IfG reveals £15m cost of setting up new departments – and £19m productivity hit

Think-tank concludes that the estimated cost of creating the Department for Work and Pensions in 2001 exceeded £170m

Photo: PA

By Richard Johnstone

18 Nov 2019

The average costs of setting up a new government department start at £15m but can rise as high as £34m when the impact of lost productivity as staff adjust to the new organisation is taken into account, an analysis has found.

The Institute for Government report on the cost of machinery of government changes urges whoever is prime minister after next month’s election to think carefully about moving responsibilities around government.

Although report authors Tim Durrant and Gemma Tetlow say that creating a new department can be useful to focus on a high priority issue or to bring together related policy areas, most changes are rushed and can end up causing confusion. The hassle of setting up a new organisation distracts from the problem the government wanted to solve, according to the report.

The report highlighted that previous prime ministers have used their power to form new ministries. Tony Blair established three new departments in 1997: for the Environment, Transport and the Regions (DETR); International Development (DfID); and Culture, Media and Sport (DCMS). His successor Gordon Brown went further, rearranging the responsibilities of five departments in his three years at No.10. Although David Cameron reduced the amount of change in departmental roles and responsibilities from 2010 to 2016 – having been urged by then-cabinet secretary Lord Gus O’Donnell to do so – more took place when Theresa May became prime minister. Two new departments were created – for exiting the European Union, DExEU, and for international trade, DIT – while the energy and climate change and business departments were merged into the Department for Business, Energy and Industrial Strategy, and skills policy transferred from the business department to education.


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Other shifts have often been mooted, with the prime minister Boris Johnson having previously called it “a colossal mistake" to divide the Department for International Development from the Foreign Office, while in the 2019 Conservative leadership contest, Dominic Raab, now foreign secretary, suggested both DIT and DfID could become part of the FCO. The Labour Party has pledged to reform the Department for Work and Pensions into a department for social security, while the Liberal Democrats have called for the Department of Energy and Climate Change to be re-established.

Durrant and Tetlow say that such Whitehall reorganisations can work, highlighting the creation of DfID as an example that successfully increased focus on a specific issue that was of importance to the prime minister.

Such moves can also bring together related policy areas, such as the creation of the DECC, but the authors also highlighted the difficulty of drawing firm lines between policy areas.

For example, higher education policy was moved from the Department for Education to the then Department for Business, Innovation and Skills (BIS) in 2009 to ensure higher education policy supported UK business and promoted innovation, but was then moved back to the DfE in 2016 to bring it together with those working on other levels of education.

This illustrates the risks associated with many MoGs, the report said.

“Such reorganisations can run the risk of weakening previously existing links between officials in favour of others. People we spoke to who were involved in the move of universities policy to DfE thought this change had been unsuccessful, in part because it weakened the link between higher education and business.

“Another downside of creating bigger, arguably less-focused departments is that issues deemed a lower priority can lose out as they do not have their own secretary of state to represent them at the cabinet table. For example, when DECC and BIS were merged in 2016, there was some concern that not having a department explicitly responsible for the UK’s efforts to tackle climate change would lead to the issue slipping down the government’s agenda.”

How the DWP came to be

Improving operational efficiency is also a reason for many changes, and was the major rationale behind one of the most significant departmental changes of recent times: the creation of the Department for Work and Pensions in 2001. This combined employment advice and job-seeking support services from the former Department for Education and Employment with the benefits and pensions systems of the then Department for Social Security.

The organisational move has “stood the test of time”, the report concludes, in part because the change was the subject of detailed analysis. The Labour government took time to consider whether to merge the employment divisions of DEE into DSS, or to move working-age benefits the other way.

“A Whitehall committee was established to consider the pros and cons of each option, bringing together the two departments and the Treasury. The committee established trials across the country to look at how the two departments could best work together at a local level.

“Following successful trials, the committee oversaw detailed planning for the merger, which considered issues such as IT integration and achieving cultural change in whichever solution was adopted. This planning was also announced publicly, which officials reported led to difficulties as ministers and officials discussed significant changes that would have a direct impact on their own jobs.

The committee reported to the prime minister shortly before the 2001 election, recommending that DEE take on the expanded responsibilities. After the election, Blair went ahead with the change but chose DSS as the department to be expanded, adding employment support to its remit to create DWP." Although this headline change was the opposite of the committee’s recommendation, Durrant and Tetlow highlighted that the work done in considering the options helped resolve many of the predicted issues.

“Both the detailed process and the rationale behind Blair’s DWP change are relatively uncommon in the UK. Most departmental restructurings have been done quickly, without a full assessment of the potential impacts or operational implications,” according to the report.

Moving costs

Previous work by the IfG found that the upfront financial cost of setting up a new Whitehall policy department or a mid-sized merger averaged around £15m, which the new analysis confirmed remained the cost. This mainly included spending to acquire and fit out new office space, as well as IT and HR systems and developing and implementing consistent branding.

However, the institute has also costed the less tangible costs from the time taken for the new organisation to bed in.

“There can also be more widespread and longer-lasting effects on productivity if staff are resistant to or unsettled by the change,” the report said.

“The uncertainty and confusion of the first weeks and months of a new or refocused organisation often mean that officials spend their time dealing with making the organisation work rather than tackling the policy issues it has been set up to deal with.”

Using a conservative estimate developed by the IfG, that 20% of staff suffer a 20% productivity loss for 10 months due to a departmental change, this implies that the productivity losses from departmental reorganisation can be as large – if not larger than – the direct financial costs of creating a new organisation.

For example, based on the staff costs for BEIS in its first full year of operation this would equate to £34m. There was an estimated £24m productivity loss associated with the creation of the Department for Work and Pensions which, added to a £140m bill to align the salaries from its two predecessor departments and a £9m formation cost, puts the total cost at £173m.

Durrant, who is the IfG’s associate director, said this analysis showed that changes should be carefully considered.

“Whoever becomes prime minister may want to signal change by moving departments and creating new ones. Instead of making rapid changes and expecting the new department to be up and running immediately, the incoming prime minister should think through what exactly the new department should do, spending time and money to get it up to speed.”

Tetlow, the think tank’s chief economist, added that “unless these changes are properly planned, the costs can largely outstrip the benefits”.

Among the recommendations for how to do government changes well, the IfG recommended that the next prime minister consider alternative ways to better link policy areas, such as joint offices or joint ministers, and to have clear objectives for the department – and its ministers.

“Even where a new or merged department has clear objectives, it will take time to get up to speed with its new responsibilities. While a prime minister can announce a new department on a Friday and expect it to exist on the Monday, it will not be running at full capacity for months, if not years,” according to the report.

“The teething pains of building the new organisation will continue to distract officials from their day jobs for a long time after the announcement is made.”

Durrant and Tetlow also called on the Cabinet Office to offer more support when new departments are being created, and the Treasury to cover the immediate costs. More should also be done to support staff morale during the changes, including allowing staff to offer ideas on what they would like to see in the new organisation, and undertaking an evaluation of the impact of the changes.

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