Reducing specific areas of spending

2.14 In May 2010, the Government announced a series of initiatives to help secure the £6.2 billion of cost reductions required in 2010-11, these include:

● A freeze on recruiting permanent civil servants, fixed‑term appointments and temporary staff, with Ministerial or Accounting Officer approval needed for exceptions in front-line and business critical posts.

● Public sector pay frozen for two years. However, most groups had already received pay awards for 2010-11, so large savings will begin to accrue only from 2011-12.

● Negotiations with major cross-government suppliers, led by Cabinet Office Ministers, to identify cost reductions. The suppliers were predominantly providers of IT and accommodation services.

● Restrictions on entering new building leases and renewing existing leases beyond contractual break points, without the agreement of the Government Property Unit.

● Moratoria on employing consultants, government advertising, and restricting business travel and related expenses.

● Increased use of cross-government procurement contracts to ensure the lowest possible prices are being achieved.

● Reforming and reducing the number of arm's‑length bodies-this programme has been the subject of a separate review by the National Audit Office.7

2.15 In July 2011, the Cabinet Office wrote to the PAC Chairman setting out estimated cash savings through increased efficiency or reduced spend, totalling £3.75 billion arising from central initiatives managed by its Efficiency and Reform Group. The savings were estimated using various information sources and were reviewed by the Cabinet Office's internal audit service. In order to corroborate these figures, we compared the estimated savings to details from the audited accounts of the main 17 departments, which were not available at the time of the internal audit review. We estimated the real‑ terms change in spending on both administration and programmes from the accounts (Figure 10) and discuss the likely savings in more detail in the following paragraphs.

2.16 The Government announced a recruitment moratorium, except for key front‑line staff with ministerial approval, in May 2010. The aggregate reduction in Departmental Expenditure Limits also created pressure to reduce staff costs. The June 2010 Budget then announced that public sector pay would be frozen for two years. However, staff earning less than £21,000 a year will be awarded a fixed annual increase of £250 (pro rata for part‑time staff). This freeze applied in 2010‑11 only to groups that had not yet reached legally binding agreements and had little impact on overall departmental salary costs.

2.17 Our analysis of the accounts for the 17 major departments found that during 2010‑11, departments reduced the average number of permanent staff employed by the equivalent of 16,2008 (4 per cent) full‑time equivalent staff, and a further 5,000 temporary staff (17 per cent). Using average costs, we estimate that these staff resources would have cost departments an additional £836 million (including employer's pension and National Insurance contributions).

2.18 These staff reductions were achieved mainly through natural wastage: including resignations, normal retirements and by releasing staff at the end of their fixed term contracts. In addition, the departments we examined agreed over 17,000 early departures during 2010‑11. These departures mainly took place in the second half of the year and in early 2011‑12. We estimate that during 2010‑11, departments and agencies met in‑ year cash costs totalling £406 million for early departures from the civil service.9 This programme will, however, produce significant savings in future years. The National Audit Office will shortly publish a review of the value for money obtained from early departures, which examines redundancy costs and the likely savings in future salary costs.

2.19 The pay freeze and early departure programmes will reduce costs in future years. Whether the reductions are sustainable depends on departments making longer‑term changes to their business so that they can manage their operations with a smaller workforce.

2.20 Other categories of spending are not analysed within annual accounts on a comparable basis to the savings reported by the Cabinet Office. For example, consultancy costs may be classified either as a staff cost or, for example, as an IT cost, depending on the type of contract used and the area of spend. In addition, our figures are likely to understate total cross‑government savings because we were unable to analyse spending by grant‑funded bodies, some of which are included in the Cabinet Office savings. However, we were able to identify:

● Some £1.7 billion of 2009‑10 spending described as consultancy. Departments reduced these costs by £645 million in 2010‑11 - a real‑terms reduction of 37 per cent.

● The 17 major departments we examined reduced their overall land and property‑ related cash spending by £326 million in 2010‑11, 4 per cent less in real terms than in 2009‑10. Of this, some £110 million relates to specific leases ended in 2010‑11.

● Departments reduced reported media and advertising spending by 72 per cent in real terms during 2010‑11. The Government has announced that the Central Office for Information will be closed. The Office managed the bulk of Government's advertising spend for departments.

● Departments reduced staff business travel costs by £148 million (28 per cent) in real terms.

● Departments reduced information technology‑related spending by £255 million (6 per cent) in real terms. In addition, there were significant reductions in capital spending on IT (paragraphs 2.10 to 2.13).

2.21 Overall our review confirmed that departments made significant spending reductions in the areas targeted by the Cabinet Office‑led initiatives. We cannot evaluate the impact of reductions in consultancy and IT spend on departments' future capability, but where changes in estates spend represent a permanent reduction in the property occupied by government, they are likely to be sustainable. Some advertising spending has been reinstated in 2011‑12, but the Cabinet Office has taken action to sustain reductions by introducing new arrangements for collaborative procurement. For advertising, for instance, a small team in the Efficiency and Reform Group will approve high priority campaigns, with five departments taking lead roles across government in specialist areas.

2.22 There are limitations to this analysis because departments do not classify spending consistently at the level of detail required. The main tables of departmental accounts follow a standard pattern with certain key figures always shown. However, the detailed breakdown of administrative and programme spending is not consistent as each department's analysis is different, to suit its own needs and accounting systems. The Economic Secretary to the Treasury announced in August 2011 that a common account format would be developed.

2.23 The reductions made to date could be regarded as value‑for‑money improvements if they do not have a disproportionate impact on performance. We cannot assess overall performance for 2010‑11 as the previous system of measuring departmental performance through Public Service Agreements, which reflected the previous Government's priorities, has been discontinued. From 2011‑12, departments are publishing a new system of input and impact indicators to measure their performance. This will enable performance tracking in due course. But, as 70 per cent of the indicators have not been reported publicly before, not all of them currently provide a historic data series for tracking change.

2.24 Departments need to link cost data to output and outcome data to identify whether specific measures represent efficiency improvements or will have an unintended impact on services. Our recent report on financial management in government found it was rare for departments to have good information on the unit cost of outputs or the value of outcomes.10 In most departments, some of the new impact and input indicators are linked, but not all of them, or similar areas are covered but there is no real link between inputs and impacts. We plan to examine the data systems supporting these indicators in a rolling programme over the next three years. In addition, our programme of reports on departments provides evidence on the value for money delivered by specific programmes.

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7 Comptroller and Auditor General, Reorganising central government bodies, Session 2010-12, HC 1703, National Audit Office, January 2011.

8 This excludes groups of front-line staff not covered by the recruitment moratorium including service personnel, NHS staff and locally-employed staff overseas. These groups also reduced, by some 2,000 staff years, saving an estimated £95 million in 2010-11.

9 This excludes payments made for staff whose departures were agreed in 2009-10 or before as these costs are met from provisions made by departments in previous years. Across some 300 pension schemes, the main 17 departments met early departure cash costs of £646 million (£279 million for administrative staff and £367 million for programme staff). In addition, the departments created £397 million of provisions to cover costs in 2010-11 and beyond arising from departures agreed during the year.

10 Comptroller and Auditor General, Progress in improving financial management in government, Session 2010-11, HC 487, National Audit Office, March 2011.