The Canadian approach to budgeting – it's ruthless, but it works

Monday, June 07, 2010

How can the public sector face cuts in budgets and yet create more effective services? Jamie Bartlett of think-tank Demos has examined the proven approaches and looks at the astonishing Canadian success story

Whichever party wins the next general election will face years of net public debt and will be forced to reduce public spending. For the next decade the most urgent question for any government will be: how can public services achieve more for less – providing services that meet people's needs, while costing less?

The natural tendency will be for the government to continue what it's doing, only cheaper, by reducing unit costs in procurement; to cut up-front investment for long-term change; or even worse, "salami slice" – which means across the board percentage cuts in departmental budgets. It's quick and ruthless, and delivers immediate short-term results. Hence Andrew Lansley's suggestion that, if the Tories get in, they might be forced to cut all department budgets (other than health and international development) by 10 per cent.

But this approach won't work, because effective programmes that can deliver long-term savings are likely to be abandoned, staff and the public will become disenchanted, and ultimately quite minimal savings will be achieved. It's a false economy. There is a more radical and effective alternative: zero-budgeting.

This approach has already been tried. In 1992, Canada was running a deficit of 9.1 per cent of GDP, and debt was 70 per cent of GDP and rising – eerily similar to our current situation. The government tried 22 rounds of efficiency drives and across the board cuts, but this failed to work.

In 1993 the new government decided to review all its spending. Every programme and project had to pass five tests: Was it core to Canadian society? If so, does government need to do it? Can local government do it? How can we do it better? Can we afford it? The Cabinet Office ran the process and acted as a neutral arbiter between the Treasury and departments. Cuts were not evenly spread, as some departments were slashed by up to 50 per cent (transport) and whole programmes that didn't pass the test were shut down in their entirety. Yet for other programmes spending was protected, sometimes even increased: benefits for older people went up by 15 per cent for example.

The results were astonishing. The GDP deficit was reversed in three years and there were no strikes, no tax rises, and no ministerial fallouts. All this despite a cut in spending of 10 per cent, and firing an eyewatering 23 per cent of public sector workforce. Oh, and to top it all the Liberals were returned with an increased majority the following year.

The issue of efficiency in the delivery of public services has never been more pressing and the current climate offers a real opportunity to transform the way services are delivered – see the Tories' new commitment to slashing the quangos. In this context, it is vital that any cuts should not be made by cutting innovative programmes with long-term results, reverting to simple lowest unit cost measures of value, or salami slicing. Instead cuts must be based on deep consideration of sustainable and whole sector potential savings; by making services more effective and removing resulting slack from the system. Zero budgeting is the way to start the process.

This article first appeared on Friday 11 September 2009