making the case for free enterprise
Weight Watchers for Whitehall
By Dominic Raab, MP for Esher & Walton
with a foreword by Andrew Sentance,
Senior Economic Advisor at PwC
3
Contents
Foreword4
Executive Summary
6
The Case for Streamlining Whitehall
8
Measuring State Spending
13
Streamlining Whitehall’s Bloated Bureaucracy
15
Controlling Public Sector Pay
20
About the Free Enterprise Group
21
4
Foreword
The UK – like many other countries in the western world – is struggling to
contain high levels of public spending and borrowing. Using the OECD’s
definitions, the UK government spent 49% of GDP in 2012 – nearly half of
total national product. We have the third highest public spending to GDP ratio
among the G7 economies (behind France and Italy) and our government
spends over 6% of GDP more than the average for the OECD economies
(42.6%).
In the 2010 Budget, the coalition government was optimistic that a combination
of economic growth, tax rises and spending restraint would bring the deficit
down to a sustainable level over the lifetime of this Parliament. However,
instead of falling to below £40bn by 2014/15, as expected in 2010, the OBR
now project that public borrowing will be £108bn in the last year of this
Parliament – around 6% of GDP.
A strong rebound in economic growth and/or further tax-raising do not offer
a way out. Most western economies have seen a slowdown in economic
growth associated with the post-financial crisis “new normal” world. And in an
increasingly globalised world economy, raising taxes is not a solution either.
Higher taxes on the income of companies and individuals will undermine
competitiveness, and encourage economic activity to relocate. Imposing
more taxes on households and consumers will intensify the squeeze they are
already feeling as a result of rising energy and food prices.
That leaves government with only one option: reducing the burden of public
expenditure. But how might this be achieved, in a world where demographic
trends and public expectations are pushing in the opposite direction?
There is no single obvious and easy solution. The public sector in a mature
western economy like the UK is a large and complex legacy business, which
has been accumulating and developing its activities since the beginning of
the 20th century. Privatisation and stronger financial discipline enabled the
government to reassert control over public spending in the 1980s and 1990s.
But new radical ideas will be needed to rethink and reshape government to
meet the challenges of the 21st century.
5
One potential area for reform and efficiency improvement is in the way
government is structured. Businesses frequently restructure their operations
to reduce administrative overhead and complexity. As well as raising efficiency
and cutting costs, a slimmer more effective organisational structure can
act as an enabler for other business improvements. A similar approach is
needed within government – to reduce the overlap between departmental
responsibilities, speed up decision-taking and to support the efficient and
effective delivery of public services.
This paper makes an important contribution to the current public spending
debate. It sets out an agenda for reshaping government – creating a slimmer,
more effective structure, better suited to the current needs of the UK economy
and society. As well as reducing administrative cost, a more efficient and
leaner government machine should be an enabler for other reforms in the
delivery of public services and welfare support, as well as simplifying the
interface with the private sector.
Private enterprise is the key engine of growth in the UK and other western
economies. By slimming down and restructuring government, the private sector
can be given more room to grow and create a more sustainable recovery for
the UK economy.
Dr Andrew Sentance is the Senior Economic Adviser at PwC. He was a
member of the Monetary Policy Committee of the Bank of England from
2006 to 2011.
6
Executive Summary
The sprawling bureaucracy and cost of Whitehall should be scaled back, to
make the UK government more efficient, and find £10billion worth of annual
savings to help cut the deficit faster and reduce business taxes to promote
growth. This should be done by:
1.Increasing transparency over domestic public spending and facilitating
international comparison, by adopting the OECD measure of government
spending in place of the narrower OBR definition.
2.Reducing the total number of separate government departments from 20
to 11, and saving £8billion per year.
3.Rigorously implementing the 1% cap on pay rises in the public sector,
through measures to prevent its circumvention, saving an estimated
£2billion per year.
7
8
The Case for Streamlining
Whitehall
In the context of the coalition’s efforts to reduce the UK budget deficit, and the
forthcoming public spending review, the case for streamlining government is
primarily built on the need to cut costs and spending that have to be paid
for through borrowing or taxation. The International Monetary Fund recently
confirmed that: ‘Reducing the large structural fiscal deficit over the medium
term is essential’.1 The need to cut the deficit, maintain market confidence
and re-balance the economy was further recently endorsed, as ‘necessary’
and ‘appropriate’, by the chief economist at the Organisation for Economic
Cooperation and Development (OECD), Pier Carlo Padoan.2
With gross UK government debt at 94% of Gross Domestic Product (GDP),
the Treasury is embarked on a further spending review, to identify further
savings in order to implement the Chancellor’s deficit reduction plan. It is
reported that the Treasury is still searching for around £9billion worth of
cuts in annual public sector spending.3 In addition, with quarterly economic
growth at 0.3%, further reductions to public expenditure would help pay for
cuts to business taxes to give the economy a supply-side fillip.
As crucial as these immediate economic concerns are, they are not the
sole reason for reviewing the functions and departments of state during the
spending review. In addition, there is a crowding out effect from high levels
of public spending, because it takes up the space that would otherwise be
filled by private sector activity, and as a result of the opportunity cost of the
tax revenue raised to fund it. This is resource that otherwise could be used
to innovate and invest. It has been shown that a 10% reduction in tax as a
proportion of GDP can lead to an increase in growth of up to 1%.4
1
IMF 2013 Article IV Consultation, Concluding Statement of Mission, May 22, 2013.
2
Widely reported, 30 May 2013.
3
Widely reported, including Reuters, 28 May 2013.
4
Philip Booth (ed.), Sharper Axe, Lower Taxes: Big Steps to a Smaller State, IEA, 2011, p.42.
9
Another key consideration is the impact on efficiency. There remain widespread
concerns about whether the structures of governments are delivering good
outcomes or not. During the decade after Labour took office, productivity in
the private sector went up by 2.3% each year on average, while public sector
productivity declined by 0.3% each year.5 Higher levels of spending have not
improved, and should not be confused with, public sector productivity.
There is also an important point to be made about democratic accountability.
There have been recent reports of government departments trying to
reclassify spending into other departmental budgets to get around budgetary
ring-fences. This risks blurring the functions of government, and obscuring
government budgets. More generally, the expanding and sprawling functions
of the state have eroded the ability of Ministers to exercise ministerial
responsibility over their departments.
Finally, although difficult to quantify, high levels of government intervention
and spending can play into the hands of vested interests. For example,
training subsidies are most easily accessed by large companies that are
able to restructure courses to meet bureaucratic qualifying criteria. Likewise,
complex regulation gives an advantage to incumbent companies with teams
of compliance offices, and makes it harder for new start-up businesses or
smaller companies to compete.
This report addresses three discrete aspects of Whitehall spending, with
a view to streamlining the costs, bureaucracy and functions of various
government departments. First, in the interests of transparency, it considers
the appropriate measure of UK government spending. Second, it analyses
5
ale Bassett, Thomas Cawston, Andrew Haldenby, Lucy Parsons, Public Sector
D
Productivity, Reform, 2010, p.4.
10
certain government departments that could be abolished or merged. Third, it
looks at the savings to be made from controlling the scope for circumventing
centrally-imposed limits on public sector pay.
The report does not purport to be an exhaustive consideration of all government
waste or functions. Rather, it is an attempt to propose a modest number
of practical steps to help streamline government bureaucracy, and place
Whitehall spending on a more sustainable basis, without harming frontline
services. Together, these policy measures would save over £10billion per
year. Those savings could be used to pay down the deficit further and faster,
and cut business taxes to deliver a supply-side fillip to the UK economy.
A Brief History of Whitehall Expansion
Britain’s public sector is complex. According to the latest Whole of
Government Accounts, there are around 1,500 ministerial departments,
regulators, QUANGOs, public corporations, executive agencies,
academies, foundations and devolved administrations.6
In practice, British Cabinets have historically been limited to twenty or
so Ministers, and thus around twenty main Ministerial Departments.
These Departments in turn oversee the rest of the public sector. While
the essential functions of the public sector – security, welfare and taxes –
have been constant for centuries, governments have continually altered
how they allocate space at the Cabinet table.
The modern civil service dates from the time of the Northcote-Trevelyan
report in 1853. Influenced by the Chinese Imperial bureaucracy, Britain
moved away from patronage to a more meritocratic system. By this point,
many of today’s departments were already in place. The Treasury traces
its ancestry back to medieval times, while the modern division into Home
and Foreign Office dates from 1782.
6
HM Treasury, Whole of Government Accounts: year ended 31 March 2011, October 2012
11
The original structure of the Cabinet was based around the needs of
Empire. Campbell-Bannerman’s cabinet of 1905-1915, for example,
contained separate Secretaries of State for Foreign Affairs, the Colonies,
War, India, and the Admiralty.
The first significant reorganisation came during the First World War. The
Haldane report of 1918 argued that there was ‘much overlapping and
consequent obscurity and confusion in the functions of the Departments
of executive Government.’7 It argued that it would be best for the Cabinet
to be kept ‘small in number – preferably ten, or at most, twelve’.
Haldane believed that there were two means of organising department:
either by function (health, education, defence) or by the clientele
they served (children, pensioners, the unemployed). He argued that
the former was preferable and proposed as a sample list: Finance;
Defence and External Affairs; Research and Information; Production
(including Agriculture, Forestry and Fisheries), Transport and Commerce;
Employment; Supplies; Education; Health; and Justice.
By 1919, new departments had been created to deal with Labour, Pensions,
Science and Industrial Research, Health, and Transport. The bureaucratic
expansion continued, and by 1951 there were 29 departments. The
Government was pruned back in the 1960s. Under Harold Wilson, the War
Office, Admiralty, Ministry of Aviation and Air Ministry were consolidated
into a new Ministry of Defence in 1964. Two years later, the Departments
for Colonies, Dominion Affairs and Commonwealth Relations were merged
into a new Department for Commonwealth Affairs, which by 1968 had
merged into the larger Foreign Office.
The shift away from imperial government represented just one aspect
of Government re-structuring. The low point of seventeen departments
in 1971 was soon added to as Governments created new departments,
often to appease political rivals or to bring salience to some issue of
the day.
7
Ministry of Reconstruction, Report of the Machinery of Government Committee, 1918, p.4.
12
The other reorganisations by Wilson, for example, proved less durable.
An attempt to split the Treasury into two with a new Department for
Economic Affairs lasted barely five years. The Department for Overseas
Development lasted just six years until 1970, although it was resurrected
for a year in 1974, and then returned once more as the Department for
International Development in 1997.
A frequent concern has been that departments organised by function are
susceptible to ‘departmentalism’. Fixated on their own concerns, they may
ignore the needs of joined-up government. To counter this, governments have
experimented with new institutions above and across departments: cabinet
subcommittees, super ministries or simply greater coordinating power at
the centre.
When this fails to work, governments have tried to create greater synergy
by changing how departments are bundled together. Nearly every
government seems to have had a different opinion on how best to
group education, universities, skills, employment, research and science.
Similarly, the links between environment, energy, transport, planning and
local government policy have led to regular change.
Despite little evidence that this constant creation of new and reconfigured
departments increases efficiency, the process shows little sign of abating.
Since 1979, British Governments have created 25 new departments, of
which only twelve now exist. By comparison, in the United States, where
it is much harder to make such changes, only two new departments have
been created. Both still exist.8
8
National Audit Office, Reorganising Central Government, March 2010, p. 10.
13
Measuring State Spending
As with any credible diet, it is important to measure consumption accurately.
So too, government’s consumption of taxpayer’s money needs to be clearly
and consistently recorded. However, there is a discrepancy between the
current UK measure of state spending, used by the independent Office of
Budget Responsibility (OBR), and that used by the OECD.
The main difference is that the OBR takes into account various streams of
government income - from leisure centre fees to hospital parking charges and deducts it from its figure for total expenditure. Whilst that is a legitimate
methodological approach, it has two downsides. First, netting off income
streams serves to mask the overall level of actual UK government spending.
There are good accounting reasons for keeping spending and income
separate, especially for those seeking to control the overall level of actual
expenditure.
Second, it obscures international comparison. An OECD review of 40
countries showed Britain to be the ninth biggest spender in 2009 on the
OECD measure, whereas it would have been around the OECD average if the
OBR measure were used. The table below illustrates the UK’s international
ranking between 2000 and 2009 on the OECD measure. Between 2001/2
and 2012/13, the OBR measure has been between 2% and 5.4% lower than
the OECD measure as a proportion of Gross Domestic Product (GDP).
This can also have a distorting effect on the evaluation public policy. For
example, at the 2013 budget, the Treasury’s Red Book estimated that public
spending would be cut to 44% of GDP by the next election, which would
appear implausible on the OECD measure.
The OBR and Treasury should adopt the OECD measure of government
spending for greater transparency - both as a domestic measure, and for
purposes of international comparison.
General government expenditures as a percentage of GDP (2000, 2007 and 2009)
Source: Government at a Glance, OECD 2011.
14
15
Streamlining Whitehall’s
Bloated Bureaucracy
The UK has 20 separate central government departments.9 This is high by
international standards. By contrast, the US has fifteen federal departments,
Japan has twelve, Germany fourteen, while even high-spending Sweden
has eight fewer ministries than Britain.
As well as inflating the cost of government bureaucracy, the proliferation
of government departments encourages mandarins to build up fiefdoms
and hampers a joined-up approach to policy-making in cross-cutting areas.
There are signs that the Treasury is currently considering reducing the
number of Whitehall departments, in particular by abolishing the Department
for Culture, Media and Sport (DCMS).10
This report urges the government to go further. By abolishing or merging
a range of Whitehall departments, offices and agencies, the number of
separate central departments could be reduced from 20 to 11, policy
integrated more closely in a range of important areas, and £8billion saved
each year. These savings can be achieved by cutting bureaucracy and waste,
and through the efficiencies gained by consolidating separate departments,
without touching frontline public services. There is a wealth of comparable
experience in the private sector. For example, research on the effects of
mergers and acquisitions suggests that labour cost savings of around a fifth
can be made through efficiencies gained.11 Whilst the consolidation of public
sector operations and functions presents a different context, it is reasonable
to expect at least the same level of scope for savings.
9
his excludes the Office of the Leader of the House of Commons and the Office of the
T
Leader of the House of Lords (which are part of the Cabinet Office), UK Export Finance
(which is part of the Department for Business, Innovation and Skills), and the Office of the
Advocate General for Scotland (which, although constitutionally separate, shares offices and
its accounts with the Scotland Office).
10
As reported, New Statesman, ‘Is Osborne about to abolish the culture department?’, 30 May 2013.
11
artin Conyon, Sourafel Girma, Steve Thompson and Peter Wright, The Impact of Mergers
M
and Acquisitions on Company Employment in the United Kingdom, Centre for Research on
Globalisation and Labour Markets, University of Nottingham, 2002.
16
In particular, based on the respective Departmental Business Plans, Annual
Reports and the Treasury’s forecasts for spending in 2014/15, the following
general estimate has been made of potential savings relative to each
respective department:12
—The DCMS should be abolished. The department brings together a
range of largely unrelated functions, and does not require a separate
free-standing bureaucracy of its own. Certain areas of spending including broadband, Ofcom, sport and certain aspects of heritage
- should be retained and hived off to other departments (including the
Treasury, the Department for Education, a new Department for Transport
and Communications, and the new Department of Devolved Affairs, see
below). By hiving off essential functions, reducing DCMS’s Departmental
Expenditure Limit by 50%, and eliminating its administration costs, at
least £0.7billion of savings per year could be made.
—The Government Equalities Office (GEO) should be abolished.
This agency (currently part of DCMS) is superfluous, and a source of
unnecessary and burdensome regulation. Whilst this measure would
only save £47million per year in departmental spending, wider savings
would accrue in the public and private sectors by removing a source
of onerous and counter-productive red-tape. Any vital residual functions
could be discharged by the Equalities and Human Rights Commission or
the Home Office.
—The Department for Business, Innovation and Skills (BIS) should be
abolished. Key areas of economic program spending should be hived
off to the Treasury, and responsibility for skills and further education
returned to their natural home at the Department for Education. While it
would be worth reviewing each element of program spending individually
for further savings, eliminating BIS’s administration costs, saving 50%
12
he estimates are based on Departmental Business Plans and Annual Reports, HM
T
Treasury forecasts and Civil Service Statistics. The estimate is based on the figures
available for 2014/15. A line-by-line analysis would be required to specify the savings with
greater precision.
17
from its capital spending, and ending further taxpayer subsidisation of
the Green Investment Bank, would save £2billion per year. Furthermore,
whilst the integration of economic policy in a single department would
be valuable, the strategic priority of strengthening UK competitiveness
also needs to be disseminated and coordinated more effectively across
Whitehall. This could be achieved by establishing a cross-departmental
Competitiveness Council, chaired by the Prime Minister, with overarching
responsibility for delivering improvements in competitiveness, as well as
introducing an economic competitiveness duty for each public sector
department and agency.13
—Return the Department for International Development (DfID) to the
Foreign and Commonwealth Office (FCO). DfiD conducts a shadow
foreign policy driven by aid considerations, often inconsistently with wider
FCO objectives (for example, in the area of conflict resolution). Returning
its functions to the FCO would ensure a more integrated foreign policy
strategy in key areas. By saving the administration and capital costs of
having a separate department dispensing aid, £2billion per year could be
saved without touching programme spending.
—Merge the Home Office (HO) and Ministry of Justice (MoJ). With the
creation of the MoJ in 2007, the HO’s functions were split between two
departments. Given the cross-cutting nature of criminal justice policy,
and wider issues that require a joined-up approach (for example, the
deportation of foreign criminals), this division of functions was always
questionable. In addition, by creating two departments, their combined
spending has risen by £5billion per year in real terms since the division
of functions.14 By just halving their combined administration and capital
costs, merging the departments back together would realise savings of
£1billion per year.
13
or further detail on the proposal for a competitiveness duty in the public sector, see George
F
Freeman and Kwasi Kwarteng, The Innovation Economy, Free Enterprise Group, 2013.
14
stimate based on expenditure data from: HM Treasury, Public Expenditure Statistical
E
Analyses 2007, April 2007, p.21, and HM Treasury, Statistical Bulletin: Public Spending
Statistics, April 2013, p. 14.
18
— Merge the Department for Energy and Climate Change (DECC) and
the Department for Environment, Food and Rural Affairs (DEFRA).
The division of environmental responsibilities between two departments
has led to duplicated spending. For example, DEFRA is spending over
£200million per year on climate change. The split has also impaired the
formulation of coherent environmental policy, for example, by separating
key areas such as environmental resilience and adaptation from energy
and carbon reduction policy. By merging the two departments into a
Department for Energy and the Environment, it would be possible to
reduce the combined budget by 20%, saving around £1.3 billion per year.
—Merge the Scotland Office, Wales Office and Northern Ireland
Office with the Department for Communities and Local Government
(DCLG), creating a new Department for Devolved Affairs. There is no
need for three separate departments for the devolved administrations,
and they could easily be merged with DCLG to deliver combined
administration and capital savings of around £10 million per year.
—Merge Her Majesty’s Customs and Revenue (HMRC) and the
Department for Work and Pensions (DWP), to create a Taxation
and Payments Agency under the Treasury. Both HMRC and DWP
provide an interface in the UK for transfers of money between the public
sector and households. DWP has 20 million clients and HMRC deals
with 30 million individual taxpayers throughout the country. There are
potentially large efficiency gains to be achieved by bringing together the
administrative and payment infrastructure of these two organisations,
including providing the public with a single online gateway to deal with
payments to and from government. In addition, by pooling resources,
HMRC and DWP can more easily provide an integrated approach to tax
and benefits and achieve higher compliance. HMRC and DWP could be
merged under the umbrella of the Treasury, saving at least £1billion just
by halving their combined administration and capital spending.
The streamlined departmental structure is illustrated in the table below. In
addition to improving the coordination of public policy, it could yield aggregate
savings of over £8billion per year, principally by cutting excess bureaucracy.
19
20
Controlling Public Sector Pay
Until 2010, the UK’s public sector remained relatively immunised from much
of the fallout from the largest and deepest recession since the war, which
started in 2008 and saw a 6% contraction in the economy. As a result of that
recession, many in the private sector went out of business, lost their jobs or
took pay cuts.
In contrast, public sector wages have risen systematically over the last decade.
Median annual full-time public sector employees now earn over £4,000 per
year more than their private sector counterparts.15 In the last year, whilst
private sector pay remained frozen, public sector pay rose by 1.4% despite
a notional freeze imposed by the Treasury. Not only is this questionable on
grounds of fairness, the 1.4% increase represents an estimated £2.4billion
in extra public spending each year.16
The government has imposed a 1% cap on public sector pay increases from
2013/14 to 2015/16. It is only an average cap, leaving further scope for it to
be circumvented. The 1% cap should be enforced consistently as a ceiling,
applying to individual employees and the total public sector wage bill, with
steps taken to ensure it cannot be circumvented in the same ways as the
earlier public sector pay freeze.
In particular, there is a widespread problem in the public sector with automatic
pay and promotion as well as promotion around pay limits. The government
should take measures to rigorously and consistently apply the 1% public sector
cap on pay increases, for example, by ending ‘automatic’ salary increases
or promotion (based on period of tenure in post rather than performance),
and preventing the creation of additional senior posts as a means of side-
15
ONS, Labour Market Statistics, May 2013, Table: EARN01.
16
here was a 1.4% increase in public sector pay for Q1 2013 compared to Q1 2012, applied
T
to the most recent data available for total public sector pay which was £171 billion in
2011/12. ONS, Labour Market Statistics, May 2013, Table: EARN01; HM Treasury, Public
Expenditure Statistical Analysis 2012, July 2012, p. 77.
21
stepping pay limits. Given the experience of implementing the pay freeze,
properly enforcing such controls can be expected to result in savings of at
least £2billion per year.
22
About the Free
Enterprise Group
Objectives
­­ Encourage a competitive and free economic environment
—
­­—Raise the global economic standing of the United Kingdom
­­— Challenge monopolies and oligopolies
­­—Free individuals to create, innovate and take risks
­­
Supporters
Harriett Baldwin MP
Nick de Bois MP
Karen Bradley MP
Robert Buckland MP
Aidan Burley MP
Alun Cairns MP
Therese Coffey MP
Charlie Elphicke MP
George Eustice MP
George Freeman MP
Mark Garnier MP
John Glen MP
Ben Gummer MP
Sam Gyimah MP
Matthew Hancock MP
Richard Harrington MP
Chris Heaton-Harris MP
Margot James MP
Sajid Javid MP
Chris Kelly MP
Kwasi Kwarteng MP
Andrea Leadsom MP
Brandon Lewis MP
Anne-Marie Morris MP
Brooks Newmark MP
Jesse Norman MP
Guy Opperman MP
Priti Patel MP
Christopher Pincher MP
Mark Pritchard MP
Dominic Raab MP
David Ruffley MP
David Rutley MP
Laura Sandys MP
Chris Skidmore MP
Julian Smith MP
Rory Stewart MP
Elizabeth Truss MP
Andrew Tyrie MP
Mike Weatherley MP
Nadhim Zahawi MP
www.freeenterprise.org.uk
Contact:
Dominic Raab MP on 0207 219 3000 or dominic.raab.mp@parliament.uk
Kwasi Kwarteng MP on 0207 219 3000 or kwasi.kwarteng.mp@parliament.uk
DISCLAIMER: All supporters subscribe to the aims of the group. However, articles written under the auspices of the group reflect the author’s own
views and not necessarily those of all group members.