Effective Spending Reviews on Public Finances
Spending reviews are instrumental in providing substantial insight into budget allocations, which enhances productivity and operational efficiency. Governments globally must manage their resources efficiently to deliver services at the lowest possible cost. For many, this requires going beyond conventional budgeting to adopt innovative strategies in managing public finances: spending reviews.
Spending reviews yield significant insights into budget allocations, resulting in recommendations that boost productivity and operational efficiency. They also enhance transparency, allowing citizens to understand the reasons and methods behind public spending.
There is no universal blueprint for spending reviews; governments can customise their frameworks based on specific priorities. However, certain approaches can support sustainability and enhance long-term benefits. These approaches include establishing detailed financial and operational baselines, identifying the underlying drivers of costs, benchmarking spending efficiency to spot improvement opportunities, and making recommendations to enhance efficiency or reallocate resources.
Governments that implement these strategic foundations are more likely to develop structured spending reviews that are reliable, effective, and beneficial.
Governments globally must manage their resources efficiently to deliver services at the lowest possible cost.
Spending Reviews: An Effective Tool for Managing Public Finances
Spending reviews assist governments in comprehending their spending and identifying efficiency opportunities. Unlike traditional top-down budgetary targets and the political negotiations prevalent in OECD countries, spending reviews are detailed evaluations of specific spending areas. Their objectives are to increase transparency, improve efficiency, and reallocate resources when necessary.
Several governments have leveraged spending reviews to improve expenditure performance.
The UK government has conducted spending reviews every two to five years as part of its budget-setting process. In 2015, HM Treasury, collaborating with government departments, established a new costing unit to carry out rapid six- to eight-week reviews of public spending areas. This unit has since completed numerous reviews on operating expenditure in sectors ranging from vocational education to criminal justice.
Denmark has carried out over 50 spending reviews across various services, from policing to back-office functions within the government. These reviews are integrated into the annual budget process, with the Ministry of Finance typically identifying several spending reviews each year. These reviews form the basis for resource reallocation and spending programs, influencing budget negotiations.
Sweden's spending reviews have mainly targeted capital efficiency (e.g., in highways and rail) and service delivery (e.g., through the migration agency).
These spending reviews have produced notable results. In the United Kingdom, they have provided transparency for over £20 billion of annual spending reviewed and introduced a new method of visualising public spending across 25 departments. In Denmark, spending reviews have contributed to combined annual savings of €1 billion through various cross-government and ministry programs over five years.
The advantages of spending reviews are clear. They offer significant insights into budget allocations, promoting higher productivity and operational efficiency. Furthermore, they enhance transparency, providing the public with a clearer understanding of public finances.
Governments that embrace strategic spending reviews are well-positioned to manage their public finances effectively. By establishing detailed baselines, identifying cost drivers, benchmarking efficiency, and making informed recommendations, they can create a robust framework for sustainable public sector management.
Designing a Spending Review Process: Essential Decisions
Spending reviews vary widely, reflecting different governmental priorities and structures. However, there are three crucial areas where design decisions must be made to ensure an effective process for managing public finances: the institutional setup, the scope, and the individual-review-selection criteria.
Institutional Setup
Governments need to determine which ministries or teams will be responsible for conducting spending reviews. The entity leading the review must have sufficient formal and informal power to coordinate the process effectively. Different countries have adopted various approaches to this. In the United Kingdom and Denmark, spending reviews are spearheaded by HM Treasury and the Ministry of Finance, respectively, in collaboration with other departments. Conversely, in Spain and Italy, an independent fiscal authority and a politically appointed commissioner, respectively, oversee the reviews. Typically, the teams responsible for the reviews are small and include personnel from both ministries and departments. For instance, HM Treasury’s team in the UK, which consists of about ten people, often undertakes two or three reviews simultaneously. It's also crucial to establish upfront whether the recommendations from the reviews will be advisory or mandatory.
Scope
Deciding the scope of the spending review is vital as it influences the type of analysis and recommendations. Reviews focusing on operating costs typically examine labour costs, external spending, and back-office processes. Capital project reviews, on the other hand, consider the volume, specifications, timing, and delivery efficiency. Reviews of transfer payments might look into eligibility, fraud, and error. The scope dictates the skills and capabilities needed; for example, a review of external spending and procurement requires different expertise than a review of transfer-payment fraud. Countries choose to concentrate their spending reviews on various aspects of public spending. In the United Kingdom, reviews have primarily addressed operating expenditure, with the government aiming to reduce operating costs in some ministries by 30 to 40 percent since 2010. In Sweden, the initial focus was on capital projects, but recently the scope has broadened.
Individual-Review-Selection Criteria
Governments generally conduct up to ten individual spending reviews annually, using different criteria for selection. A key decision is whether to focus on a single ministry or agency or address cross-cutting issues spanning multiple government areas, such as criminal justice and social care. Cross-cutting reviews can tackle more complex issues, including the frictional costs arising from inter-ministerial coordination, but they are more challenging to execute and implement. Additionally, governments must decide on the size of the expenditure being reviewed. Reviews that are too small may not be significant, while those that are too large may not yield insightful results within the available time. In the United Kingdom, most reviews target areas with at least £1 billion in annual expenditure.
There is no single correct approach to these design decisions, as they must reflect national priorities, governmental structures, and political realities. However, it is essential to ensure that these choices are aligned to enable the review teams to generate valuable insights and recommend significant changes to manage public finances effectively.
Conducting a Spending Review
Governments, despite varying institutional setups, scopes, and selection criteria, have adopted a common approach for conducting spending reviews to manage public finances effectively. The process typically involves establishing granular financial and operational baselines, understanding the underlying drivers of costs, benchmarking spending efficiency to identify opportunities for improvement, and making recommendations to enhance efficiency or reallocate resources.
Agile Teams and Timelines
Spending reviews are generally conducted by agile teams comprising five to ten members from both the finance ministry and the service-delivering ministries. Depending on the review's size and complexity, timelines can range from six weeks to six months, encompassing four critical stages.
1. Establish Granular Financial and Operational Baselines
Creating comprehensive financial and operational baselines is often the first step in a spending review. Financial baselines detail the spending amount, responsible entities, and expenditure areas, while operational baselines highlight activities funded by public spending and their outputs.
The initial task involves agreeing on a standard taxonomy of inputs, outputs, and outcomes, enabling like-for-like comparisons and revealing potential conflicts across ministries or undefined outcomes. For example, the UK’s HM Treasury reviewed the further-education system in England in 2015, establishing cost categories comparable across institutions and analysing them at the individual educational institution level. This process revealed the relationship among inputs, outputs, and outcomes, offering a holistic view of public spending.
Developing a detailed financial baseline includes all costs in a specific public spending area, often spanning multiple ministries, at the most granular level. This can uncover unexpected spending levels and identify structural deficits or surpluses. Forecasting future costs based on underlying drivers, such as migration figures or infrastructure projects, can also be part of the review.
Operational baselines map activities and outputs generated by public spending, identifying high-volume and complex areas, handoffs, and potential friction points in cross-government spending. For instance, HM Treasury's spending review of London’s criminal-justice system produced an end-to-end map of activities, outcomes, and key performance indicators.
2. Identify Underlying Cost Drivers
A key benefit of spending reviews is the deep understanding they provide of cost drivers and management strategies. The initial step involves building cost-driver trees for main cost categories. For instance, the cost of supporting military vehicles includes factors like manpower, fuel, spare parts, and basing. By modeling these factors, governments can understand cost drivers and identify areas where small changes can significantly impact overall costs.
Disaggregating fixed and variable costs is crucial. For military vehicles, basing and manpower costs may be fixed, while fuel costs are variable. Understanding these distinctions helps in outsourced and public-private support arrangements, where departments need to know how costs vary with usage.
Governments with detailed cost-driver knowledge can develop unit costs for service provision, allowing for effective comparisons between internal and external service provision. When HM Treasury reviewed further education costs, it worked with vocational institutions to understand the cost per qualification hour, enabling comparisons across institutions.
3. Benchmark Spending Efficiency and Identify Improvement Opportunities
Spending reviews equip ministries to make informed decisions about efficiency and productivity improvements. Review teams can benchmark efficiency internally and externally, using the granular picture of costs and cost drivers. Internal benchmarking involves standardizing costs and comparing performance across institutions, such as schools and hospitals. International and private sector benchmarking can also identify opportunities.
Once opportunities are identified, teams can find levers to realise improvements, typically involving financial and operational analysis, discussions with practitioners, and subject-matter expertise. Proven productivity levers include large-scale automation in corporate functions, demand management, contract renegotiation, and procurement consolidation.
For capital expenditure, productivity improvements can result from cross-government pipeline reviews, project specification enhancements, and value engineering during project delivery. For example, the UK’s Infrastructure and Projects Authority maintains a single view of major capital programs, and Sweden has achieved efficiencies in highway spending through standard project requirements.
Spending reviews of transfer payments often focus on reducing fraud and error levels. Using benchmarks and efficiency levers, review teams can help ministries identify productivity improvements, size opportunities, and define actions for efficiency.
4. Agree on Recommendations, Prioritise Actions, and Ensure Delivery
The ultimate goal of spending reviews is to make recommendations that enhance the efficiency and effectiveness of public spending. Achieving this impact requires agreement on recommendations with implementing ministries. Recommendations may involve policy changes, funding arrangements, and operational adjustments, necessitating clear stakeholder agreement for implementation.
Prioritising actions involves defining a road map for the coming months and beyond, potentially requiring additional funding, such as capital investment in automation. These arrangements may take the form of performance contracts between the finance ministry and line ministries.
Finally, ensuring delivery involves follow-up by the review team, using frameworks that define key performance indicators and include timetables for subsequent reviews and annual impact assessments.
Spending reviews, as pioneered in countries like Australia, Denmark, Italy, and the UK, offer a powerful approach to ensuring value in public spending. Deploying small, mixed teams over fixed periods to review specific public spending areas consistently provides deep cost insights and identifies efficiencies. For countries yet to embrace this opportunity, spending reviews present a viable route to maximising value from public finances.
