Spending Review: Comprehensive or Selective?

The idea that spending review should become a regular part of the budget preparation process is now widely accepted. Most budget professionals now accept that the systematic and ongoing scrutiny of “baseline” expenditure to identify savings options is an essential part of good expenditure prioritization. Without systematic spending review, finding adequate fiscal space for high priority new spending – while keeping proper control over aggregate expenditure – becomes extraordinarily difficult, if not impossible.

So far, so good. The problems start when decisions are made about how to design the spending review process. It seems to have become a widespread article of faith that spending review should be always “comprehensive” or, as some put it, “zero-based”. This point of view partly reflects the fact that so many countries have conducted “comprehensive” spending reviews over the past five years. Obvious examples include the 2010 UK Comprehensive Spending Review, the 2010 Netherlands Comprehensive Spending Review (Brede Heroverwegingenin), and the Canadian 2011 Strategic and Operating Review . More than that, however, the idea that spending review should critically examine everything has great intuitive appeal – surely, if baseline spending is to be examined, everything should be thrown into question?

What this fails to take into account is the extremely demanding, resource-intensive nature of the spending review process – not only for the Ministry of Finance (MOF), but also for the spending ministries and for the political leadership. Even a selective spending review is a demanding process for MOF and spending ministry staff. But a comprehensive spending review is a truly exhausting process during which MOF and other civil servants involved have no choice but to put other important responsibilities to one side and concentrate overwhelmingly upon the spending review process. It involves, in the words of one British minister (describing the 2010 CSR), an “enormous effort”.

This is why, despite the recent popularity of comprehensive spending reviews, selective spending reviews have over the decades been more common than comprehensive reviews. The spate of “comprehensive” spending reviews in recent years has been a direct reflection of the exceptional fiscal stress experienced by many OECD countries in the wake of the global financial crisis, and the consequent magnitude of the fiscal consolidation many have sought to undertake. Of the type of spending review which may have made sense under the extreme stress of recent years is not necessarily the type of spending review process which will work best on a continuing basis into the future. Even if we set aside the debate about the wisdom of “austerity” policies at the current time, it would be inappropriate to base the design of ongoing spending review mechanisms on the approach adopted in order to achieve exceptionally large fiscal adjustments such as that implemented recently in the United Kingdom.

Under more normal conditions, selective spending review is a better approach. Expenditure restraint rather than sudden major cuts is what is normally required, and it is easier to reallocate gradually than suddenly. The types of major changes required to, say, pension systems to achieve longer term fiscal sustainability are widely understood, and do not require comprehensive spending review to implement. Moreover, avoiding the extreme pressure of a comprehensive spending review has the added advantage that the review work carried out during each round of the spending review process will generally be more thorough and of higher quality.

Conversely, comprehensive spending reviews are only desirable when a government wishes to achieve major aggregate expenditure reductions in a short period of time – whether to deliver fiscal consolidation, to reduce the size of government, or to pave the way for a dramatic shift in the direction of spending after the arrival in office of a new government with radically different expenditure priorities to its predecessor.

There is, of course, a problem of terminology here as well – the term “comprehensive” is inherently ambiguous and cannot be taken literally. No spending review processes has ever reviewed everything – i.e. every single government program and every single business process. To do so would be completely impracticable.

Does it even make sense to use the term “comprehensive” in relation to spending review? Given that the use of the term is well established, it arguably makes sense to continue using the term, but only on the condition that it is clearly defined not as a process of reviewing everything, but as the type of in-depth review which countries have in recent years carried out under the banner of “comprehensive” review. As I’ve suggested In my recent paper on the design of Spending Review processes, comprehensive spending review can best be defined as spending review the scope of which is not limited by any ex-ante list of review topics, and in which review teams are asked to look at all ministries with the expectation that they should seek to identify, to the extent practically possible, the most important savings options. By contrast, a selective spending review can be defined as a review which is limited to a specific list of review topics – programs, processes and/or agencies – which is specified at the beginning of each round of spending review.

The use of the term “zero-based” to refer to spending review is, by contrast, particularly unfortunate and should be entirely avoided. It carries with it all the baggage of the so-called “zero-base budgeting” systems which were such a total failure in the United States and the number of other countries in the 1970s and 1980s – precisely because of the inherent impossibility of starting every budget preparation process from the “zero” base of taking no spending for granted and justifying everything as if it were being proposed for the first time.

The challenge for the future is that of how best design a continuing and routine processes selective spending review, as an integral part of the budget preparation process. I’ll return to other aspects of this question in future blogs.

4 Responses to “Spending Review: Comprehensive or Selective?”

  1. Bruce Stacey says:

    Marc

    Having lived through 3 types of comprehensive spending reviews in Canada the Program Review of the 90’s then the Quarterly Strategic Review begun in 2007 and then the Strategic & Operating Review i still see the value in this kind of review but i agree that a review that attempts to look at all spending in a one year window will not be successful. Governments may reach their targets on paper and Finance Departments will reduce departmental budgets accordingly but the reductions proposed will likely not be achieved. In fact what will happen will be departments doing the same with less resources. However the staggered comprehensive review allows for the most productive effort. In the Canadian experience these reviews were started in a surplus situation so when departments put up there poor performing low priority programs government had the ability to accept or reject these proposals. if rejected departments maintained the resources to continue delivering those programs. It was less about the money and more about being more effective. By reviewing 25% of departments each year the 75% of non reviewed departments were operating business as usual. Yes it was work intensive for Central Agencies and Ministers but really isn’t hat there job. Unfortunately in the Canadian context we did not run a second cycle of quarterly reviews but went instead to the Strategic & Operating Review which tried to focus on back office expenses in organizations and do it all in a year. Thus departments really didn’t have the time or information to do quality reviews but instead just meat financial targets. Of course the most important component of a successful review is having the information and in Canada’s case we were successful because we had build the Program Alignment Architecture with all the program information and then basing the reviews on that architecture. In the Quarterly Strategic Review we did try and focus on several cross cutting programs like HR Agencies and Security but i’m not sure how successful they were.

  2. Marc says:

    Thanks Bruce. You were, of course, closely personally involved in the conduct of Canadian spending review, and this makes your views particularly valuable.

  3. Ivor Beazley says:

    Dear Marc

    Its important to recognize the political dimension here. Both the UK and Canadian Governments lauched their CSRs shortly after a general election. For a newly elected Government a “comprehensive” spending review can be attractive, offering the opportunity to re-direct spending towards its chosen policy commitments and goals, often signalling a clear direction for the rest of the term. Since changes of Goverment often follow an economic downturn and the need for fiscal consiolidation this provides an additional motive. A rolling program of targeted spending reviews is more of a good management/housekeeping tool although, as with any decisions on public spending, it also has political overtones.

  4. Ivor. Thanks for this point. You are absolutely right, and indeed I make the same point in the full paper on which the blog piece was based — a key theme of which was the need to differentiate between the type of roots and branches comprehensive review we’ve seen so much of over the past 5 years and the type of spending review which can work as an ongoing process into the future.