Archives For AME

By Gillian Fawcett, head of public sector, ACCA

In the 2013 Budget, George Osborne told parliament that he intended to “introduce a new limit” on Annual Managed Expenditure (AME) that would “bring real control to areas of public spending that had been out of control” yet do so in a way “that allows the automatic stabilisers to operate.”

Therefore, it was no surprise the chancellor used the June 2013 Spending Review to announce reforms to AME and reign in the ‘out of control’ element of public sector spending.

AME currently stands at £350bn (€408.7bn, $533.4bn) and accounts for almost half of the government’s annual expenditure. While the chancellor has made the first tentative steps towards tightening the purse strings on AME, there is still much more to be done to make this part of public finance more accountable.

The measures announced include a cap on certain elements of AME, including tax credits, welfare benefits and a temperature test for the winter fuel allowance of pensioner’s living abroad. The chancellor also announced that he would be expanding the role of the Office for Budget Responsibility (OBR) to monitor AME spending and issue a warning when the government is reaching the agreed limit.

Consequences

While this is a welcome move, he failed to offer further detail on the consequences of this limit being breached.

Given the demand-led nature of AME and the right of every UK citizen and some non UK nationals living in the UK, to claim benefits and a state pension, it seems unlikely that there will be a hard cut off point.

As a result, regular breaches seem likely, much like in other areas of the public sector where targets are routinely missed.

In order to reduce the cost of the UK’s welfare system in the long-term, the chancellor needs to take a structural look at AME expenditure and the drivers behind every expense.

A future focus on investing in preventative services is the best way to achieve long-term savings and this can only come from understanding local demographics and implementing measures to tackle the AME cost drivers in each local authority.

On a more strategic level, there should be greater emphasis on the costs of life, from cradle to the grave in all areas of public spending, which is something the government has struggled with for many years.

Emulating the US and Australia?

The UK would benefit from longer term fiscal strategies, similar to the US and Australia, where fiscal policy is planned out 50-75 years ahead. AME would also benefit from this kind of future planning.

In addition to capping AME, the chancellor could have explored the possibility of devolving some AME spending decisions to government departments or local authorities. They would then be responsible for spending these AME budgets in the way that they feel is most appropriate for their local area – making AME a more accountable part of public expenditure. Currently there is no accountability or scrutiny of AME, despite its high expenditure.

AME was originally introduced to control public expenditure and avoid arbitrarily cutting public services. However, over the years, that purpose appears to have been lost and AME spending has spiralled out of control.

It is encouraging to see that the chancellor is making the moves to manage this unaccountable and expensive section of the public purse. But he may have missed a golden opportunity to once and for all take a radical approach to AME.

Only time will tell if the changes made in the 2013 Spending Review go far enough to amount a long term reform.

This post was first published in International Business Times, July 2013

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Gillian Fawcett-8525

By Gillian Fawcett, head of public sector, ACCA

There is a risk that the Chancellor’s Spending Review is seen in isolation, but to appreciate the potential effects of some of the latest austerity measures announced by George Osborne, you have to look back to 2010.

There is a ticking time bomb of public sector cuts that have yet to be implemented from when they were announced early in the Coalition’s life. The full impact of the austerity measures have yet to be felt by households in Britain. However, the cuts of £11.5billion announced in the latest Spending Review for 2015-16, in addition to those from 2010, will be felt with full force when they are eventually implemented. The protection of critical frontline services can no longer be guaranteed. No one knows yet what the impact the cuts will be and yet Chancellor’s scythe keeps slicing away.

There were few surprises when it came to Departmental Expenditure Limits (DEL). Though there were some sweeteners in there, such as the welcomed emphasis on capital spending to stimulate growth, in reality that increase in capital spending looks good only on paper. When taken along with the widespread cuts to departments and local government, the extra money is nothing more than shuffling the deckchairs around.

There will come a point where the Government can’t cut the DEL budget anymore and public services will suffer. Frontline services are already at breaking point. ACCA’s current research Developing strategic financial leadership highlights that directors of finance in local government feel confident that they have delivered all that was asked to date, but are less confident about the future and the next 10 years. There is a general lack of a long-term strategy for public services.

Where there were positives in the Chancellor’s review was in the pooling of health and social care budgets for the elderly. This has been a long time coming and will allow greater flexibility and efficiency of service provision.

The Chancellor also took a step in the right direction with the annually managed expenditure (AME) budget, which totals £350 billion, over half of public expenditure. AME has for too long not been actively managed and controlled. The emphasis has been on ‘hands off’ management for too many years. So the cap is a good move but with the caveat that limits and caps are notoriously broken. So perhaps with that in mind, the Chancellor took the safety measure of a wider role and powers for the Office of Budget Responsibility, in particular its trigger of an early warning signal and monitor expenditure.

However, the Chancellor didn’t go far enough and missed further opportunities to take a more structural look at AME and review the drivers behind the budget headings and how they inter-relate. The lack of a long-term strategic review is evident. The cap is a short-term fix. There needs to be a longer term perspective that goes beyond the short-term political cycle.

Other countries, such as the US and Australia, have long-term fiscal strategies that encompass 50 years or more. Here in the UK, we seem wedded to the immediate future. There was no consideration as to whether the AME budgets should be devolved, exploration of the impact new policy initiatives would have on AME, or any focus on what the impact that further joint-working by government departments might have.

There needs to be more emphasis on whole life costing – cradle to the grave, across all public spending, not just AME. Perhaps then we will get a clearer understanding of the true cost of what public expenditure should be, rather than have a demand-led welfare system.

It seemed unusual and illogical to makes cuts in the Treasury where financial leadership is needed most. Managing public expenditure needs more, not less expertise. While setting an example might seem like the right gesture, government needs stronger financial leadership at a time of on-going cuts and greater financial management.

All in all, the Chancellor made some positive movements to getting public expenditure under control, but the potential impact of back-logged cuts from 2010 on top of some of these announcements today, as well as his reluctance to take a radical approach to tackling annual managed expenditure, outweigh those positives.

This was first published in The New Statesman, June 2013