As we head into an unusually significant ‘outcome focused’ spending review ministers and senior officials should reflect on two mistruths that have dogged public expenditure controls and the accompanying narrative about waste and efficiency over the last 60 years:
that efficiency interventions improve efficiency (as opposed to the reality of blunt, unprioritized savings with little regard to the consequences); and,
that the treasury takes a strategic approach to outcome-based performance budgeting (as opposed to an increasing reversion to central controls of inputs and clunky, costly centralising of administrative and professional costs using largely failed devices like shared services)
These mistruths are vividly portrayed in a brilliant new piece of research (Warner et al., 2024) which tells the depressing story of the impact on the Prison Service of twenty years of civil service reforms, spending reviews and efficiency measures. The story starts with significant improvements in financial and performance management resulting from the Next Steps reform that are reinforced by the 15 year push towards performance budgeting up to the late noughties.
It turns ugly after the Osborne Axe in 2010. His ideological and careless assault on the size of the public sector was accompanied by centralised cost cutting measures across Whitehall. The Prison Service story comprehensively dismantles the delusion of efficiency measures and any notion of outcome focused spending reviews.
The authors conclude that “an increasingly hyper-centralised governance model, designed in part to strengthen input controls, has subverted managerial freedom and financial flexibility and undermined performance budgeting’s emphasis on outputs/outcomes”. (Warner et al., 2024)
1. The great efficiency lie.
The cross-party narrative of a war on waste and inefficiency prevails because it plays well. Somehow the answer is always 5% (except for protected departments – not because they are any less wasteful, but because reductions in their budgets are politically difficult). There is always something there because ‘everyone knows’ the public sector is wasteful and full of public servants working from home.
Using the efficiency pretext successive spending reviews impose cuts without considering the consequences. The output of a spending review is almost always cuts, savings and headcount reductions that deliver the Treasury’s bottom line. Economy not efficiency.
In my role as Strategy and Change Director in the Ministry of Justice during the 2009 emergency budget and subsequent spending review I saw first-hand that so long as you meet the bottom line imposed or negotiated by the treasury, no one will ask you how that affects performance, effectiveness let alone efficiency. Chancellors of all parties, aided and abetted by the treasury and Cabinet Office offer up the magic efficiency tree which always can give up ‘waste’ if you just shake it hard enough. In her launch of the spending review Reeves repeats the standard no-pain line, which contradicts the zero based budget review she outlines elsewhere:
"It's through finding those efficiency savings that we'll have the money to spend on the priorities of the British people,"
The reality is that it is through some big ticket, politically difficult cuts that she will find most of the money needed for funding missions. Especially as she says that the 5% Efficiency savings can be re-allocated within the department that finds them.
The Prison Service Story shows what will happen in practice. Between 2010-15 £983 million were taken out of the Prison Service's £4 billion budget – a 24% reduction. And staffing was cut by 10,000 from an initial head count of around 50,000 a 20% cut. Unsurprisingly performance dropped against output/outcome ‘decency’ measures: prison assaults per 1,000 prisoners rose from 135 to 285; and, by 2022 self-harm rates per 1,000 prisoners had risen from 3,000 to 5,000 (Warner et al., 2024). These cuts were not about efficiency – they produced less outcomes for less cost. People died.
‘it always felt like the MoJ and the Treasury were more interested in the input ... the Treasury just wanted to get the money and that was it’.” (former prison governor)
“[there was] an absence of ‘intellectual curiosity’ about the resulting waste in terms of money and outcomes, emphasising an unwillingness to critically evaluate the evidence.” (former prison governor)
“[there is an] ‘unspoken Treasury mantra [that] if something is shit it better be cheap’.. ‘we’ve ended up with a prison system which meets both of those criteria actually’. (former senior prison service official in (Warner et al., 2024))
Departments tend to pass on a greater share of ‘their’ savings to agencies and local public services than they take out centrally. They do this by passing on the Treasury’s imposition of 5% ‘efficiency’ cuts without regard to the consequences, or sometimes through the old trick of devolving power and responsibilities after removing a large chunk of the previous budget to provide centrally cashed savings.
A look at local government employment compared with central government tells this story well: local government employment fell by 31% from 2010 to 2020 - down to 2 million, the lowest since the early sixties (foley, 2020). Meanwhile civil service employment fell initially by 19% between 2010 and 2016 before rising to 5% above its 2010 level by 2024 (IfG Explainer: Civil service staff numbers, 11-6-2024).
Osborne’s ideological axe had a massive impact on local public services:
Central government funding of local public services fell by 46% in real terms between 2010 and 2019. Adjusting for inflation and population growth core funding was 26% lower per person in real terms. (Ogden & Phillips, 2024)
Fuelled by pressures from responsibility for children’s social care, there were large cuts to other services: 40% for housing, culture, leisure and highways and transport; 60% to planning and development. The sharpest cut of 67% was in spending on sure start and services for young people. As those who work in local public services know these are amongst the valued local services – but they are targeted because unlike social care they are generally not statutory responsibilities. (Ogden & Phillips, 2024)
Councils whose areas were among the most deprived tenth in England in 2019 faced cuts to overall core funding per person averaging around 35% between 2010–11 and 2019–20, compared with ‘just’ 15% in the most affluent tenth of councils. (Ogden & Phillips, 2024) These figures expose the lie of Prime Minister Johnson’s levelling up rhetoric.
This story of the Prison Service and local public services is not one of efficiency measures or of taking collective political decisions about what to prioritise – instead it is one of wielding of a blunt axe with no regard to the consequences. The results look nothing like the results of an outcome-based or zero-based budget review.
2. The budgeting for performance and outcomes delusion.
From 1982 until 2009 driven by the Treasury the UK made world leading progress towards performance budgeting that exposed and challenged what the taxpayers were getting for public expenditure through a extended sequence of sometimes technical reforms: Financial Information System (1975), the introduction of cash limits (1976), the Efficiency Unit and Rayner Scrutinies (1979), the Financial Management Initiative (1982), the Next Steps Report (1988), the Fraser Report (1993), Fundamental Reviews of Expenditure (1993/4), Better Accounting for Taxpayer Money: Resource Accounting and Budgeting in Government (1995), creation of the spending review (1998), introduction of Public Spending Agreements (1999), introduction of resource accounting and budgeting (2001), the Gershon Review (2004), the Devolved Decision Making Review (2004), the introduction of local public service agreements (2002), the introduction of cross cutting PSAs (2007), the Operational Efficiency Programme (2008/9) and Total Place (2009).
Increasingly empowered public managers were beginning to be held to account for the performance, effectiveness and efficiency of the resources in their control.
The catalyst for the most profound decentralisation of controls of finance and staffing in that period was the landmark 1988 Rayner Scrutiny Review - Improving management in government: next steps. Whilst the headline measure was the creation of arm’s length agencies which at their peak covered almost 90% of civil servants, the problem the measures were explicitly designed to address was the failure of central interventions to incentivise managers to develop efficiency savings (Panchamia & Thomas, 2014).
In the prison service, the argument for these reforms was unchallenged and seen to have a rapid impact in turning round in the prison service. Prior to agencification “financial management and control was ‘shambolic’”(Warner et al., 2024). Spurred by the devolution that accompanied agency status a new generation of prison governors moved away from a focus on efficiency as cuts driven by the Treasury led efficiency drives - to thinking about how to make best use of the resources they had. By the early 2000’s managers were incentivised to create non-cashable savings in the way envisaged by Next Steps.
‘We didn’t do that to give money back to the Treasury, we made that decision to recycle the money into services that we wanted to deliver’.” [former Chief Executive of the Prison Service in (Warner et al., 2024)]
by 2000’s “control became ‘about how to spend that money well, rather than not having enough money’.” [former Prison Service Finance Director in (Warner et al., 2024)]
This phase of prison service managerialism was found to be a major factor in turning prisons around, combining managerial freedoms within the agency with a strong focus on input efficiency (Warner et al., 2024).
But since 2010 this progress has been significantly undermined (along with the accountability for performance that it enabled) by the increasing centralisation of input controls. The paradox is that this centralisation ran simultaneously with, and in direct opposition to, the Treasury’s more enlightened push for devolved decision making, removal of ring fences, outcome focused Public Spending Agreements and Total Place.
This incoherence at the heart of public expenditure management remains today.
…there can be longer-term costs to the public sector and public finances if policy outputs/outcomes in highrisk areas are neglected. Delivering improved outcomes requires local adaptability, but this cannot be achieved when input-controls crowd out innovative use of public money at the front line.” (Warner et al., 2024, p. 21)
It is paradoxical that the ministry which has done the most to drive towards performance budgeting is also comfortable to settle back into its caveman instincts of centralising administrative functions for generally unrealised gains (see shared services example in (Elston, 2021)) and adopting ineffective input controls on the false promise of efficiency. They encourage the easy politics of ineffective wheezes in the headline friendly ‘war on waste’ including: micro-ring fencing of allocations; controls on consultancy spending; arbitrary headcount reduction targets; recruitment freezes; pay freezes; freezes of administrative costs; centralising back office and professional services through shared services.
The continued use of these measures is not explained by their efficacy. Successive efficiency reforms have failed to sustainably reduce administrative costs over the twenty years in which they flourished. A mammoth study by Hood and Dixon (2013) looked at 28 years of the so called new public management reforms (NPM) whose most frequent intention was efficiency. For the classic period of these reforms between 1980-1990 they found little evidence of real running cost reductions. The largest reduction within the entire period (1980-2008) was around 10% in the later years of the Major government. Unsurprisingly they concluded that NPM does not offer a model for cutting costs of the scale desired by the coalition in the first of several periods of austerity (2010-14). And they debunked the much loved device of headcount reduction targets in the civil service:
over the whole period, cuts in civil service staff numbers did not always translate into equivalent reductions in pay bill, cuts in pay bill did not always translate into equivalent reductions in running costs, and the observed pattern leads to the conclusion that the ‘best’ way to cut relative costs is for government to spend (or tax) more.(Hood & Dixon, 2013)
Another long running approach to centralised input controls is shared services: ‘generic organisational activities – like procurement, accounting, human resources or legal counsel – are consolidated and shared between multiple partners, while other mission-specific work is left untouched‘ (Elston, 2021).
Peter Gershon’s 2004 review was the prime UK driver of this approach but only four years later he reflected that it was harder in practice than principle and “should only be undertaken on a very carefully selected and controlled basis” (Elston & MacCarthaigh, 2016). By 2022 the NAO had found ‘the government’s previous shared services strategies failed to deliver their intended cost savings and other benefits’. And of the new shared services programme that had been designed to address earlier failings they were ‘unable to conclude that his programme is on track to demonstrate value for money’ (National Audit Office, 2022).
Important research by Hood and Piotrowska (2023) revealed that the continuation and increased use of input control measures despite their very patchy record is due to their value to politicians.
“input controls on [Administration Costs] provided Treasury ministers with credit-claiming opportunities to demonstrate to middle-ground voters how tough they could be on “back-office bureaucracy.” Several sources indicate that AC cost controls had high political and parliamentary salience throughout the period covered by our study.” (Hood & Piotrowska, 2023)
This is in sharp contrast to the views declared by treasury officials in their in-depth interviews who clearly knew the severe limitations of input controls and micro-management (Hood & Piotrowska, 2023). This has been the case since Jeremy Heywood led their Fundamental Expenditure Review in 1994 (HMT, 1994).
…the treasury and OPSS will in future adopt a more ‘strategic’ approach in seeking to improve other departments management and efficiency…
we have taken this… to imply that the Treasury will place more reliance on maintaining bottom line control over departments expenditure and less reliance on detailed controls over sub-component
The review argued for more reliance on ‘providing departments with the management freedom and financial incentives to improve efficiency themselves’. And for less reliance on:
separate controls over detailed aspects of departmental management; or,
a detailed search for savings within agreed running costs ceilings of departmental running costs.
Whilst the bureaucracy believed in the trajectory they had created of performance budgeting and reduced use of crude input controls like ringfencing or freezes, this enlightenment stands in contrast to the attitude of ministers from successive governments. Hood and Piotrowska (2023) found that outcome controls (such as PSAs) were seen to have a limited use in terms of credit-claiming for ministers, and in some cases were seen to be risky to the point of resignation, for example Estelle Morris who resigned over a missed PSA target.
3. The Implications for the 2025 spending review
These two great lies reflect how “principles like effective policy delivery, accountability, public trust and satisfaction are ‘traded down for the false economy of greater efficiency’ (Warner et al., 2024).
15 years after Chancellor Osborne’s austerity axe and 40 years of largely failed efficiency measures the 2025 spending review is the new Government’s one-shot opportunity to shift resources in time to deliver their milestones and missions.
The Prime Minister and Chancellor need to rewire how the spending review is conducted if they are to use their one shot well. Above all they need to change how ministers collectively make tough spending review decisions (and expend some serious political capital in doing so). After 15 years of relentless cuts in public spending these decisions are rarely going to provide a politically easy win-win
Spending reviews have never been a collective endeavour amongst politicians. The Treasury is hardwired to act as a secretive controller of a strongly bilateral process that hands out the spending bottom line to departments – an approach that reached its nadir during the Brown/Balls/Blair era. It would be some change in approach for the Treasury to become an open, collaborative and honest broker supporting the Cabinet and Civil Service Board (CSB) in shifting resources to the Government’s top priorities whilst ensuring they deliver the deep savings required by their spending review parameters. This changed HMT approach would be less like re-wiring and more like electroconvulsive therapy.
In sharp contrast to the rest of the public sector the CSB and senior leadership of the civil service has always been a spare part when it comes to shaping the parameters and process of the spending review. Permanent secretaries will typically stand behind their minister in staunchly defending their resources and programmes regardless of their relevance to the priorities of the whole government. The Treasury plays a hardball divide and rule game that both creates and sustains this dysfunction.
To change this pattern you are reliant on the home minister to push hard to prioritise and de-prioritise areas of spend on their own turf in the greater interests of the cabinet. Departments will almost always take that push from their own minister seriously. But departmental ministers will need strong and unusual support from their permanent secretary and senior officials if they are to do what they have very rarely done in past spending reviews: offer up bold savings options that fit the government’s collective priorities.
Conclusion
This spending review will show whether this government is serious about doing things differently.
Unity and political courage from the Cabinet will be essential to drive an outcome focused spending review that shifts resources to their five missions.
The Chancellor’s launch of the second phase of the spending review is giving some of the right messages:
…departments will be advised that where spending is not contributing to a priority, it should be stopped.
Departments will be expected to work closely together to identify how their work contributes to the Government’s missions, meeting in mission clusters throughout the process to agree priorities and links.
Panels will bring an independent view to what government spend is or isn’t necessary, with a mixture of expertise from local delivery partners, think tanks, academic experts and private sector backgrounds.
If the new Cabinet Secretary Chris Wormald can rewire his permanent secretaries collective behaviour to reject departmental defensiveness and act as corporate leaders who support their ministers and the cabinet to make some tough decisions – then he will begin to confound those who are sceptical of his corporate leadership and reform credentials.
References
Elston, T. (2021). Implementing shared services in the UK central government: A five-year progress report using longitudinal brueaumetrics. OECD Journal on budgeting.
Elston, T., & MacCarthaigh, M. (2016). Sharing services, saving money? Five risks to cost-saving when organizations share services. Public Money & Management, 36(5), 349–356. https://doi.org/10.1080/09540962.2016.1194081
Foley, Niamh. (2020, December). Public sector employment by parliamentary consistuency. House of Commons Library.
HMT. (1994). HMT Fundamental Review of running Costs.
Hood, C., & Dixon, R. (2013). A MODEL OF COST-CUTTING IN GOVERNMENT? THE GREAT MANAGEMENT REVOLUTION IN UK CENTRAL GOVERNMENT RECONSIDERED. Public Administration, 91(1), 114–134. https://doi.org/10.1111/j.1467-9299.2012.02072.x
Hood, C., & Piotrowska, B. M. (2023). Who loves input controls? What happened to “outputs not inputs” in UKPublic Financial Management, and why? Public Administration, 101(1), 303–317. https://doi.org/10.1111/padm.12741
National Audit Office. (2022, November 30). HC 921 Government shared services. Cabinet Office.
Ogden, K., & Phillips, D. (2024). How have English councils’ funding and spending changed? 2010 to 2024. Institute for Fiscal Studies.
Panchamia, N., & Thomas, P. (2014, February). Civil Service reform in the Real World: Patterns of success in UK civl service reform. Institute for Government.
Warner, S., Richards, D., Coyle, D., & Smith, M. J. (2024). The inefficiency of centralised control and political short-termism: The case of the Prison Service in England and Wales. Policy & Politics, 1–27. https://doi.org/10.1332/03055736Y2024D000000053
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