House of Commons - Evaluating the Efficiency Programme

Evaluating the Efficiency Programme - Treasury Contents

2 Reviewing Gershon and Lyons

The Gershon Efficiency Review

6. The recent drive for improved efficiency commenced in August 2003, when Sir Peter Gershon, former chief executive of the Office of Government Commerce, was commissioned to conduct a review to identify the scope for making efficiency savings in public services. His objective was to release resources to "front-line" services such as schools and hospitals and deliver further improvements in the performance of the public sector as a whole.[9] Prior to the conclusion of the Gershon Review, the 2004 Budget announced "a stretching but realistic target for the whole public sector to deliver efficiencies of 2.5% a year over the three years of the 2004 Spending Review period, which would deliver gains equivalent to £20 billion a year by 2007-08".[10] The Gershon Report, Releasing resources to the front line: Independent Review of Public Sector Efficiency, was published at the time of the 2004 Spending Review.[11] It set out proposals for efficiencies in public spending based on the principle that efficiency within the public sector involved "making best use of the resources available for the provision of public services". The Gershon Report defined 'efficiencies' as reforms which achieved:

reduced numbers of inputs (e.g. people or assets), whilst maintaining the same level of service provision; or
lower prices for the resources needed to provide public services; or
additional outputs, such as enhanced quality or quantity of service, for the same level of inputs; or
improved ratios of output per unit cost of input; or
changed balances between different outputs aimed at delivering a similar overall objective in a way which achieves a greater overall output for the same inputs ("allocative efficiency").[12]

7. On the basis of the Gershon Review analysis of departments' efficiency programmes, the Government revised its Budget 2004 forecasts projecting that the annual outturn level of efficiency savings across the whole of the public sector would increase to £21.5 billion by the end of the 2004 Spending Review period.[13] In addition, there would be a reduction of 70,600 Civil Service posts and a relocation of 13,500 posts to front-line public services.[14] Under Gershon, the overall efficiency programme was coordinated by the Office of Government Commerce.

8. The 2008 Pre-Budget Report provided a final report on the Gershon efficiency programme including a detailed breakdown by department showing the calculations underlying departments' claims that they had delivered over £26.5 billion of efficiency savings, substantially exceeding the target of £21.5 billion; and over 86,700 civil service workforce reductions, significantly over-delivering against the target of 70,600 net reductions.[15]

The Lyons Review of Public Sector Relocation

9. Following Sir Michael Lyons' Independent Review of Public Sector Relocation, also published alongside the 2004 Spending Review, the Government established targets for relocations by 2010 which were similar to, but distinct from, the proposals outlined in the Lyons Report.[16] The Spending Review established a target for 20,028 relocations from London and the South East across the Civil Service as a whole to be achieved by 2010. The relocation targets, unlike the targets arising from the Gershon Report, went beyond 2007-08, although the relocation targets have been reported on and considered as part of the overall efficiency programme. Budget 2009 announced that, with 19,000 posts already relocated, the target would be increased to 24,000 posts by 2010.[17]

10. We asked Treasury officials how many Treasury staff whose jobs were relocated out of London and the South East, moved to follow their jobs. Ms Louise Tulett, Finance Director, Treasury Group, told us about a case where ten posts were relocated from London to Norwich. Ten new staff in Norwich were employed to fill the newly located posts and the ten staff in London were redeployed to other jobs, but remained in London.[18] We asked Mr Timms whether HMRC had reduced staff numbers in London and the South East and he told us that he believed that numbers "must have significantly fallen".[19]

11. Mr Andrew Hudson, Managing Director of Public Services and Growth at HM Treasury, reported on the Chancellor's Departments' progress in meeting the Lyons targets. He said that Treasury had over-delivered on the relocation target while HMRC's target was to relocate 4,250 posts by March 2010 and in March 2009, 3,171 posts had been moved.[20]

Did the reported savings represent real efficiencies?

12. The Gershon definition of efficiency placed a constraint on the Government since efficiencies could not be recorded if service quality was adversely affected. It also permitted a degree of flexibility as efficiencies could be either cashable or non-cashable,[21] and gains could be reported either gross or net of costs.[22] Sarah McCarthy-Fry MP, Exchequer Secretary to the Treasury, told us that she was confident that Gershon savings represented real improvements in efficiency. However, she did concede that the National Audit Office had not audited the final Gershon savings.[23]

13. Ms Louise Tulett said she was confident that the efficiency savings made within the Treasury Group were "sustainable". She argued that cultural and structural changes had brought "considerable efficiencies", citing the establishment of group shared services, where corporate services were moved away from the Debt Management Office, OGC and core Treasury and "pulled …together under the management umbrella of core Treasury".[24] The Treasury Group also "looked at work that we could stop doing" and reallocated 89 posts within the Treasury "towards new priority work".[25]

14. The NAO reported twice on this programme.[26] Its second report commented on figures produced by the Government in September 2006. At that point public sector bodies were recording a total of £13.3 billion in efficiency savings against the target of £21.5 billion by 2007-08.[27] The Government reported achievement of 45,551 (65%) of the targeted 70,600 headcount reductions, and 9,412 (70%) of the target for relocation of staff to front line public services by September 2006.[28]

15. The NAO's work to verify the accuracy of these reported figures showed that, although improvements had been made since the previous year's report, there were still inaccuracies in reported financial efficiencies. Of the £13.3 billion claimed efficiency savings, it considered that only £3.5 billion were able to "fairly represent the efficiencies made", just over a quarter of the savings reported.[29] The NAO described half of the reported gains as being measured with error, as almost a quarter of the efficiencies were assessed to be "substantially incorrect" or yet to have occurred.[30]

16. The Institute of Chartered Accountants in England and Wales told us that it was concerned about the lack of assurance in respect of the reported efficiency savings. It argued that a thorough independent audit process of the Gershon Programme's announced savings would help to provide greater confidence in the figures.[31] Dr Jennifer Law, Principal Lecturer, Faculty of Humanities and Social Sciences, University of Glamorgan, told us that efficiency was commonly defined as "the ratio of inputs to outputs", a holistic measure taking account of the quality of the residual service as well as the savings achieved. She was concerned that the NAO had noted that whilst departments were making savings, some were unable to demonstrate that "they were still continuing to provide the same quality of output". However, she was reassured that departments had made moves towards ensuring that they were "more accurately reporting the quality".[32]

17. Mr Andrew Hudson, pointed out that when the NAO had assessed the Gershon Programme the review "still had some way to run". He argued that the NAO had recognised at that time "that over three-quarters of the savings did, indeed, represent efficiencies".[33] The Treasury had taken steps following the NAO review to ensure the measurement was properly rigorous and he remained confident that the £26.5 billion savings were "real compared to a target of £21.5 billion".[34]

18. The NAO interim report about Gershon efficiency savings highlighted serious problems in measuring efficiency. We are concerned the NAO did not audit the final Gershon efficiency savings. This has led to a lack of confidence on the part of some organisations in the reported savings. We heard from the Treasury Minister that using resources to check Gershon savings would not be efficient, but we believe it is important to check that efficiencies have actually been achieved. At a time when the public sector will be pressed to make further efficiencies, it is vital that any savings made are properly recognised and quantified. We want the Government to continue to work with the NAO to ensure that future efficiencies are accurately measured.

The 2007 Comprehensive Spending Review and Budget 2007

19. The 2007 Comprehensive Spending Review (CSR07),[35] and Budget 2007[36] continued to require departments to make efficiency savings. The Government outlined its intention to increase the Value for Money (VFM) savings target to £26 billion by 2010-11. It increased this target further to £30 billion in the 2007 Pre-Budget Report[37] and then finally to
£35 billion in the autumn 2008 Pre-Budget Report.[38] The Treasury agreed that some departments could "recycle" some of the additional target, that is, retain savings within the department to spend on other priorities.[39]

20. VFM savings under CSR07 differ from efficiency savings under the Gershon Efficiency Programme in a number of important ways:—

VFM savings take account of upfront and ongoing costs whereas efficiency gains under Gershon could be reported gross;
only cash-releasing savings will be recognised as VFM savings (up to 40% of Gershon efficiency savings were classified as "non-cashable");
VFM savings can be termed "allocative" i.e. savings from stopping or reducing low priority activities as long as there is no adverse impact on Public Service Agreements targets or Departmental Strategic Objectives;
the Gershon Efficiency Programme allowed departments to reinvest savings in front line services. However, CSR07 removes the money saved from the departments' resource allocations for the years 2008-09 to 2010-11 with the exception of HMRC, the Department for Work and Pensions, and the Ministry of Defence.[40]

21. Departments have published Delivery Agreements outlining how they expect to secure their VFM targets. The Chancellor's Departments are required to generate annual net cash-releasing savings of over £700m by 2010-11. The Treasury told us that this saving coupled with the provision of £330m in "modernisation funding", would allow the departments to deliver their key priorities within budgets that fell "by 4.9 per cent per year in real terms".[41]

22. Mr Andrew Hudson, for HM Treasury, told us that the savings would be reported on regularly in departments' autumn performance reports and that the NAO would be auditing the work. He felt that there was "more transparency about what is being done than ever before in terms of this Value for Money programme".[42]

23. We welcome the NAO's role in auditing the work on the Value for Money Programme. The Government has increased the Value for Money target three times in the last two years, perhaps suggesting the calculation of the target was insufficiently robust in the first instance. In our future monitoring of the performance of the Chancellor's Departments we will assess the extent to which these efficiencies have been achieved.

Staff morale in HMRC

24. Time constraints meant that it was not possible for us to collect evidence about staff morale from all the Chancellor's departments. We therefore decided to focus on morale in HMRC.

25. The evidence we received suggested that morale in HMRC was low. The latest HMRC staff survey showed that only one quarter of respondents described themselves as "proud to work" for HMRC.[43] The staff survey from Summer 2008 was the last to gauge the level of satisfaction with the department. Results showed that only 16% of staff agreed that they were "satisfied" with HMRC. Mr Lockhart, a Senior National Officer for the Public and Commercial Services Union (PCS), highlighted that morale in HMRC was currently lower than before the merger of the Inland Revenue and HM Customs & Excise in 2005.[44] It is evident that the trend in morale in recent years has been decreasing.

Table 1: Staff morale in HMRC

Percentage of HMRC staff who responded positively to "considering everything, I am satisfied with the Department at present time "
May-05
Nov-05
May-06
Nov-06
Jun-07
Nov-07
Jun-08

32%
28%
26%
21%
21%
13%
16%

Source: HMRC Staff Surveys

26. When we questioned Mr Lockhart about the 16% satisfaction figure from the Summer 2008 staff survey, he told us he felt the results correctly captured the views of his union's members.[45] Mr Lockhart elaborated on reasons why morale might be low among members of PCS. He explained that they did not feel secure in their jobs and were frustrated that they were expected to undertake the same workload with fewer staff.[46] He also implied that the public's negative attitude toward HMRC staff had adversely affected their morale.[47] Mr Timms stated that uncertainty about office closures also had a negative impact on HMRC staff morale.[48]

27. We asked Mr Lockhart whether morale could be expected to improve after a period of transition, HMRC having recently changed its senior management team and having only existed in its current form since 2005.[49] In his view there was no evidence to suggest that staff morale would improve in the near future.

28. We questioned Lesley Strathie, the Chief Executive and Permanent Secretary for HMRC, about the relationship between morale and the Government's efficiency programmes. She explained that where a programme will lead to headcount reductions, staff morale will suffer markedly if communication from management is poor. She went on to stress that involving staff by seeking their views about how to improve efficiency could boost morale.[50]

29. Mr Timms, was confident that HMRC senior management would deal with the problem of staff morale. Indeed, he believed that in the medium term, efficiency programmes would in fact have a positive effect on morale.[51]

30. Senior management at HMRC recognised that low staff morale was a serious issue and Ms Strathie acknowledged that management needed to engage with staff better to improve the situation.[52] She attributed low morale in HMRC to uncertainty caused partly by the reduction of headcount through the process of natural wastage, rather than compulsory redundancy.[53] Ms Strathie emphasised that leaders in HMRC would need to engage with staff using "honesty, cultural change and being clear" about the future.[54]

31. Ms Strathie indicated that the efficiency programmes in HMRC could also be an opportunity to develop the skills of the workforce. She told us that a fit-for-purpose tax administration would require staff to be able to do different types of work.[55] This flexibility was likely to require training. We asked the Treasury Ministers whether training budgets would suffer as a result of efficiency savings. Mr Timms insisted that "sufficient training" would be provided so that staff could successfully move between jobs.[56]

32. Low staff morale at HMRC has been caused, in part, by uncertainty about the future, a lack of understanding about the chosen efficiency targets, especially when service quality is perceived to have fallen, and increased pressure—having to do the same job with less resources.

33. We were assured that HMRC senior management take the issue of morale seriously but we would like to see more evidence of action taken to back these words. Communication is key: staff should hear about office closures and headcount reductions from their managers, not the media. We welcome the Government's reassurance that training will not suffer as a result of the efficiency programmes.

9 HM Treasury, 2004 Spending Review: New public spending plans 2005-2008, Cm 6237, July 2004, para 2.5 and pp 13, 15 Back

10 HM Treasury, Budget 2004 Prudence for a purpose: a Britain of stability and strength, HC 301, March 2004, p 135, para 6.16 Back

11 Sir Peter Gershon CBE, Releasing resources to the front line: Independent Review of Public Sector Efficiency, July 2004, para 1.7, pp 6 Back

12 Ibid., para 1.7, pp 6 Back

13 Ibid., para 4.3 Back

14 Ibid., p 31, table 4.2 Back

15 HM Treasury, Pre-Budget Report 2008 Facing global challenges: Supporting people through difficult times, Cm 7484, November 2008, p 114 Back

16 HM Treasury, 2004 Spending Review: New Public Spending Plans 2005-2008, Cm 6237, July 2004, Table 2.2, p 20; Lyons Report, Table 6.1, p 59 Back

17 HM Treasury, Budget 2009: Building Britain's future, HC 407, April 2009, pp 121-122 Back

18 Q 126 Back

19 Q 231 Back

20 Q 227 Back