End short-term focus to unlock Spending Review efficiencies, Treasury told

NAO highlights areas where efficiencies have fallen short, including shared services, automation and outsourcing
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By Richard Johnstone

14 Jul 2021

The Treasury has been urged to take a long-term view of any demands for efficiency savings in the forthcoming Spending Review, with the National Audit Office calling on the finance ministry to “recognise the tendency of its arrangements to focus on the short term”.

In a document examining the lessons from previous government efficiency drives ahead of the multi-year spending exercise planned for this year, the NAO said the review represents an “opportunity to set a medium-term approach for spending across government”.

Gareth Davies, the head of the watchdog, said that "it is inevitable that government is now focusing on efficiency”, given the huge impact of Covid-19 on public finances.

Chancellor Rishi Sunak has already warned that departmental budgets will be tight in the forthcoming exercise. Davies added: “As it prepares for the Spending Review, it will be important for government to apply the learning set out in this report drawn from its previous successes and failures in increasing efficiency.”

Among a series of recommendations for how the government can increase efficiency – defined as trying to achieve the same or better outcomes with fewer resources – was the call for the Treasury to take a longer-term view.

“The Treasury should recognise the tendency of its arrangements to focus on the short term and consider how its current efficiency programme accommodates long-term efficiency plans," the report said.

"This means challenging departments on whether they have considered long-term benefits of allocating resources to different activities, such as preventative measures, and working with departments to consider whether planned efficiencies will endure beyond the Spending Review period or if they may inadvertently increase other costs in the future.”

A series of other recommendations also called on departments and the Treasury to plan any forthcoming efficiency drive carefully, and “consider the risk that efficiency plans reduce resilience to deal with unforeseen pressures” in light of the Covid-19 pandemic.

“Before the pandemic, we often saw departments operating in ‘firefighting mode’, reacting in an unplanned and uncoordinated way to problems as they arose and surviving from day to day," the NAO said.

“This means they do not have the time or resources to anticipate, plan or prepare for unexpected issues or areas of uncertainty to build better ways of operating that would make government more resilient to changes in demand, including any unanticipated emergencies.”

Some departments may plan efficiency gains based on operating with less spare capacity, or with fewer people, that could present “a greater risk of service delivery failure in emergency or unplanned situations”, according to the auditors.

As a result, departments are urged to “consider what they have learned about risk and resilience when forming their efficiency plans in the coming months”.

Assess the impact of cuts

Individual ministries must also assess the likelihood that efficiency savings will lead to service cuts “on the things that the end users of services value”.

When this can’t be determined, departments “should at least be fully transparent about where their uncertainties lie and monitor them closely”, the report urged.

It also told the Treasury to provide a cross-government perspective” to identify potential consequences for citizens that departments have missed", including the cumulative risk to different groups in the population from the collective efficiency plans across government.

This could be an extension to the analysis Treasury already performs at major fiscal events on the distributional impact on households of tax, welfare and public service spending decisions.

The report also urged the Treasury to ensure that it plays the role of accounting “for the wide range of government objectives in determining opportunities for savings, recognising that there may need to be trade-offs between conflicting priorities”.

The NAO recommended that both the Treasury and individual ministries should draw on their understanding of related objectives and activities that span departments to consider whether savings accrue for the exchequer as a whole, or if savings in one area will simply lead to increased spending elsewhere, including in local government.

“This might mean needing to consider the risk that seemingly attractive opportunities for savings in fact reflect a poor end-to-end understanding of a complex system,” it said.

In addition, the Treasury should consider “whether departments have sufficient incentives to invest in efficiencies if the benefits accrue to another department”, and how it might improve this.

Realism urged on optimism bias

The review also looked at the problems that can be encountered when implementing agreed efficiency plans, including the concern that officials making them will be too optimistic about what can be achieved.

To ensure plans are realistic, the NAO said both departments and the Treasury “should consider whether efficiency plans have been subject to adequate challenge within departments and by the Treasury… particularly on assumptions about savings accruing for other parts of government".

Departments should be required to show they have drawn on lessons from similar attempts to achieve efficiency gains when determining what it is possible to achieve.

The report highlighted shared servies, reductions in the number of arm’s-length bodies, process automation and outsourcing as among the areas where efficiencies had previously not matched intentions.

It urged the Treasury to put management of these risks “at the centre of the underlying decision-making process” and show how uncertainty will be managed with sufficient oversight and data. To help reduce uncertainty, it should consider the option to pilot approaches, it said.

'Include the option to stop'

Departments should also establish effective ways to track progress of planned efficiency savings, including set milestones to compare performance against, with clear thresholds for intervention, including the option to stop, the NAO recommended.

Alongside the Treasury, they should also consider what lessons and opportunities from the ways data have been captured and shared during the Covid-19 pandemic could be applied in achieving efficiency gains.

The Spending Review is also an opportunity to embed efficiency in government, according to the report, and departments should “consider gaps in their ability to embed continuous improvement, such as creating system incentives for leadership behaviour that encourage continuous improvement and training staff in problem-solving, and to factor this into spending plans”.

Davies highlighted that the pandemic followed a decade of rising demand for services and fixed spending levels, which saw departments having to plan to deliver more with less.

“This means, in many cases, that departments have already absorbed any easy wins and they now need to think more creatively and radically to achieve further efficiency gains,” he said.

“Equally, the pandemic has caused government to operate in new and unexpected ways, presenting an opportunity to challenge previous conventions around what might be possible.”

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