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Select Committee on Treasury First Report

3 EFFICIENCY AND VALUE FOR MONEY

The overall importance of efficiency and value for money

15. In seeking to convey that the slowdown in the rate of growth of public spending was not incompatible with continued improvements in public services, the Chief Secretary placed great emphasis on the role of the new efficiency programme that forms part of the 2007 Comprehensive Spending Review settlement. He said that, "if departments make the headway on efficiency, as I have every confidence they will, we have said all along that they will be able to maintain the rate of improvement in public service within the tighter spending climate they are now working in".[43] He thought that "we have moved away from a period where people generally thought that the public services were under-funded to one where now people are looking more critically at what the return is for that investment".[44] He left little doubt of the dependence of the overall settlement on the efficiency programme:

The Chancellor of the Exchequer similarly remarked that what some of the spending departments "want to do will have to be achieved through being more efficient".[46]

Setting the efficiency targets

16. In the 2006 Pre-Budget Report, the then Chancellor of the Exchequer announced that, "for the years to 2011, I have reached agreement with Secretaries of State for net efficiency savings in their overall budgets of 3% a year".[47] When we reported on the emerging efficiency programme for these years in June 2007, we noted that the targets set for the period covered by the 2004 Spending Review were varied between departments to reflect an assessment by Sir Peter Gershon of each department's capacity to secure efficiency savings and that the Government was apparently now adopting a different approach, imposing a minimum requirement to meet an annual target of savings of 3% of total departmental budget on an across-the-board basis for all departments.[48] The Chancellor of the Exchequer emphasised that the 3% target had served as a baseline for negotiations, with some departments able to offer greater savings than that minimum.[49] The Treasury subsequently provided us with information about the targets for each department set out in Table 1.

Table 1: Annual value of efficiency targets for 2010-11 by department

Department	Net Cash-releasing VfM Savings by 2010-11	Net Cash-Releasing VfM Savings by 2010-11 (% of 07-08 vfm baseline)
Attorney General's Dept.	£79m	3.5%
Cabinet Office	£35m	3.2%
DBERR	£307m	3.1%
Dept. for Children, Schools and Families	£4,491m	3.0%
Dept for Culture, Media & Sport	£148m	3.0%
Dept for Environment, Food and Rural Affairs	£379m	3.6%
Department for Innovation, Universities	£1,543m	3.0%
Dept for International Development	£492m	3.0%
Dept for Transport	£1,762m	5.4%
Dept for Work & Pensions	£1,225m	5.1%
DCLG	£887m	4.9%
Dept of Health	£8,200m	3.0%
Foreign and Commonwealth Office	£144m	3.0%
HM Revenue & Customs	£673m	4.9%
HM Treasury	£30m	4.1%
Home Office	£1,414m	3.0%
Local Government	£4,900m	3.0%
Ministry of Defence	£2,700m	3.0%
Ministry of Justice	£1,025m	3.6%
Northern Ireland Office	£108m	3.4%
TOTAL	£30,542m	3.2%

17. The monetary targets relate to the annual value of savings achieved by 2010-11.[50] The percentage figures in the final column relate to a value for money baseline based on departmental budgets within Departmental Expenditure Limits.[51] Thus, for example, the Ministry of Justice has a baseline budget in 2007-08 of £9,465 million. If it were to follow an even path towards its target of savings with an annual value of £1,025 million by 2010-11, it would be expected to report savings of around £341 million in 2008-09, secure additional savings of around the same level in 2009-10 as well as ensuring that all savings reported in 2008-09 were recurring, and obtain further savings of around £343 million in 2010-11, as well as ensuring that all savings obtained in previous years continued to recur. For savings to be treated as recurring, it is assumed that they will continue to be measured against a 2007-08 baseline, so that the Ministry of Justice would be required to secure savings with a value of £682 million in 2009-10 against its 2007-08 baseline.

18. If the targets were simply to be assessed in monetary terms, the annual value of the overall efficiency target for the period from 2008-09 to 2010-11 of £30.54 billion would be seen as around one third more stretching than the target of £21.48 billion for the period from 2005-06 to 2007-08. However, this simple comparison understates the extent to which the new target is more demanding. First, only around 60% of the earlier targets were "cashable", whereas all the new savings have to be achieved by savings that are cash-releasing.

19. Second, the earlier Gershon target excluded most investment or implementation costs necessary to achieve the savings, in part because some up-front capital investment was begun before the Gershon efficiency programme began. Although the Government's own measurement guidance recognised that accounting for such additional ongoing costs arising from reforms was best practice, only four out of the 10 departments contributing most to the £21.48 billion target tried to subtract such costs from their reported savings.[52] The Committee of Public Accounts recently suggested that, "by not including on-going costs, six out of the ten largest departments may be over-stating their efficiency gains".[53]

20. In the 2007 Budget, the Government announced that all of the savings delivered under the 2007 Comprehensive Spending Review value for money programme would be net of implementation costs.[54] Treasury officials argued that the recording of savings net of implementation costs was "a better reflection of the budgetary flexibility of departments".[55] They noted that this element, together with the requirement for all savings to be cash-releasing, meant that the new programme was "more ambitious" than the Gershon efficiency programme that preceded it.[56]

21. In June 2007, we recommended that the Government clarify, at the time the final outcome of the Comprehensive Spending Review is announced, the reporting requirements relating to implementation costs, indicating whether standard accounting conventions will be used for identifying and distributing such costs.[57] In its response, the Government stated that it would set out value for money "definitions" and information about the monitoring and reporting system "alongside the conclusion of the CSR".[58] However, when the conclusion of the Comprehensive Spending Review was announced, the Government stated that further information about the departmental detail of the new efficiency programme would be provided in value for money Delivery Agreements to be published by the end of 2007.[59] We recommend that, in its response to this Report, the Government provide a definitive answer to the issue we posed in June 2007, namely whether standard accounting conventions will be used for identifying and distributing implementation costs under the new efficiency programme. We further recommend that the Government confirm in its response whether the presumed methodology for calculating savings in monetary terms set out in paragraph 17 of this Report is correct and, if not, clarify the methodology to be used.

Achievability, verification and service standards

22. Treasury witnesses emphasised that the target of efficiency savings with an annual value of £30.54 billion by 2010-11 had been arrived at after reviews of departmental expenditure and drawing upon the experience of the Gershon efficiency programme.[60] The Permanent Secretary viewed the new target as "a perfectly sensible number".[61] The Chief Secretary stated:

The Chancellor of the Exchequer similarly viewed the target as "demanding", but "one that is eminently doable".[63]

23. In our previous consideration of the efficiency programme, we highlighted a number of outstanding issues relating to measurement and verification of reported efficiency savings, including a lack of clarity about the extent to which savings had been fully verified and audited. In particular, we noted that there has been a lack of measurable and externally verifiable evidence to support the contention that all efficiency savings reported as delivered had been secured without a diminution in service quality.[64] In June 2007, we recommended that the Government ensure that a clearer performance measurement framework be established for the efficiency programme from 2008-09 onwards, including a greater role for external audit of service quality than hitherto. We further recommended that the Government ensure that a coherent framework for the verification and reporting of savings on a consistent basis be established as part of the post-2008 programme and that the Government set out the details of such a framework in publishing the final outcome of the Comprehensive Spending Review.[65]

24. Mr Macpherson told the Sub-Committee in November 2007 that the Treasury adhered to the practice whereby the Treasury would not "score" savings being offered by departments unless departments could prove to the Treasury that "service has at least been maintained in the area in question".[66] He also indicated that the Treasury was keen to use all ways to ensure that standards of service were monitored effectively, including through greater use of internal audit.[67]

25. The efficiency targets that have been set for the period from 2008-09 to 2010-11 are stretching and highly ambitious. In view of the unresolved issues concerning the effects of the current Gershon efficiency programme on service delivery, it is important that there is parliamentary and public confidence in claims about the effects of the efficiency programme for the period from 2008-09 to 2010-11 on service delivery. We recommend that the Government state explicitly that financial savings during that period will only be recorded as efficiency savings if there is sufficient evidence that service standards have at least been maintained. We further recommend that such evidence be the subject of regular external audit by the National Audit Office. We expect that this Committee and other select committees will wish to examine departmental value for money Delivery Agreements to ensure that clear baseline standards are established against which contentions about the impact of efficiency savings on service standards can be tested.

Administration budgets and Civil Service numbers

26. Alongside the monetary savings targets set under the 2004 Spending Review, departments were set targets for reductions in Civil Service numbers. A number of concerns have been expressed about this programme, including that an undue focus on headcount reductions could simply lead to a shift of resources from direct employment to the use of consultants and that workforce reductions could have a direct and detrimental effect on service quality and delivery.[68] Partly in response to such concerns, we recommended in our Report on the 2006 Budget that, "in seeking to embed a culture of efficiency in Government departments during the period covered by the Comprehensive Spending Review, the Government places greater emphasis on delivering and reporting on targets for continued reductions in departmental administration budgets rather than on workforce reductions attributed to efficiency projects".[69] In the 2006 Pre-Budget Report, the Government announced that all departments had agreed to cut their administration budgets by 5% a year in real terms over the period covered by the 2007 Comprehensive Spending Review.[70] In June 2007, we concluded that

27. In announcing the outcome of the Comprehensive Spending Review, the Government confirmed that the target for reductions in administration budgets of 5% a year in real terms would be "a successor to the SR04 workforce reduction target".[72] The Chief Secretary to the Treasury indicated that the decision to forgo explicit workforce reduction targets was partly a response to the "sensible" recommendation by this Committee, and also reflected "a desire … to give more freedom, more ability at local level to manage these pressures without constraining people in a particular direction around managing workforce pressures".[73] Mr Macpherson also acknowledged that, while headcount targets had been a good way of kick-starting staff-related efficiency savings, such targets had a potential to distort decision-making and encourage "game playing". He noted that "wage pressures" would be a factor to be borne in mind by departments in meeting their targets for reductions in administration budgets.[74] Professor Talbot believed that it was "much more sensible to target administration budgets" than Civil Service numbers, while pointing out that the dividing line between administration budgets and programme expenditure was not always clear cut.[75] We welcome the decision of the Government not to impose new explicit targets for reduction in Civil Service numbers for the period from 1 April 2008. We will monitor the implementation of reductions in departmental administration budgets, including classification issues and the effect of such reductions on the Civil Service workforce.