Spending Review

In the years since the onset of the global financial crisis in 2007, spending review has come to be widely used by OECD governments, principally as a tool for reducing aggregate expenditure to achieve fiscal consolidation. Spending review is, however, much more than a tool for cutting aggregate expenditure. Properly viewed, it is a core instrument for ensuring good expenditure prioritization – more specifically, for expanding the fiscal space available for priority new spending in a context of firm aggregate expenditure restraint. Given the difficult fiscal context facing many OECD governments in the medium and long term, it is essential that spending review become a permanent feature of the budget preparation process. The use of this important budgetary instrument must not be allowed to dwindle away once the immediate crisis has passed, as has happened in some countries in the past.

The questions of how to design spending review as an ongoing process, and to ensure that it survives as a core instrument of budget preparation, is the focus of a paper which I have just presented to the OECD Senior Budget Officials meeting in Paris.

The paper also proposes a set of best practice principles for the design of spending review processes. These principles call for spending review to be a continuing process, fully integrated into budget preparation. They suggest that spending review should have wide coverage of government expenditure, and should aim to deliver both efficiency and “strategic” savings. Spending review should nevertheless normally be selective rather than comprehensive, with comprehensive reviews undertaken exceptionally when either fiscal circumstances or major changes in government priorities require special in-depth scrutiny of spending. Care should be taken to keep spending review focused on the identification of savings measures, and to avoid the dissipation of energy through a broader focus on, for example, new spending proposals or broader public sector reform.

In respect to roles and responsibilities in the spending review process, firm political oversight and direction of the spending review process is critical. The overall management of the spending review process at the bureaucratic level by the ministry of finance (MOF) – together, where relevant, with any other central agencies which play an important role in the budget process – is essential for its success. The primary work of identifying savings options should normally be carried out by the civil service, with selective use of external expertise. In this work of developing savings options, either a joint review or bottom-up approach can be taken in respect to the roles of the spending ministries and MOF. In either case, the process must be designed in such a way as to place substantial pressure upon spending ministries to “play the game”.

Finally, steps should be taken to improve the information base of spending review – particularly through the greater availability of appropriately-designed evaluation studies.

The full paper is available at the OECD budgeting website.

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