). This introduced a new code of fiscal stability that mandated the Government to clearly outline the rules that would govern the application of the fiscal policy. This brought about the introduction of two rules that include the golden rule and the sustainable investment rule. The golden rule states that the Government would borrow money only for investment purposes rather than funding current spending over the economic cycle. The sustainable investment rule states that the debt net of the public sector, as a proportion of GDP would be put over the economic cycle on a prudent and stable level.

The Spending Review was set in determination of how the coalition government would carry out Britain’s deficit reduction plan that was unavoidable. This was brought in as an urgent priority measure would secure the financial stability of the country especially in the time of a lot of uncertainty of the global financial system. The Spending review by the coalition government also set out to significantly accelerate the reduction of the structural current budget deficit. The coalition government set out to eliminate the deficit in a five-year rolling plan (Horton & Reed, 2010, p. 15). The spending review also highlighted the plans of the government for capital spending. For example, as part of the Spending Review Process, the government made several considerations regarding a range of capital projects and identified those that had the highest value. The government also looked at the spending issue of the previous government’s contractual commitments. This made the government increase the capital range by 2.3 billion euros a year by 2014-2015 financial year to ensure that long-term economic plans were funded (Chancellor of the Exchequer, October 2010, p. 13). The spending review was set to protect the high value transport investment and maintenance, ensure UK remains a leader in science and research, increase adult apprenticeship funding by 250 million Euros, invest in low carbon economy and put higher education on sustainable financial base. The Spending Review of 2007 also set out to bring reforms in the Banking sector, benefits scheme, employment creation, education and planning.

In the 1998-2007 economic cycle, the sustainable investment rule was developed with the observation that the government should maintain a net debt of not more than 40 percent of the Gross Domestic Product in each year of cycle (The Treasury Committee, June 2007, p. 10). This was clearly set to ensure that the government becomes strategic in the management of the country’s finances. On the other hand, using the golden rule raises certain concerns. The golden rules as it was formulated maintained that the calculations of compliance to the set standards of the rule would depend on the judgement of the date of initiation and the date of ending. This also rests on the treasury because the treasury has the right to alter its judgement about the date of initiation using new economic data. An instance such as this happened in 2005 when the treasury changed its judgement on the beginning date of the economic cycle that existed from a beginning in 1999-2000 to another one in 1997-1998 (Horton & Reed, 2010, p. 20).

The setting of the Spending Review helped the Government for the reasons of forecasting financial expectations, to judge issues of compliance with economic rules. Therefore, the Government comes up with a series of assumptions about planning that occur beyond the term for which allocations have been accorded under the new Spending Reviews regime. For instance, an assumption about the levels of the spending in 2008-2009 was done and put in the Pre-Budget Report of the 2003 economic cycle. Further, an assumption of the current spending in the economic cycle of 2009-2010 was put in the Pre-Budget Report of 2004. In each of the above cases, assumptions were made that the public expenditure would face a growth of 1.9 percent in each year. Despite the fact that Exchequer used these figures for several years, the figures were not final. For instance, the 2006 Budget saw a change in the assumption of the current spending of 2008-2009 from 1.9 percent to 2.0 percent in real terms (Chancellor of the Exchequer, October 2010, p. 80).

In 2008, the total Government outlays of the UK Government as measured by the OECD were 48.1 percent of national income (Crawford, et al., September 2009, p. 6). This figure gave the British Government the tenth highest out of twenty-eight countries, in terms of public spending as a proportion of national income for which the OECD had consistent data. The United Kingdom was also the third highest among the G7 countries. In the OECD report, most countries had a similar increase to UK in their public spending between 1970 and 2010 particularly during the recession that happened in the 1980s. From 1999, the United Kingdom has experienced a sustained increase in public spending greater than other countries such as Italy, France and the USA.

In the recent years, the government has used the Spending Reviews in developing a capital budget that is targeted for spending cuts. For example the Comprehensive Spending Review of 2007set the platform for investment spending to increase to a figure of 2.3 percent of the total national income in the 2012-2014 financial year (Crawford, et al., September 2009, p. 11). The treasury, through its Long-term Public Finance Report that was published in 2008, assumed that in the end, the national income would stabilize at 2.0 percent. However, the government has reduced its investment plans and has decided to major on investment spending of about 1.3 percent of the national income of the 2013-2014 financial year. When studied on a closer point of view, this decision seems to have been informed by the financial crisis and the recession that the government has faced rather than by the belief that lower investment spending would go in line with the aspirations of the government for making public services efficient. If this can be delivered, it would be comparable to the level that was met in the beginning part of the 1990s (Tanzi & Schukne, 2000, p. 10).

The Spending reviews that were brought in 1998 also brought in new changes in terms of how departments would handle unused funds at the end of a financial year. The departments were allowed to carry forward the funds to the next financial year. This would be done by accruing an end-year flexibility (EYF) entitlement. Under the new scheme, the departments would retain an entitlement to all of the unused allocations from the previous years. The government took this measure with the hope that it would discourage the need for end-year splurges that encouraged poor planning and misuse of funds (The Treasury Committee, June 2007, p. 5).

Looking at the scenario before the introduction of the End Year Flexibility, the monthly totals for the central government cash outlays hardly recorded any significant changes especially in terms of the annual spending proportions that happen in the last months of a financial year. This clearly shows that the EYF scheme was not a success and the government did not meet its goal of using it. For instance, the spending done in the financial year 1988-1989 was 9.8 percent and 18.0 percent respectively. The spending recorded in the financial year of 1998-1999 after the introduction of EYF is 9.5 percent and 17.4 respectively (Crawford, et al., September 2009, p. 12). This figures still show high spending rates than if spending was evenly distributed over the whole financial year.

Spending on the payments of the net debt interest has historically grown in a slow pace than TME especially under the Conservative government between the years 1979 and 1997. On the other hand, since the entry of the Labour government, the level of spending on the net debt interest has been dropping by an average of 2.5 percent in real terms each financial year. However, it was predicted that from April 2008 onwards, the average rate of spending on an annual basis would increase to 16.1 percent. This rapid growth will supersede any other area of public spending (Crawford, et al., September 2009, p. 16).

The Comprehensive Spending Reviews introduced in 1998, 2000 and 2002 brought in fast growth in total spending than had been originally planned. For instance, in the adjustment for actual inflation, the spending plans initiated by the Spending Review of 1998 showed that TME would grow by 3.4 percent. However, the figures show that TME grew by 3.7 percent. However, the fast growth rate was because of the higher than planner DEL growth. The Spending Review of 2004 had a growth that was similar to what was planned for in the Review (Crawford, et al., September 2009, p. 40).

The 2007 Comprehensive Spending Review saw the introduction of setting a three-year DELs and testing it on a period characterized by a weak growth of the economy. The lower than expected inflation rates meant that the cash spending plans from the Comprehensive Spending Review of 2007 implied a fats real growth rate  over the period than it was planned for. It is also projected that there will be a higher fiscal spending on AME than was projected originally. This is because of the rising benefit payments and social security that came during the recession. When it comes to departmental spending the government was keen on is plans to implement the spending plans that were outlined in the Comprehensive Spending Review of 2007. It is noteworthy to point out that the government has not made significant reductions in the planned departmental spending. Nevertheless, the capital budget of the NHS in 2010-2011 was reduced, but the government claimed that it identified 5 billion Euros of further efficiency savings across the current budget allocated to governmental departments that was expected to be delivered within that period (Crawford, et al., September 2009, p. 41). This means that the planned spending was reduced. Within the 2010-2011 fiscal period, the government also brought certain planned investment spending forward into the preceding two years to ensure that the economy is stimulated. Therefore, since the introduction of the Comprehensive Spending Review of 2007, the departmental financial spending plans for 2010-2011 have been reduced slightly since the inception of the Spending Review. Despite this, the latest prediction for real DEL growth over the period is still high than the original plan of growth.

In conclusion, the British Government’s use of Spending Reviews from 1998 to 2007 and from 2008 onwards has made the government strategic. The Labour Government that took over power from the conservatives initiated this change. The Coalition Government also implemented the Spending Reviews to ensure greater spending investment and reduce net public debt below 40 percent. The use of Spending Reviews has helped the government to be strategic in terms of organizing its economic policies and allocation methods towards various departments. The usage of government funds has also been made efficient in public service by allocating more funds to the needy institutions, such as education social security and science and research. Therefore, despite the fact that the Spending Reviews have not met their targets on a 100 percent score, the reviews have helped the government become strategic.

References

Chancellor of the Exchequer, October 2010. SPENDING REVIEW 2010, Norwich: TSO (The Stationery Office).

Crawford, R., Emmerson, C. & Tetlow, G., September 2009. A Survey of Public Spending in the UK. IFS BrIefing Note BN43, Issue 4-43.

Horton, T. & Reed, H., 2010. The distributional impact of the 2010 Spending Review. Radical Statistics, Volume 103, pp. 13-24..

Mitchell, P., 1998. UK health service benefits in public spending review. The Lancet , 352(9124), p. 298.

Tanzi, V. & Schukne, L., 2000. Public Spending in the 20th Century. London: Cambridge University Press.

The Treasury Committee, June 2007. The 2007 Comprehensive Spending Review: Prospects and Processes, Norwich: The Stationery Office Limited.

 

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