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Four Ways of Containing Running Costs in
Government and Public Services
Christopher Hood, University of Oxford
www.christopherhood.net/
Presentation for ‘Shared Services Conference’, Lisbon, 26 November 2014
2
Valedictory lecture at Oxford, 2014
Inaugural Lecture at the London School of Economics, 1990
The Effects of Observing Government Reform in the UK over 25 Years: The Ravages of Time
Some of the UK government ‘makeovers’ I’ve witnessed over 3 decades, all aspiring to make government and public services cheaper & better…
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1979 – 1990 Margaret Thatcher Rayner Scrutinies, Efficiency Unit,
Privatization/ Marketization,
Audit and inspection regimes
1990 – 1997 John Major Next Steps Agencies, Key
Performance Indicators,
Citizen’s Charter
1997 – 2007
Tony Blair Prime Minister’s Delivery Unit,
Public Service Agreements,
Gershon Review
2007 – 2010 Gordon Brown Efficiency and Value for Money
Programmes
2010 – David Cameron Civil Service Reform Plan, Target
to cut government administration
costs by 34% by 2015.
Some of the Main UK Initiatives 1979-2014
Three of my recent projects and experiences - Three year Leverhulme-funded study (with Dr. Ruth Dixon) of
running costs and complaints/litigation in UK central government from the 1980s to the 2010s, book forthcoming April 2015 (A Government that Worked Better and Cost Less?’ Oxford University Press)
- Four year ESRC-funded comparative study (with Professor David Heald and Dr. Rozana Himaz) of episodes of fiscal squeeze in the UK and cross nationally. Book When the Party’s Over: The Politics of Fiscal Squeeze in Perspective, Oxford University Press/British Academy 2014 and other publications in preparation
- Membership of Government Office of Science Review of the Analytical Capability of HM Treasury 2012-2013
These three items overlap, but they are not the same
(See C. C. Hood and R. Dixon, ‘A Model of Cost-Cutting in Government?’ Public Administration Volume 91 2013)
Exploring Running Costs and Related Costs of Government
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public service paybill costs
tax collection
costs
running or administration
costs
Real-Terms UK Central Government Civil Service Staff Costs, 1960-2012
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1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Civ
il Se
rvic
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aff
(th
ou
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ds)
£b
illio
n (
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12
-13
val
ues
)
Treasury Memoranda /Supply Estimates
PESA 1993-2004
NAO/ Cabinet Officeestimates
Staff numbers (FTE) fromCivil Service Statistics atstart of FY
Staff costs include pensions and national insurance. MoD civilian staff included. Effects of reclassifications removed from PESA data.
Sources of data:
Thatcher BlairMajor
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
1961-62 1969-70 1979-80 1989-90 1999-2000 2009-10
Pe
r C
en
t
Fiscal year
Civil Service Paybill as Percentage of TME
Includes MOD civilian staff,superannuation and NICs
Sources : Treasury Memoranda PESA NAO/Cabinet Office
In the UK, Civil Service Paybill Has ben Falling Relative to Spending Since Well Before the era of Modern Managerial Reforms
Real-terms Administration Costs of UK Tax Departments 1980-2010
0.0
1.0
2.0
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1980 1990 2000 2010
£b
illi
on
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09
-10
va
lue
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Administration Costs of Tax Departments (IR + C&E and HMRC)
Inland Revenue and Customs & Excise merged to form HMRC in 2005
Source: OECD, Government at a Glance, 2013, Table 2.24
Reported Tax Collection Costs Compared across Countries
Cost/yield ratio of UK tax collection 1965-2010
0.00
0.50
1.00
1.50
2.00
2.50
1960 1970 1980 1990 2000 2010
per
cen
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Financial year ending
Cost/ yield of Inland Revenue and Customs & Excise duties and HMRC following merger in 2005
(net costs as a percentage of net revenues)
Inland Revenue
Customs & Excise
HMRC
Sources: calculated from data in Reports of the Commissioners of Her Majesty’s Inland Revenue, Reports of the Commissioners of Her Majesty’s Customs & Excise and HMRC Annual Reports and Accounts
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English Local and UK Central Government Gross Administrative Spending Relative to 1980-81
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1980 1985 1990 1995 2000 2005 2010
Spe
nd
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rela
tive
to
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(re
al t
erm
s)
Local Government
Central Government
BlairThatcher Major
Source of LG data: Local Government Financial Statistics Figures are corrected for inflation by means of the GDP deflator, 2012-13 values.
Running Costs are a Relatively Small Component of Total Government Spending…
Example: Reported running costs for UK (civil) central government departments as per cent of Total Managed Expenditure (TME = total government spending including social benefits, debt interest, and capital and current expenditure on services)
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1980 1990 2000 2010
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r ce
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Gross Running Costs / TME
Net Running Costs/ TME
Net Running Costs/ TME post-Gershon reclassifications
Thatcher Major Blair
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SocialSecurity
Health/NHS
Education
Defence
PublicOrder &Safety
Transport
PS Grossdebtinterestpayments
PublicSector Netinvestment
…so large cuts can only come from programme spending: categories of UK spending as % of GDP 1920-2010
Even so, running/administrative costs are important, for three closely related reasons: (i) Because of the political importance of signalling cuts in the cost of ‘bureaucracy’ when other items of government spending are to be cut (ii) Because it’s often easier to secure agreement among different political parties or viewpoints about cuts in government running costs than cuts in substantive programmes delivered to voters (iii) Because even if running costs are relatively small in proportion to total government spending, they are nevertheless large in absolute terms.
Total ICT Expenditure as Per Cent of Central Government Spending, (2011 or latest available year)
Source: OECD, Government at a Glance, 2013, Table 3.50
So, how can running costs be limited, cut or controlled? Four possible ways: (a) Through specialized common service departments within government
(b) Through departmental control of aggregated running cost budgets
(c) Through encouragement of sharing of running cost services, for example through outsourcing companies or other arrangements
(d) Through refining or redefining what is to be classified as ‘running costs’
These four ways are not mutually exclusive, nor are they jointly comprehensive (there are probably other ways) But all are observable from UK experience over the past 40 years
Specialized common service departments in government
Advantages: concentrated expertise, monopsonistic buying power, economies of scale Disadvantages: compartmentalized approach, scope for budget gaming, monopoly element if sharing is compulsory (but can also involve voluntary sharing & outsourcing) Example: the UK’s stationery office (HM Stationery Office), created by the Treasury in 1786
Photo: Kentigern House, Glasgow, built by the then UK Property Services Agency for the Ministry of Defence and opened in 1986
Departmental control of aggregated running cost budgets
Advantages: allows and requires departmental managers to make trade-offs, enables clear financial targets to spending controllers to check, avoids or limits budget gaming between departments and common service providers Disadvantages: scope for budget gaming on the boundary of programme and running costs, inherent classification difficulties create perplexities, potential loss of expertise in controlling common service costs (especially IT) Example: the UK’s running cost regime for central government departments, created by the Thatcher government in the mid-1980s
Shared services, old-style: a typing pool
Encouragement of sharing of running cost services, for example through outsourcing companies or other arrangements
Advantages: avoids unnecessary duplication of ‘back office’ costs that can be pooled, allows scope for ‘best practice’ common service expertise, allows departmental managers to focus on core task or front line activity Disadvantages: potentially inflexible to each organization’s individual needs, potential monopoly elements over quality and charges, sharing agreements may be costly to reach and to change Example: departmental ‘groups’ using common HR and finance systems, different police forces with ‘back office’ functions managed by outsourcing companies
Refining or redefining what is to be classified as ‘running costs’
Advantages: allows managers and governments to focus on the costs that most matter to them at any given point in time, changing regimes may limit some kinds of gaming, makes adaptation possible e.g. fit with changing accounting standards Disadvantages: makes it all but impossible for evaluators to track running costs consistently over time (unless stepped overlapping series are used), creates opportunities for gaming by reclassifying ‘back office’ as ‘front line,’ may produce cost savings that are more apparent than real Example: UK ‘Gershon Efficiency Review’ 2004
Pre-Gershon (2004) Post-Gershon (2005) Effect on reported running
costs for FY 2003-04
Gross Administration Costs Net Administration Costs –£1.26 billion
Whole Civil Service included
Some 'front-line activities' reclassified –£4.27 billion
PFI capital adjustment No PFI capital adjustment +£0.44 billion
"Other changes" –£1.04 billion
Reported running costs for 2003-04
£21.27 billion (reported in 2004)
£15.15 billion (reported in 2005)
–£6.12 billion
"–28 per cent"
Running Costs Reclassifications after Gershon
Source: PESA 2004, 2005
1. These four approaches can be combined – up to a point anyway For example, linking common service departments to departmental running costs budgets through user-pay charging regimes, or linking departmental running costs budgets to cost reclassifications 2. These approaches don’t necessarily follow a one-way historical sequence For example, demise of central common service IT provision in UK after the 1980s in favour of departmental control of IT, but a return to central control in the 2010s 3. In UK experience, upward pressure on running costs have come more from IT and consultancy costs than from civil service wage costs 4. 30 years of running cost control in the UK at both central and local government level produced at best mixed results, and it is hard to separate cost reductions from reclassifications since 2010, so it cannot yet be said confidently that the running cost control problem has been ‘solved’.
Some Concluding Comments
