Buying Quality Performance

In her last post, Jane talked about how an exclusive focus on cost in the reform of public services is to the detriment of the value of those services. Far from delivering ‘value for money’, a blinkered focus on short-term ‘savings’, and consequent loss of value, may ultimately drive up long-term cost. In the last few years of the previous government and the early years of this, a new way of thinking about government finances was proposed. It offered a way out of the vicious cycle in which short-term austerity creates long-term financial and social deficit. The ‘AME-DEL switch’ is an investment model – in its most basic terms, spend more now (e.g. on employment programmes) to save later (e.g. on unemployment benefits). Unfortunately, memories are short and the relationship between AME and DEL, between outcomes and inputs, appears forgotten.

Government departments have two budgets – AME and DEL. The difference between these budgets is most marked in the Department for Work and Pensions. DEL (Departmental Expenditure Limit) is basically the operating budget. It is viewed as costs that are within departmental control and is set out in a three-year plan. It includes running costs and programme spend, such as the Work Programme. AME (Annualised Managed Expenditure) is the social security spend – benefit and pensions.

DEL can be viewed as the money spent administering AME, and in the case of unemployment-related benefits, it is the money spent trying to keep AME in check through, for example, helping people find jobs.

In 2011/12, DWP took 24% of total government spending which was, as usual, the largest departmental slice. Of this £166.98 billion, 92% was AME, with just under half of that going on pensions. Expenditure on steps to ameliorate unemployment amounted to about 1.5% of their total budget.

The UK coalition government’s manifesto in 2011 set out a radical agenda for welfare to work. It was based largely on the recommendations of Lord Freud (now Minster for Welfare Reform), which he had first worked up as advisor to Blair’s administration when authoring the highly influential Freud Review (http://www.dwp.gov.uk/policy/welfare-reform/legislation-and-key-documents/freud-report/) and which Labour had started to pilot. At its heart, the policy was all about using outsourcing to enable an AME-DEL switch.

Instead of spending £100 million a day on out-of-work benefits, why not spend more on tackling unemployment, thereby creating long-term savings in the benefits bill? Bring forward some of the AME expenditure to bump up current DEL, to reduce future AME commitment.

In his report, Lord Freud costed the value of addressing someone’s long-term unemployment: ‘a genuine transformation into long-term work for such an individual is worth a present value of around £62,000 to the State.’

Switching AME into DEL is not allowed under Treasury rules. It is considered too risky to gamble future liability on increased/improved service delivery. If your service does not deliver the required savings, you are left with a big hole in next year’s AME pot.

The answer, said Lord Freud, is to get the private sector to facilitate the switch. Get them to provide the upfront funding and then repay them out of the savings they demonstrate: a sort of retrospective AME-DEL switch.

The result is the Work Programme.  All (or virtually all) existing welfare-to-work provision was terminated and rolled up into a new national programme, with contractors rewarded for the number of long-term unemployed people they could move from welfare into sustainable employment. The payments to the contractors being linked to each of these employment outcomes and paid progressively over the 18 months that the employment is sustained, ie reflecting the savings being accrued in AME as a result.

However, the underlying principle of the relationship between AME and DEL was immediately forgotten and the contracts were procured, and are now managed, as if they are simply part of the normal DEL way of working.

With all Work Programme contractors underperforming in the first two years of delivery, they are underspent against the initial plan. This is viewed as a good thing since it is a saving in DEL. It has been clawed back by Treasury. No consideration is given to how this actually represents a significant decrease in the numbers flowing off benefit into work. Far from using the AME-DEL switch to drive down long-term costs, reduced DEL on welfare-to-work services is driving up future AME liability.

The DEL on welfare to work is set to continue to reduce since the contracts are designed to attempt to drive progressively improved efficiency with payments to contractors decreasing over the contract life. To exacerbate this, providers delivering most of the Work Programme contracts won those contracts on the back of large discounts they offered the Department, which start to take effect three years in.

Instead of cutting the cost of welfare by cutting the demand for it, the Chancellor may have found a different solution to runaway AME.  As reported by Paul Waugh on 20^th March (http://www.politicshome.com/uk/article/74855/the_man_from_del_ame_he_say_yes.html), a fundamental change in the way governments manage their finances was “tucked away in the Budget”.

“The Chancellor has signaled he will look at imposing a new cap on so-called AME spending.

In the coming 2015/16 Spending Review, AME will for the first time face a ‘forward looking’ cap. 

A source is reported as saying that, “If AME spending is running ahead of forecasts, tough decisions on things like welfare [will have to be made] in order to stay within that cap.”

Treasury aides say the “the structural growth in welfare spending” on things like incapacity benefit, for example, could be tackled this way.”

The implications of this could be far reaching. A progressive reduction in DEL expenditure on welfare to work will lead to growing numbers of unemployed people, depending on AME to live. At the same time, an aging population drives up the demand for pensions, also coming out of AME. But if the AME spend is capped, then a way is going to have to be found to make a smaller amount go further – suggesting either a cut of some benefits in their entirety or a year-on-year cut per claimant.

The relationship between DEL and AME sits at the heart of an understanding of welfare to work that sees spending on support and programming as an investment in individuals: An investment that reaps rewards for each of those individuals, and also creates savings to government in falling unemployment.  It has applications in many other areas of public service, where investment/intervention can drive down future expenditure, such as in the reduction of recidivism or in the numbers of children taken into care. Losing the link between the two – moving away from the idea of programmes as investment – will decrease service efficiency and effectiveness. It makes it likely AME will increase rather than decrease. The implications of an AME cap in this context need clarifying with some urgency.