101519 November 2015 · Number 10 Sanja Madzarevic-Sujster, Suzana Petrovic and Theo Thomas1 and effectiveness, while new spending often follows separate procedures. Croatia has recently piloted a Spending Review (SR) Scope of the SR as a mechanism to identify options for budgetary savings that can be realized either by improving SRs can be selective or comprehensive and efficiency or by reducing ineffective or low-priority both approaches have merits. A comprehensive expenditures. This note highlights a number of lessons and challenges from Croatia’s experience, SR incorporates a major part of government which need to be considered to strengthen budget spending and often considers tradeoffs between management in the future. spending priorities. It is particularly appropriate when the objective is to achieve Spending Reviews (SR) major reductions in aggregate expenditure, or when a government wishes to achieve a major Croatia conducted its first SR, exercise from redesign of public spending. However, a December 2014 to February 2015. It was comprehensive SR is a very demanding process triggered by the need to identify sustainable for any administration, and puts pressure both fiscal savings, after Croatia entered the EU’s upon the Ministry of Finance (MoF) and the line Excessive Deficit Procedure (EDP) soon after its ministries (as well as the political leadership). accession to the EU in July 2013. The exercise For this reason, many consider that was considered a pilot to improve spending comprehensive SRs should be undertaken only efficiency and identify potential savings. occasionally, rather than regularly or routinely, as they require strong analytical and leadership A Spending Review is an institutionalized capacity. process for the review of baseline government expenditure. The primary aim is to identify The Government selected five categories of options for alternative levels of funding for state budget expenditure to be reviewed: (i) consideration in the budget process. A health sector; (ii) central government wages, Spending Review also goes deeper than the without health sector and agencies’ wages; (iii) regular review of spending that is part of the subsidies, without agriculture; (iv) public sector annual budget cycle, where many existing agencies; and (v) tax expenditures. These programs are not routinely challenged for their accounted for 27 percent of GDP, or more than ongoing efficiency third of the general government spending, in 2014. A Government Decision defined the SR areas, but did not provide a clear rationale for 1This note was cleared by Ivailo Izvorski, Practice Manager (GMFDR). the selection of these sectors. relevant institution) is able to direct that SR, as Another important coverage issue is whether in the case of Croatia where Cabinet authorized the SR includes subnational governments. the areas for specific consideration. Including untied transfers within the SR process Table 1. Efficiency and Strategic Reviews is often legally challenging, compared to using Efficiency Strategic review tied (conditional) grants to subnational reviews government, in order to achieve national policy Objective Create fiscal Create fiscal space: objectives. In this first exercise, Croatia decided space: reallocate reallocate and/or and/or reduce reduce government to focus on central government spending, government expenditure for although health spending is largely executed expenditure for programs or through the health insurance fund. programs or organizations. organizations. Focus Efficiency - Efficiency & Setting the Objectives and Baseline Identify how the prioritization - Identify existing policies what the government The first step in designing a SR process is can be delivered should or should not determining the objectives, which mainly at lower cost. do. reflect political decisions. The type of review Examples • Finland • Australia normally falls within two categories, an “Productivity “Comprehensive Program�(2005- expenditure reviews�, efficiency review, a strategic review, or a ) “Strategic Review� combination (Table 1). • UK Value for (2007) Money • Canada “Program The objective of the Croatia’s review was Reviews (e.g. Review�(1994) defined as across-the-board 10-percent Gershon • Netherlands Review 2004) “Interdepartmental decrease of expenditure on an annual basis, • Korea “Self- Policy review� (1982; using the revised 2014 budget as a baseline. Assessment of 2009-present) However, the SR covered different spending the Budgetary • UK “Spending categories where the same magnitude of savings Program� Review�(1998- (2005-) present) could not have been achieved, which Aggregate Limited, except Large, but dependent questioned the credibility of the objective and Fiscal when applied on political backing the process. For example, the review of Impact widely across and will often subsidies showed that such a reduction of the public encounter line subsidies is not achievable due to the sector–e.g. the ministerial and special introduction of interest group Government’s prior legal commitments for shared service opposition. shipyard restructuring that would require centers. renegotiation with the new owners as well as Source: adapted from OECD 2012. the approval of the European Commission. Organizational Setup The SR requires political leadership and direction to identify priority programs and In almost all cases, spending reviews are processes. By definition, a selective SR involves carried out primarily by civil servants. the ex-ante selection of programs, processes or Experience where SRs were carried out by agencies for review. It is in principle possible to commissions led by prominent businessmen select agency reviews, in which case there and staffed mainly by outsiders have largely would be no prior specification of specific been ad hoc and sometimes considered programs or processes to be reviewed. disappointing, because outsiders do not have However, it will often be the case that the sufficiently detailed knowledge of government political leadership and MoF see specific to be effective. Notwithstanding, private sector programs or processes as in need of review. experts can play a major role in the search for There should, for this reason, always be a improving the efficiency of government mechanism whereby the Cabinet (or other agencies, particularly those providing standard November 2015 · Number 10 · 2 services, such as the tax office, customs (i.e. Table 2. Standard Questions for Defining the ‘production agencies’). In these types of Challenge Function Canada: UK Spending Ireland agencies, ‘business re-engineering’ solutions Program Review Review 2010 Comprehensive developed in the private sector are often 1993-99 Spending applicable (e.g. the Gershon efficiency review in Review 2012 the UK). 1) Does the 1) Is the activity 1) Is the funded program or essential to meet activity meeting The organizational setup in Croatia followed activity continue government a government the principles of a joint review. For each SR to serve a public priorities? priority that area the Government appointed a separate interest? 2) Does the provides 2) Is there a government economic value commission with an external expert chairperson legitimate and need to fund this and serves a from a public research institute (the Faculty of necessary role activity? public interest? Economics and Business in Zagreb, the Institute for government 3) Does the 2) Should the of Economics, Zagreb or the Institute of Public in this program activity provide government be Finance). The Government appointed a area or activity? involved in substantial president and six members for the Steering funding this 3) Is the current economic value? Committee from managers in the Ministry of role of the activity? 4) Can the Public Administration, Health, Economy, federal 3) Can the activity be Maritime Affairs, Transport and Infrastructure, government targeted to those activity be Science, Education and Sports, and Finance. An appropriate or is most in need? provided by Advisor to the Minister of Finance Chaired the the program a 5) How can the alternative Steering Committee, which was tasked with candidate for activity be means, such as coordination and quality assurance of the realignment the private or provided at with the voluntary sector, Commissions’ work. In cases when lower cost? provinces? another level of Commissions could not define the packages of 6) How can the 4) What government or measures, the Steering Committee needed to activity be joint provision? activities or take responsibility, and therefore accountability, provided more programs 4) Can the for the recommendations and supplemented the should, or could, effectively? activity be reports with additional measures (Figure 1). be transferred in 7) Can the provided more whole or in part activity be efficiently and at Figure 1. Spending Review Organizational Setup to the private or provided by a lower cost? voluntary non-state 5) Is the range of Steering sector? provider or by services Committee citizens, wholly 5) If the program provided Advisory group or in (IMF, WB) or activity affordable, and partnership? continues, how if not, what Commission Commission could its 8) Can non-state elements should Commission Commission Commission for Wage Bill for Health for Tax for Agencies for efficiency be providers be be dropped? Expenditures Subsidies improved? paid to carry out the activity 6) Is the In addition to the savings targets, most according to the resultant countries make use of a standard set of results they package of questions/review criteria. These high-level tests program and achieve? serve as the conceptual framework for the activities 9) Can local exercise, and are very similar across countries. affordable bodies as The precise nature of the questions can vary within the fiscal opposed to between reviews, but teams should have a good restraint? If not, central understanding of the process that encourages what program or government activities should provide the practical, non-partisan reviews. activity? be abandoned? Source: various governments’ documents. November 2015 · Number 10 · 3 The standardized format for the presentation expected to be approved by Cabinet by March 1, of SR recommendations should make the 2015 with the commissions delivering draft findings accessible to key decision-makers reports to the Steering Committee by February (especially Cabinet ministers, the Minister of 1, 2015. However, two committees could not Finance and the Prime Minister). There is a need deliver on time, while there were quality to present options and supporting discussion in concerns with some reports so the timeline for a brief and easily-digestible form, based on a the delivery was extended for a month. standardized format, keeping the technical detail separate from the key findings. In the Political Leadership Netherlands, for example, reports on SR topic reviews are usually 10-20 pages, with a brief A key question in the design of the SR process Executive Summary, and are always based on a is the role of political leadership. What is standardized set of sections. Another aspect of important is the involvement of key political methodological standardization is the use in budget decision-makers—the individuals and countries such as the UK of standard templates institutions that essentially control the content and spreadsheets for line ministry SR of the budget (as distinct from legally submissions. As this was a pilot exercise, with a approving it)—in (i) setting the tight schedule, the standardized questions and priorities/objective for the reviews; (ii) formats have yet to be developed for Croatia. providing the authorizing environment for the teams conducting the reviews to be able to carry Timeline out their mandates; and (iii) providing the review and challenge role for the In most countries, timing and frequency is recommendations before they can be clearly linked to budget preparation. For implemented through subsequent budgets. example, SR is a process carried out (approximately) every three years in the UK, as Public Communication and Dissemination this helps to set multi-annual budgets for line ministries. By contrast, in other countries (e.g. While the launch of the SR was widely Denmark, Netherlands), selected SRs are carried publicized and received a broad public out every year, with recommendations timed to support, there was little communication of its coincide with the preparation of the annual findings. The Commissions’ reports were budget. The Netherlands conducts a SR most intended to be published on the MoF’s web years, but the last comprehensive SR, which page after they have been finalized and covered 20 topics, was conducted prior to the approved, according to the Government 2010 elections and was designed to inform the Decision. Six months later, only the public election debate and also the post-election sector agencies’ spending review had been coalition agreement that established the fiscal posted. The government publicly framework for the life of the parliament. communicated that it would accept some recommendations and made a decision to Croatia’s schedule was very compressed. It consolidate several agencies. aimed to generate measures to both amend the 2015 budget, but more importantly for the 2016 Some lessons from Croatia’s SR budget. On October 23, 2014, the Croatian Government adopted a cabinet Decision to The impact of the initial spending reviews has conduct the SR in selected areas. In December been limited, but the process is a good basis 2014, the Minister of Finance issued the on which to build. Many countries have Guidelines on the implementation of the SR, developed their approaches to, and capacity for, with the methodology, data sources, the SRs over many years (e.g. the Netherlands since timeline and individuals appointed to the 1980). Given Croatia’s ongoing fiscal challenges, commissions. The final output was initially this initial process provides a basis on which to November 2015 · Number 10 · 4 build a more routine process for challenging The roles of the Steering Committee and existing fiscal policies programs. The process Commissions could be more clearly could be strengthened by addressing the delineated. There are three basic alternative following lessons: approaches which may be taken in assigning roles: (i) bottom-up review (spending ministries The political engagement should have been develop their own savings options, with stronger through formalized political roles and alternatives challenged by the MoF/Steering institutional arrangements. While political Committee); (ii) joint review (savings options participation was required to approve the are developed in a joint spending Decision that created the Commissions, the ministry/MoF/Steering Committee review roles of political appointees could be made teams); and (iii) top-down review (savings more formal. One option to consider would be options are developed by the MoF/Steering to create a Ministerial Committee (which could Committee with limited spending ministry be a sub-Committee of the Cabinet) to oversee involvement). The joint review might help the the SRs, set the priorities, authorize the Commissions reach a broader consensus on Commissions and provide a review/challenge reform options, but perhaps required stronger function for final Reports. top-down guidance on the objectives and baselines. Setting a clear rationale for the selection of topics and savings options: this would have It is important to clearly establish baseline helped to ensure that the SRs were well expenditures and cost drivers, against which targeted, either at priority policy areas and/or savings will be evaluated. For the tax areas where savings options appeared to from expenditures’ review in Croatia, the baseline previous analysis. Linking the savings target to has not been provided since Croatia has not the adjustment required by Government been registering tax expenditures so far, so the objectives or the EDP could also have spending review was used to establish one (a established more credibility that actions would good externality). Many countries also make the be taken. distinction between discretionary and nondiscretionary spending, with the later The combination of vertical and horizontal perhaps harder to alter on an annual basis, or spending reviews selected by Croatia was may have to be altered through separate appropriate. Vertical reviews look at programs legislation. What is included in the review, or that are commonly with a specific excluded, will likely depend on the size of ministry/regions/municipalities etc.), while savings or nature of the reforms that are horizontal reviews look at crosscutting areas required. Clearly communicating the baseline (e.g. procurement/wages/subsidies). A will reduce the scope for underestimating or combination of vertical and horizontal reviews double-counting savings at a later stage. provided Croatia with the opportunity to look at important crosscutting issues, like wages, in Similarly developing the standardized formats greater detail and to seek efficiencies from and questions would be helpful. While these economies of scale (e.g. by centralizing payroll questions and formats can change between payment functions or reforming wage system). reviews, the guidance would help to build However, as in the pilot exercise, clear guidance teams capacity for regularly undertaking needs to be given to teams regarding the reviews, as well as policy makers expectations handling of any inconsistency between and perhaps ability to generate more effective horizontal and vertical reviews, particularly options. where they overlap (as in wages and wages for health). The timeline of the spending review in Croatia was too short with insufficient time for a high quality analysis. Given there was only one November 2015 · Number 10 · 5 month and three weeks for conducting the review itself, many Commissions had taken a practical approach to the task delivery within About the authors: the limited timeline, which compromised their ability to be grounded on thorough analysis. Sanja Madzarevic-Sujster, Senior Country Economist, World Bank’s Macroeconomics Most reviews would take between six to nine & Fiscal Management Global Practice months. (GMFDR), smadzarevic@worldbank.org Theo David Thomas, Lead Economist, Croatia should consider incorporating World Bank’s Macroeconomics & Fiscal subnational issues in designing subsequent Management Global Practice (GMFDR), rounds of SRs. This would be needed to reflect tthomas3@worldbank.org the significant role played in service delivery Suzana Petrovic, Consultant, World Bank’s and to ensure the general government savings Macroeconomics & Fiscal Management objectives are met. Global Practice (GMFDR), spetrovic1@worldbank.org ______________________________________________________________________________________ November 2015 · Number 10 · 6 This note series is intended to summarize good practices and key policy findings on MFM-related topics. The views expressed in the notes are those of the authors and do not necessarily reflect those of the World Bank, its board or its member countries. Copies of these notes series are available on the MFM Web site (http://worldbank.org/macroeconomics) November 2015 · Number 10 · 7