HOW CAN GOVERNMENT IMPROVE FINANCIAL AND BUSINESS PLANNING? Discussion paper Better financial management is right at the centre of creating a more effective, smarter, government. This discussion paper sets out, for debate and challenge, an assessment of the current state of play, and some suggestions for further improvement.
THE COMMISSION FOR SMART GOVERNMENT The Commission for Smart Government is an independent initiative to consider how to make public administration more effective. The Commission is a project of GovernUp, which is an independent, non-party research initiative that offers evidenced-based solutions for all political parties to adopt. The 12 workstreams are: Assessment
What have been the standout successes and failures of recent public administrations, and what can we learn from them?
What are the examples of best practice in the UK and around the world from which we can learn?
Talent & Competence
How do we equip civil servants with better skills, recruit and remunerate to attract the best and incentivise success, and share knowledge?
How do we ensure government has the right skills and systems in place to commission and manage big projects successfully?
How do we ensure stronger financial management, strip out cost and drive efficiency?
How should we improve the current Whitehall structure, with its small yet overlapping centre and siloed departments, to make decision-making more effective and less bureaucratic?
To what extent should we devolve more power and decision-making to local bodies, and how can this be achieved while maintaining a proper role for the UK Government?
How can we make the system, including ministers and civil servants, as well as agencies, regulators and arms-length bodies, more accountable?
How can we deploy technology more effectively and rapidly to improve public services?
How can we ensure that decisions are evidence-based and informed by data?
How can we make ministers and advisers more effective in their jobs?
How can we ensure that the appointments system attracts the best and aligns with the Government’s priorities?
COMMISSIONERS Michael Bichard
Deborah Cadman Camilla Cavendish Suma Chakrabarti
Ian Cheshire Phaedra Chrousos Chris Deverell Jayne-Anne Gadhia Martin Gilbert Verity Harding Nick Herbert Margaret Hodge Husayn Kassai Daniel Korski Paul Marshall John Nash Mark Rowley Gisela Stuart Jacky Wright
Lord Bichard KCB is a crossbench peer in the House of Lords. He was formerly Permanent Secretary at the Department for Education, first Director of the Institute for Government and chair of the National Audit Office. Deborah Cadman OBE is Chief Executive of the West Midlands Combined Authority. Baroness Cavendish of Little Venice is a former Head of the Number 10 Policy Unit. Sir Suma Chakrabarti KCB was until recently the President of the European Bank for Reconstruction and Development. He was formerly Permanent Secretary at the Ministry of Justice and the Department for International Development. Sir Ian Cheshire was the Chairman of Barclays UK plc until 2021. He was formerly the Government Lead Non-Executive Director 2019-2020. Phaedra Chrousos is the Chief Strategy Officer for Libra Group and a former commissioner for the US Technology and Transformation Service. General Sir Chris Deverell KCB MBE is the former Commander of UK Joint Forces Command. Dame Jayne-Anne Gadhia DBE FRSE is a businesswoman and the founder and Executive Chair of the start-up Snoop. Martin Gilbert is the Chairman of Revolut and the co-founder and former CEO of Aberdeen Asset Management. Verity Harding is a Visiting Fellow at the Bennett Institute for Public Policy, Cambridge University, where she is on secondment from her role as Global Head of Policy and Partnerships at DeepMind. Lord Herbert of South Downs CBE PC (Chair) is a former Conservative minister. Rt Hon Dame Margaret Hodge DBE MP is a Labour Member of Parliament, a former minister, and the former Chair of the House of Commons Public Accounts Committee. Husayn Kassai is the co-founder and CEO of Onfido. Daniel Korski CBE is the co-founder and CEO of PUBLIC and a former Deputy Head of the Number 10 Policy Unit. Sir Paul Marshall is Chair and Chief Investment Officer of Marshall Wace LLP and a former Lead Non-Executive Director at the Department for Education. Lord Nash is a businessman and Government Lead Non-Executive Director. He is a former minister. Sir Mark Rowley QPM is a former Assistant Commissioner of the Metropolitan Police. Baroness Stuart of Edgbaston PC is Lead Non-Executive Director at the Cabinet Office and a former Labour MP and minister. Jacky Wright is the Chief Digital Officer for Microsoft US.
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Contents Foreword by Sir Ian Cheshire...........................................................................................4 Key points ...........................................................................................................................5 Summary ............................................................................................................................7 How well does government currently plan and manage spending? ..........................7 How to reform financial planning: proposals for discussion ................................... 12 Economic and fiscal context .......................................................................................... 15 Planning well: how the UK government compares with business and other countries .......................................................................................................................... 17 Clear, shared, ambitions (strategy) ........................................................................... 19 Spending money in the right way and the right time (value) ................................. 22 Control vs Delegation ................................................................................................. 27 Telling the story clearly .............................................................................................. 30 Systems and workforce ............................................................................................... 34 How to reform financial planning: proposals for discussion ....................................... 38 Author .............................................................................................................................. 46 References ....................................................................................................................... 46
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Foreword by Sir Ian Cheshire Even after the unwinding of exceptional spending to tackle coronavirus, government is set to spend over one trillion pounds a year through this decade. Spending money is government’s most powerful instrument for meeting many societal needs and achieving political ambitions. British government led the way internationally in its approach to government financial management in the second half of the last century. It continues to be strong in some respects, notably setting and sticking to plans for spending. However, in vital other respects, its approach has been weaker, in comparison both with what I see in the best corporates, and the approaches of other governments with whom the Commission has engaged. I know the Treasury is determined to improve further, and the 2020 spending review announces some important reforms. In this paper we offer some ideas about how to make a success of those intentions. Financial management matters for two important reasons. First, the public finances have taken an enormous hit from coronavirus. That will continue for years to come, even if the worst direct impacts cease, because of the impact on the economy, tax receipts and welfare and other demand-led spending. The existing tension between the electorate’s desire for good public services and infrastructure and its reluctance to pay higher taxes will therefore become even more challenging to manage. The government must make sure that every pound it spends goes where it is most needed and makes most impact. Second, citizens expect their money to be spent well and transparently. Failing to do that undermines trust in government. Better financial management is right at the centre of creating a more effective, smarter, government. This discussion paper sets out, for debate and challenge, an assessment of the current state of play, and some suggestions for further improvement.
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Key points •
Spending money is government’s most powerful instrument for meeting many societal needs and achieving political ambitions. Modernising government’s financial management is essential if that is to be done effectively. Corporate and international experience points to five features of effective financial planning systems: o Clear, shared, ambitions (strategy). o Spending money in the right way and the right time (value). o Finding the right balance between control from the centre and letting those closest to customers decide what to do. o telling the story clearly (transparency). o the right IT systems and people.
UK government financial management: our assessment Clear, prioritised, whole-of-government strategic ambitions are not yet explicit, though we understand work is under way to agree them. The Treasury certainly now cares about what money is spent on and what it achieves, and is leading more consideration of combined impact and trade-offs across departments. A crucial test of the 2021 spending review is the extent to which, as a result, decision-making is different from the past. The approach to control has widely been seen as the worst of both worlds; a controlling style which doesn’t actually lead to the money being spent right. The Treasury says it makes evidenced judgements about capability which are reflected in decisions on delegation, but the framework for this is not publicly documented, let alone individual judgements. Financial reporting has improved in recent years, more so in some departments than others, and the Treasury is driving further improvement. But the UK needs to catch up with other countries in using digital to make information accessible to non-expert audiences. Finance professionalism across government has improved strongly in recent years. In the Treasury itself, there is now strong emphasis on finance and other professional skills and experience in wider public services. This trend must be sustained.
Managing money better is vital for the delivery of the government’s programme, and needs to lie at the centre of a reset of the system of government. Over the period of the current Parliament, the government needs to: o Abolish the current spending review process. o Put in place a best-in-class system of financial planning, consisting of: 1. Working out across government as a whole how money and activity can make things happen in line with the government’s intentions. 2. Using a common rating system to decide whether departments and public bodies are good at financial management or need to be helped to improve. 3. Full transparency of plans and performance, through a single user-friendly web portal, so citizens can see what government is achieving with their money. 4. An excellent financial planning IT system and expert, high-powered staff at the centre of government. Such a transformation will be nowhere near complete for this year’s spending review. Nevertheless, government should attempt as much as possible of the new approach – a beta version – to be the basis of re-setting public investment and services in the wake of the pandemic.
Summary Planning and managing government spending well is not an arid, technical, issue, to be left to accountants and economists. The 2021 Budget sets out planned public spending over the next three years of over £3 trillion – around £44,000 for every person in the country. Governments can achieve their intentions by a variety of other means, the design of the tax system, legislation, legislation, influencing, but spending money well is at the heart of achieving most, if not all, of what government needs to do. £3 trillion is a vast sum. But it will be extremely challenging for government to stick to that total. The Office for Budget Responsibility and external commentators like the Institute for Fiscal Studies are already saying it is extremely ambitious. On top of long-term pressures, notably population ageing, which were understood before the pandemic, the spending consequences of the pandemic will have a long tail, even if vaccination eliminates the threat and the economy recovers well. The current Government is also ambitious, on net zero, levelling up, Global Britain and other fronts. Radical improvement in the way public money is put to work is vital if the Government’s political ambitions, the things it wants to do, are not to be squeezed out by the unavoidable and unplanned. The eyes of the ratings agencies are on whether it can do so, and on the quality of its institutions and processes. Moody’s has warned that it perceives them to becoming weaker, and that policymaking has become less predictable and effective.
How well does government currently plan and manage spending? Large corporates and other governments, like ours, have to manage their resources and achieve impact, in a challenging and fast-moving external environment and across complex organisational structures. For much of the post war period, the UK was an innovator in the planning and management of spending, for example in planning spending across the whole of government across a multi-year period, in applying financial management disciplines to government, and in a rigorous approach to planning and managing the achievement of results. It successfully drove down public spending following the financial crisis.
However, of late, it has not been so much at the leading edge, as the ratings agencies have spotted. In comparison with successful businesses and governments, UK government has appeared to be behind the field in five respects: • • • • •
Being able to set clear, shared ambitions (strategy); Spending money in the right way and at the right time (value); Controlling effectively from the centre while allowing those closest to customers decide what to do; Telling the story clearly (transparency); The right systems and people.
The Treasury has recognised the need to change, and is pursuing reforms accordingly. Clear, shared, ambitions (strategy) Financial planning ends up with a set of numbers which add up arithmetically. But, as a senior finance executive in a large multi-national put it, the planning process “articulates what we are trying to achieve as a business.” A successful planning process cannot work bottom up, by taking plans from the component parts of the organisation and trying to wrangle them into some kind of corporate shape. It has to start with a clear articulation of priorities – “well-defined, specific, measurable, ambitious but realistic targets and expectations that are communicated into the organisation.” Countries like Singapore, Canada, and New Zealand, have found ways of basing their planning on a set of collective ambitions, not “department A will do this, department B will do that.” Priorities must be more than aspirations – “well-defined, specific, measurable.” The UK has made considerable headway, moving from nearly 1,400 stated priorities or intentions in 2019 to 69 priority outcomes in the 2020 spending review. The 2020 spending review document presents plans under four thematic headings, as spending reviews typically have over the last 20 years. However, broad thematic headings are not the same thing as clear prioritisation, and one ambition to which the government appears strongly committed, net zero, does not feature in them. We understand, however, that work is in hand to develop a clearer, short, set, of whole-of-government priorities. This would be an important step forward, indeed an essential basis for a successful 2021 spending review. The 2020 spending review also addresses the need for collaboration across government on challenges which do not belong neatly to a single department. There are further allocations under the Shared Outcomes Fund, and 15 of the 69 priority outcomes are shared between departments. We understand clear governance is being established so the lead department, other departments and the centre are properly involved in decisions on resources and activity. This is essential in The Commission for Smart Government is powered by GovernUp, an initiative of The Project for Modern Democracy, a company limited by guarantee no. 8472163 and a registered charity in England and Wales no. 1154924. Privacy Notice.
order to ensure government is able to act in a coherent way to tackle its key strategic agendas – net zero, levelling up and the Plan for Growth. Spending money in the right way and at the right time (value) Looking outside UK government, the process is not just a haggle over planned spending. It explores thoroughly the real-world consequences of spending – value, outcomes and impact. As Sir Michael Barber, currently advising government on value and results, puts it, “of course it is necessary and right that the Treasury should count the pennies – someone has to – but that should surely not be its only focus, even in hard times.” This requires: • • •
Getting the best results from spending at the level of individual organisations or projects (productive efficiency); Where, across the whole of a business or government, investment can be most effective in achieving results or driving down cost across the whole (allocative efficiency); Thinking about spending and financial benefits over time: to what extent will spending more or less at a particular point in time result in better or poorer value down the line. The New Zealand government has applied this to social, as well as capital, investment, to working out how to reduce the future costs of social programmes not achieving successful impact on the lives of vulnerable people.
For government, such a process needs to involve realism and humility about how to achieve impact when addressing complex social challenges, like homelessness or reoffending. That is unlikely to come about through monolithic, top-down approaches. At times, the UK has led the way in going beyond the planning of financial inputs, to the achievement of impact and results, notably in the early years of this century during the Blair government, led by Barber during his earlier phase in public service. It has also led the way on applying resource accounting to government and on whole of government accounting. The Treasury has taken a renewed interest in value following a review by Barber in 2017, and reaffirmed its commitment to his Public Value approach in the 2020 spending review. Its impact is visible in the emphasis in the spending review on priority outcomes, though it would be good to see some case studies of where it has made a difference to thinking on specific programmes The other recent change in how government plans spending and activity, the Single Departmental Plans introduced in 2016, are widely seen to have been ineffective, and are now being superseded by Outcome Delivery Plans. The Government’s intentions seem good, but the defaults of British government are not to consider sufficiently well trade-offs between spending across different parts of the system, or The Commission for Smart Government is powered by GovernUp, an initiative of The Project for Modern Democracy, a company limited by guarantee no. 8472163 and a registered charity in England and Wales no. 1154924. Privacy Notice.
across time. Weak understanding of the relationship between funding and operational performance has led to serious real-world consequences, as unrealistically low plans for spending on public services like social care and prisons in the 2015 spending review led to a cycle of service and political crises and emergency cash injections. As the Institute for Government (IfG) has put it: “The Government’s failure to make successful transformative changes, or make explicit national decisions on the quality or scope of services, has left it trapped in a reactive cycle: allowing problems to mount, being confronted with a crisis (practical or political) and being left with the only option of injecting emergency cash.” Control vs delegation Any large organisation needs to balance central direction and control against enabling decisionmakers closer to customers the flexibility to deploy resources where they will make most impact. The answer is unlikely to lie at one or other extreme: successful organisations apply tight control to spending linked to the greatest opportunities or risks, or where the corporate centre has concerns about capability. But, in other areas, they allow leaders with the right skills freedom to apply resources creatively, subject to accountability for achieving the intended results. In a large organisation, these judgements need to be systematic and evidence-based. The 200109 Bush administration judged federal agencies’ financial management capability on a standard scorecard, which supported organisational and personal accountability, and helped target support with improvement. New Zealand’s Performance Improvement Framework is likewise a tool for assessing agencies’ performance on a consistent basis. In the UK, the Treasury has frequently been criticised for a default towards excessively close control. Nor is there any published, formal, objective, and consistent methodology for assessing the capability of government departments. This is in contrast to many front-line public service organisations, like schools, hospitals and social housing landlords, all of whom face regular scrutiny by external assessors applying standard methodologies. However, there are some examples of a well-judged loosening of direct control by the Treasury, enabling more mature relationships through the chain of accountability down to organisations achieving results on the front line. The Treasury says it does systematically assess the financial management capability of departments, and uses that assessment both to make decisions about delegation and to work with departments on improving capability. During the pandemic, the Treasury says it has loosened controls where necessary to ensure an effective response. Learning from this will be applied to decision-making during the recovery.
If so, that should lead to better decision-making and a strengthening of capability. However, it would be helpful if the assessment framework were made public, and maybe, as in the US under the Bush administration, and in New Zealand, the results for departments published.
Telling the story clearly Being open, and explaining how money is being spent to achieve impact, is an important incentive and discipline in financial management. It is also important for public trust in government. The Bush administration found that publishing assessments of agencies’ financial management capability created incentives for improvement, as much for the positive incentive of receiving strong ratings as for the reverse. Information must be published in a way which is easy to explore and understand. In the digital age, this means making it available on all commonly used operating systems and using data visualisation to help non-expert readers understand information and make comparisons between organisations. Both the Canadian and Singapore governments publish information on spending and performance in ways which use technology to provide easy access. The UK has some strong transparency institutions, including, at the macro level, the Office for Budget Responsibility. The Independent Commission for Aid Impact is an arm’s length scrutineer of overseas development spending. The National Audit Office (NAO), working with the Commons Public Accounts Committee, provides effective post hoc scrutiny of spending. In other respects, transparency is not as strong as other nations. The presentation of spending plans, and outturn information in departmental annual reports have been criticised by Parliamentarians and others. The Treasury is committed to improvement, some departments’ documentation has improved very strongly, and the government’s approach to transparency has been recognised as comparable to the strongest corporates. However, there is further to go, in terms of the full publication of departmental plans, and enabling external users to comprehend easily how actual spending and activity relates to previous plans. Government’s current approach also looks weak in the digital publication of information on spending in ways which make it easily accessible and comprehensible to non-experts. Parliament’s scrutiny of spending plans, as opposed to what has happened after the event, is weak.
Systems and workforce The characteristics described above of an effective approach need to be supported by excellent data and systems to retrieve and manage information. The corporate centre needs a workforce with an exceptional combination of technical skills, and the experience and credibility to provide well-judged advice to decision-makers at the top of organisations. An example from another government is the Government of Singapore’s Strategy Group, part of the Prime Minister’s Office. A forthcoming Commission paper will examine the government’s financial management systems and make proposals for improvement. On the people side, an obvious challenge for the UK is its “two head offices”, the Treasury and Cabinet Office. Capability has improved since 2010 with the establishment of the government professional functions. However, the centre remains underpowered in relation to departments, in particular to help Minister shape strategy and bring together departments effectively on government priorities which span departments. NAO and others have expressed concern about the skills, experience, and rapid turnover of Treasury spending officials. The Treasury’s current leadership are addressing this, by setting stronger expectations that officials will be qualified in finance or other relevant disciplines, and more of them will have substantial experience in departments and the wider public service.
How to reform financial planning: proposals for discussion The ability of the Treasury and Cabinet Office to lead and shape financial management decisions across government has undoubtedly improved in recent years, in particular through the development of the professional functions, and the renewed interest in the Treasury in the value and impact of spending. However, improvement has not up to now matched the pace and extent of reform in other countries, though the Treasury has made clear its commitment to strengthening its approach, and the 2020 spending review and subsequent developments suggest it is pursuing improvement vigorously. With a further step up in ambition, the UK would be in a good position to regain its place as an exemplar of effective financial management practice. In fact, doing so is vital if the Government is to be successful in delivering its ambitions for the country, and, in order to do so, to overhaul radically the system of government. Our proposals for best-in-class financial management are summarised below, and described in more detail on pages 35-42.
1. Abolish the spending review and replace it with a new Plan for Government
2. Adopt a systematic riskbased approach to the balance between central control and delegation
• • •
3. Full transparency of government plans and performance 4. Stronger financial management systems and capability at the centre of government
• • • •
5. Transition: operating elements of the new approach in the 2021 spending review
Review to be based on a limited number of goals for changing or improving the country, we suggest no more than five. Each would be defined by one or more clear metrics indicating the change expected by the end of the Parliament. (Prioritisation of this kind does not mean that government does not also need to plan effectively for vital ‘business as usual’ functions.) There would be departmental financial allocations and performance plans. But they would be part of, and consequent on, plans for the funding and delivery of government’s strategic priorities. Rigorous published assessment of each organisation’s financial planning and management capability. Alongside the degree of opportunity or risk in projects or services, this would guide the degree of delegation over spending decisions. The assessment would also guide intervention and support with developing capability. Full publication of spending and performance plans, and regular progress updates, through a What’s Happening to Your Money? app. Further Commission paper to follow on financial management systems. Stronger financial management expertise and more experience outside Whitehall in Treasury spending teams. The Treasury and Cabinet Office to operate as much as possible like a single, corporate, HQ, with joint teams managing relations with departments and leading for government on its top priorities. Use the 2021 spending review so far as possible as a pathfinder or beta version of the new approach. In particular, base it on a limited number of clearly expressed priority themes.
How the government plans and manages money: brief overviewi Since 1998, every two to five years, the Treasury has drawn up multi-year1 spending plans for government. They result in a published spending review document, and unpublished settlement letters for each department. Spending reviews settle the allocation of the part of spending called Departmental Expenditure Limits (DEL). This is, broadly, controllable spending, whether on the budgets of public services or capital investment. More than half of total public spending, on pensions, welfare benefits and debt interest, is not controllable in the same way and is known as Annually Managed Expenditure (AME). The spending review is a fairly high-level strategic plan and does not have any legal force. Each year, government seeks formal Parliamentary approval through the process known as Supply Estimates. However, unlike (for example) the USA, Parliament has no real power in this process. It cannot amend the Estimates presented to it and in practice approves them with little debate. Departments each produce an annual report and accounts.
In 2019 and 2020, they have been for one year only, because of the Brexit and pandemic crises.
Economic and fiscal context There is, famously, no ‘magic money tree.’ Government must finance its spending from taxation or borrowing. The latter is dependent on the markets’ view of the country’s fiscal sustainability, and, of course, its servicing is a call on public spending. Even before the pandemic, the fiscal outlook was challenging. Government is facing significant demand pressures on public spending over the medium to long term, notably pensions, health and care spending associated with an ageing population. The ageing population and lower revenues from energy taxation will also affect tax revenues. The Office for Budget Responsibility (OBR) long term forecast in July 2018 projected borrowing would, on unchanged policy assumptions, increase to 8.6 per cent of GDP by the 2060s, and net debt to 282 per cent of GDP. OBR concluded: “This would not be sustainable.”ii The British public’s preference, revealed in successive elections, has been for parties committed to lower taxation. Yet, as one observer has put it, “we cannot run Sweden’s welfare state with US tax levels.”iii The pandemic has turned the screws further on the public finances – very dramatically. OBR estimate that, in 2020-21 and 2021-22, government will have undertaken £344bn of additional spending, and that 2020-21 receipts will be over £40bn lower than previously forecast.iv In place of the 2020 Budget’s target of a balanced budget by 2023-24, OBR’s central projection in its November 2020 forecast is for a deficit of nearly 17 per cent of GDP in 2020-21, and over 10 per cent in 2021-22. Even by 2025-26, borrowing is still forecast to be nearly 3 per cent of GDP.v The combination of demand pressures, the impact of the pandemic on public finances, the government’s policy ambitions on its priority issues, like net zero and ‘levelling up’, and its commitments on taxation, mean that the management of the public finances will be exceptionally challenging over the remainder of this Parliament and beyond. The 2021 Budget assumes cash reductions, compared with pre-pandemic plans, in total DEL (controllable) spending from 202223 onwards. OBR estimates that this implies a real terms reduction in “unprotected” programmes (everything except the NHS, schools, defence and aid) of 1 per cent between 202122 and 2022-23, and points out that it will be exceptionally difficult to achieve against a large number of policy pressures.vi If the Government is to have any chance of succeeding on its policy agenda, substantively and politically, it must urgently take steps to manage the public finances in ways which will enable it to be clear-sighted about the policy choices, and ensure every penny it spends goes where it will have most impact. As Sir Michael Barber, who is currently advising government on how to drive and monitor delivery put it in his report for the Treasury in 2017: “the only sustainable way to The Commission for Smart Government is powered by GovernUp, an initiative of The Project for Modern Democracy, a company limited by guarantee no. 8472163 and a registered charity in England and Wales no. 1154924. Privacy Notice.
deliver [better public services and lower taxes] and avoid accruing crippling debts is to improve productivity.”vii There is a direct connection between the credibility of the UK in international markets and the effectiveness of government, not least in managing money. The ratings agencies are sounding warnings. Managing how public money turns into results on the ground is a central, maybe the central aspect of addressing that critique. Moody’s (October 2020, downgrade to Aa3) “unlikely that the government will be able meaningfully to rebuild the UK's fiscal strength in the coming years given the low growth environment and the likely political obstacles to doing so.” “the weakening in the UK's institutions and governance…policymaking, particularly with respect to fiscal policy, has become less predictable and effective.” Fitch (January 2021, maintaining AA-, outlook negative) “the absence of a credible mediumterm fiscal consolidation plan would increase the level of downward pressure on the ratings.” Comment on the March 2020 downgrade expressed concern about the effective targeting of infrastructure investment. S&P (October 2020, maintaining AA/A-1+) “destabilizing shifts are possible and policy predictability has reduced in recent years.”
Planning well: how the UK government compares with business and other countries Large corporates, and the governments of other countries, face the same challenge as government here: how to manage financial resources and achieve impact. They are doing so in the face of a challenging and fast-moving external environment and across large and complex organisations. Large corporates consist of operating businesses trading in different sectors and in different geographic markets. Other governments likewise consist of numerous agencies with very different missions. The end point of their financial planning needs to be the same in all cases: a set of financial plans for each business which are consistent with the financial outcomes which need to be achieved across the whole. There are five elements of success: • • • • •
clear, shared, ambitions (strategy); spending money in the right way and the right time (value); finding the right balance between control from the centre and letting those closest to customers decide what to do; telling the story clearly (transparency); the right systems and people.
The UK has made some moves in the right direction recently and the leadership of the Treasury and the finance function is strongly committed to further improvement. It is vital that further changes are successfully implemented: strong financial management is at the heart of a smart government. Figure 1 below summarises our findings. We then explain them more fully.
Figure 1: How strong is UK's current approach? Five elements of success Strategy
What they mean
69 ‘priority outcomes’ across government, 15 of them shared between departments. Work in hand to define small number of whole-of-government priorities.
clear, shared ambitions focus on outcomes for customers/citizens whole more than the sum of the parts spending money in the right way and the right time avoiding waste, now and in the future right balance between control from the centre and letting those closest to customers decide exactly what to do
Control vs delegation
telling the story clearly making it easy for stakeholders to see what spending is achieving
Systems and people
excellent data and systems and an expert central finance/planning function
Commitment to make this happen: Public Value Framework in place: but needs to be embedded and sustained in practice. Up to now the approach has widely been viewed as a controlling style which doesn’t actually control effectively. The Treasury says its decisions are informed by rigorous assessment, but the methodology and results are not published. Recent improvements in presentation of documents, but departmental plans not published in full up to now. Accessibility and presentation of information on-line weak compared with international exemplars. Commitment to improve data and systems; but delivery to the right standard critical. Stronger expert capability required at the centre of government.
Clear, shared, ambitions (strategy) Successful corporates and governments Financial planning “articulates what we are trying to achieve as a business”, as a senior finance executive in a large multi-national put it.viii The consensus, across highly performing corporates and governments, is that getting to that point successfully cannot be achieved bottom-up, by starting with individual plans for the component parts and then somehow trying to bring them together into a whole. Rather, the process needs to start with top level leaders reaching a view both about where they want the whole organisation to end up financially, and business priorities: “Well defined – specific, measurable, ambitious but realistic targets and expectations that are communicated and cascaded into the organization.”ix Likewise, Singapore’s Budget for 2021 has been built around: • •
A clear set of intended financial metrics. Four strategic themes: recovery from the pandemic, strengthening the social compact, business and skills, and housing.
The one-page presentation (Figure 2) is in terms of these themes, not financial allocations to departments. Figure 2: Government of Singapore 2021 Budget: summary presentation
Other countries likewise have starting points for their budget planning which are top-down and strategic, as a basis for considering how departmental plans fit into a wider whole – New Zealand, Canada, and, close to home, Scotland.x As well as focusing on priorities for the whole, successful strategic processes ensure that interdependencies between different parts of a business or government are understood, and there is a consistency of approach to decision-making about, for example, projects. This is about the process being objectively right, but also felt fair across the organisation: “Business units are perceived as one team”, as one corporate planning adviser put it.xi In Canada, as well as being allocated individual priorities, there is a set of government-wide goals on which departments are expected to work together. New Zealand is setting up ‘government joint ventures’ with pooled budgets.xii How UK compares Strategy, or in plain English being clear about what the government, as a whole, really wants to achieve, has been the greatest weakness in the UK’s approach to financial management. This failure is fundamental. It matters not just for its own sake, but because, without strategy, the other elements of an effective approach cannot be put in place. Characteristics of UK government, the weakness of the centre in relation to departments, and firefighting crises distracting from the big picture, have, on the whole, stopped governments clearly articulating what they are about. The two partial exceptions were: •
The Blair government, which selected a small number of targets in four departments as a focus for its delivery planning and accountability system. While this achieved more focus than other governments have achieved, the targets were specific to departments, and about operational performance in public services rather than true outcomes. Subsequently, the 2007 spending review put in place 30 targets, most of which crossed departmental boundaries. While the reduction in the number from 600 in 1998 was in the right direction, 30 was still too large a number to drive true clarity and prioritisation. The Coalition Agreement of 2010. In the particular, and, for the UK, highly unusual, context of a coalition government, this was a formal, single, statement of what the government was setting out to do. However, at 39 pages, it was not a short, simple, statement of top priorities.
The lack of clear central prioritisation contributed to departments having too many priorities. The 2019 departmental plans contained, between them, 99 objectives, 283 sub-objectives and over 1,000 actions. Such a proliferation of intentions was in no way strategic, nor did it form any basis for rigorous prioritisation of resources. The Commission for Smart Government is powered by GovernUp, an initiative of The Project for Modern Democracy, a company limited by guarantee no. 8472163 and a registered charity in England and Wales no. 1154924. Privacy Notice.
The last 18 months have not been a good time to try to develop a strategic view, with the government in crisis mode over Brexit and the pandemic. The two spending reviews which have taken place have been limited exercises to draw up financial plans for one year only, with little space to be strategic. Against that background, it is a step forward that the 2020 spending review put in place a much smaller set of priority outcomes, three or four for each department, 69 in total. Treasury officials say that greater focus at departmental level has helped to drive prioritisation within departmental programmes. The plans set out in the 2020 review were organised under four themes (below). However, thematic headings, whose relationship to other definitions of the government’s priorities are unclear, is not the same thing as the international examples we described above. The absence of net zero from the list of themes is striking, and an illustration on the unclarity about strategy which has been pointed out in a recent PAC report.xiii We understand work is under way inside government to agree more sharply defined whole-of-government priorities as a basis for the spending review later this year. That would be a very important step forward. UK: Thematic headings in the 2020 spending reviewxiv Responding to Covid-19 Investing in a recovery for all regions of the UK Delivering on the government’s promises to the British people Strengthening the UK’s place in the world The UK has also not done enough to pull together the work of departments, so that the whole is more than the sum of the parts. Spending has normally been planned on the basis of financial allocations to departments, not what government as a whole is seeking to achieve, with plans bringing together the work of different departments to contribute to a whole. At an even more basic level, the current approach has failed to prevent cost-shunting between different parts of government, with reductions in spending in one place resulting in increased pressures elsewhere.xv On occasion, the UK has set up pooled budgets targeting policy objectives, jointly operated by a number of departments. For example, the 2000 spending review established an Africa Conflict Prevention Pool, shared between DfID, FCO and MoD, over £300m over the spending review period. The purpose was “a joined-up, and inter-departmental, approach to preventing the reemergence of conflict in violence-prone countries and regions.”xvi According to a senior official involved in the pool, it worked well because the policy objectives of the three departments were aligned. Similar approaches elsewhere in the world worked less well, because there were tensions over objectives.xvii A 2012 review of a successor Conflict Pool found that “it lacks a The Commission for Smart Government is powered by GovernUp, an initiative of The Project for Modern Democracy, a company limited by guarantee no. 8472163 and a registered charity in England and Wales no. 1154924. Privacy Notice.
clear strategic framework and robust funding model; its governance and management arrangements are cumbersome; and it has little capacity for measuring results.”xviii The Treasury recognises the need for departments to work together to achieve impact on many aspects of government policy. 15 of the 69 priority outcomes agreed in the 2020 spending review are shared between departments, and in each case a Senior Official Delivery Board has been put in place to discuss and drive outcome delivery.xix The 2019 spending review allocated £200m to “pilot innovative approaches to cross-public working” through a Shared Outcomes Fund. The 2020 review announced a further £200m and draws attention to a number of other shared funding streams, over £3bn in total. However, this means that only a third of one per cent of total spending is allocated on a cross-departmental basis.
Spending money in the right way and the right time (value) Successful corporates and governments In both corporates, and other countries with reformed approaches to financial planning, the process pays close attention to the consequences of financial decisions on the real world – the value, outcomes and impact they should achieve. In a major multinational corporate, when business units produce their first cut of plans in response to the strategic goals set out by the centre, “a key purpose of this stage in the process is to build an understanding of the relationship between ambitions and resources.”xx Among other things, the value or outcomes need to be properly defined, using smart indicators to avoid “target ‘sandbagging.’”xxi Other governments are likewise moving towards planning processes which bring together spending and the results they wish to achieve. Closest to home, the Scottish Government has used a ‘National Performance Framework’ as part of its decision-making since 2007.xxii In its current form, it is based on 11 ‘national outcomes’ defined by an indicator set.xxiii In Canada, goals for departments are defined in ‘mandate letters’ issued by the Prime Minister to Ministers, supported by indicators.xxiv An effective planning process will pay attention to: 1. At the level of individual organisational units or projects, how to produce the optimal relationship between spending and results (productive efficiency), 2. Across a complex organisation, the trade-offs between investment in one place as opposed to another (allocative efficiency).
3. The trade-offs between spending at different points in time: to what extent, if spending is committed, or not committed, in the near future, will it result in improved or poorer value in the future. In a multinational corporate, questions of the first kind, such as whether the same results can be achieved with a marginally squeezed budget, are certainly part of the discussion. However, the second and third categories of question are at least as important: will a given amount of investment achieve more or less progress towards corporate objectives if made in one business unit rather than another? Or will making or withholding investment in the near term add or subtract value in the future. The New Zealand Government has developed an approach which it describes as ‘social investment’, focusing on “early investment to achieve better long-term results for people and helping them to become more independent.” Targeted on such challenges as helping children at risk of poor outcomes as young adults, and helping former recipients of unemployment benefit staying it work, it is based on answering, on the basis of rigorous data, two key questions: “Who do we need to get better long-term results for?” and “What is the best way to get those results?” It looks at the return on investment of a range of possible interventions, delivered inside and outside government.xxv In considering the relationship between spending and results, governments need to proceed with caution. Much of what governments want to achieve requires change in complex social systems – for example such challenges as homelessness or childhood obesity. As one government expert put it: “there is a tendency for governments, reflecting the unthinking assumptions of both politicians and civil servants, to rush into doing, allocating resources, setting targets, mandating approaches to delivery, as opposed to spending time properly understanding the problem they think they want to tackle, and the systems within which it operates.” xxvi National government also needs to consider carefully whether interventions are best designed and delivered at metro, local or even community level, as discussed in the Commission’s recent devolution paper. xxvii However, these correct cautions are not a reason not to care about outcomes and impact, more, to proceed with great care in defining goals, how they could be measured and assessed, and with humility about the ability of centrally-designed approaches to achieve results. The New Zealand approach described above includes “working with local organisations to commission services within communities” and “new citizen-centred services that cut across existing departmental service channels.”xxviii
How UK compares The UK has a long history of processes intended to link spending with value, outcomes or performance.xxix However, according to Sir Michael Barber, “these have tended to be temporary and separate initiatives rather than irreversible changes in either the core processes or the culture.”xxx For example, in successive stages from 1998 to 2007, New Labour developed a system of Public Service Agreements, intended to make clear the intended outcomes or results from public spending. But political interest in the system waned after 2005, and their Coalition successor abandoned the approach altogether.xxxi The UK approach has also not been conducive to considering trade-offs between departments or programmes, or between potential spending and impacts over time. There are many public policy challenges, for example homelessness or the prevention of reoffending, which need to be tackled by making strong judgements about the costs and benefits for government of where spending is best made to achieve outcomes. For example, to achieve results on reoffending, government needs to consider the balance of investment between direct interventions (programmes run by prisons and probation and funded by the Ministry of Justice) and other kinds of support in the community (employment, housing, health and substance misuse programmes, funded by a range of other departments). A focus on ‘making the numbers add up’ in the nearterm risks incurring longer-term costs. For example, OBR has drawn attention to the ‘fiscal illusion’ in the way the government accounts for student loans, which means they do not score as public spending in the near-term but will incur much higher costs over the next thirty years. xxxii The UK also maintains an artificial distinction between public spending, as conventionally designed, and tax expenditures (exemptions, allowances, credits and reliefs). Where such mechanisms are used to achieve policy objectives, they have the same effect on public sector borrowing, the government’s ‘bottom line’, as voted expenditure. NAO has raised concerns about value for money and transparency.xxxiii There are other ‘quasi-spending’ mechanisms like the funding of energy saving and low-carbon measures through consumers’ energy bills. Weak understanding of the relationship between funding and operational performance has led to serious real-world consequences. IfG analysis of public service spending and performance has shown the risks of misjudging the impact of spending reductions on performance in services like social care and prisons, leading to service and political crises, to which government has to respond through emergency injections of cash: “The Government’s failure to make successful transformative changes, or make explicit national decisions on the quality or scope of services, has left it trapped in a reactive cycle: allowing problems to mount, being confronted with a crisis (practical or political) and being left with the only option of injecting emergency cash.” xxxiv
Barber suggests three reasons why governments have struggled so much with bringing together spending and results: the challenge of measuring results in public services, incentives on Ministers and civil servants lead to a focus on spending money, rather than what is accomplished with it, and advocates for public services push for more spending, while pushing back against accountability. Barber also points to the Treasury’s tendency to focus on financial inputs and pay less attention to accountability. As he says, “of course, it is necessary and right that the Treasury should count the pennies – someone has to – but that should surely not be its only focus, even in hard times.”xxxv Since 2015, there have been two main initiatives intended to bring together the management of money and its intended results – Single Departmental Plans (SDPs) and the Public Value Framework (PVF). SDPs set out departments’ objectives and how they will achieve them. They are agreed with the Cabinet Office and the Treasury. As the then Civil Service Chief Executive, John Manzoni, put it when they were introduced in 2016, their intention was to bring together “separate plans for almost everything [into] a single, clear, roadmap.”xxxvi They were, of course, ‘single’ in the sense of one plan per department. There is nothing setting out a comparable plan for government as a whole. (In 2017 and 2019, the Cabinet Office produced ‘The Government’s Plan’. But it was nothing more than a list of objectives, with no information about spending or performance metrics.xxxvii) SDPs did not reference back to it. The Prime Minister’s Implementation Unit and the Treasury worked together to provide central department scrutiny and quality assurance. xxxviii They were produced three times, in 2016, 2017 and 2019. SDPs were supposed to rebuild government’s ability to understand the relationship between spending and outcomes. But NAO found, in 2018, that “they are not central to decision-making in departments”; that “departments are weak at setting out their understanding of the relationship between inputs, outputs and outcomes”; and that only half of respondents in a survey of departmental officials were “confident that there was a good match between planned results and actual capability and capacity.”xxxix IfG found that there was a widespread perception in government that SDPs were not central to departments’ discussions with the Treasury.xl In 2017, the Treasury commissioned Sir Michael Barber to advise about how to improve focus on the value of projects and what spending achieves. He proposed a new ‘Public Value Framework’ (PVF). The initial version was discussed and refined within government and a final version published in 2019 – confounding widespread cynicism in Whitehall as to whether it would stay the course.xli The PVF is a tool for assessing policies and programmes against four sets of questions (‘pillars’) – pursuing goals, managing inputs, engaging citizens and users, and developing system capacity. The Commission for Smart Government is powered by GovernUp, an initiative of The Project for Modern Democracy, a company limited by guarantee no. 8472163 and a registered charity in England and Wales no. 1154924. Privacy Notice.
The principles of the PVF are now being built into spending review processes. Department’s bids for the 2020 spending review were required to propose priority outcomes, metrics for measuring progress, and evidence of what works.xlii The spending review document announced “further steps to ensure taxpayers’ money is spent well” and “a renewed focus on outcomes…ties spending and performance more closely together.”xliii It name-checks the PVF and announces a new approach to planning and performance, the main features of which are: • • • • •
SDPs to be replaced by Outcome Delivery Plans (ODPs) focused on 3-4 priority outcomes for each department. The Treasury has published the first set.xliv The publication of metrics against which progress against outcomes can be measured. Ministerial involvement: “Ministers will receive regular updates, enabling them to track performance and take early action where delivery may be under pressure.” Public reporting. Greater emphasis on evidence bases and evaluation. xlv
Following the spending review, the Treasury is engaging closely on the development of ODPs, including on departments’ theories of change and the evidence base supporting them.xlvi The spending review document also sets out some other improvements in financial management, including investment in departmental systems and the Treasury’s OSCAR II platform, funding for joint programmes to address the problems of silo working, and improved processes for considering the geographic impact of investment.xlvii The PVF is a clear and sensible framework for examining the relationship between spending and outcomes, though it will need to pay attention to avoiding simplistic top-down approaches to complex social challenges. It is reassuring that the Treasury’s commitment has been sustained through the tenures of three Chancellors. The commitment to more focused departmental plans is also a step in the right direction. However, outside the tent, it is not yet clear what practical difference it has made to the dialogue between the Treasury and departments, or to decisionmaking. At least as important, whether and how the Treasury and departments are able to trade off spending and impact on challenges and objectives across government as a whole to improve decision-making on the 15 shared priority outcomes will be an important test. The 2021 spending review also needs to explore systematically at the trade-offs between short-term expenditure restraint and longer-term public expenditure and societal costs. A start has been made on ensuring the government’s financial planning addresses value. This needs to be consolidated and developed further over the coming years.
Control vs Delegation Successful corporates and governments An important choice for any organisation is where it should stand on the spectrum between ‘tight’ (decision-making tightly controlled from the centre in ways which may protect the organisation against poor decision-making and inconsistency, but which may suppress creativity and an agile response to changing circumstances) versus ‘loose’ (less controlled, but with the risk that poor decisions somewhere in the organisation will create risks which it is difficult to control). Of course, most organisations are not at one extreme or the other, and mix and match ‘tight’ and ‘loose’ approaches for different parts of the business.xlviii For a major corporate, for example, there is not a uniform approach to the degree of discretion business unit leaders have over financial decisions. An objective, risk-based judgement is made, balancing the scale and impact of the expenditure on the organisation as a whole, and the confidence of the centre about the capability of the business unit. However, maintaining tighter control because of concerns about capability should be a temporary response: the centre will also take steps to ensure the capability issues are addressed. Governments may default towards ‘tight’ approaches because they believe, or vested interests assert, that they are necessary to ensure the democratic accountability and transparency which should attach to their spending and activity. However, a better answer may be to allow more operational independence, but create new forms of direct accountability, which may in fact be more powerful.xlix Operating a smart approach to judgements about delegation requires excellent financial management data, and objective, evidenced, approaches to making judgements about capability. In the UK, such approaches have never been applied to government departments. However, the former Audit Commission made judgements about councils according to a standard method. In the US, the 2001-09 Bush administration operated a standardised scorecard system for federal agencies, as the basis for making judgements about where capability needed to be developed (Figure 3).l
Figure 3: Standardised ratings of US Federal Agencies: 2001 and 2006
The New Zealand Government’s Performance Improvement Framework, in a broadly similar way, is a consistent methodology for assessing agencies’ capabilities, leading to a published assessment (Figure 4).li
Figure 4: New Zealand Government performance improvement framework
How UK compares Government is very large and complex. A typical programme will involve a chain of control and accountability running from the Treasury, through departments to operational organisations (as different in scale and nature as the NHS, local government, with its own democratic accountability, commercial outsourcing suppliers and social businesses like academy trusts and housing associations). That makes the challenge of balancing ‘tight’ and ‘loose’ models of working great. IfG’s 2019 report on spending and results found some examples where there had been a productive move away from very close control. In housing investment, there is a clear line of The Commission for Smart Government is powered by GovernUp, an initiative of The Project for Modern Democracy, a company limited by guarantee no. 8472163 and a registered charity in England and Wales no. 1154924. Privacy Notice.
accountability from the Treasury, through MHCLG to an arm’s length body, Homes England. The Treasury has allowed MHCLG to manage its relationship with Homes England from detailed control over programmes to an outcomes-based approach with flexibility about how resources are allocated. That has, in turn, enabled Homes England to work in a more mature way with the housing organisations which it funds.lii Unfortunately, there are too many less happy examples. The approach which has tended to prevail is one focused on close control of money and exactly how it is spent. If this led to successful outcomes and good value for money, it would be justified. However, it has instead tended to lead to the reverse: constraining leaders at the sharp end from spending funding intelligently, or moving it between years, leads to waste and lack of impact.liii Well-managed corporates adopt a risk-based approach to control, taking into account both the strategic importance of programmes and their assessment of the capability of business leaders to manage them. In the UK, front line public service organisations, for example schools and housing associations, are expected to understand and manage well the control risks in different aspects of their operations. External regulators periodically assess them and produce a rating of their capability. Organisations with weak scores are supported to improve, but leaders are likely to find themselves replaced if they do not successfully turn around. We understand the Treasury applies a standard and rigorous approach to assessing the financial management capability of departments and public bodies. The results guide its decisions on delegation, and where departmental capability needs to be strengthened. The approach is based on Treasury documents, Managing Public Money and the Government Finance Function Finance Standard.liv A performance framework is being developed in the 2021-22 financial year.lv
Telling the story clearly Successful corporates and governments External transparency is an important incentive and discipline for strong performance on financial management. Publicly quoted corporates need to take transparency, to shareholders, regulators and their stakeholder community seriously. For government, there are two sets of arguments. First, democratic governments spending money and taking other decisions on behalf of citizens need to be transparent, to encourage trust in government. Second, external transparency reinforces incentives for value for money and strong capability and performance. The 2001-09 Bush administration in the US found that The Commission for Smart Government is powered by GovernUp, an initiative of The Project for Modern Democracy, a company limited by guarantee no. 8472163 and a registered charity in England and Wales no. 1154924. Privacy Notice.
publishing their scorecards of agency capability and performance reinforced incentives on agency leaders for performance. Interestingly, this was at least as much from the positive impact of transparency about good performance, as the deterrent impact of poor performance being visible. Governments need not just to release information, but make it accessible to non-expert users, Parliamentarians and the public. In the digital age, this means attractive web portals, with effective data visualisation which non-expert users can use both to see the big picture and drill down into detail which is of interest to them. A good example of what is possible is the Canadian Government’s InfoBase system. InfoBase is a single portal through which users can find out information about the spending, performance and workforce of government agencies, in a consistent format and using data visualisation to present the information clearly and enable users to explore in as much detail as they wish.lvi The Singapore Government publishes a report card, accessible on citizens’ smartphones via a QR code (Figure 5). Figure 5: Singapore Government Outcomes Review
Effective legislative scrutiny of spending plans is important. All OECD countries other than the UK have mechanisms for this.lvii For example, the Canadian Parliament has a Committee with such a remit, supported by a Parliamentary Budget Office. Its assessment in 2019 was that “Parliament has invested more time and effort in valuable discussions about the adequacy of the information provided to committees, as well as financial due diligence on spending.”lviii How UK compares The UK has some strong transparency institutions. OBR ensures the UK’s economic forecasts are free of political interference and published independently. The Committee on Climate The Commission for Smart Government is powered by GovernUp, an initiative of The Project for Modern Democracy, a company limited by guarantee no. 8472163 and a registered charity in England and Wales no. 1154924. Privacy Notice.
Change provides published independent advice and commentary on progress on carbon reduction and climate adaptation. The Independent Commission for Aid Impact (ICAI) provides challenge on the effectiveness of aid programmes.lix A sub-committee of the Commons International Development Committee assesses the FCDO’s and other departments’s responses to ICAI’s recommendations.lx The UK’s Whole of Government Accounts are another good example of transparency. NAO, supporting the Commons Public Accounts Committee, not only provides independent assurance about departmental accounts, but publishes detailed and informative studies of departmental spending and activity, post hoc. OBR publishes forecasts of the impact of spending review decisions. However, in other ways, the UK government falls short: •
Spending review documents are summary presentations of high-level plans. They are ‘spun’ documents, whose presentation is designed to support the political messages the government wishes to make at the time of each review, rather than presenting comprehensive information in a consistent format, review to review. They tend to focus on major changes in planned spending, rather than a presentation of the whole. Between 2010 and 2019, they have not included much information on outcomes or performance. In a welcome development, the government has published the departmental priority outcomes agreed in the 2020 review in a companion document.lxi Governments seek annual formal authority for spending through the Supply Estimates presented to Parliament. They contain information on planned spending, with short explanatory descriptions, categorised by type of spending, rather than departmental priorities. Improvements are under way, but it is still difficult even for external experts, let alone nonexperts, to trace through consistent presentation how actual spending and performance compares to earlier published plans.
Departments also draw up annual plans (between 2016 and 2019 SDPs, from 2021 ODPs). The full versions of SDPs (around 50 pages) were not published, only summary versions of around 10 pages, which varied somewhat in content and presentation. The Government said the full versions contained too much detail to be useful for Parliamentarians and the public. lxii The Chair of the PAC expressed her frustration: “We want to hold departments to account on their spending, value for money, and delivery for their citizens. If we could see these plans, we could help hold them to account even more effectively”lxiii
Departments publish annual reports and accounts. Parliamentarians have been very critical of them: “the information provided to Parliament through government annual accounts does not enable effective Parliamentary scrutiny.”lxiv The UK, unlike most other OECD countries, does not have a Parliamentary Committee with staff support, to conduct independent scrutiny of spending plans. The Commons Procedure Committee has argued for this to be remedied.lxv While this is a matter for Parliament, not the Government, as a former Treasury Permanent Secretary, Lord Macpherson has suggested, there is a good case for the Treasury to embrace it: “Such a Committee would encourage the Treasury to raise its game, since It would be under greater pressure to explain the Government’s decisions. For example, in the absence of such scrutiny, there is a tendency for the Treasury to cut corners in spending allocations.”lxvi Improvement is under way in the quality of government’s formal financial documentation. In its response to Parliamentarians’ concerns, the Treasury published a review of financial reporting in 2019, undertaking to improve guidance to departments, build a bank of best practice examples, and work with departments to drive improvements.lxvii Improvement in reporting has been recognised by NAO and in the annual Building Trust financial reporting awards. Figure 6 is a graphic from the MoD’s 2019-20 annual report, which shows how departmental reports are now using good data visualisation to tell their story more clearly.
Figure 6: Ministry of Defence spending 2019-20 annual report
These improvements are welcome. But the UK needs to go further in improving the transparency of spending plans and performance, by publishing plans and capability assessments, by presenting plans and outturns in a consistent way, and publishing digitally in a way which enables users to explore and interpret information.
Systems and workforce Successful corporates and governments A clear message from the corporate sector is the vital importance of excellent, consistent, data on money and performance, and sophisticated systems which enable information to be retrieved and analysed. A forthcoming Commission paper will set out how high performing companies and governments manage and use data for financial planning. The Commission for Smart Government is powered by GovernUp, an initiative of The Project for Modern Democracy, a company limited by guarantee no. 8472163 and a registered charity in England and Wales no. 1154924. Privacy Notice.
Systems and processes only work when they are operated by the right people. Companies and organisations need financial skills throughout the business. But the workforce at the corporate centre needs to have a particularly strong combination of skills. They need to be technically excellent, in terms of understanding and using data. But they also need the experience and personal credibility to be able to make sound judgements about the reliability of what business units are telling them, and advise top leaders about whether stretching financial or performance targets are achievable. The Government of Singapore has a Strategy Group located in the Prime Minister’s Office which “drives whole-of-government strategic planning by identifying key priorities and emerging issues over the medium to long-term. It partners public agencies to strengthen whole-of-government effort on key cross-cutting issues, such as population and climate change.”lxviii How UK compares As noted above, the Treasury is putting in place a new financial data platform (OSCAR II) “which will enable more users from across government to submit and interrogate financial data in near real time.”lxix A forthcoming Commission paper will explore the extent to which OSCAR II will take government to the best corporate and international practice, and how well it works alongside departmental systems. In terms of people, the most striking feature of government’s corporate centre is that it is split across two departments, the Treasury and Cabinet Office, with separate political and official accountabilities. As one government non-executive put it, “it is challenging to operate with two head offices.” We understand officials work hard to make sure the centre is aligned in its discussions with departments. The development of the functions, and the Infrastructure and Projects Authority since 2010, has also strengthened the specialist expertise available to the Treasury on projects, procurement and other issues.lxx However, in other respects, the division is unhelpful, for example the Treasury’s perceived ambivalence about SDPs reported above. The centre of government is also weak, in relation to departments. As a recent IfG report puts it: “recent governments have found it difficult to set direction from No.10 and the Cabinet Office. Ministers in the Cabinet Office, up to and including the prime minister, are surprised by its weak delivery capacity and inability to address cross-cutting issues… No.10 and the Cabinet Office have a limited capacity at ministerial and senior civil service level to lift decisions above lowest common denominator compromise.”lxxi
The development of the finance function across government since 2010 has done much to reinforce finance professionalism across the Civil Service as a whole. Most departments now have professional finance operations, led at executive board level by a qualified professional. This is a big change from before 2010, when the FD role in departments was typically occupied by a policy generalist. Further improvement is in train, with a four-year strategy in place from 2019 (Figure 7). It has been more open to question whether the staffing model of the spending directorate of the Treasury matches the needs of a modern government. There have been longstanding concerns about turnover and expertise – a median time in post of 11 months, and low levels of practical experience in public services, according to NAO. NAO found that the Treasury did not even capture what the skills and experience of people in spending teams were.lxxii In a welcome development, in 2020, the Treasury recruited to the Director General role, for the first time in its history, a career finance professional, with private sector as well as government experience, who combines leadership of the Treasury’s spending work with the professional leadership of finance across government. The Treasury is now developing an illustrative career pathway showing the experiences and qualifications likely to contribute to a successful career.lxxiii
Figure 7: Government Finance Function: Strategy Objectiveslxxiv
How to reform financial planning: proposals for discussion In this section, we set out our proposals for a new approach to financial planning. Its main elements are: 1. Abolish the Spending Review and replace it with a new Plan for Government, developed through a strategic review, normally at the beginning of a Parliament. 2. Adopt a systematic risk-based approach to the balance between central control and delegation to departments and more widely in the public sector, based on a standard assessment of planning and management capability. 3. Full transparency of government plans and performance. 4. Stronger financial management systems and capability at the centre of government. 5. Transition: operating elements of the new approach in the 2021 spending review – a beta version of an approach to be put fully into effect after the next election Abolish the Spending Review and replace it with a new Plan for Government Past Spending Reviews have suffered from not being connected to any clear strategic view of government’s priorities and does not produce workable, reliable plans which make best use of spending. It should be replaced by a new Plan for Government, developed at the beginning of each Parliament. The Plan process would work as follows: •
Ministers would decide on a limited number of goals (we suggest no more than five), expressing their most important intentions for their term in government. For example, a set of such goals for the current government might include: net zero; levelling up, Global Britain, and the reform of the UK’s government institutions. The set of goals would not encompass the whole of what government does. There are vital ‘business as usual’ functions of government, which need to be planned and managed effectively. For example, even if reform of welfare was not a priority goal, government would continue to resource and deliver a welfare system. It is also important that there is a systematic review of asset value and risk across the whole of government: for example, government should be clear about the potential costs and risks of legacy IT systems, and ageing physical assets. For each priority goal, there should be one or more clear metrics, expressing the results the government expects to achieve by the end of the Parliament. Likely priorities such as net
zero and levelling up will play out over much longer timescales. However, there should be clear intermediate milestones. The Plan process would end up with a set of financial plans and performance expectations for each department. But these would be consequent on financial and performance plans developed for each priority in the Government’s first three months in office, by the centre of government and the departments with a part to play in achieving each priority working together. The process would pay particular attention to: reaching a clear understanding of what needs to happen when, and carried out by whom, to bring about the government’s intentions; understanding the trade-offs between spending and activity by different parts of government; and understanding the impact of decisions to spend or not spend money in the short term on government spending and society in the medium to long term. The process would include on a consistent basis, and consider trade-offs between public spending, tax expenditures, and other forms of ‘quasi-spending’. Plans for each priority need to be based on an understanding of how to bring about change on complex issues, the functioning of society or the international system, over which government has limited leverage. A vital aspect of the planning process would be bringing together and analysing the data and evidence needed to understand the challenge and design solutions. The process would agree how government would organise itself to execute its plans, including the structure and governance of joint working arrangements between the departments and agencies involved in the delivery of a priority. Part of the process would be the careful identification of strategic risks and stress-testing of plans, overseen by central Risk Committee including heavyweight corporate professionals.
A systematic risk-based approach to the balance between central control and delegation to departments So that the centre can make reliable judgements on the balance between control and autonomy for departments and other parts of the public sector, there should be a rigorous assessment of each organisation’s financial planning and management capability, resulting in a clear, published, scorecard. We suggest that, rather than being an external assessment, this should: •
Start with a self-assessment by the department, against a standard methology. The department’s assessment could include internal review and assurance, notably by the board. Be assured within government by the Government Finance Function and the Treasury. Be externally validated by NAO.
The Treasury should give organisations with strong ratings more autonomy in their spending decisions; those with weak ratings should be the subject of an improvement plan, with support from the centre. Full transparency of government plans and performance Following the example of Canada, the government should publish its spending plans and proposed targets, and provide regular updates on performance. (Where confidentiality is really essential, for example on aspects of security and defence, plans could be redacted.) Presentation of actual spending should be in a form which enables easy comparison with earlier plans. Transparency should be enabled through a What’s Happening to your Money? app which would run on all commonly used operating systems. The House of Commons should set up a new Committee to examine government spending plans, along the lines recommended by the Procedure Committee in 2019. Stronger financial management systems and capability at the centre of government A forthcoming further Commission paper will set out proposals on how to develop a best-inclass financial and performance management system. In keeping with the proposals in the Commission’s Talent and Competence workstream, the staffing of the units at the centre which deal with financial and performance planning and management should be overhauled so there is stronger financial management expertise, including those with experience at the business end of government; and more experience outside Whitehall. The Treasury and Cabinet Office should seek to operate so far as possible like a single corporate HQ, with joint teams managing the relationship with departments, individually and in the groupings which will plan and manage the delivery of the government’s top priorities. Some important aspects of a better approach to government financial management are being developed as part of other Commission workstreams: •
A reformed approach to the financing and spending of local government is a key component of more effective financial planning and management. Proposals for this are being developed as part of the devolution workstream. A subsequent Commission discussion paper on structures will examine whether structural changes are necessary, or highly desirable, for a reformed approach to financial planning to be successful.
A paper on departmental boards, published alongside this paper, will suggest how they can be strengthened, in particular to improve the translation of policy into workable plans, departmental planning, and capability.
Transition The last two spending reviews, in 2019 and 2020, were limited exercises to roll forward spending plans for one further year only. The 2021 spending review will be a multi-year review, setting spending plans for the remainder of the Parliament. It will have to reconcile competing challenges: the recovery from Covid, the delivery of the Government’s policy ambitions, and the need to put the public finances on a sustainable footing. In its full form, the approach to planning and management which we recommend in this paper cannot be put in place for this year. But the Government should design this year’s spending review process to be as much as a possible a beta version of the Plan for Government. In particular, we support the focus we understand it plans to adopt on a limited number of priorities for the whole of government, on understanding and planning the impact of spending, and looking across government at the trade-offs between spending in different departments, and at how to bring the work of departments together effectively. In the section which follows, we summarise our proposals and questions on which we invite feedback.
Headline Desired end state Unified plan for government
Timing: beginning of Parliament Starting point: five (maximum) strategic priorities for whole of government plus financial metrics. Each department to produce a high-level plan for 4-5 years, showing relationship between proposed spending and performance/results. Centre to lead a process of cross-departmental planning for each strategic priority. Scrutiny and discussion: leading to publication of strategic plan within three months of election. High level plan for each department plus plans for each strategic priority; transparent reconciliation between the two. Strategic plan the basis for developing detailed departmental budgets. Identifying strategic risks and stress-testing of plans, overseen by central Risk Committee including heavyweight corporate professionals.
How often should the strategic plan be refreshed? Every year? Mid-term? Would it be possible to be more radical, and produce a strategic plan based solely on the strategic priorities? Is the Public Value Framework a good basis for the development of plans for departments and strategic priorities? Should budgets for the strategic priorities be pooled between departments involved, or ‘virtual’ budgets made up of linked allocations made to different departments?
Headline Risk-based approach to central control versus delegation to departments.
Full transparency of plans and performance.
Best-in-class financial planning system
Key elements • Centre to supervise and control closely: Programmes which are mission-critical/high risk. Departments or agencies whose internal systems and capabilities are assessed as weak. • Control over other programmes delegated, subject to regular exception reporting. • Strong central oversight of execution of strategic priority plans. • Centre to support improvements in capability in weak-rated departments and agencies. • Strengthen departmental boards.lxxv • Plans to be published via single web portal/app. • Spending and performance information published regularly. • (Canada’s InfoBase) to be a template. • (Sensible exemptions for security or marketsensitive plans) • Commons should set up powerful new Committee to scrutinise spending plans (as proposed by Procedure Committee in 2019). • See forthcoming Commission paper
Discussion questions • What practical methods could centre use to assess and periodically revisit judgements about control vs delegation? • Should centre lead management of strategic priority programmes, or should a lead be allocated to a department, with central departments providing expert support?
What would be the benefits and risks of radical transparency? How could risks be mitigated?
Headline New staffing model for central financial planning and oversight.
Key elements • Single relationship team for each department. (In current structure, joint Treasury/Cabinet Office teams with dual reporting lines) • Strong central teams for strategic priorities (matrix approach)? • Key capabilities: Finance professionalism. Portfolio/programme management. Data analysis. Digital. HR.
Discussion questions • Is suggested capability mix correct?
Headline Transition 2021 requires a strategic re-set of government plans post-Covid, of a kind which would normally otherwise happen at beginning of a Parliament. Government should see SR 2021 (setting plans through to 202425 as a trial run for more fully developed new model to be put into effect after a 2024 election.
Government to agree (and announce) threefive strategic priorities. Review departmental outcomes published December 2020: identify those which are aligned with strategic priorities. ‘Dragon’s Den’ process on December 2020 departmental outcomes: try to cull as many as possible not aligned with strategic priorities, test/refine those which are. Strong presumption that discretionary programmes will be cut or removed if they are not aligned with strategic priorities. Tough targets for operating efficiency. Departmental NEDs and a central NED panel to ensure that outcome/operational impact of proposed changes in proposed spending thoroughly understood and how deep cuts can be practically and politically sustainable. Set up Cabinet Office/Treasury multidisciplinary teams to run discussions with departments and on each of the strategic priorities. Set up transition team to start workforce and systems planning towards full version of new model by 2024.
Is this a feasible and practical approach to a new-style spending review/corporate plan process in 2021? How can government best ensure that the human resources and systems it needs for the fully developed approach are in place by 2024?
Author The author of this Discussion Paper is Martin Wheatley. Martin is a former senior civil servant and local government professional, with experience on social policy, environment and housing including the Treasury, the Social Exclusion Unit, Croydon Council and the Local Government Association. An independent adviser and researcher since 2011, his published work on government reform includes reports on the centre of government and localism for GovernUp, and on government financial and performance management for the Institute for Government.
For a fuller explainer, see Wheatley, M et al (2018), The 2019 Spending Review: How to run it well, Institute for Government, p 8-11 ii Office for Budget Responsibility (2018) Fiscal sustainability report, p12-15 iii The UK cannot run Sweden’s welfare state with US tax levels, Tony Travers, Guardian, 29 March 2016 https://www.theguardian.com/public-leaders-network/2016/mar/29/average-earners-higher-taxes-future-publicservices-bleak iv Office for Budget Responsibility (2021) Economic and Fiscal Outlook, March 2021, p 18, p 96 v Ibid, p 22 vi Ibid, p130-133 vii Barber, M. (2017) Delivering better outcomes for citizens: practical steps for unlocking public value, p 9 viii Interview with author ix Strategy consultancy, interview with author x Wheatley, M. et al (2019), The Treasury’s responsibility for the results of public spending, Institute for Government, p 52 xi Interview with author xii Commission for Smarter Government (2020), New Zealand’s Innovative Government Reforms, p 11-12 xiii Public Accounts Committee (2021), Achieving Net Zero: Forty-Sixth Report of Session 2019–21, House of Commons, p3 xiv HM Treasury (2020a) Spending Review 2020 xv Wheatley, M et al (2018), p 18 xvi Austin, G. and Chalmers, M. (2004) Evaluation of the Conflict Prevention Pools: Portfolio Review, DfID, p 3 xvii Interview with author xviii Independent Commission for Aid Impact (2012), Evaluation of the Inter-Departmental Conflict Pool, p 1 xix Correspondence with HM Treasury xx Interview with author xxi Strategy consultancy, interview with author xxii Campbell, A. (2015) Time-line for the Development of the National Performance Framework and the Outcomes Approach in Scotland, What Works Scotland xxiii National Performance Framework, Scottish Government https://nationalperformance.gov.scot/ xxiv Mandate Letter Tracker: Delivering results for Canadians, Government of Canada, Privy Council Office, https://www.canada.ca/en/privy-council/campaigns/mandate-tracker-results-canadians.html
Social Investment, New Zealand Treasury, https://www.treasury.govt.nz/information-and-services/state-sectorleadership/cross-agency-initiatives/social-investment xxvi Interview with author xxvii Hawksbee, A, and Kaye, S (2019) Smart Devolution to Level Up, Commission for Smart Government xxviii Social Investment, New Zealand Treasury xxix Wheatley, M. et al (2019), p 23-37 xxx Barber, M. (2017), p 4 xxxi Wheatley, M. et al (2019), p 30-31 xxxii Wheatley, M. et al (2018), p 18-19 xxxiii NAO (2020) The management of tax expenditures, p 12 xxxiv Andrews, E. et al (2017) Performance Tracker: A data-driven analysis of the performance of government, Institute for Government, p 7 xxxv Barber, M. (2017), p 3-4 xxxvi Manzoni J. Clarifying our priorities – Single Departmental Plans https://civilservice.blog.gov.uk/2015/07/29/clarifying-our-priorities-single-departmental-plans/ retrieved 10 February 2021 xxxvii Wheatley, M. et al (2019), p 41 xxxviii Ibid, p 39 xxxix NAO (2018) Improving Government’s Planning and Spending Framework, p 10-11 xl Wheatley, M. et al (2019), p 43 xli HM Treasury (2017) Delivering better outcomes for citizens: practical steps for unlocking public value; HM Treasury (2019a) The Public Value Framework: with supplementary guidance xlii Correspondence from Alex Chisholm, Civil Service Chief Operating Officer and Cabinet Office Permanent Secretary, re Seventy-Eighth Report of Session 2017-19: Improving government planning and spending (Cabinet Office and HM Treasury), dated 15 March 2021 Public Accounts Committee https://committees.parliament.uk/publications/5187/documents/52040/default/, p 1 xliii HM Treasury (2020a), p46 xliv HM Treasury (2020b) Spending Review 2020: Provisional priority outcomes and metrics xlv HM Treasury (2020a), p46 xlvi Correspondence with HM Treasury xlvii HM Treasury (2020a), p47-49 xlviii Is Your Organization Tight or Loose? How to Tell—and Ways to Fix It, Michelle Gelfand, Forbes, 11 September 2018 https://fortune.com/2018/09/11/leadership-organization-business-company-change/ xlix Hawksbee, A. and Kaye, S, (2021), p 21-22 l Agency Scorecards, Office of Management and Budget, https://georgewbushwhitehouse.archives.gov/omb/budintegration/agency_scorecards.html li Performance Improvement Framework, Public Service Commission https://www.publicservice.govt.nz/our-work/performance-improvement-framework/ lii Wheatley, M. et al (2019), p 10-11 liii Ibid, p 15-16 liv Managing Public Money, HM Treasury https://www.gov.uk/government/publications/managing-public-money; Government Functional Standard GovS 006: Finance, HM Treasury and Government Finance Function, https://www.gov.uk/government/publications/government-finance-standards-page lv Correspondence with HM Treasury. lvi Canada shows the way on government financial transparency, Martin Wheatley, Institute for Government, 17 April 2019 https://www.instituteforgovernment.org.uk/blog/canada-shows-way-government-financial-transparency lvii Procedure Committee (2019), Should there be a Commons Budget Committee? Tenth Report of Session 2017–19, p 15 lviii Ibid, p 16n lix About Us, Independent Commission on Aid Impact https://icai.independent.gov.uk/about-us/ lx International Development Sub-Committee on the Work of the Independent Commission for Aid Impact https://committees.parliament.uk/committee/347/international-development-subcommittee-on-the-work-of-theindependent-commission-for-aid-impact/ lxi HM Treasury (2020b) The Commission for Smart Government is powered by GovernUp, an initiative of The Project for Modern Democracy, a company limited by guarantee no. 8472163 and a registered charity in England and Wales no. 1154924. Privacy Notice.
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